5 Types of Change that Can Shift the Power Balance within an Organization
Why it is worth pro-actively contemplating an organization’s approach to change
2021 is out of date, 513 BC is now: “there is nothing permanent except change.” (Heraclitus). Because there are a lot of moving pieces when you’re working within a complex, fast-paced corporate system, it is important to understand how all the competing interests, values, and methods can impact a company’s strategy formulation process and shift an organization’s internal power balance unconsciously and unexpectedly.
Ownership, strategy, and management are integral parts of a company’s governance system. Heraclitus’ statement in 513 BC “there is nothing permanent except change.” could not be more accurate in 2021. The volume and magnitude of change boosted by globalization has never been experienced before. Due to breakthrough technologies, demographic shifts, and political transformations, the world has become more fast-paced and interconnected than ever.
To put it simply, there are a lot of moving pieces when you’re working within such a complex, fast-paced corporate system. Therefore, it is important to understand how all these competing interests, values, and methods can impact a company’s strategy formulation process. As originally identified by professors of strategy Harry Korine and Pierre-Yves Gomez, there are five major types of corporate change, all of which have the potential to shift the power balance within an organization and trigger conflict, including corporate derailment and scandal, leaving your organization vulnerable.
1. Change in Ownership
Against common perception, shareholders cannot be seen and treated as a homogenous group. Differences are manifold, for example, in regard to the horizon of investment, objectives, degree of activity, portfolio concentration, and size. Hence, shareholders’ values and methods differ.
According to Korine and Gomez, there is a distinction between owners with external values (competitors and performance of equity market) and those with internal values (commitment to and continuity of the company). Another differentiating factor is the method with which shareholders try to exert influence on the company. There are vocal methods (decision-making, elaboration of plans, recruitment of directors and managers) and silent methods (threaten to sell shares, review holdings, or announce expectations).
Any given type of shareholder can transform into another, but the change that involves the highest potential for conflict is the one from a silent shareholder with internal values transforms to a vocal shareholder with external values. This can happen when a family business is passed on from one generation to the next, and the family successors no longer want to be entrepreneurs (vocal, internal).
The key is in the distribution of power. In family enterprises and business partnerships, a change of ownership identity can strongly impact the history of the business, depending on the values and methods of the new generation. The process of attracting new shareholders needs to be carefully prepared and executed in privately held companies, e.g., insider vs. outsider shareholders. In publicly held companies, shareholder change is common, although interests amongst vocal shareholders may vary even more strongly.
2. Change in Strategy
A major change in strategy very often leads to further changes, such as the need for capital, requirements for management skills, or new ways of processing information. Such changes can have a strong impact on ownership, management and corporate governance.
For example, a newly acquired company brings in new people, new processes, and probably new risks, which all impact elements of corporate governance, such as accountability, reporting, and accounting mechanisms. Corporate governance is rarely adjusted, and if it is, adjustments are usually made reactively after an incident has occurred. This process is risky.
Change in strategy can be considered as a test that reveals who has decision-making power within a company. At the CALIDA group, a Swiss-based lingerie manufacturer and retailer, it was the CEO’s plan to continue the expansion strategy and acquire new companies, whereas the BoD and the family decided to focus on sustainable, organic growth. The CEO’s run for reelection to the BoD failed, and the power game led to a CEO change.
3. Change in Management
If there is a change in management, either due to succession or disagreement over strategy, the first question is whether an insider or outsider should be selected as successor.
The perception is that insiders tend to follow the current path; outsiders tend to change direction. But this is not the right lens through which to view the situation for two reasons. First, the company’s situation may have been misdiagnosed, e.g., there being a crisis on the horizon. Second, there might be a false sense of security in expecting people to be that predictable; insiders could favor a new direction and outsiders a current path.
The first step should be to focus not on insiders vs. outsiders but on the company’s context and the required values and methods of the potential successor. Executives tend to have different methods and values in the way they approach change. Management methods are summarized as “disruptive”—change oriented, bring in new approaches, plans, strategy, people—and “continuative”—focus on continuation of a path, process improvements, best practices.
Conflicts within a management team often emerge because the team members fall into different categories and thus have different, even opposing, values and methods that impact strategy. Situations get even more complex when executives assume new roles with new employers who have different shareholder structures from those to which they are accustomed, e.g., switching from a public to a private company.
Change in ownership, strategy, and organization often cause further changes such as change in the organizational structure or the legal form, which is likely to further shift the power balance within an organization.
4. Change in Organizational Structure
Organizational changes happen frequently, but the multilayered impact that change can have is often underestimated and approached reactively instead of proactively. In addition to change that happens on the level of management and ownership, changes to legal form (e.g., an IPO or de/centralization) and the organization structure can cause the power balance to shift in unexpected ways, leading to negative outcomes that could have been avoided.
Organizational structures experience frequent changes that almost always lead to power shifts. These shifts impact the direction of a company. Owners and BoDs should be aware of the embedded risks: these power shifts leave winners and losers, and this can lead to conflicts within the management team.
For example, a change in organizational structure in response to a new strategy can intensify diverging interests within a management team. Some individuals who want to preserve the status quo may become resistant to the organizational change, while others want to comply with standards and procedures, while others still focus on the market and advocate disruption.
5. Change in Legal Form
Let us revisit some scandals of the 1990s and 2000s in the context of changes in legal form. Until the early 1970s, the investment banking industry in the US was dominated by the following six partnerships: Merrill Lynch, Salomon Brothers, Goldman Sachs, Bear Stearns, Morgan Stanley, and Lehman Brothers.
After the prohibition of an initial public offering (IPO) by the New York Stock Exchange ended in 1970, all six partnerships went public. They started to establish profit centers and increased their risk appetite. Their ownership identities changed from majority to minority ownership by partners. Corporate governance was not able to keep up with these changes, even less so when the economic climate declined.
The time period after an IPO has its own dynamic. The interests of the different parties get accentuated with an IPO, which changes the dynamic of each group involved. Furthermore, the time needed to prepare for an IPO can be used to change the strategy so that the company looks more attractive to investors. The surprise arises when the investors realize, for example, that the strategy was changed to show only excessive growth, driven by the self-interest of existing owners.
In order to prevent unwanted changes after an IPO, a dual share structure can be implemented. A dual share structure can either help prevent a power shift or aggravate conflicts and power games, depending on the circumstances and the people involved.
Consider the Consequences
When you’re contemplating your organization’s approach to change, it’s worthwhile to consider how all these interrelated parts come together. New management with a new strategy can lead to new risks and call for different control mechanisms. Corporate governance, as a system that focuses on structure, processes, procedures, and accountability, should be adapted when changes occur.
When a new executive is hired, it is rather unusual for the BoD and shareholders to (proactively) think about the consequences of such change on different elements. The selection process of a new executive is not only about the job itself. The BoD needs to consider potential changes of strategy, their possible impact on corporate governance, and the way the new executive might handle newly assumed power—from the outset and over time.