King Arthur and the Knights of the Round Table (anon. medieval)
Ideas for Leaders #082

How Evolving C-Suite Structures Affect Performance

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Key Concept

The size and structure of C-Suites has changed significantly over the past few decades. An examination of these changes reveals a number of shifts, including one towards more product-focused (or front-end) functional managers in organizations with closely-related business units, and an increase in administrative positions where organizations invest more in IT. These findings also have an impact on general managers’ salaries. Here’s why executives should pay attention to these shifts when structuring their top teams.

Idea Summary

What do we know about the structure of a typical C-Suite? Most corporations are run by one, but the formation of them and the roles that comprise the C-Suite have changed considerably and are continuing to do so. Notably, top management teams have been doubling in size since the mid-1980s. The composition of an organization’s C-Suite will have an effect on the running of it and its strategy choices. What can be learnt about these effects from an examination of the members of a C-Suite? Faculty from INSEAD, the University of New South Wales and Harvard Business School put this to the test in this Idea, finding that a disproportionate move away from general managers towards specialized functional managers has been taking place.

They analyzed confidential firm data from Hewitt Associates, including audits of management positions, reporting structure, and pay from 300 Fortune 500 firms, allowing them to track changes over time for each firms’ management teams. In particular, they focused on the relationship between changes in composition, firm diversification and IT investments.

“Instead of general managers who carry out many different functions for the specialized units they run, there are now marketing officers, finance officers, legal counsel, chief information officers - positions that specialize in one particular function that applies across the organization,” notes one of the researchers, Maria Guadalupe. She calls this phenomenon “functional centralization.”

Other findings from their research include the following:

  • Firms that wanted to increase their focus on improving specific lines of business added more product, or front-end functional managers (e.g. chief marketing officers, R&D officers, etc.) that report directly to the CEO.
  • On the other hand, firms that focused on IT investments saw an increase in administrative or back-end functional positions (e.g. chief financial officers, legal counsel, chief human resources officers, etc.) reporting directly to the CEO.
  • Pay structures also changed as C-Suite compositions changed; as functional managers increased, general manager’s compensation decreased. 

Business Application

Understanding these findings can be beneficial for CEOs when they structure their executive teams, as that structure will eventually have an effect on their organizational strategy as a whole.

“Firms need to start thinking about how to convince talent to take a more specialized route to management,” notes Guadalupe. Why? Because otherwise, the new composition of the C-suite may present recruiting challenges for them, as those entering the market often view general management as the path with the greatest career potential.

But as this Idea shows, functions like finance and marketing are being taken out of business units and shifted to a higher level in the organization. This has also resulted in pay for general managers going down, because responsibility for the functions they perform has shifted upward. In time, this may lead to their jobs become somewhat less valuable to organizations.

Finally, CEOs should design their top teams based on their firm’s scope and opportunities for synergies; in other words, centralizing product functions must go hand-in-hand with the focusing of activities:

  • Where an organization has closely related business units, they should centralize and create specialized product, or front-end, functional positions (i.e. positions that use product information more prominently, such as marketing).
  • Where an organization is increasing investment in IT (or has already done so) to enhance communication within the firm, administrative, or back end functional positions (such as finance and human resources) are more needed.

CEOs should also recognize the distinction between different types of functions and the importance of the nature of the information that is required to perform different activities.

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Authors

Institutions

Source

Idea conceived

  • 2012

Idea posted

  • February 2013

DOI number

10.13007/082

Subject

Real Time Analytics