Core Group Theory

Who Really Matters: The Core Group Theory of Power, Privilege and Success starts with a hilarious anecdote about an Exxon Oil employee conference to announce their new "core values". Enshrined as number one on their list of core values was this simple sentence: "The customer comes first". That night there was an executive dinner, and after a few drinks a brash young rising star named Monty proposed a toast. "I just want you to know," he said, "that the customer does not come first." Then Monty named the president of the division, "He comes first." He named the European president. "He comes second." And the North American president. "He comes third." The Far Eastern president "comes fourth." And so on for the fifth, sixth and seventh senior executives of that division, all of whom were in the room. "The customer," concluded Monty, "comes eight." An Exxon retiree who told me this story said: "There was an agonized silence for about ten seconds. I thought Monty would get fired on the spot. Then one of the top people smiled, and the place fell apart in hysterical laughter. It was the first truth spoken all day."

According to Art Kleiner, "The customer comes first" is one of the three great lies of the modern corporation. The other two being: "We make our decisions on behalf of the shareholders" and "Employees are our most important asset."

In Who Really Matters: The Core Group Theory of Power, Privilege and Success Art Kleiner tries to answer the question what is the actual objective of the modern corporation, making the bold statement that what comes first in every organization is keeping the Core Group (normally most of the top executives) satisfied. And yet, according to Kleiner Core Groups are not inherently bad or dysfunctional, but rather necessary and even the best hope we have for ennobling humanity, since organizations are natural amplifiers of human capability. An organization's Core Group is also the source of its energy, drive and direction. or more accurately, any organization goes wherever its people perceive that the Core Group needs and wants to go. Non-members depend upon the Core Group for direction, The Core Group and its members depend upon the non-members for their legitimacy. 

You will not often find Core Groups mentioned in any organization chart. They exist in people's hearts and minds only. After some time, organizations will resemble how their Group act and looks like and automatically pivot and twist to give the members of the Core Group what they think they want and need, without even asking them. Great Core Groups hold an essential form of knowledge. They set the context that establishes this knowledge as significant. (Compare: Intellectual Capital).

How do Core Groups become so powerful? Kleiner explains the mechanism is based on guesswork and amplification. People who are not in the Core Group try to guess as good as they can what it is the Core Group wants. So even a casual remark in passing by a Core Group member can be amplified to a shift of direction of an entire division. As a consequence, Top Managers need to be very cautious in what they say. According to Kleiner, concepts like the Balanced Scorecard do not really change this. Although more objective measurements may be used and there is better strategic communication top-down, still a lot of guesswork remains: people assume that they should interpret the numbers according to what they perceive the Core Group really wants, and also people assume they should interpret the Core Group according to the numbers: if the measurements send a clear signal, then people assume that is where the Core Group wants the organization to go. Core Group dynamics also prevent organizations from changing easily according to Kleiner. Both the Core Group and the non-Core Group employees have an interest in maintaining the status quo. 

Who Really Matters: The Core Group Theory of Power, Privilege and Success also gives interesting examples of Core Groups: Enron (...), HP, Government Agencies, and includes special chapters on the role labor unions, management consultants and schools play. Art Kleiner ends the book with reflections on Making a Better World, giving important tips and clues on what not to do and what should be done if one wants to influence or even change a Core Group and discussing Corporate Governance, Corporate Purpose and how Core Groups thinking relates to the world we and our children live in.

Are Core Groups and Core Group theory relevant within Value Based Management? Of course they are. Managing for Value (the second of the three components of VBM) should be seen in another perspective if Kleiner is right. Perhaps the "managing" in corporations often is indeed primarily aimed at satisfying the needs of the Core Group. Also executive compensation and corporate governance regulation become even more important then than they already are.

Art Kleiner suggests that is it is possible to create "Expanded-Core-Group Organizations". To do this, the following elements are suggested:

- employee stock-ownership plans

- financial literacy

- non-hierarchical decision-making

- comprehensive (financial and strategy) training programs

This is were Core Group theory is very much like Value Based Management thinking.

Core Group Theory and Vale Based Management 

As far as the Value Creation part of VBM is concerned it is important whether one should aim primarily at maximizing shareholder value or stakeholder value or that in reality the Core Group comes first, principally a form of stakeholder value. Core Group dynamics can indeed explain how it is possible that companies adopting the maximizing shareholder philosophy often end up in becoming less responsive to shareholders in a meaningful way. If Core Group members lack adequate knowledge or experience or mistakenly(!)  decide that the organization's first job is to keep up the stock price, the easiest way of doing that is the presentation of slowly but steadily growing positive quarterly figures. Through guesswork and amplification the entire organization will follow a Core Group that makes this severe mistake and will support the Core Group in providing a manipulated and wrong picture of the reality instead of what really should be done: taking decisions that maximize shareholder (or stakeholders) value. 

Art Kleiner goes one step further saying: "we need a model that recognizes the primacy of the Core Groups while constraining them from abuses of power" and suggests we need a third model (besides stakeholder value and shareholder value): a model that recognizes the primacy of Core Groups while constraining them from abuses of power.

This is where we would slightly disagree with Kleiner: Core Groups are a mechanism, a model that explains who really matters, but not an end. Through writing Who Really Matters: The Core Group Theory of Power, Privilege and Success Art Kleiner has given us a brilliant insight in the dynamics why organizations often fail to implement Value Based Management or their corporate purpose. But Core Groups should not be what really matters. In other words:  what really matters for organizations is whether they do what they were created and exist for: taking care of the desired value creation for its shareholders and/or stakeholders (Value Based Management).

For its description and analysis of how Core Groups work, this book should become a management classic and Kleiner's book is highly recommended for any top manager, strategy consultant or corporate governance specialist acting in the field of Value Based Management.

Who Really Matters The Core Group Theory of Power, Privilege and Success

During two decades spent watching organizations at work (and the struggles people had within them), I saw that most of the stated rhetoric about their purpose represents a set of lies:
• Corporations do not exist to return investment to shareholders. (If they did, they would be better at it).
• Non-profits do not exist to fulfill the requirements of their membership (except to the extent they need to do so to keep their membership).
• Government agencies do not exist to fulfill the public interest (especially when it's in the public interest for them to go out of existence).
• Employees are not any organization's greatest asset.
• The customer does not come first.

Who, then, does?

It varies, depending on the organization - but in every one of them, there is some "Core Group" of key people who matter more than anyone else when decisions are made. The Core Group of any organization won't be named in a formal hierarchy chart, contract, or constitution. It exists in peoples' hearts and minds. Its power is derived not from authority, but from legitimacy. Its influence is not always conscious, or even visibly apparent, but it is always present in the implementation of actual decisions.

Once you understand the Core Group nature of organizations, then you can understand the true nature of political parties (devoted first and foremost to getting jobs for their Core Group members), diversity in organizations (the glass ceiling is the boundary between the rest of the organization and the Core Group), and labor unions (who have collective-bargained their way into the Core Group of many companies, which is why they are so intensely hated by managers).
Core Groups aren't bad in themselves; every organization has them. Behind every great organization is a great Core Group. The trick is learning to find the organizations with great Core Groups, change the ones that can be changed, and avoid the dysfunctional ones - hopefully in time to avoid being capsized.

Finding your way in a Core Group-driven world is the subject of this book.

References (Core Group Theory)

http://www.valuebasedmanagement.net/leaders_kleiner.html 

http://www.well.com/user/art/coregrpconcepts.html