Hongyi Li, a lecturer in the school of economics at the Australian School of Business, who co-authored the paper with INSEAD’s Maria Guadalupe and Harvard University’s Julie Wulf, says there has been a clear shift from the mid-20th century when a multi-divisional structure ruled in organisations. Companies were split into several semi-autonomous units under the control of general managers.
Li notes that the increasing number of functional managers in the C-suite with company-wide responsibility for their specialised area, including chief information officers (CIOs), chief operating officers (COOs) and chief financial officers (CFOs), “means that we are moving away from this decentralisation of power within each product”.
The authors refer to the trend as “functional centralisation”. By contrast, general managers within individual business units are in decline.
Li interprets the growing number of functional managers as a response to increasingly focused organisations with greater coordination across their products. Apple, for instance, has a suite of products including the iPhone and iPad requiring a synchronised sales and marketing campaign.
“There becomes much more value in trying to exploit synergies, in trying to co-ordinate between the different products,” Li says.
The result is that many companies are employing specialist executives who can devise and implement strategies to promote a company-wide brand and its products.
According to the research authors, the number of managers reporting directly to the CEO has doubled, from an average of five direct reports in 1986 to an average of 10 today. Functional managers such as finance, human resources and marketing specialists are filling the C-suite rather than general managers.
Virginia Mansell, executive chair of leadership development firm Stephenson Mansell, says the consensus is that up to about eight direct reports to the CEO is manageable. However, anecdotal evidence suggests it has risen to as high as 22 in some companies. Mansell believes the growth of the C-suite reflects a more egalitarian and collaborative modern corporation compared with more hierarchical or patriarchal organisations of the past.
“It’s an evolution from command and control to this team-based approach,” she says.
Such a change has implications for the types of employees and leaders that a company recruits. Mansell says there must be a clear emphasis on hiring or developing leaders with teamwork and communication skills.
“They get people who fit into the culture and then they do a lot of development around individual and team performance and leadership. It’s become much more sophisticated for developing talent pipelines.”
The researchers note a clear need for CEOs to design the structure of their top management team based on the scope of the firm and opportunities for synergies, while recognising the distinction between different types of functions.
For instance, a CEO who is narrowing the company’s focus and divesting tired brands would be advised to put product functional managers in the C-suite. Or if a company has made a major investment in IT, the slate of direct reports in the C-suite should include human resources, IT, finance and other admin-functional managers in order to communicate more efficiently across these areas.
Li says the changes present challenges for modern CEOs. Whereas once they could be more hands-off, they now have to “get their hands dirty” and manage these different functions.
'There becomes much more value in trying to exploit synergies, in trying to co-ordinate between the different products'
- HONGYI LI
The research paper highlights IBM, which exemplifies this shift towards functional centralisation. It notes that after Lou Gerstner was hired as CEO of IBM in 1993, he transformed the battling business from a decentralised operation with a range of info-tech businesses into a centralised organisation with an integrated product and service offering to customers (“One IBM”).
With the new strategy requiring coordination across business units, Gerstner overhauled his C-suite and added functional managers to aid corporation-wide coordination.
Joe Fischer, who has held senior executive positions in corporations such as Nestlé and P&O Group, says modern companies need a different executive skill set as a consequence of the four Cs: complexity, control, consistency and cost.
In a more complex business environment, they typically require specialist executive leaders rather than generalists. In the aftermath of the global financial crisis, control is at the heart of risk management. If you have people who are consistently responsible for some areas there is likely to be greater control, real or perceived, in the organisation. Then there is de-layering of management, which can have positive cost implications.
“What it has done is create a difference in the way they have to operate, and what they have to start to do is to learn to work together,” says Fischer, now executive director of Stephenson Mansell.
Fischer believes influence, trust and relationships become the key factors in this environment, whereas in a decentralised organisation general managers rule their domain and do not have to deal with colleagues to such a degree.
“Now you’ve really got to influence your peers to get anything done,” he says.
The reseachers argue that the rise of IT investment has contributed to the growth of functional managers in the C-suite. They suggest that before the emergence of email and intranets, for example, it was too expensive for employees to communicate crucial local information from the frontline to the C-suite.
IT systems also make it easier for administrative functional managers to codify and aggregate information such as a profit-and-loss spreadsheet across products and divisions.
“So now it’s easier to evaluate the performance of the organisation even when there is decentralisation going on,” Li says.
In theory, at least, the authors argue that this “IT intensity” can push legal counsels, HR directors and CFOs to the forefront. Arguably the biggest winners, though, have been the CIOs, many of whom have shed the tech-geek tag to become powerful members of the C-suite.
Fischer says there is no doubt about the rise of CIOs.
“They are becoming very powerful and are very often change agents in an organisation.”
The researchers suggest that it pays to join the C-suite. They found that simply by joining the C-suite and reporting directly to the CEO, a senior manager can expect an 11% increase in base compensation and a 15% rise in total compensation. On the flip side, the pay of general managers decreases as more functional managers move into the C-suite.
Mansell says such pay hikes for the C-suite reflect the level of complexity that CEOs, in particular, have to manage in a modern corporation.
“They have got to be able to lead the organisation at a cognitive level, plus be emotionally resilient and collaborative,” she says.
With that pay comes responsibility. The researchers argue that regardless of the balance of product-functional and admin-functional managers in the C-suite, CEOs with more functional manager direct reports will have more knowledge of, or involvement in, functional areas.
They conclude: “These CEOs are likely to be more hands-on, taking on a wider array of responsibilities as they strive to understand every facet of the business, not to mention all the new technologies they are adopting.”