First, let’s be clear what we are referring to. By a federal structure we mean an organisation that consists of a collection of separate organisational entities that are joined together to create a larger organisation able to pursue a common purpose collectively and/or at a larger scale. Member entities are typically separately incorporated with their own governance and management, but delegate agreed responsibilities to a central (often national) body. The central body, also separately incorporated, has a mandate to operate at greater scale to achieve what the member bodies cannot achieve on their own.
The history of federalism can be traced back to ancient times when alliances between states were formed for common purposes (e.g., the Persian Empire). Many more modern political structures are federal including Australia, Canada, United States, and the European Union.
Federalism is also widespread in other kinds of organisation both commercial and non-commercial (or ‘for-purpose’) organisations. Charles Handy who has studied and written extensively on the philosophy and mechanics of organisations has given particular attention to federal arrangements. [1] In general, Handy extolls the (theoretical) benefits of federal structures. He notes that what once was the basis for a range of nation states is also a means of organising increasingly complex organisations. In that context, he says:
“…The concept of federalism is particularly appropriate since it offers a well-recognised way to deal with paradoxes of power and control: the need to make things bigger by keeping small; to encourage autonomy but within bounds; to combine variety and shared purpose, individuality and partnership, local and global, tribal region and nation state, or nation state and regional block.” [2]
Handy does not, however, shy away from the challenges inherent in a federal structure.
“[Federalism] is messy, untidy and always a little out of control. Its only justification is that there is no real alternative in a complicated world. No one person, or group, or executive, is so all wise and so all sensitive that they can balance the paradoxes on their own, or run the place from the centre, even if people were prepared to allow them to.” [3]
Organisational paradoxes and federal principles
Among the paradoxes Handy alludes to are the following:
- Many organisations need to be both big and small at the same time. Big, because economies of scale apply, and small, because people want to identify with something closer to them and of human scale. Small is also likely to be more flexible and more likely to innovate. Federalism applied effectively responds to a wide range of pressures. It balances power amongst those in the centre of the organisation (which exists to coordinate rather than control), those in centres of expertise (which can be located anywhere in the structure), and those in the local/regional ‘branch offices’ where much of the business of the organisation is conducted.
- While business organisations philosophically prefer free and open markets in which they can operate in a relatively unencumbered manner, their managers instinctively organise for centralised control in their own operations. This is justified by those in ‘head office’ as only they can know the whole picture and take decisions that are in the best interests of all. As Handy puts it, they are inclined to ‘steal’ their subordinates’ decisions. However, the cost is often high in terms of bureaucracy, delay, demotivation, and a lack of innovation.
These two paradoxes point to the need to acknowledge that the member bodies of a federated organisation are interdependent – with each other and with the centre. Common goals built on mutual respect and shared interests are a critical component. A power balance is also essential. For example, some direction from the centre is needed (but not too much) as are various forms of support so that the ‘local’ level members bodies can live up to their responsibilities. On their part the member bodies must be willing to collaborate, to acknowledge that the greater good is ultimately more important than unlimited local autonomy, and to allow the centre to do its job.
Constitutional reality in membership organisations with federal structures means that power resides with the member organisations unless they delegate some of that that upwards to the federal centre. It is not, therefore, a case of the centre giving away or delegating its power as would occur in a unitary or more hierarchical organisational structure. Rather it is process of the member entities yielding some of their autonomy, which Handy describes as ‘reverse delegation’.[4]
Federalism has been defined over the centuries by a set of basic principles. Of those the most important is ‘subsidiarity’. An unattractive word with a simple meaning: that power (i.e., the right to make decisions) belongs at the lowest possible (competent) level in the organisation. In a federal structure subsidiarity requires that rather than taking decisions better made at the local/lower level, the centre should provide the kind of support (eg, by training and guidance) that would enable member organisations to be better at making the decisions that properly belong to them.
Even a former Pope saw fit to weigh in on the morality of this. The papal encyclical, Quadragesimo Anno of 1931, a response to industrialism and the Great Depression, stated:
‘It is an injustice, a grave evil and a disturbance of right order for a larger and higher organisation to arrogate to itself functions which can be performed efficiently by smaller and lower bodies.” [5]
Leading management thinker Rosabeth Moss Kanter has characterised the benefits of smaller units in another way – as faster, focussed, flexible, friendly and more fun. [6]
Modern approaches to federalism are very akin to good practice governance. The centre (board) articulates organisational purpose, specifies the outcomes to be achieved, and provides only as many guidelines (policy) as necessary to guide its smaller units. The same is true whether it is a holding company with subsidiaries or a federation of member organisations. Thereafter the smaller units are free to choose optimal means to achieve the outcomes (targets) set. The centre provides support, but the subsidiary entities may choose to go elsewhere if the price is better or the service superior. Interestingly Golf New Zealand has just reframed itself as the ‘National Support Centre’ for the sport’s member bodies.
