When Democracy and Centralisation Meet in Leadership

By David De Cremer and Tian Tao

Business leaders face a plethora of challenges and one of those is finding the leadership approach that would benefit the company and its employees. In this article, the authors elaborate on how the right amount of democracy, mixed with the right amount of centralisation, makes an efficient leadership strategy and how it is embodied by Chinese telecom giant, Huawei.

 

Since the outbreak of the financial crisis, an abundance of debates are being held to discuss the type of leadership that is needed to organise and direct financial institutes to incorporate the interests of all stakeholders available (and not only the interests of the shareholders). In the last few years, these debates about leadership effectiveness in financial institutes has been extended to organisational leadership in other industries (e.g. automobile industry) but also into the political arena as a result of the surprising outcomes of the 2016 US presidential election and the Brexit referendum in the UK. All these leadership debates have one thing in common and this is whether democracy as a decision-making tool has reached its limits and whether centralised power is needed more. With more centralised decision-making fear, however, exists that the social glue that binds societies and organisations together will be lost. These debates thus have important implications on how organisations nowadays can create a strong basis of belongingness for its employees, but at the same time achieve the most optimal balance between being a democratic versus a centralised decision-making authority.

In a time where financial resources are scarce, a shift has emerged in which employees’ motivation needs to be enhanced more by relational means such as making employees feel that they are valued and inclusive organisational members.

Current discussions on the importance of employees feeling that they belong to the organisation are motivated by the desire to bring back more humanity to the work place. In a time where financial resources are scarce, a shift has emerged in which employees’ motivation needs to be enhanced more by relational means such as making employees feel that they are valued and inclusive organisational members. Specifically, leadership is increasingly being recognised as an organisational element that contributes significantly to the identity of employees, and preferably so in ways that both the weaknesses and strengths of those employees are accepted and worked with by their leaders (i.e. a focus on compassionate leadership). This view point is somewhat different than how organisations have usually thought about the influence that leaders can exert. The influence of a leader is usually recognised as primarily having decision power over how to distribute valued and tangible (financial) outcomes. The limitations of looking at leadership effectiveness in terms of tangible outcome distributions are that (a) it associates leadership too much with the notion of power and (b) introduces too often a win-lose situation for the employees involved. Both the issues of defining relationships in terms of power and win-lose allocation decisions do not contribute to belongingness feelings but rather create feelings of exclusion.

 

A Common Leadership Challenge in East and West?

Today, it seems that this traditional viewpoint on leadership may move centre stage again, especially in light of the debate whether democratic decision-making systems have to be sacrificed for more centralised ones. Critics do point out that if this would happen an emphasis on centralisation will undermine belongingness feelings and therefore present a threat to leadership effectiveness. Important to note is that this debate is not only happening in the Western world, but a largely similar debate seems to be taking place in Asia, and more specifically China. China is transforming its economy into a more service-oriented one and this type of transformation implies that innovation is becoming a key competitive asset and in order to facilitate this process companies need to know what they stand for. They need to create organisational cultures in which employees feel that they belong so that they can represent the values of their company and where needed voice suggestions, opinions and improvements for the welfare of the organisation. From the perspective of the value “harmony”, as postulated by the Chinese philosopher, teacher and politician Confucius, installing a feeling of belongingness among employees should not necessarily be a problem. A potential problem, however, may be that belongingness in Chinese philosophical tradition goes together with a strong respect for hierarchy and authority. And, it is this latter value that makes that belongingness and voicing opinions – as is known in the democracy model – do not necessarily go together in Chinese business settings. In fact, because hierarchy is so important, decision-making is centralised, leaving little room for discussing opposing views with the aim to change the system if the environment requires it.1 Put differently, a strong focus on respecting (and actually maintaining) hierarchy in the strict sense installs a culture where there is little transparency and conflicts of interest may easily grow underneath the surface. In light of this consequence, it may therefore maybe be no surprise that Chinese president Xi Jinping has recently asked State Owned Enterprise (SOEs) to improve significantly on their governance by making decision-makers more accountable and enhancing cooperation with private companies to bolster innovation. 

In a way, because of economic needs (i.e. the service-oriented economy), in China the centralised decision-making model may need more democracy by building voice cultures. So far, it thus seems clear that in both East and West, the ultimate challenge today is to promote feelings of belongingness among their employees, whereas at the same time find the appropriate level of decision-making power, which asks for some level centralisation. The reason for this is that in an ever changing global economy, companies need to be built on inclusive cultures that create shared values by means of voice (i.e. democracy) whereas at the same time being able to make decisions quickly (i.e. centralisation) without being slowed down too much by enduring discussions. What kind of leadership is needed to achieve such balance?

