atlas highlights

Some Lessons from the Engine Room

about Managing an Institute
By Michael Walker, Senior Fellow,
The Fraser Institute (Canada)
am very pleased
I to have the oppor-
tunity to share with
the Atlas network
some of the lessons I
learned about man-
aging an institute
during my thirty-one
years in the engine
room of the Fraser
Institute (Canada).
Michael Walker I think the first
thing that needs to
be said is that the management style
which is appropriate to a newly formed
institute is very different than the mod-
el which can be applied when it has
fifty or more employees with three
regional offices and extensive interna-
tional connections.
In their early stages, most small
enterprises are “cults of personality,”
since the organization is closely identi-
fied with one individual. This early
phase is the “Mike’s Grill” stage.
Everybody knows Mike and either
likes Mike’s food or hates Mike’s food
and patronizes the business according-
ly. Of course there may be an equally
well-known Millie or Moe at the till,
but it’s the Mike at the grill that draws
people in.
The inside workings of the
“Mike’s Grill” stage is essentially that
of a hierarchical autocracy. Everybody
expects the decisions to be made at the
top and for the most part that is where
they are made. Communications up
and down the line of command keep
the organization on mission and one
or a few people at the top drive the
organization.
The real strength of such an orga-
nization structure is that it is relatively
cheap to operate. Transaction costs in
terms of meetings, consultations, etc.
are minimized and the organization
can respond quickly to changes in the
perception of the CEO as to the oppor-
tunities and threats that the
organization faces. There are, howev-
er, distinct weaknesses.
The first is that it is often difficult
for the person at the top of such a hier-
archy to encourage within the
organization the development of indi-
viduals who could potentially replace
the CEO. Often the personality sur-
rounded by the cult won’t tolerate
This market-based
management system...
simultaneously makes
the Institute less
vulnerable to the loss of
the CEO and gives the
CEO more opportunity
to develop new
departments and new
activities within the
institution instead of
simply doing the
fundraising or micro-
managing the activities
at the departmental
level.
potential successors, but even if they
do, good people leave because of the
lack of upper mobility in such a hierar-
chy. Therefore this sort of organization
is vulnerable to succession difficulties.
How will “Mike’s Grill” do when
Maurice is at the grill and nobody
knows Maurice?
In the think tank world, “difficult
leadership transition” has been the rule
rather than the exception. In my
assessment of the record of think tank
succession, I concluded that the prob-
lem was the nature of the
organizational structure used by the
organizations. That inference, whether
correct or not, greatly influenced my
thinking about how the structure of the
Fraser Institute should evolve.
As a side note, it is also the case
that a small organization may not have
any choice but to stick with the cult of
personality model. If the organization
only has enough resources to pay one
higher-priced individual, then it is also
going to have to face the “Mike’s Grill”
transition problems. Happily, there are
some spin-offs of a positive sort that
emerge from this situation.
For example, at the Fraser
Institute, my colleague for seventeen
years, Sally Pipes, grew in ability,
capacity, and appetite for indepen-
dence to an extent that the Institute
could not afford to retain her. She
could have run the Fraser Institute by
herself. She knew that and eventually
left to become the president of the
Pacific Research Institute
(California), where she has been one
of the most successful think tank
CEOs in the business.
The second weakness of the single
personality model is that it is not well
adapted for expansions that may
require different kinds of centers of
excellence or different geographic
locations.
As the Fraser Institute has grown,
its organizational structure has been
changed to accommodate the chal-
lenges posed by increased size and to
actively encourage further growth.
One of the earliest changes was the
adoption of a collegial model for the
determination of programs and pro-
jects. In such a model the strategic
plan in general terms and over a five-
year horizon is determined by the
CEO while the project detail, includ-
ing the development of new program
ideas, is evolved collaboratively by the
researchers. Collegiality encourages
ownership, and ownership induces
higher productivity and more reliable
innovation.