In their book, Humanocracy, Gary Hamel and Michele Zanini take aim at the stultifying effect of central bureaucracy and discuss modern examples of dispersed organisations. For example, Haier, the Chinese appliance maker divided itself into more than 4,000 microenterprises each with 10 to 15 employees, organised in an open ecosystem of users, inventors, and partners. The centre sets some boundaries and, of course, expects a level of return. Hamer and Zanini also cite the American steel manufacturer Nucor and tyre company Michelin who have both pushed decision-making out from the centre. [7]
Challenges in realising the potential of a federal structure.
The attraction of federalism in larger organisations is the belief that “…for instance, autonomy releases energy; that people have the right to do things in their own way as long as it is in the common interest…” and, for the common interest to be recognised and acted upon “…people need to be well-informed, well-intentioned, and well educated to interpret that common interest…” [8]
This requires people whether located in the centre or an outlying part of the structure to acknowledge they have a stake in both, and to act accordingly. An organisational federation is comparable to a federal country; everyone is a citizen of two states: his or her own and the union. In both situations people are expected to exercise their local level responsibility while also considering and acting consistently with the interests of the whole.
Without that sense of dual citizenship, the high degree of autonomy prized by local level entities can look remarkably parochial and self-interested. That is just as damaging to the well-being of the federation (and its individual components) as the centre’s instinct to direct and control the member bodies of the federation.
A federal structure typically evolves through pressure on pre-existing small ‘local’ organisations to respond to the need for greater scale. As was recently described in an extensive ‘fit for purpose’ governance review of the NZ Rugby Union:
It is understandable that rugby in the 19th century, as a relatively new form of organised sport, evolved along federal lines. The sport developed locally first and spread regionally. Then followed the need to collaborate nationally and form a body capable of carrying out activities that required collaboration, coordination and greater scale.[9]
That review showed how rugby in New Zealand has struggled to overcome the increasingly apparent limitations of its current federal structure. Rugby is not alone in that. A particular challenge in many federations is to overcome the unsurprisingly parochial preoccupations of their members.[10]
One reason is that local autonomy can be so embedded in federal constitutions to the point that evolution to a successful federal enterprise in a rapidly changing world is almost impossible to achieve without some kind of ‘burning platform’ or outside intervention. The kind of constitutional change needed to adjust successfully to new challenges is often subject to a super-majority vote of member bodies which is difficult to achieve.
This is particularly difficult to achieve in organisations where local management interests often trump local governance capability and accountability. Part of the reality of many for-purpose organisations is that they depend on volunteers at the board level. Many of these come to the governance level with little understanding of their roles and responsibilities and, in any case, limited time to devote to the discharge of those. As well, volunteer boards typically have little appetite for conflict with their managers on whom they depend and for whom there may be little incentive to put the wider organisation’s interests ahead of protecting their own ‘patch.’ As Charles Handy states: “…a federal organization can be particularly exhausting to govern since it relies as much on influence, trust and empathy as on formal power and explicit controls.” [11] Thus it demands a competency in, and appetite for leadership that is rare in an organisation that is governed by elected volunteers.
What compounds that problem is that the governing board of the central body in a federation is often made up of representatives of member bodies. Regardless of legal and constitutional requirements to act independently as directors and in the best interests of the federation as a whole, they are invariably under pressure from their nominating body to act as delegates to advance local interests. Twin citizenship is a fine idea until the interests of one conflict with loyalty to the other. Federal functionality is difficult perhaps impossible to achieve when the sense of being part of a greater whole and, accordingly, accepting some restrictions on local independence, is trumped by local interests. Given member entities control the votes required to approve change, when ‘them’ versus ‘us’ becomes the prevailing narrative, a federation will find it difficult, if not impossible, to adapt to its changing operating environment.
Not all federations are vulnerable in that way. It depends on the kind of governance structure at the centre. The governance review of NZ Rugby cited a comparative study of federal governance structures in sports organisations which identified two alternative kinds of federal structure: participatory and independent. [12] In participatory federations affiliate organisations (federation members) maintain an active role in federation decision making and management. In independent federations like, for example, the Australian Football League (AFL), the federation is controlled by an independent board with autonomy over day-to-day operations in which affiliate organisations (clubs) have little direct involvement. The participatory model in a range of sports settings was found to feature, among other performance issues, “…naked self-interest…fundamental and seemingly inescapable.” [13] The same researchers identified another condition common in participatory federations, which they described as governance rent seeking. This condition, they concluded, is present in:
…situations in which governance structures persist even after they have become demonstrably sub-optimal because of the presence and actions of parties who resist change, because it would reduce their private benefits of control while the efficiency gains of change would be shared… [14]
In our experience the comparison of the relative strengths and weaknesses of participatory and independent federal models is also valid in other sectors. The central administrative body in the independent variant (i.e., an independent board) is better positioned to introduce and maintain initiatives that facilitate progress of the whole federation. An independent board is far less likely to be constrained by factional interests and political infighting among member entities. That does not mean, however, that does not mean there are no other performance risks to be managed.