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Procedural Fairness to Balance Democracy and Centralisation

Our research efforts have proven that an important element in this task is the use of procedural fairness, which refers to the perceived fairness of procedures used to make decisions. An important assumption associated with this concept is that fairness is in the eye of the beholder. In other words, based on own experiences and expectations people can differ in how they evaluate the fairness of events. Procedural fairness is different from what is known as distributive fairness which refers to “what” you receive. Although the outcome (e.g. salary, bonus, promotion and so forth) you receive can also be evaluated in more subjective ways (e.g. when one compares one’s bonus to the bonus of a colleague), it has undeniably more objective features than the perceived procedures used when making decisions. That is, a bonus, for example, is a tangible outcome and its financial value is transparent and clear to all. Procedural fairness is referred to as the “how” of decision-making. Specifically, in the process of making decisions, do feel employees feel respected, treated with dignity, are they listened to, are biases and stereotypes suppressed and can wrong decisions be corrected. All these procedural elements refer to the treatment one receives from leaders when they make decisions. This type of fairness reveals non-tangible outcomes, which make its interpretation subject to personal biases and preferences.

Our research has demonstrated that if the procedural treatment is perceived as fair, employees feel more included in the organisation, their self-esteem and confidence is higher, and they are motivated to contribute more to the interests of the organisation.
It is exactly this type of treatment that can make leaders effective in balancing democratic with centralised approaches to decision-making. Our research has demonstrated that if the procedural treatment is perceived as fair, employees feel more included in the organisation, their self-esteem and confidence is higher, and they are motivated to contribute more to the interests of the organisation.2 In turn, these effects create a culture of psychological safety where trust can grow.3 So, procedural fairness allows for creating fertile ground to make employees belong via building a voice-expression culture. At the same time, the use of procedural fairness also allows for centralised decision-making to be accepted. For example, research has shown that if the outcomes (“what”) one receives are judged to be negative or unfavourable, the use of fair procedures by the leader nevertheless leads employees to accept and comply with these outcomes.4 In other words, procedural fairness installs a belongingness culture that helps promote compliance to centralised decision-making.5 And, it is exactly this balance that organisations and societies nowadays are looking for.

 

Leader Procedural Fairness in China: Huawei’s Decision-Making Model

Our analysis of the Chinese telecom giant Huawei revealed that this company known for its mix of Chinese and Western management ideas is building exactly a culture where democracy and centralisation meet each other (i.e. we refer to this situation as “controlled democracy”).6 And, when looking at what makes this balance possible, it is revealed that – in line with our earlier mentioned research on procedural fairness – exactly the building of a voice-expression culture that creates belongingness (harmony by accepting diversity) combined with a more centralised decision-making platform (respect for hierarchy and decisions made) is doing the trick.

Huawei was founded by Ren Zhengfei in 1987 in Shenzhen and emerged as the world leader in the telecommunication industry when it surpassed Ericsson in terms of sales revenue and net profit in 2012. Because of its success at the global level, the company is often hailed as the example for other Chinese companies to strive for. In fact, many Chinese believe (and hope) that knowing about and then applying Huawei’s management practices will make them also successful. However, it is not that simple. First of all, Huawei is the only Chinese company that receives more sales revenue from markets outside (67%) than from inside China. This statistic implies that Huawei must adopt a different a focus than any other Chinese company. As a company that started with strong Chinese roots, Huawei transformed gradually – by pursuing a mix of Chinese and Western management styles – into an organisation able to deal with different voices and demands as communicated by its diverse work crowd and international clients. In contrast, Chinese companies are relationship oriented but take place within a very hierarchical work culture where employees and lower levels of management do not voice their opinions and feedback easily (in contrast to companies from more egalitarian Western countries).

The building of a voice-expression culture that creates belongingness (harmony by accepting diversity) combined with a more centralised decision-making platform (respect for hierarchy and decisions made) is doing the trick.

Second, in addition to bringing employees and customers with different cultural backgrounds together, Huawei is also a company populated by many “knowledge” workers (i.e. 1 out of 2 employees are engineers and thus involved with some aspect of R&D). Because of this employee composition, Ren Zhengfei provides more freedom – than most observers expect – to its employees on how to execute decisions.  Even in Huawei’s early years (when the primary focus was on surviving as a company) Ren Zhengfei fully empowered employees when it came down to R&D, compensation and benefit allocations. The general idea is that people in pursuit of knowledge cannot be constrained else the innovation process will be severely disrupted. 

Having pointed out the emergence of the more Western ideas of information sharing and feedback loops from bottom to top and vice versa in Huawei’s culture, it is important to note that Ren Zhengfei does not believe in an unlimited democratic form of decision-making. In fact, he does not trust people to the extent that no restrictions are needed in how they pursue their jobs. Rather, his idea is that a sense of freedom needs to be present in this industry but because of people’s inherent weaknesses a centralised and institutional decision-making system is also needed. Today, Huawei makes use of a democratic mode of thinking and acting in combination with an appropriate level of centralisation. For this reason, Ren Zhengfei considers the act of leadership as similar to the workings of a fireplace. Within a controlled space (the fire place), people can be free to a very large extent (as the fire is within the fireplace). This idea is closely related to Western management thinking in which the relationship of a person to organisation, or a person to a company, is considered to be contractual. It gives you rights, but at the same time, these rights must be bounded. This leadership approach is illustrated by finding different forms of voicing (democracy) at different hierarchical levels in the company.

