1. FederalismAnd the Distribution of Power and Authority From Drucker’s Lost Art of Management Joseph A. Maciariello and Karen E. Linkletter

2. Federalism and Drucker’s Objectives Drucker believed in human capacity to manage complex organizations. But, never lost sight of reality of humankind’s weaknesses. Organizations needed to be structured to counteract, minimize, or redirect the darker forces of human nature—especially greed and lust for power.

3. Federalism and Drucker’s Objectives Constitutionalism—including Federalism—can contribute to creating a system of functioning organizations: By acknowledging darker side of human nature By identifying ways to curb abuses of power

4. A Virtuous Society Importance of a moral, upright populace was a prominent theme during the American Revolution. Intellectuals viewed the revolution in moral as well as political terms. New republic had to learn lessons from Europe’s past. We must try not fall into trap of decadence leading to downfall of Rome

5. Legitimacy of Power Constitutional debates in context of their recent experience with Great Britain and Revolutionary War. The entire question of legitimacy of authority–how authority should be appropriately wielded in the new government.

6. Sovereignty Nature of sovereignty had been one of the primary disputes behind the American Revolution—idea of sovereignty became established in British political thought after the Revolution of 1688. American revolutionaries began to argue that true sovereignty lay within the people. Governmental authority was to be restricted to certain areas—e.g., by the creation of a Bill of Rights.

7. Separation of Power Separation of powers into different units—executive, legislative, judicial—and checks and balances on each unit—part of early American government . This prevented concentration in hands of one or a few individuals. Separation of powers in the Constitution was the Founder’s means of acknowledging the importance of human nature, and not just organizational structure. Same separation of powers in constitution and charters of decentralized organizations.

8. Federalism as a Guide for Business Like Federalists Drucker sought to design blueprint for society that would curb the worst tendencies in humankind & liberate people’s potential for good. The Framers wrestled with designing a framework for governance, just as Drucker struggled to find a model of a tolerable society for a modern industrialized world.

9. Federalism as a Guide for Business Following Federalism, Drucker addressed his work on management to people of virtue: Legitimate power and authority Sovereignty Separation of powers Principles of Corporate Federalism* Principle of subsidiary Principle of interdependence Coordinated controls and corporate governance *Charles Handy, “Balancing corporate power: A new federalist paper”

10. General MotorsCorporate Federalism Example General Motors as an “essay in federalism—on the whole, an exceedingly successful one”: What made it a successful essay on federalism? “It attempts to combine the greatest corporate unity with the greatest divisional autonomy and responsibility; and like every true federation, it aims at realizing unity through local self-government and vice versa [diversity through responsibility]” (Drucker, 1946, p. 46).

11. Decentralization Is Not Just Organizational Structure Federal decentralization not merely as another method of organization because of: Ancestry in political federalism. Application to divisions inside the company and to dealers and other external partner organizations outside the company. Its pattern for a new social order. Pluralism and distribution of power. Application to networks and alliances.

12. Federal Decentralization “To give autonomy, one must have confidence. And this requires controls that make opinions unnecessary. To manage by objectives, one must know whether goals are being reached or not, and this requires clear and reliable measurements.” Management by Objectives & Self-Control* Clear objectives & appropriate performance measures allow top management to independently evaluate performance of persuasive personalities and charismatic leaders–dealing with potential negative effects of charisma

13. Distributed Work & Checks and Balances when Organizing Top Management Turnover of CEO’s of 2,500 largest global companies set a record in 2005. Rate of failure suggests unworkable job— “widow maker”. Hints as to direction restructuring of CEO position. Three person top-management team –allow each member of team to provide candid advice, and checks and balances on CEO. Provide visibility of team to Board of Directors & provide checks and balances on conduct of CEO. These steps are essential to the principles of corporate federalism and constitutionalism.

14. Work of the Board Board of Directors is needed to assume fiduciary responsibility, organize work and perform their duties effectively. The current position of a Board Member in US also unworkable—needs restructuring. Recommendations for work of the board: Set the agenda for the board so as to focus on the areas critical to the success of the corporation Have appropriate information flows to board to permit board to set agenda and organize their work Assess performance of top management and individual board members Set compensation levels reflecting performance against the responsibilities of top management Adapted from Ira M. Millstein, Holly J. Gregory and Rebecca C. Grapsas “Six Priorities for Boards in 2006,” Law and Governance, March 2006, Vol. 10, No. 3., pp. 17-19; with assistance from Professor Cornelius de Kluyver.

15. Work of the Board (cont) Recommendations for work of the board: Designate subcommittee of the board for succession issues. Establish culture of integrity extending to compliance. Actively participate in formulation of major strategies and monitor effectiveness of management’s implementation. Ensure financial statements accurately reflect economics of business. Identify critical success drivers, review status of drivers, and identify present & potential risk factors facing corporation. Provide justification for incentives and compensation levels. Adapted from Ira M. Millstein, Holly J. Gregory and Rebecca C. Grapsas “Six Priorities for Boards in 2006,” Law and Governance, March 2006, Vol. 10, No. 3., pp. 17-19; with assistance from Professor Cornelius de Kluyver.

16. Chapter 4 Take Aways Drucker’s teachings–pragmatic for diverse society of institutions & seeks a model for a tolerable society of diverse organizations. Considers both the nature of man and organizational realities. Like Federalists, Drucker struggled to find blueprint for organizations to curb worst tendencies in humankind while liberating potential of people for good. Believed in separation of powers and recognized inevitable abuses of power and authority. Framers sidestepped conflicts between state & federal government which created ambiguity. Drucker (and GM’s Alfred Sloan) recognized similar conflicts between decentralized units and central administration; thus ambiguity by design.