Greg Kesler and Michael Schuster
People & Strategy, 2009

Organization structures have become as complex as the business challenges they face. Matrix structures are designed to balance competing,but equally important, priorities and decision rights across global, local and functional units. Despite a great deal of frustration over its failures, the matrix is here to stay. In fact, increasingly complex matrix structures will continue to flourish.

Heywood, et al. (2007), offered a persuasive case that companies are likely to generate more value by reducing the negative effects of complexity through clear operating-model choices and clear roles and decision rights than by attempting to simplify organization structures and business models. Cisco’s “distributed-innovation” networks and boards deliver 70 percent of the company’s innovations today, according to CEO John Chambers (McGirt, 2009). Chambers’ drive to shape a culture of enterprisewide collaboration began with a massive restructuring shortly after the tech bust of 2001. His objective is to maximize innovation through simultaneous empowerment and integration.

Cisco is already teaching AT&T, GE, Procter & Gamble and others how to bring Web 2.0 to life in their businesses through creative combinations of organization and technology. Cisco is convinced that real innovation is possible only when diverse functions, P&L units and market leaders collaborate together and with customers. Chambers wants to do it in a manner that reduces dependency on him and other top executives to manage the work.

In nearly all multi-nationals, the drive to innovate must be balanced with pressure to reduce costs and to leverage corporate resources fully. (Drucker also argued that organization structures needed to separate the work of operating management—managing things we know—from the work of innovation.) Few may achieve the level of flexibility of culture and structure that Chambers envisions. But all global, multi-business companies must find ways to manage the chaos and continuously rebalance the tension among customer intimacy, brand building, functional excellence and cost effectiveness. And today they must do so in the context of Sarbanes-Oxley and what are likely to become even more stringent fiduciary controls, with board and regulatory oversight.

Coca-Cola’s chairman, Neville Isdell, made major strides turning around the brand giant during the past four years by embracing the complexity of seeking both global brand excellence (with leveraged R&D spend) and local responsiveness with bias to action. It was precisely his predecessors’ refusal to manage the built-in conflicts between local and global that accelerated the company’s slide to degraded earnings, sluggish sales growth and stagnated innovation. Isdell’s “freedom within a framework” (Kesler, 2008) became the means to corralling an accepted level of chaos—a way to engage the natural tension between many new global initiatives and the need for geographic GMs to get more aggressive about finding local solutions to brand, product and revenue gaps.

Isdell dubbed his framework the “manifesto for growth”—a sweeping vision, long-term objectives and set of beliefs about the world and business that empowered and demanded, in uncompromising fashion, that leaders would work together and with corporate social responsibility to re-energize the brand around the world. Isdell’s (and his team’s) success in “managing the matrix” is arguably the major difference in Coke’s performance since 2005 versus the previous six years.

Corporate Versus Operating Governance

Corporate governance is the system and processes by which power is managed in the business enterprise—the means by which business corporations are directed and controlled (Schliefer and Vishny, 1997). Prior to the Sarbanes-Oxley Act of 2002, a body of literature addressing corporate controls was well established. Sarbanes-Oxley added a stimulus to both corporate activity and academic interest in the subject of governance and control (Romano, 2005).

But it is useful to separate corporate governance, meeting the legal requirements of governance embodied in legislation (e.g., Sarbanes-Oxley, FASB) and corporate charters (board rules and bylaws), from what we term operating governance. At its basic level, corporate governance structures specify the distribution of rights and responsibilities among different participants in the corporation such as the board, managers, shareholders and other stakeholders. Control and governance provide the structure through which company objectives are set, and the means of attaining those objectives and monitoring performance, while assuring the enterprise acts as a responsible member of the community.

Operating governance, in contrast, refers to the way managers within the business make decisions and the ways they delegate decision-making vertically into the organization (driven by structure, policy and process). Additionally operating governance reflects the way that decision rights are allocated horizontally across functions and business units. Put another way, operating governance is the process—intentionally designed or by happenstance—by which power is managed. Power is embedded both vertically, as in what is delegated down through organizational layers,and it isembedded horizontally,among peer units, as in who carries decision rights between potentially conflicting organizational entities or functions.

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