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 / Spring 2003 / Issue 30(originally published by Booz & Company)


The Paradox of Corporate Entrepreneurship

The net result of having too few boundaries — or of not policing existing boundaries — can be disaster. Lax controls have allowed individuals to destroy, or nearly destroy, entire companies. (Recall Nick Leeson at Barings Bank, Joseph Jett at Kidder Peabody, and John Rusnak at Allied Irish Banks.)

The need for defined boundaries (e.g., regulatory and financial controls) is obvious, even though they are sometimes absent. In the Allied Irish Banks case, Mr. Rusnak reportedly kept a file on his computer called “fake documents” because the monitoring systems were so slipshod that he believed he would never get caught.

But even when boundaries are clear, policing them presents thorny issues. An established body of thought in social psychology shows that companies induce their employees to act in a certain way by virtue of the control systems they create. For example, if travel expenses are tightly controlled, employees will delight in finding ways to contravene the expense rules. If employees are instead asked to claim what they think is reasonable, they will generally be honest. From this, guidelines can be suggested to help establish boundaries that are respected.

  • First, identify mission-critical boundaries, the ones that can destroy the business if crossed. It almost goes without saying that these boundaries must be carefully controlled, and anyone who fails to respect them should be fired. Such dismissals are one of the most important tools for reinforcing how seriously these boundaries are viewed.
  • Second, identify other boundaries that are no less important but that can be controlled less intrusively, in order to maintain the spirit of initiative. Most companies today, for example, have codes of conduct or values statements. These typically represent important boundaries, but they are managed in a noninvasive way: They are built into recruiting and training programs and emphasized in internal communications; even more important, visibility is given to people who uphold them. Paradoxically, boundaries of the moral and ethical type can actually be better managed by not being policed too heavily.

Too Little Support. Support covers the wealth of services companies provide to individuals and business units to enable them to do their jobs well, from information about what others are doing, to forums and committees to share experiences, to training and development programs. With too much support, even with the best intentions, the organization can become bureaucratic and complex. But with too little support, a real risk arises that individual managers will start to act like lone entrepreneurs, taking initiative without any regard for what is happening around them. Organizationally, this results in duplication — lots of overlapping projects, as well as different business units chasing the same customers. For individuals, it results in burnout, confusion, and disillusionment.

Enron again offers some insights into the extremes of entrepreneurial management. For Enron, too little support was manifest in its almost unfettered internal labor market. The typical recruit came from a top U.S. business school, and was given a compensation package on par with an investment banker’s. These new hires were given a series of six-month assignments with different business units through an “associate” program, but after they completed these rotations all further career steps were their own responsibility. Some individuals created their own opportunities by proposing new business ideas. Some sought out opportunities in exciting new growth areas. For example, Gary Hamel observes in Leading the Revolution that when Ken Rice announced he was starting Enron Communications, he had 64 volunteers within a week, all of whom were free to leave their existing jobs. The risk–reward mentality in the company meant that the highest-paid individuals were those starting new businesses. The “rank and yank” evaluation system, which forced people out of the company, also favored the most aggressive people. Enron’s personal development program, in other words, was almost entirely the responsibility of the individual.

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  1. Julian M. Birkinshaw, “Entrepreneurship in Multinational Corporations: The Characteristics of Subsidiary Initiative,” Strategic Management Journal, Volume 18, Issue 2, 1997; Click here. 
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