16.1 To be successful, all organizations must have checks and balances.
By checks, I mean people who check on other people to make sure they’re performing well, and by balances, I mean balances of power. Even the most benevolent leaders are prone to becoming more autocratic, if for no other reason than because managing a lot of people and having limited time to do it requires them to make numberous difficult choices quickly, and they sometimes lose patience with arguments and issue commands instead. And most leaders are not so benevolent that they can be trusted to put the organization’s interests ahead of their own.
a. Even in an idea meritocracy, merit cannot be the only determining factor in assigning responsibility and authority.
Appropriate vested interests also need to be taken into consideration. For example, the owners of a company might have vested interests that they are perfectly entitled to that might be at odds with the vested interests of the people in the company who, based on the idea meritocracy, are most believable. That should not lead the owners to simply turn over the keys to those leaders. That conflict has to be worked out. Since the purpose of the idea meritocracy is to produce the best results, and the owners have the rights and powers to assess that, of course they will make the determination—though I recommend they choose wisely.
b. Make sure that no one is more powerful than the system or so important that they are irreplaceable.
For an idea meritocracy, it is especially important that its governace system is more powerful than any individual—and that it directs and constrains its leaders rather than the other way around. The Chinese leader Wang Qishan drew my attention to what happened in ancient Rome when Julius Caesar revolted against the government, defeated his fellow general Pompey, seized control of the Republic from the Senate, and named himself emperor for life. Even after he was assassinated and governance by the Senate was restored, Rome would never again be what it was; the era of civil strife that followed was more damaging than any foreign war.
c. Beware of fiefdoms.
While it’s great for teams and departments to feel a strong bond of shared purpose, loyalty to a boss or department head cannot be allowed to conflict with loyalty to the organization as a whole. Fiefdoms are counterproductive and contrary to the values of an idea meritocracy.
d. Make clear that the organization’s structure and rules are designed to ensure that its checks-and-balances system functions well.
Every organization has its own way of doing this. The diagram below is a sketch of my conceptualization of how this should work for Bridgewater, which is currently an organization of about 1,500 people. The principles it follows, however, are universal; I believe that all organizations need some version of this basic structure.
There are one to three chairmen working with seven to fifteen board members supported by staff, whose purpose is primarily to assess whether: 1) The people running the company are capable; 2) The company is operating in accordance with its agreed-upon principles and rules. The board has the power to select and replace the CEOs, but doesn’t engage in the micromanagement of the firm nor the people running it, though in the event of an emergency, they can drop into a more active role. (They can also help the CEOs to the extent they want it.) While Bridgewater’s idea meritocracy is ideally all-inclusive, there need to be various circles of authority, trust and access to information, and decision-making authority, which are shown in the chart’s three circles.
e. Make sure reporting lines are clear.
While this is important throughout the organization, it is especially important that the reporting lines of the board (those doing the oversight) are independent of the reporting lines of the CEOs (those doing the management), though there should be cooperation between them.
f. Make sure decision rights are clear.
Make sure it’s clear how much weight each person’s vote has so that if a decision must be made when there is still disagreement, there is no doubt how to resolve it.
g. Make sure that the people doing the assessing 1) have the time to be fully informed about how the person they are checking on is doing, 2) have the ability to make the assessments, and 3) are not in a conflict of interest that stands in the way of carrying out oversight effectively.
In order to assess well, one has to gain a threshold level of understanding and that takes time. Some people have the ability and the courage to hold people accountable, while most don’t; having such ability and courage is essential. And the person doing the assessing must not have conflicts of interest—such as being in a subordinate position to the person they are intended to check on—that stand in the way of holding them accountable, including recommending that they be fired.
h. Recognize that decision makers must have access to the information necessary to make decisions and must be trustworthy enough to handle that information safely.
That doesn’t mean that all people must have access and be trustworthy. It is possible to have subcommittees who have access to sensitive information and make recommendations to the board that are substantiated with enough information to make good judgments, but without disclosing the highly sensitive particulars.
* Source: Principles by Ray Dalio