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September 21, 2011

Applied Sociocracy - Corp Democracy

Can a Company Be Run as a Democracy?

By JACLYNE BADAL
* The Wall Street Journal
* APRIL 23, 2007

During a recent strategy meeting at Ternary Software Inc., a programmer criticized the chief executive's new incentive plan for employees. An hourlong discussion ensued, in which several participants, including the CEO, critiqued the proposal. Ultimately, all six participants agreed to handle incentives differently.

That part was crucial: Ternary runs itself as a democracy, and every decision must be unanimous. Any of Ternary's 13 other employees could have challenged the incentive decision and forced it to be revisited.

Running a company democratically sounds like a recipe for anarchy, and it can prompt bureaucratic whiplash: Ternary, a company with annual revenues of around $2 million, adjusted salaries for employees up and down several times last year.
But Ternary's leaders, who adopted the system in reaction to experiences of corporate infighting at another small company where they met, insist that it works. CEO Brian Robertson says Ternary makes decisions more quickly because everyone has a voice and knows that mistakes can be undone. The company, which writes software programs on contract for other companies, is growing and profitable, and drawing interest from outsiders. "It takes getting beyond your ego," says Mr. Robertson, who, as one of the founders of the company, has the CEO title but little typical CEO authority.

Ternary's practices are extreme, but other employers use similar tactics to give workers a voice. Beverage company Honest Tea Inc., Bethesda, Md., shares financial data with employees and encourages them to help at annual planning and strategy meetings. Product-design consultancy Continuum Inc. in West Newton, Mass., hosts monthly employee townhall meetings to discuss plans. Google Inc. prides itself on an egalitarian culture that includes weekly updates from executives who field questions from employees.

Advocates say such systems appeal to workers, particularly younger ones, searching for careers with meaning. "Everyone wants to be a somebody," says Traci Fenton, founder of WorldBlu Inc., a Washington organization that promotes workplace democracy.

Ryan Quinn, a management professor at the University of Virginia's Darden Graduate School of Business, says these companies typically are willing to sacrifice some short-term profit to pursue innovation or other goals. Mr. Quinn says unorthodox practices can succeed at large and small companies, but says he has never seen a company like Ternary, that strives for unanimous agreement.

Harry Katz, dean of Cornell University's School of Industrial and Labor Relations, doubts a system like Ternary's could work on a large scale. In bigger companies, "there's an inevitable conflict of interest between managers and employees," Mr. Katz says. General Motors Corp.'s Saturn plant in Spring Hill, Tenn., for instance, experimented with giving employees a strong voice in management, but later moved back to a more-traditional structure, he says. A GM spokesman, however, says the auto maker gleaned many insights from the Spring Hill plant and still emphasizes employee input.

Ternary's path to workplace democracy wasn't painless. The company, founded in 2001, first tried to draft a mission statement by consensus in 2004, when it had grown to more than a dozen employees. The meeting lasted two days and ended as participants too exhausted to continue arguing agreed in principle to run the company as a democracy. An attempt the next year to create a salary system by consensus was no better. But Mr. Robertson persevered, guided by two out-of-print books about a Dutch management technique called "sociocracy" or "dynamic governance." He has dubbed Ternary's system "holacracy" and has begun marketing it as a managing style.

The 19-person Exton, Pa., company has a policy-setting team of seven people, including two frontline workers elected by their peers. The team is linked to smaller groups through the company that ultimately give all employees a voice. The team meets to set policy for two hours once or twice a month.

The meetings take into account feelings as well as strategy. In the "check-in" round at a recent session, a programmer recovering from a tetanus shot reported a sore left arm. As new items are introduced, each participant is asked for a gut reaction. Then, they're asked to state objections. The group reworks the proposal until the objections are resolved or the plan is rejected.

The meeting where the incentive scheme was discussed was typically busy. The team rejected Mr. Robertson's proposal to replace the profit-sharing program with an "ad hoc bonus system" based on performance, formulating a new plan that would keep the profit-sharing program and introduce monthly bonus incentives. The group also assigned the CEO new responsibility for spurring growth, gave the sales manager more authority to negotiate contracts, and decided to bill clients by the day, rather than by the hour.

Technology chief Anthony Moquin, one of the founders of the company, said his gut reaction to the billing change was that it was simplistic. But he accepted it, saying, "We can try it and see how it works."

That's a common refrain at Ternary. Managers don't look for an ideal solution, merely a workable plan that looks like progress. Employees who don't like the results can seek a seat at the next strategy meeting or ask a member of the policy group to revisit the issue.

The repeated changes to Ternary's pay scale last year demonstrate employee empowerment in action. The company shares financial data, including everyone's salary, with all employees. In 2005, Bill Schofield proposed cutting the salaries of senior programmers, including his own, by 15%, and boosting compensation for junior programmers. The council agreed.

Then, last summer, Ternary ran into a cash crunch because some customers weren't paying their bills on time. The strategy council slashed salaries by 22%. That rattled Chad Wolfe, a 29-year-old Canadian programmer who told his representative on the strategy team that he would have trouble paying his personal bills. So the team devised no-interest loans for needy employees.

"It's frustrating and hard not to be able to count on your paycheck being consistent," Mr. Wolfe says. But he still likes working at Ternary.

Four months later, in November, Ternary restored the pay cut. Then, in January, several employees asked the strategy group to give everyone a raise, as thanks for staying through the bad time. Salaries rose 20%. Last month, Ternary paid employees the money they lost during the four-month pay cut, plus interest. Mr. Wolfe will start repaying his roughly $2,000 interest-free loan at the end of April.

Mr. Robertson says the pay saga highlights why the practice works. Instead of getting upset and leaving, the employees "used the system to inject feedback and get their needs met," he says.

Ternary's governance system has won fans among middle-age employees, such as 52-year-old Wade Lee, who survived decades of management fads at behemoths such as International Business Machines Corp. and Verizon Communications Inc. He says the pay fluctuations are no worse than when he was a salesman working on commission; plus, he has a voice in the outcome. "You don't have to fight and claw to be heard," says Mr. Lee, director of business development.

Write to Jaclyne Badal at jaclyne.badal@wsj.com
Printed in The Wall Street Journal, page B1

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