• A
  • A
  • A
  • ABC
  • ABC
  • ABC
  • А
  • А
  • А
  • А
  • А
Regular version of the site
vision

Management Decentralization Contributes to Better Business

Companies with decentralized management systems are, on average, more effective than firms where the CEO tries to control everything. The risk of centralization is higher if the company is managed by families. These were the main findings of the recent research by Irina Levina, research fellow at the HSE Institute for Industrial and Market Studies.

Reasonable delegation of responsibility is an important principle of successful management, and is also relevant to the management of big firms and corporations. This study, conducted by Irina Levina, among European and Russian companies confirmed this assumption.

The results of the study describe some factors that influence the centralization or decentralization of company management. These factors include the company size, the human capital quality, socio-demographic characteristics of the CEO, and the family links between the CEO and the company owners.

The study was carried out in two stages. The first included an empirical analysis of the 2010 survey ‘European Firms in a Global Economy’, which was conducted in seven European countries: Germany, Great Britain, France, Austria, Spain, Italy, and Hungary. The second stage analyzed the results of the survey ‘Russian Firms in a Global Economy’, which was conducted in Russia in 2014.

Strong family ties restrain decentralization

According to the results of the study, firms with decentralized management are more often involved in international trade, innovation and research, and more often offer education and training to their staff. According to Irina Levina, decentralization is not an easy process for a company, since it incurs many costs and depends on a specific set of factors.

For example, if the property belongs to private owners or families, the probability of centralization grows considerably. This, according to Levina, might be related to a lack of desire to share power and control over the company with strangers.

The chances of centralization are also higher if the CEO is part of the family that owns the firm. But there are some country-specific factors in this case. The presence of family ties between company owners and managers increases the probability of centralization in Russia, Great Britain, and France by 5%, by 7% in Hungary, 12% in Italy, 28-31% in Spain and Germany and 41% in Austria. According to the researcher, such country differences might be related to cultural specifics. For example, in Spain, Austria and Germany it is very prestigious to own and manage a family (or one’s own) business. And the influence of family ties on the probability of decentralization is highest in these countries.

The personal characteristics of the CEO also partly influence the style of management. Male managers are more inclined to a centralized management style rather than female managers. In some countries, there is a correlation between the age of the company manager and the choice of management style (centralized or not).

Centralization champions: Russia, Hungary, Italy

The study revealed that there is a big inter-country difference in the breadth of decentralized management style. The highest share of companies with decentralized management was found in Spain (39% of all the surveyed companies), Great Britain (38%), and Austria (35%). In Germany, the share of decentralized firms is 29%, and in France it is 22%. Business in Russia, Hungary, and Italy is the least decentralized (15-17%).  ‘Countries with weak institutions and low legitimacy level bear higher risks of decentralization, since the managers to whom company owners or top managers delegate responsibility might use their power not for the company’s benefit, but for their personal benefit, and it would be difficult for the company owners/top managers to punish them’, said Levina.

The study data includes separate statistics for firms that work in high-tech or specialized areas, and by medium-sized and big companies. Notably, even among big companies, the share of firms with decentralized management is not that big: in five of the eight studied countries it is less than 50%. Meanwhile, the bigger the company, the harder it is to manage it in a centralized style. In high-tech and specialized fields, the share of decentralized firms is somewhat higher than in other fields.

Table 1. Share of decentralized firms by countries

Country

Total share

Companies in high-tech and specialized fields

Medium-sized and big companies: 100 employees or more

Big companies: 250 employees or more

Spain

39%

43%

59%

64%

Great Britain

38%

42%

43%

40%

Austria

35%

43%

65%

58%

Germany

29%

33%

52%

58%

France

22%

29%

28%

30%

Russia

17%

17%

22%

24%

Hungary

16%

20%

20%

29%

Italy

15%

20%

25%

32%

Source: study by Irina Levina

The results of the research, according to Levina, lead to the conclusion that in the decision on company management decentralization, not only economic and rational factors, such as economic advantages and costs of management decentralization, play a role. Behavioural factors related to the CEO’s motivation to be in control can also influence the management model choice. The data obtained as part of this study can be used by companies in order to improve their efficiency.

 

Author: Marina Selina, October 12, 2015