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Some Lessons from the Engine Room about Managing an Institute
By Michael Walker, Senior Fellow, The Fraser Institute (Canada)
am very pleased to have the opportunity to share with the Atlas network some of the lessons I learned about managing an institute during my thirty-one years in the engine room of the Fraser Institute (Canada). Michael Walker I think the first thing that needs to be said is that the management style which is appropriate to a newly formed institute is very different than the model which can be applied when it has fifty or more employees with three regional offices and extensive international connections. In their early stages, most small enterprises are “cults of personality,” since the organization is closely identified with one individual. This early phase is the “Mike’s Grill” stage. Everybody knows Mike and either likes Mike’s food or hates Mike’s food and patronizes the business accordingly. Of course there may be an equally well-known Millie or Moe at the till, but it’s the Mike at the grill that draws people in. The inside workings of the “Mike’s Grill” stage is essentially that of a hierarchical autocracy. Everybody expects the decisions to be made at the top and for the most part that is where they are made. Communications up and down the line of command keep the organization on mission and one or a few people at the top drive the organization. The real strength of such an organization structure is that it is relatively cheap to operate. Transaction costs in terms of meetings, consultations, etc. are minimized and the organization can respond quickly to changes in the perception of the CEO as to the opportunities and threats that the
organization faces. There are, however, distinct weaknesses. The first is that it is often difficult for the person at the top of such a hierarchy to encourage within the organization the development of individuals who could potentially replace the CEO. Often the personality surrounded by the cult won’t tolerate
This market-based management system... simultaneously makes the Institute less vulnerable to the loss of the CEO and gives the CEO more opportunity to develop new departments and new activities within the institution instead of simply doing the fundraising or micromanaging the activities at the departmental level.
potential successors, but even if they do, good people leave because of the lack of upper mobility in such a hierarchy. Therefore this sort of organization is vulnerable to succession difficulties. How will “Mike’s Grill” do when Maurice is at the grill and nobody knows Maurice? In the think tank world, “difficult leadership transition” has been the rule rather than the exception. In my assessment of the record of think tank succession, I concluded that the problem was the nature of the organizational structure used by the organizations. That inference, whether
correct or not, greatly influenced my thinking about how the structure of the Fraser Institute should evolve. As a side note, it is also the case that a small organization may not have any choice but to stick with the cult of personality model. If the organization only has enough resources to pay one higher-priced individual, then it is also going to have to face the “Mike’s Grill” transition problems. Happily, there are some spin-offs of a positive sort that emerge from this situation. For example, at the Fraser Institute, my colleague for seventeen years, Sally Pipes, grew in ability, capacity, and appetite for independence to an extent that the Institute could not afford to retain her. She could have run the Fraser Institute by herself. She knew that and eventually left to become the president of the Pacific Research Institute (California), where she has been one of the most successful think tank CEOs in the business. The second weakness of the single personality model is that it is not well adapted for expansions that may require different kinds of centers of excellence or different geographic locations. As the Fraser Institute has grown, its organizational structure has been changed to accommodate the challenges posed by increased size and to actively encourage further growth. One of the earliest changes was the adoption of a collegial model for the determination of programs and projects. In such a model the strategic plan in general terms and over a fiveyear horizon is determined by the CEO while the project detail, including the development of new program ideas, is evolved collaboratively by the researchers. Collegiality encourages ownership, and ownership induces higher productivity and more reliable innovation. While the collegial model allows more individual initiative in the selection and execution of projects, its
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Walker’s Laws for Creating and Working with a Board of Directors
The selection of a Board of Directors is a crucial step for a new think tank. The new CEO needs a board which is active enough to provide advice and guidance based on business experience but not so active as to interfere with the independence of the researchers and the research agenda of the organization. If the think tank is to be successful it must be independent of its sources of financing and the CEO must be the principal shield that guards the researchers from any influence. Ideally the Board of Directors would only be involved in an oversight function regarding the financial affairs of the institute and not at all involved in setting the research agenda. While I realize that frequently the Board of Directors are involved in the creation of an institute and in the provision of its initial funding, it is very important that the new CEO work diligently to build a funding base which is not reliant on the Board of Directors. Walker’s Law is that, “the independence of the researchers and the research agenda is inversely proportional to the percentage of the budget raised by the Board of Directors.” Directors who raise a lot of money for an organization will want to have influence over the projects on which the money is spent and may have firm opinions about what the studies should conclude. I have never subscribed to the rule that is often applied to directors of not-for-profit organizations that they should “give, get, or get off.” Directors should be chosen on the basis of their experience, their track record of success, and their knowledge that good directors advise, not manage. It is also important to pick directors who have a day job so that their hobby doesn’t become an inclination to meddle in the internal affairs of the institute. During my thirty years of experience at the Fraser Institute, I was very fortunate to have directors who clearly understood the foregoing. They were very helpful with business advice, often very helpful with fundraising advice, and in providing some funding. But once the rules of engagement were settled, they never interfered with the projects or the research work of the Institute. ●
Drawing by Kara Dyble
In their early stages, most enterprises are “cults of personality,” since the organization is closely identified with one individual. This early phase is the “Mike’s Grill’ stage.