While the collegial model allows
more individual initiative in the selec-
tion and execution of projects, its

10 Winter 2006/07

In their early stages, most enterprises are “cults of personality,” since the organization is
closely identified with one individual. This early phase is the “Mike’s Grill’ stage.
essential structure is “socialist” in nature.
While decisions are made collaboratively,
and researchers have control over the pro-
ject agenda, the consequences are
experienced collectively. In such a situa-
tion individuals don’t benefit when they
make good choices and don’t bear costs
when they make poor decisions.
Not surprisingly, in the collaborative
model some of the problems of socialist
organization are experienced. The most
important of these is that people are not
incentivized to make good choices and
avoid poor choices. A related issue is that
it is more difficult as a practical matter to
structure an efficient compensation pro-
gram when inputs and outputs are
collectivized.
In 1995 I began a program to restruc-
ture the Institute to place more power and
responsibility in the hands of department
heads. The bookkeeping system in the
Institute was disaggregated so that costs
and income could be tracked by depart-
ment. Department heads were given the
task of devising their own operating plan
together with the financial implications.
By 1998 this organizational structure
had evolved into a decentralized planning
and management system involving a com-
pensation program under which every
employee in the Institute received a por-
tion of their pay as a performance-related
bonus. The coupling of compensation to
the performance monitoring program
Drawing by Kara Dyble
transformed the collective, collegial
model into a market-like incentive pro-
gram which guides participants’
behavior. At the same time, depart-
ment heads were made responsible for
raising funds for the research projects
within their department, as well as to
contribute toward the general operat-
ing expenses of the Institute. The
service departments, like publications
and communications, but also the
infrastructure departments, like
accounting, are dependent on the oth-
er departments for their budgets for the
most part. This ensures that the pro-
gram departments have a keen interest
in the efficiency of the service depart-
ments and the service and
infrastructure departments are as
responsive as they can be to the needs
of the program departments.
In effect the “Mike’s Grill” model
has been transformed into the “Mike’s
Shopping Mall” model, where each of
the stores (departments) can grow at its
own pace as long as it contributes its
“rent” to the mall. Each of the depart-
ments within the Institute is like a mini
Institute, with each of the departmen-
tal directors setting out and achieving
their own performance targets. The
Fraser Institute’s CEO acts like the
conductor in an orchestra to ensure
Continues on page 20
atlas highlights
Walker’s Laws for Creating
and Working with a Board
of Directors
The selection of a Board of Directors is
a crucial step for a new think tank. The new
CEO needs a board which is active enough to
provide advice and guidance based on busi-
ness experience but not so active as to
interfere with the independence of the
researchers and the research agenda of the
organization. If the think tank is to be suc-
cessful it must be independent of its sources
of financing and the CEO must be the princi-
pal shield that guards the researchers from
any influence. Ideally the Board of Directors
would only be involved in an oversight func-
tion regarding the financial affairs of the
institute and not at all involved in setting the
research agenda.
While I realize that frequently the Board
of Directors are involved in the creation of an
institute and in the provision of its initial
funding, it is very important that the new
CEO work diligently to build a funding base
which is not reliant on the Board of
Directors. Walker’s Law is that, “the inde-
pendence of the researchers and the
research agenda is inversely proportional to
the percentage of the budget raised by the
Board of Directors.” Directors who raise a
lot of money for an organization will want to
have influence over the projects on which the
money is spent and may have firm opinions
about what the studies should conclude.
I have never subscribed to the rule that
is often applied to directors of not-for-profit
organizations that they should “give, get, or
get off.” Directors should be chosen on the
basis of their experience, their track record of
success, and their knowledge that good
directors advise, not manage. It is also
important to pick directors who have a day
job so that their hobby doesn’t become an
inclination to meddle in the internal affairs of
the institute.
