Why Your Entrepreneurs Leave

In large organizations, if board oversight and management incentives aren’t aligned with value creation, entrepreneurial mindsets can and will be crushed by “iron bureaucrats.”

In a recent post, I juxtaposed the decision-making approaches applied by hard core entrepreneurs and those applied by big company executives.  My thesis was that big company execs can learn from the decision making approach applied by entrepreneurs, if only their incentive structures can allow for it.

One reader, Graham Moores, responded on LinkedIn with this comment:

“In my experience the collaboration between Entrepreneurs and Executives is what should be aimed for, when one side does not understand and respect the other, problems will exist.”

This is a fantastic point, and in the ideal world, makes great sense.

If we can couple the entrepreneurial mindset of building businesses and bearing risk with the executive mindset of allocating resources and protecting against downside; all can win.

However, as Mr. Moores noted, the two sides often don’t understand one another; and therein lies the rub…

Why are real entrepreneurs so often bred out of large organizations?

The classical answers tend to be given offhand.  They include that big organizations move too slow, are too risk averse, and are double ungood at listening to new ideas.

These “reasons” tend to imply that large organizations are uncomfortable for people with an entrepreneurial bent.

That may be true…

But…

I’d argue the real reason entrepreneurship is bred out of large orgs is actually rooted in an organizational phenomenon best articulated by science fiction author Jerry Pournelle.  It has been called the “Iron Law of Bureaucracy.”

I’m capturing it from his website, but it has been quoted in many other places.

It reads (with my emphasis added):

“In any bureaucratic organization there will be two kinds of people:

First, there will be those who are devoted to the goals of the organization. Examples are dedicated classroom teachers in an educational bureaucracy, many of the engineers and launch technicians and scientists at NASA, even some agricultural scientists and advisors in the former Soviet Union collective farming administration.

Secondly, there will be those dedicated to the organization itself. Examples are many of the administrators in the education system, many professors of education, many teachers union officials, much of the NASA headquarters staff, etc.

The Iron Law states that in every case the second group will gain and keep control of the organization. It will write the rules, and control promotions within the organization.”

If we replace Pournelle’s well-known government-connected bureaucracies with some generic corporate examples, then you and I can start to see how this law applies to the problem of entrepreneurship and executive management.

It could easily read as follows (to be clear, all edits are my own and I present it only for conjecture):

“In any business bureaucracy there will be two kinds of people:

First, there will be those who are devoted to the goals of the organization. Examples are people dedicated to customer satisfaction, product excellence, and advancing the organization’s reputation among employees, customers, and the community…

Secondly, there will be those dedicated to the organization itself. Examples include executives and administrators who focus exclusively on defending position, avoiding risk, and managing to the letter of all incentives.

It’s plausible to argue that in every case the second group will gain and keep control of the organization.It will write the rules, and control promotions within the organization.”

What this might mean is that instead of large organizations being uncomfortable for entrepreneurial people, they actually become actively hostile to people who want to rock the boat in the name of building value.

The two don’t merely misunderstand each other; they grow to be fundamentally incompatible.

And, since the second group is far more likely to play the bureaucracy game with alacrity, its most senior representatives will eventually call the shots, just as Pournelle’s law states.

They are the “Iron Bureaucrats.”

So what?  Isn’t that just life?

Well, sort of.

As my reader, Mr. Moores, noted, it’s actually ideal if the entrepreneurial and executive mindsets can coexist and collaborate.  We want large organizations to both embrace business building and risk taking while at the same time embracing discipline and risk awareness.

That’s a good strategy.

But how?

Much of the time, this comes down to the inherent bent of the CEO and senior management.  If the CEO is an iron bureaucrat, then entrepreneurs will struggle.

If the CEO is a closet entrepreneur, even within the trappings of a large bureaucracy, then entrepreneurs can thrive.  One need only look at some of the shifts in strategy at bellwether companies like IBM, Apple, Nucor and many others over the years to see the evidence of this factor.

The other factor is the incentive set that is outlined for senior executives.  In a sort of Judo move, boards can take an iron bureaucrat’s best strength (hitting the numbers) and make it work for the long term value of the company by measuring business building activity aggressively.

So, while entrepreneurs are likely to be bred out of large organizations, they don’t have to be.  Through better board oversight (particularly on the philosophical bent of the CEO) and incentive alignment (particularly around business building) the curse of the Iron Bureaucrat can be overcome.

It’s always great to get thoughtful responses on blog posts, regardless of platform; and I hope you’ll add your thoughts here.