What Works for Nations Works for Business

The new book Why Nations Fail argues that nations flourish when they foster inclusive political and economic institutions, and they fail when power and opportunity are concentrated in the hands of the few. Like nations, CEOs need to practice inclusive decision-making if they hope to attain the performance magnitude they are aiming for.

April 19 2012 by Dr. Patricia Seemann


The new book “Why Nations Fail” is more than an insightful analysis of why some countries thrive and others struggle. With only slight modification, its principles apply with equal force to business organizations.

The authors, MIT economist Daron Acemoglu and Harvard political scientist James A. Robinson, argue that nations flourish when they foster inclusive political and economic institutions, and they fail when power and opportunity are concentrated in the hands of the few.

In much the same way, companies where decision-making is almost entirely restricted to top executives are setting themselves up for trouble. Like national leaders, they need to practice inclusive decision-making to unleash their organizations’ full economic power.

All executives like to say things like, “People are our most important asset” and “Culture is a critical component of our competitiveness.” But how many executives have human resources professionals they respect as much as, for example, their CFOs? How many companies actually try to create a culture that makes people successful? How many put as much effort into systems that will improve performance as they do into systems that rate performance?

Traditionally, most companies operate on the assumption that all knowledge, experience and insight are located at the top of the pyramid and the top knows best how the firm should be run. Command and control are still very much a part of the identity of most senior executives. So is the notion that it is perfectly fine for them to extract rewards for themselves that are a high multiple of what the average worker earns.

Not surprisingly, when this happens employees wind up feeling that the executives are acting only as agents of their own self-interest. They may do their jobs satisfactorily, but their real potential and their full participation in the company’s success are left untapped.

Smart executives treat decision-making very differently. They establish a leadership culture that is eager to listen and takes pride in being responsive to the needs and insights of workers. They practice the business version of the inclusive politics that Acemoglu and Robinson describe as the key to national success.

These executives strive to distribute power throughout their companies. For instance, they try to push decision-making to the lowest possible level rather than pulling it up to the top. They invest in developing the judgment capabilities of their people so they can make the decisions that were handled upstairs in the past.

They tie their organizational strategy (where are we going, and why?) to their human resources (how do we make our people successful?). They link internal communications (how do we create a shared understanding of how we make money?) to organizational learning (how can our people develop best-in-class judgment?).

As a result, people feel empowered and the firm becomes more agile because its decisions are made faster and with much more real-life knowledge — closer to the coal face, you might say.
Just about everyone in the business world is begging for innovation. Senior executives will try almost anything, from tossing their people into kindergarten-like environments to “unleash their creativity” to testing executives for their cognitive agility.

But most attempts to improve company performance are short-lived – they don’t stick. Instead of being tied to what people really do, they are based on some theoretical model of what consultants and academics think people do. The reengineering wave of the ’90s proved what a flawed concept that is.

In today’s knowledge economy, people’s work consists above all in making choices and decisions. To bring about lasting performance improvement, management has to focus on this as the real work. That requires the reallocation of power, attention and resources – even when it means letting the CEO’s pet project go.

To put it as simply as possible, managers have to learn how to take pride in the fact that the right decisions are being made, not in their making the decisions themselves.

Among nations, politics drives economic behavior. For companies, translate “politics” into culture and people, and you have the formula for success.