During my thirty years of experience at
the Fraser Institute, I was very fortunate to
have directors who clearly understood the
foregoing. They were very helpful with busi-
ness advice, often very helpful with
fundraising advice, and in providing some
funding. But once the rules of engagement
were settled, they never interfered with the
projects or the research work of the
Institute. ●
Newsletter for the Atlas Network 11
atlas highlights
Lessons on... (continued from page 11)
that the performance targets of the dif- ty and growth. The peer review pro-
ferent departments are mutually cess maintained by the Institute guards
compatible and appropriately support- against such an eventuality. Every
ed by the Institute’s infrastructure. research output is subject to a peer
Each of the departmental directors review by external as well as internal
is a member of the Institute’s manage- reviewers. In the event that reviewers
ment committee, which meets find what they regard as a crucial flaw
monthly to consider the individual in a paper, an Institute author may
budget performances of the divisions as only proceed to publication after the
well as the overall budget performance flaw has been corrected or if the
of the Institute. The management Editorial Advisory Board of the
committee serves to internalize exter- Institute overrides the external review-
nalities which might be produced by ers objection – something which has
one department and affect other yet to happen in the thirty-two-year his-
departments. The committee also tory of the Institute.
serves as a sounding board for the In addition to creating a more effi-
CEO and a venue in which Institute- cient and effective organization, the
wide problems can be solved. approach now used at the Institute pro-
Of course in a think tank the issue duces some additional benefits. Since
of quality control is all-important, and each of the department heads within
where departmental directors are the Institute are in effect running a
incentivized to grow their divisions, mini Institute, they can grow their
there may be a trade-off between quali- activity and their compensation as
much as they want.
Departmental growth
finances itself and con-
tributes to the operating
expenses of the Fraser
Institute, so there really is
no limit to what a depart-
ment head can achieve.
Correspondingly, each of
the department heads is a
potential Executive
Director for the Institute
since each has to master
all of the skills that are
required in running their
own departments.
Of course the other
great benefit of this mar-
ket-based management
system is that it simultane-
ously makes the Institute
less vulnerable to the loss
of the CEO and gives the
Drawing by Kara Dyble CEO more opportunity to
develop new departments
As an institute grows, the “Mike’s Grill” model and new activities within
transforms into the “Mike’s Shopping Mall” model,
the institution instead of
where each of the departments (or stores) within the
institute is like a mini Institute. The departmental simply doing the fundrais-
directors set out and achieve their own performance ing or micro-managing
targets and contribute to the overall success of the the activities at the depart-
organization. mental level.
20 Winter 2006/07
The main challenge posed by this
decentralized power structure is the
transition to it from the status quo. It
is my experience that the only human
being who likes change is a wet baby.
The change we must engender in our
institutes is not very different than the
challenge of the change that we try to
encourage in the political system – in
each case there is a well-entrenched
set of interest groups which will try to
stop it.
The way we overcame the status
quo was by linking the change in
responsibility with the change in the
compensation program. By introduc-
ing a bonus arrangement linked to the
performance assessment program, at
the same time as we made the depart-
ment directors responsible for their
budgeting, we provided an opportunity
for the change to improve the financial
position of each department director.
Of course there were still those who
preferred the status quo and wanted
neither the increased compensation
nor the responsibility for the perfor-
mance that would produce it.
As they say, the proof of the pud-
ding is in the eating, and the Fraser
Institute has now transitioned from a
CEO who had essentially been in that
position for thirty years to a new CEO
who is doing very well. The Institute
has continued to grow at double-digit
rates and it is possible that during the
current year the Institute will enjoy its
best year ever. Of course this is a trib-
ute to the great skills and abilities of
my successor, Mark Mullins, but it also
reflects the fact that all of the depart-
ments within the Institute are pulling
together as they strive to achieve their
own objectives, both institutionally and
personally.
Of course the biggest bonus is that
the transition has provided me with
free time to do things like write essays
for the Atlas Economic Research
Foundation! ●
Please contact Michael Walker at
mawalker@fraserinstitute.ca with ques-
tions or comments about this article.