Sovereign Wealth Funds
Power to the Institutional Investor’s Edge
Summer reading from our SWF expert.
July 5, 2011
I was having a conversation with one of my new Stanford colleagues last week about the organizational design challenges facing SWF sponsors. Specifically, I was making a point about the difficulty of structuring a public organization that could be agile enough to successfully navigate the volatile world of global finance. This individual had one thing to say: “You have to read Power to the Edge.” So I did. I downloaded it (for free), and read it on a recent flight. I haven’t plowed through 300 pages that fast since the last Harry Potter book (for real).
Some background: Power to the Edge is a 2003 book about organizing the military by the military for the military. So it’s maybe a tad more militaristic a read than you (or I) are used to. However, I promise you, it has some broad implications for the design and governance of all organizations, including SWFs. Here’s a little teaser to pique your interest:
“One can view the history of mankind as a journey of empowerment, conspicuously marked at critical junctures by the synergic combination of a particular technological advance and an innovative social adaptation that together eliminate a debilitating constraint. The result is a leap to a new isoquant of productivity. This book explores a leap now in progress, one that will transform not only the U.S. military but all human interactions and collaborative endeavors. Power to the edge is a result of technological advances that will, in the coming decade, eliminate the constraint of bandwidth, free us from the need to know a lot in order to share a lot, unfetter us from the requirement to be synchronous in time and space, and remove the last remaining technical barriers to information sharing and collaboration.”
Cool stuff, right? I know. Basically it’s a book about how technological advances are allowing organizations to redirect flows of information, thereby allowing them to better respond to volatile operating environments. In other words, Power to the Edge is a book about creating agile organizations for the modern era. And why does agility matter? Because it is the touchstone of success in modern organizations (and the authors of the book cite a bunch of research proving the importance of agility in modern firms’ performance).
In short, agility is crucial for success in the modern era, which creates some serious problems for organizations from the industrial age that typically rely on hierarchies and bureaucracies for managing decision-making:
“Industrial Age organizations are, by their very nature, anything but agile. Agile organizations must be able to meet unexpected challenges, to accomplish tasks in new ways, and to learn to accomplish new tasks. Agile organizations cannot be stymied when confronted by uncertainty or fall apart when some of their capabilities are interrupted or degraded. This lack of agility stems directly from an Industrial Age belief in optimization and centralized planning…
…An organization that does not promote the widespread sharing of information will not have well informed individuals and organizational entities. An organization that develops an approach to command and control that takes full advantage of the information available will be at a competitive advantage. Industrial Age organizations create fixed seams through which information is lost. They create seams that prevent information from being brought to bear. And they create seams that prevent them from integrating effects. These organizations will survive only as long as it takes for others in their competitive space to take advantage of Information Age concepts and technologies. This will not be long…
And given that this book was written in 2003 (before the likes of Twitter and Facebook), this “time” is probably now. So, this begs the question, what are the components of agile organizations?
“The key dimensions of agility:
- 1. Robustness: the ability to maintain effectiveness across a range of tasks, situations, and conditions;
- 2. Resilience: the ability to recover from or adjust to misfortune, damage, or a destabilizing perturbation in the environment;
- 3. Responsiveness: the ability to react to a change in the environment in a timely manner;
- 4. Flexibility: the ability to employ multiple ways to succeed and the capacity to move seamlessly between them;
- 5. Innovation: the ability to do new things and the ability to do old things in new ways; and
- 6. Adaptation: the ability to change work processes and the ability to change the organization.”
One of the interesting take-aways from this book was the notion that today’s successful organizations will no longer be able to rely on a single “genius” to make sense of the entire marketplace. That’s the old hierarchical world whereby a single person can drive an organization’s direction (i.e., central planning). Today, the market is simply too complicated. A successful organization will have to tap into collective knowledge and collaborate more and more in order to ensure that decision-makers are integrating all the risks and variables into their plans.
In my view, all of this has some clear parallels to institutional investors, especially those that are increasingly bringing assets in house. With increasing financial market volatility, there is enormous value in reliable information. I’ve spoken to many executives in the past few years about the challenges of managing information flows and getting the information into the hand of the people that need it most. Anyway, I think this chart really sums up the new organizational paradigm for the “Information Age” — institutional investors should take note (click image to enlarge).
This post originally appeared on the Oxford SWF Project