essential structure is “socialist” in nature. While decisions are made collaboratively, and researchers have control over the project agenda, the consequences are experienced collectively. In such a situation individuals don’t benefit when they make good choices and don’t bear costs when they make poor decisions. Not surprisingly, in the collaborative model some of the problems of socialist organization are experienced. The most important of these is that people are not incentivized to make good choices and avoid poor choices. A related issue is that it is more difficult as a practical matter to structure an efficient compensation program when inputs and outputs are collectivized. In 1995 I began a program to restructure the Institute to place more power and responsibility in the hands of department heads. The bookkeeping system in the Institute was disaggregated so that costs and income could be tracked by department. Department heads were given the task of devising their own operating plan together with the financial implications. By 1998 this organizational structure had evolved into a decentralized planning and management system involving a compensation program under which every employee in the Institute received a portion of their pay as a performance-related bonus. The coupling of compensation to the performance monitoring program
transformed the collective, collegial model into a market-like incentive program which guides participants’ behavior. At the same time, department heads were made responsible for raising funds for the research projects within their department, as well as to contribute toward the general operating expenses of the Institute. The service departments, like publications and communications, but also the infrastructure departments, like accounting, are dependent on the other departments for their budgets for the most part. This ensures that the program departments have a keen interest in the efficiency of the service departments and the service and infrastructure departments are as responsive as they can be to the needs of the program departments. In effect the “Mike’s Grill” model has been transformed into the “Mike’s Shopping Mall” model, where each of the stores (departments) can grow at its own pace as long as it contributes its “rent” to the mall. Each of the departments within the Institute is like a mini Institute, with each of the departmental directors setting out and achieving their own performance targets. The Fraser Institute’s CEO acts like the conductor in an orchestra to ensure
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Newsletter for the Atlas Network 11
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The main challenge posed by this decentralized power structure is the transition to it from the status quo. It is my experience that the only human being who likes change is a wet baby. The change we must engender in our institutes is not very different than the challenge of the change that we try to encourage in the political system – in each case there is a well-entrenched set of interest groups which will try to stop it. The way we overcame the status quo was by linking the change in responsibility with the change in the compensation program. By introducing a bonus arrangement linked to the performance assessment program, at the same time as we made the department directors responsible for their budgeting, we provided an opportunity for the change to improve the financial position of each department director. Of course there were still those who preferred the status quo and wanted neither the increased compensation nor the responsibility for the performance that would produce it. As they say, the proof of the pudding is in the eating, and the Fraser Institute has now transitioned from a CEO who had essentially been in that position for thirty years to a new CEO who is doing very well. The Institute has continued to grow at double-digit rates and it is possible that during the current year the Institute will enjoy its best year ever. Of course this is a tribute to the great skills and abilities of my successor, Mark Mullins, but it also reflects the fact that all of the departments within the Institute are pulling together as they strive to achieve their own objectives, both institutionally and personally. Of course the biggest bonus is that the transition has provided me with free time to do things like write essays for the Atlas Economic Research Foundation! ● Please contact Michael Walker at email@example.com with questions or comments about this article.
that the performance targets of the different departments are mutually compatible and appropriately supported by the Institute’s infrastructure. Each of the departmental directors is a member of the Institute’s management committee, which meets monthly to consider the individual budget performances of the divisions as well as the overall budget performance of the Institute. The management committee serves to internalize externalities which might be produced by one department and affect other departments. The committee also serves as a sounding board for the CEO and a venue in which Institutewide problems can be solved. Of course in a think tank the issue of quality control is all-important, and where departmental directors are incentivized to grow their divisions, there may be a trade-off between quali-
ty and growth. The peer review process maintained by the Institute guards against such an eventuality. Every research output is subject to a peer review by external as well as internal reviewers. In the event that reviewers find what they regard as a crucial flaw in a paper, an Institute author may only proceed to publication after the flaw has been corrected or if the Editorial Advisory Board of the Institute overrides the external reviewers objection – something which has yet to happen in the thirty-two-year history of the Institute. In addition to creating a more efficient and effective organization, the approach now used at the Institute produces some additional benefits. Since each of the department heads within the Institute are in effect running a mini Institute, they can grow their activity and their compensation as much as they want. Departmental growth finances itself and contributes to the operating expenses of the Fraser Institute, so there really is no limit to what a department head can achieve. Correspondingly, each of the department heads is a potential Executive Director for the Institute since each has to master all of the skills that are required in running their own departments. Of course the other great benefit of this market-based management system is that it simultaneously makes the Institute less vulnerable to the loss of the CEO and gives the Drawing by Kara Dyble CEO more opportunity to develop new departments As an institute grows, the “Mike’s Grill” model and new activities within transforms into the “Mike’s Shopping Mall” model, the institution instead of where each of the departments (or stores) within the simply doing the fundraisinstitute is like a mini Institute. The departmental ing or micro-managing directors set out and achieve their own performance the activities at the departtargets and contribute to the overall success of the organization. mental level.
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