Personal Finance

Save investors from matrix organisation

| Updated on January 17, 2011 Published on January 17, 2011

BL17_IWPF_KVIJAYAN

The matrix organisation is like a coalition government; everyone can avoid responsibility. The matrix organisation is like a coalition government, everyone can avoid responsibility for a wrongdoing.

One of the positive fallouts of the financial crisis is that we can now question the myth of superior American systems, without losing our reputation for professionalism. Let me pick on one — the matrix organisation. It tops my list of bad ideas.

Collective deniability

This structure has evolved to protect the US corporate chieftains from the consequences of their negligence. This is harmful to the most vulnerable external stakeholders i.e., small share fromety. Stringent accountability is the only check on greed, which is the pivot of every decision in their bonus-centric culture.

When the financial crisis broke, one question that was often asked was, “How is it that the best brains in the developed world, working for the most powerful financial organisations, operating in the best regulated capital markets, blow up investor wealth in such a spectacular manner?” The answer is lack of central accountability, embodied by the matrix organisation.

What's the matrix

The matrix organisation is harmful in any business. But in the financial business, it is the most critical investor risk – he trusts his savings to a company that is run like a coalition government.

The matrix organisation is a descendent of two management structures. One is the line and staff structure that the army evolved, to deal with the need for specialist inputs to decision-makers. Here, there are two lines of authority which flow at one time, viz. line authority and staff authority. Power of command, however, remains with the line executive and staffs serves only as counsellors.

The second structure is the project matrix organisation, which was created to deal with projects that require multiple disciplines. A company creates a flat hierarchy with a team leader and multiple specialists need to quickly and efficiently execute a project.

A permanent matrix organisation, on the other hand, is a bureaucracy nightmare. In each business unit (say the Indian subsidiary) there is a CEO, who is supposedly assisted by domain specialists. But each of these specialists does not really take orders from the CEO.

They report into domain empires within the organisation. Matrix organisations create a feeling of infallibility, because so many “domain experts” get pulled into making a decision. This fosters a sense of irresponsibility, because everyone believes that someone else who has approved the decision knows what he or she is doing.

Everyone is also secure in the belief that this collective decision-making ensures that the whole organisation will be arrayed against anyone who tries to prove that they were wrong.

Even if this does happen, no one can be individually blamed and lose his job or worse. When a “scam” happens in India, people get arrested, cases are fought and life can become living hell for those who are involved. In the developed world, they get fat severance pays and golden parachutes.

Coalition government

In some respects, the matrix organisation is exactly like a coalition government – each cabinet minister supposedly reports to the Prime Minister but in fact reports to his party boss first each of whom has his own agenda to maintain his power base in his local city or state.

Like a coalition government, again, the members come together strongly to deny any hint of wrongdoing or negligence. Indeed an external threat is the single unifying force of a matrix organisation. No senior executive can be blamed for anything and the only punishment that can be meted out to the one in power is a golden handshake, though smaller fry do get blamed and sacked.

It creates deniability – witness the experience of our investors with multinational financial organisations versus domestic organisations in the various scams that have beset us from time to time. Not one multinational executive has had to face regulatory or legal action, except in the latest one where it was a clear fraud and the perpetrator has been arrested. Even here, it is interesting that the perpetrator is the only one blamed – whereas in the case of Indian institutions, the senior management faces severe action.

Protecting the investor

In India investors are feeling vulnerable and it is necessary for the regulator to think differently and ensure protection by ensuring stringent accountability at the top for all organisations.

Under Indian regulations, the directors are accountable and they take comfort from the managing director or the chief executive officer who is responsible for the acts of omission and commission of his staff; let even multinational financial businesses toe that line.

In this way, investors will get a far better deal when there is built-in due diligence and knowledge based decision making.

Published on January 17, 2011

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