Decentralisation Alone Will Not Lead to Better Organisational Performance, but Complementing It With Empowering Leadership Will

There should be no blind enthusiasm for decentralised organisational structures and HR approaches aimed at pushing decision-making authority down the organisational hierarchy. Decentralisation will lead to better organisational performance only if employees’ line managers show high levels of empowering leadership. Line managers that grant autonomy to their employees, foster employee participation, express confidence in employee abilities and enhance the meaningfulness of their work can help realise the strategic benefits of decentralised organisation, a new study found.

Decentralisation is not a human resource (HR) practice but an aspect of organisational design. Yet, it has become an underlying principle of many contemporary HR approaches, such as self-managed teams or empowering HR practices. By decentralising their decision-making structures, organisations reduce their line of command, giving more job autonomy (freedom) to employees and offering employees a range of opportunities such as taking on leadership responsibility in an informal way. The expectation is that employees’ informal leadership will benefit the company. However, a study published recently in Human Resource Management (HRM) found that decentralised organisational structures do not automatically lead to better organisational performance. 

“Our research started with a very simple observation - that in recent years many companies tend to rely on less hierarchical forms of organisation and implement HR policies that are aimed at granting employees more autonomy and decision-making authority. Companies hope to motivate employees to take more agency and thereby contribute more to organisational performance by decentralising organisational structures, introducing flatter organisational hierarchies and pushing decision-making authority down the hierarchy. However, there's quite a striking gap between what organisations do and what scientific evidence tells us. Existing research on potential performance gains of decentralised forms of organisation is inconsistent. Some studies found that decentralisation increased performance, while others found that it hampered it. Some studies even found there was no relationship at all. So, our goal was to illuminate these inconsistent findings and understand how organisations can ensure that such decentralised forms of organising bring about their intended positive effects on company performance”, said Hendrik Huettermann, the lead author of the study and a professor of Leadership and Organisational Behaviour at the Bundeswehr University Munich, Germany. 

“We analysed data from the survey of almost 6,000 employees working in 144 companies of different sizes and industries in Germany, and from publicly available annual balance sheets capturing organisational performance from these companies. We found no direct relationship between decentralisation and organisational performance, which reflects some of the existing research findings on this matter”, said Stefan Berger, one of the study authors and an associate professor of Organisational Behaviour at the University of Groningen in the Netherlands. 

According to Huettermann, the practical implication of this is that there should be no blind enthusiasm regarding decentralised forms of organisation and HR approaches that are aimed at transferring authority and autonomy down the organisational hierarchy.

So how can organisations ensure that decentralisation works? To answer this question, the study focused on investigating employees’ individual reactions to decentralised decision-making structures in terms of the extent to which employees actually use the autonomy and emerge as informal leaders in response to decentralisation.

“This is new, because most of the prior research has implicitly assumed that all employees react identically when they are given more autonomy and more decision-making authority in decentralised organisations. By contrast, our study proposed that there would be significant differences in employee reactions, depending on what employees’ immediate work context looks like”, said Huettermann. 

And a part of the employees’ immediate work context is their line managers. Line managers have different leadership styles and can provide different levels of support to employees in making productive use of their increased autonomy granted by decentralised structures. It is precisely the role of this empowering leadership in the decentralisation-organisation performance link that the study focused on: “Our idea was that the employees make effective use of the greater autonomy and emerge more as informal leaders only when decentralisation is accompanied by high levels of empowering leadership used by the employees’ supervisors, for example, when employees’ supervisor provides the employees with autonomy in the daily work and expresses confidence in their abilities”, said Huettermann. 

Max Reinwald, one of the study authors and an assistant professor at the Ludwig Maximilian University of Munich, Germany, explained this approach: “Organisational structures offer the opportunities for employees to show “desired” behaviours and at the same time restrict “undesired” behaviours in terms of employee contribution to organisational performance. However, we argued that when organisations decentralise their structure, the understanding of these opportunities is not strong enough for employees to really change their behaviours. So, we need something to reinforce this understanding. And so we tried to learn how employees perceive decentralised structures, how they make sense of those structures and, most importantly, how organisations can shape the perception of those structures actively by empowering leadership”, said Reinwald. 

The study did support its assumption – the findings show that decentralisation can indeed increase employees' propensity to emerge as informal leaders, and thereby indirectly enhance company performance, but only if the employees are simultaneously also empowered by their line managers. 

The study also estimated the financial value of empowering leadership, demonstrating that complementing decentralised structures with high levels of empowering leadership is beneficial for the organisation’s bottom line: “Our sample shows that in a decentralised organisation, increasing empowering leadership from moderate to high levels raised annual sales per employee by more than 9% on average. This nicely illustrates the importance of line managers’ empowering leadership in achieving the strategic goals of organisations with decentralised decision-making structures”, said Berger. 

According to Huettermann, empowering leadership is a key success factor in decentralised organisations because line managers demonstrating this leadership style can provide colour and meaning to the often rather abstract principles that are associated with decentralised decision making in employees’ daily work - their immediate work context. 

“If organisations implement structural or HR policies that are intended to grant employees greater autonomy and want to inspire them to take on leadership responsibility themselves, organisations should reflect on the question, how will employees interpret the signals sent by these policies and when are the employees likely to make effective use of the greater autonomy? This requires formal leadership that helps employees make sense of these policies and understand what these policies mean for them personally - what is expected from them and how they can make effective use of the increased autonomy in their daily work. Line managers that grant autonomy to their employees, foster participation, express confidence in employee abilities and enhance the meaningfulness of their work can help realise the strategic benefits of decentralised organisation”, said Huettermann.

This is particularly important from an HR perspective: “HR should focus on promoting empowering leadership in decentralised organisations, for example, when selecting, training or appraising line managers”, said Huettermann.

Huettermann’s, Berger’s, and Reinwald’s co-author was Heike Bruch, a professor of Leadership and Director of the Institute for Leadership and Human Resource Management at the University of St. Gallen, Switzerland.

Contact Hendrik Huettermann at hendrik.huettermann@unibw.de  

Read the full article here.

Written by Jelena Petrovic, Knowledge Transfer Editor of HRM and Associate Professor at the University of Southampton Business School, j.petrovic@soton.ac.uk  

HRM is a Financial Times Top 50 Business Journal published by Wiley.