Making the federal model work
So, given the challenges described above, and others for which there was no space, what can federal organisations do to at least moderate the impact of their structural tensions? Here are some initial thoughts.
- Get very clear about the federation’s purpose. By this we don’t mean another unactionable vision or mission statement. We are talking about a very clear statement of why the organisation exists and the outcomes it must deliver to stakeholders to justify its existence and its licence to operate. This is vitally important to the governance of any organisation as a starting point for decision-making and action. In a federation, in particular, agreement on purpose is the glue that can bind even disparate organisational parts together. Without a focus on and commitment to a common purpose, and a shared sense of the benefits it must provide to diverse stakeholders, all bets are off.
- Clarify the allocation of decision rights. It is particularly important to clarify and codify which decisions are reserved to the central body and which to the subsidiaries and member organisations. Whose authority counts where? Ideally there should also be meaningful consequences for non-compliance. We’ve seen too many situations where decision rights have supposedly been clarified only for those to be deliberately flouted in practice. It is particularly important to ensure that these rights are allocated in a way which will ensure that all parts of the system will work together as a coherent whole.
- Open, honest, and respectful communication. Trust is at the heart of any functioning organisation. For the subsidiarity principle to be applied effectively it not only has to be formalised. It also requires intelligence and information broad enough to give a total picture but detailed enough to select, agree and respect appropriate decision points.
- Create plentiful opportunities and processes for making connections and active dialogue and learning across the federation. To keep the federation healthy, it needs to create opportunities for its members to meet and regularly explore what success looks like and how best to achieve it. There is a need for cross-fertilisation and exposure to grow knowledge and understanding of the organisation as a whole and to reinforce the responsibilities of dual citizenship.
- A common information system that aids the performance of the entire federal entity but also exposes the reality of organisational performance in all its nooks and crannies. Success measures must be consistent across the whole system in order to expose the need for change and to support and reinforce the accountability of its various component parts.
- A common currency (or its non-monetary equivalent). As a member of the European Union United Kingdom never really embraced the Euro. Unsurprisingly, and not for this reason alone, UK citizens continued to think of Europe as a place to visit rather than somewhere to belong.
- Active leadership. Effective governance in any organisation hangs to a significant extent on the capabilities of the governance lead (President, chair, etc.). Charles Handy argues that the ‘President’ (i.e., the federal board chair) in particular must be “…a constant teacher, ever travelling, ever talking, ever listening, the chief missionary of the common cause.” [15] This is a governance responsibility not one that can or should be delegated to the Chief Executive although the two must be in lock step on the messages they send.
- Stronger, more effective governance. At the centre the governing body must be as independent as possible. The board must consist of people who have the skills, knowledge, and experience to govern the federation as a whole and, without fear or favour, to do so in the best interests of the federation writ large. Ideally, therefore, they are appointed rather than elected and certainly not elected as representatives of member bodies.
At the local level, if the federation’s member organisations are primarily dependent on volunteers, weak governance can be a particular problem. As a consequence, governors end up working for managers not the other way around. To be fair someone has to fill the governance vacuum but over time management and professional staff can easily become entrenched and all-powerful. One way to rebalance the power relationship is to provide (usually from the centre) professional development in governance disciplines and corporate support and advice to make it easier to apply those disciplines.
Notes
[1] See Charles Handy ‘Balancing Corporate Power: A New Federalist Paper,’ In Charles Handy (1995a) Beyond Certainty; The Changing World of Organisations. London, Hutchinson, Chapter 3. An essay originally published in the Harvard Business Review, November-December 1992. See also Charles Handy (1995b) The Empty Raincoat Arrow Business Books, Chapters 6-7
[2] Handy (1995a,33-4)
[3] Handy (1995b,99)
[4] Handy (1995a,41)
[5] Handy (1995a,41)
[6] Quoted by Robert Chote in 5 Fs for Success. The Independent, July 1993
[7] Hamel, G. Zanini, M. (2020) Humanocracy. Boston. Harvard Business Review Press.
[8] Handy (1995a,34)
[10] See, for example, Fish & Game NZ, Royal New Zealand Returned Services Association
[11] Handy (1995a,35).
[12] McLeod, J., Shilbury, D., Parnell, D., & O’Boyle, I. (2023) ‘Analysing the Australian Football League’s (AFL) governance structure: how does it compare to Europe’s “club run” leagues?’ Taylor & Francis Online
[13] McLeod et al (2023,6)
[14] McLeod et al (2023,12)
[15] Charles Handy (1995b, 106)