A first level is referred to as the “Top Layer Democracy”, taking the form of standing board member committees characterised by collective decision making mechanisms involving thorough discussion (also think about the rotating CEO-system that Huawei uses).7 A second level takes place at the middle-management level where major business and HR issues are discussed using their “Administrative Team” system characterised by debates and sharing collective responsibility. A third level is referred to as “All-Inclusive Democracy” involving all employees using the online “voice community” intranet. Most of the major decisions taken by higher levels, and policies implemented that directly affect the interests of the employees are published on this intranet community for employees to fully discuss and question those decisions.

Although a hierarchical structure remains very present, Huawei has consciously implemented voicing opportunities across all levels, because, in line with research on procedural fairness, the company believes in building voice communities to contribute to the identity, loyalty and feelings of belongingness of its employees. Providing opportunities to voice signals to employees that they are a valued and important resource to the company. In fact, Ren Zhengfei has mentioned several times that he is proud and happy with the many talents out there. Creating a voice community will help to identify all these talents and employ them in the best positions possible. Listening to people and giving them the opportunity to bring diverse opinions to the table is a guideline that Huawei endorses to identify their future leaders. In this way, Huawei considers voice communities as directly bringing value to the company.

Listening to people and giving them the opportunity to bring diverse opinions to the table is a guideline that Huawei endorses to identify their future leaders.

A final and noteworthy point is that this attitude is a challenging one for many Chinese companies to take on – hence, the reason why we mentioned that applying Huawei’s management practices are not necessarily easy to translate to organisations working only in China. Indeed, many Chinese work cultures breed the attitude of avoiding opposing voices, which makes that organisational leaders are not trained to deal in constructive and not defensive ways with criticism and diversity in opinions. In addition, the personality of Huawei’s founder and leader, who constantly ruminates and analyses doubts about different strategies to promote the survival of his company, further contributes to the organisational habit to collect different points of view. As we have noticed in our interviews with employees, this attitude has contributed to the perception that the Huawei leadership is confident in dealing in open ways with dissident voices. And, it is this perception that makes the Huawei leadership legitimate in employee’s eyes and able to motivate them to pursue excellence in their job. After all, as humans are social beings, it is no surprise that we all like to be listened to but prefer to share responsibilities when it comes down to decision-making. In organisational cultures that are perceived as legitimate this kind of decision-making process will always produce the best outcomes.

Featured Image: Ren Zhengfei, Huawei Founder and CEO, at World Economic Forum, Davos, January 22, 2015, 

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About the Authors 

David De Cremer is the KPMG Professor of Management Studies at the Judge Business School, University of Cambridge, UK, where he heads the Department of Organisational Leadership and Decision-Making. He is the author of the book Pro-active Leadership: How to overcome procrastination and be a bold decision-maker (2013) and co-author of “Huawei: Leadership, culture and connectivity” (2017).

Tian Tao is Co-Director of Ruihua Innovative Management Research Institute at Zhejiang University. He is also the author of the book Huawei: Leadership, culture and connectivity” (2017) and Founder and Editor in Chief of Top Capital magazine.

 

References

1. Liu, W., Zhu, R., & Yang, Y. (2010). I warn you because I like you: Voice behavior, employee identifications, and transformational leadership. The Leadership Quarterly, 21(1), 189-202
2. De Cremer, D., & Tyler, T.R. (2005). Managing group behavior: The interplay between procedural fairness, self, and cooperation. In M. Zanna (Ed.), Advances in Experimental Social Psychology (Vol. 37, pp.151-218). New York: Academic Press.
3. De Cremer, D., & Tyler, T.R. (2007). The effects of trust and procedural justice on cooperation. Journal of Applied Psychology, 92(3), 639-649.
4. Brockner, J., & Wiesenfeld, B. M. (1996). An integrative framework for explaining reactions to decisions: Interactive effects of outcomes and procedures. Psychological Bulletin, 120, 189–208.
5. See, for example, how procedural fairness helped the New York Police Department to be accepted by the local community, Sunshine, J..& Tyler, T.R. (2003). The role of procedural justice and legitimacy in shaping public support for policing. Law and Society Review, 37(3), 513-548.
6. De Cremer, D., & Tian, T. (2015a). Huawei’s culture is the key to its success. Harvard Business Review, June.
7. De Cremer, D., & Tian, T. (2015b). Leadership innovation: The rotating CEO system of Huawei. The European Business Review. November/December, 10-13.