Book Review on: The Functions of the Executive
(Chester I. Barnard, 1938)
By: Ling Zhou
This book is one of the first to provide a comprehensive theory of cooperative behavior in
formal organizations. Before its publication, most of the work on management and
organization was fragmentary: to administer is to plan, organize, integrate and measure
etc. But some more basic questions like why we need organizations, what are essential
for organizations, are left untouched. Barnard realizes that without first answering these
questions and finding the nature of organizations, we are lack of a solid base on which to
discuss the more specific questions.
One of the greatest contributions of Barnard is to point out the cooperation nature of
organizations. Barnard was the first to insist that organizations by their very nature are
cooperative systems and cannot fail to be so. Cooperation is the essence of organizations.
An organization can survive only because of cooperation. Actually, he emphasized
cooperation almost to the exclusion of such things as conflict, imperative coordination
and financial inducements. This extreme position is, of course, not so favorable in today’s
view and I will discuss these defects later. We should give Barnard the credit, however,
for seeing that an organization is a cooperative system, interpreted with the language of
contract theory, this is saying that in order for an organization to exist, there should be a
set of contracts that every member agrees.
The problem is that Barnard seems to minimize the importance of individuals in order to
emphasize on the cooperation in organizations. He defined the organizations as
“nonpersonal”. And he is forced to distinguish between the organizational aspects of
people and the personal aspects: an employee has dual personality—an organization
personality and an individual personality. But looking from the contract theory’s view,
we do not need “nonpersonality” to ensure cooperation. Actually, every individual can
decide whether to cooperate (enter the contract) after considering her own preferences.
Cooperation can exist as long as the contract is designed in such a way that it is to every
member’s best interest to cooperate.
Barnard also believes that organizations are superior to individuals. Organizations are
rational, while individuals are not. This is an interesting point. In modern economic
theory, it is often assumed that individuals are rational, while if we aggregate individuals
to a group, the group may not be rational. Of course, this is from the “aggregation” view
that there may not exist a representative rational individual for the group even when each
member of the group is rational. I think Barnard’s point is valid in that “bounded
rationality” may be a better description of individual behaviors than “rationality”. But
“organizations are rational” seems to be too simple a claim to be accepted. If we regard
organizations as a set of contracts, it is very hard to define rational behaviors for the
organization.
As necessary for cooperation, Barnard stresses on the existence of the organization
purpose and each member’s commitment to it. We have discussed extensively in the class
that there do not exist an organization purpose in the strict sense. First of all, it is hard, if
at all possible, to draw the border of an organization. Second, even if we can, every
member in the organization has her own purposes (even for each individual, it’s possible
that she has multiple purposes): the employee wants to get a wage and build up working
experiences; the supplier wants to sell her product; the customer wants good
products…It’s not very meaningful to say which should be the organization purpose. In
fact, for an organization to exist, every member’s purposes must be satisfied, otherwise
she can refuse to participate. In the literature and business, when people talk about
“organization purpose”, they usually mean the shareholders’ purpose which is to increase
the stock price. Note that to accomplish that, we need to satisfy other stakeholders’
purposes as well though those are not identified as “organization purpose”. Also, every
member needs not to commit to that purpose in order to accomplish it.
Barnard redefines authority from his cooperation view of organization: authority comes
from the bottom. Before him, people usually took it for granted that the persons at the top
of an organization have a lot more authority than those at the bottom. Barnard is very
insightful to note that the subordinate makes a decision to grant authority to the person
above her. If a subordinate does not accept the legitimacy of an order, the person giving it
has no authority. This point of view is essentially a contract theory view. Barnard also
speaks of the “fiction of the superior authority”. To explain the fact that organizations do
fire people, Barnard says that “firing” is essentially a decision of the employees. If the
employee knows what behaviors would lead to being fired while she still chooses that
behavior, then she is actually choosing to be fired.
Based on his organizational theory (essentially cooperation), Barnard discusses the
functions of the executive. He believes that the executive functions serve to maintain a
system of cooperative effort. It is not quite correct to say that the executive functions are
to manage the system of cooperative efforts because as a whole, it is managed by itself,
not by the executive, which is part of it. He argues that control relates directly to the work
of the organization as a whole rather than to the work of executives as such. The fact that
practically the control is over executives for the most part is only due to the heavy
dependence of the cooperation success upon the functioning of the executive.
Barnard proposes three executive functions:
1) Develop and maintain a system of communication. This involves jointly a scheme
of organization (organization charts, specifications of duties etc.) and executive
personnel (the selection of personnel and the offering of incentives etc.).
2) Promote the securing of the personal services that constitute the materials of
organizations. The work divides into two main divisions: (1) the bringing of
persons into cooperative relationship with the organization; (2) the eliciting of the
services after such persons have been brought into that relationship.
3) Formulate and define the purposes, objectives, ends, of the organizations.
I will address some interesting points for each of the three functions sequentially.
First, in the communication function, Barnard has mentioned both formal and informal
communication channels. But he does not address communication from the information
point of view. Since he has put too much weight on cooperation, he does not give enough
attention to the decision right and information extraction problem. Because everyone is
working for the same common organization purpose, there is no incentive to hide
information. Thus the executive can collect all information and make decision
accordingly. This is certainly not true given the agency theory.
Second, in the securing of personal services function, Barnard plays down the importance
of economic incentives. Again, the reason might be the existence of common
organization purpose—the workers do not need incentives to get to work. He does
mention the balance between “inducements and contributions”, but this is against his
cooperative view—why would the employees have to make elaborate calculations of
inducements and contributions if the crux of the matter were cooperation in a common
purpose? This contradiction can be easily solved by turning to the contract theory.
Here, Barnard raises a very interesting question: how should the executives be
compensated? He argues that material incentives play an “incidental and superficial role”
in the case of the executive. Their salaries are usually high because they need the money
to meet the burdens of prestige. Although I do not agree with that, I do agree that it’s hard
to design a compensation scheme for executives. As Barnard says, the most important
single contribution required of the executive is loyalty. Interpreted in the agency theory
language, the essential problem of compensation scheme design is to align the interests of
the executives and the organization. When and probably only when their interests are
aligned, will the executives be “loyal” to the organization.
Third, in the organization purpose formation function, Barnard deliberates on the
importance of moral purpose and indoctrination. Since the organization purpose has to be
common, it must be moral. And for people to work toward this common goal, the
executive must use propaganda and indoctrination to solve the possible conflicts. Barnard
admits that sometimes the ends of the person and the ends of the organization are not the
same. He could have proceeded from here and arrived at conclusions much more similar
to those of contract theory. Instead, he indicates that such opposition is most likely to
occur among the lower-ranking participants in an organization and can be removed by
educating the workers. Actually, he is so obsessed with the idea of common purposes that
he claims that when they do not exist, the executive need to manufacture them in order to
maintain the cooperative system. As we have said before, this is not true: an organization
can exist when the members have different purposes.
Barnard’s book is enormously influential and remarkable. It contains the seeds of three
distinct trends of organizational theory. One is the institutional school as represented by
Philip Selznick; another is the decision-making school as represented by Herbert Simon;
the third is the human relations school. These schools will be covered in my book review
on Charles Perrow’s Complex Organizations. I believe Barnard’s book will remain a
classic for organization theory.