What do we mean by “Hourglass company”?

What the analogy says is that a company should not be seen as a pyramid, the way most of us are used to modeling it in our minds. Our pyramid contains the employees at the base, the most populated layer, who perform execution tasks and are the ones who make things happen. On top of them is the management layer, with fewer and fewer managers as you go up in the hierarchy, culminating with the head of the company, the CEO, who is alone at the top. And this is, for most of us, all.

What Radu says is that beyond the CEO, the company continues to have other layers, who contain progressively more people. Immediately on the other side of the CEO, we have the board layer, which may have an administration board or an advisory board, or both. And beyond them we find the shareholders, maybe a couple, maybe a lot of them, who control the whole thing through the boards, the CEO and so on.

The hourglass analogy says thus that the company is not a pyramid, but has two equally important halves, communicating always and connected through the CEO. Anytime we look at a company, structure, change or analyse it, we should look at both halves, and decide if they are correctly structured, if the flows are unobstructed, and if the information and execution decisions are arriving in time where they should.‍

How similar are the two halves?

The hourglass analogy refers mainly to the size of each half and forces us to consider what flows through the bottleneck, the CEO. The two sizes may be similar in the sense that they both expand as the distance from the CEO increases, but they are also dissimilar in many ways. The two halves function differently and are rather complementary.

The shareholders’ vision is a democracy. Important decisions are reached through a voting mechanism, which is clearly defined in the shareholders’ agreement. Shareholders choose boards, which represent the shareholders and appoint the CEO, who should find ways to execute the shareholders’ will.

The other side is typically non-democratic. Most companies rely on various ways by which the decisions are taken at the top and implemented as they are executed, with democracy involved maybe in finding ways to fulfil the tasks, but not in deciding which those tasks are. The shareholder half thinks strategically, the employee half executes, and somewhere in the middle, the desires of the shareholders are transformed into strategic thinking, then in operational thinking, then in management and execution.

But always, sand flows between the sides, visions are transformed in actions, actions generate feedback, and each side influences the other, while the market decides the success and efficiency of the whole process.‍

Is one half more important than the other?

Well … yes and no. Both halves are important in different ways, and the company could not function, as an hourglass could not function, with only one half. But at any given time, one half leads the way, and the other half receives sand, or, in our case, information and orders. And we should never lose sight of the fundamental truth of any commercial company: the company has as its goal to bring value to the shareholders. The shareholders create and finance the company to receive some value. Which may be profit, most of the time, but not only. The company may build an image, make the world a better place, solve specific issues, create various types of value. The company is not created to pay salaries to the employees, to give jobs, or to pay taxes. It does this because the shareholders want to achieve some goals which need the whole hourglass to come true.

One of the most fundamental mistakes many companies make, says Radu Georgescu, is that they ignore the shareholders’ side of the hourglass, and do not create channels so that their wishes could reach the CEO and the company. Considering that the company ends at CEO level is a very dangerous mistake. Even if the company management is competent and execution is good, the lack of alignment between the CEO and the shareholders may in the end kill the company. ‍

What is the role of the CEO in all this?

As a hourglass could not function without the tiny connection between the two halves, the company needs, at least in most cases, to pass through a single person, the CEO. The CEO receives information sent towards the company by the shareholders, condensed and refined by the boards, transforms it into decisions that shape the company activity, and sends these decisions towards the rest of the company, which then generate management and operational decisions governing the activity of all the employees.

Could the company function without the CEO? Well, maybe, but it would be difficult. With no bottleneck in the middle, a hourglass would just allow all the sand to circulate straight to the bottom; without the CEO and all the layers on top and below the CEO which shape and refine the information, the shareholders’ wishes may arrive at the bottom, but unstructured and spread around in all places, and the efficiency would be probably zero.‍ 

Is there a downside to this structure?

As with all bottlenecks, even if they have a functional reason to be there, there are many ways in which things could go wrong. The hourglass is a tense structure, adjusted all the time to keep a dynamic equilibrium, and which could lose balance at any time. The CEO needs to pass information up and down, inform layers on top and below about what goes on in the other half. The CEO level is the area where all the tensions inherent in the dual structure of the hourglass are battling and hopefully getting resolved. In an ideal case, the time needed to circulate the data and the bits left aside as the CEO interprets and synthesises the information to be passed on are not important. In practice, even in the best cases, the CEO is a serious bottleneck, which in the worst cases may introduce distortions and delays that may hinder or even threaten the functioning of the whole entity.

The CEO passes on not only information, but also orders, goals and decisions. The effect of these decisions should be sent to the upper side for evaluation, feedback and eventual restructuring of the goals and strategic decisions. Good execution depends on the efficiency and speed of this transmission.

As a CEO should always juggle the speed versus the amount of processing to be done on transmitted information, any mistake affects the efficiency of the activity, and in extreme cases, may even jeopardise reaching the shareholders’ goals.‍

What could be done to help the CEO perform?

Once the hourglass framework is clear in the minds of the participants, there are some ways in which the CEO work could be eased and better organised. Some of these possibilities are:

1. Good structuring of the layers below the CEO. ‍

This means a good management team, and good C-level performance, starting with good structure, good job descriptions and selecting good candidates who create a good team and work well together.

2. Good structuring of the layers on top of the CEO. ‍

The administration and advisory boards have each one of them clear missions, and they should be well prepared to fulfill their goals. Their members should be competent and, as the management team, they should work well together. They must be able to take shareholders’ interests, which may sometimes be contradictory, and transform them into decisions and guidelines which would make sense and help the CEO fulfil his or her work.

3. Implementing extra communication and incentive channels between the two halves. ‍

Helping the CEO transmit information and decisions up and down should be made easier through extra channels, structured carefully to not circumvent or bypass the CEO, but to add extra details and clarifications when needed.

What is the role of the ESOP in the hourglass company?

ESOPs are tremendously important in such a structure. By allowing the both halves to connect directly, so that employees are at the same time shareholders, the information flow, and the decisions flow, are boosted, clarified and their efficiency could increase with no additional effort or restructuring of the company. The employees know why they must attain some goals, and may even be participating, as shareholders, in a certain measure to set these goals. This leads to increased motivation, and a much greater cohesion of the whole team, employees and managers and shareholders.

Participation in the ESOP is a very strong incentive measure. It is critical to the balance of the company to have a good incentive in place for both halves. The shareholders’ half is motivated by design, as the whole company works towards fulfilling their goals; once an ESOP is in place, a similar motivation is created also for the employees, and the whole structure becomes more stable and efficient.

The degree to which the ESOP is accepted by the employees may also show the management and the shareholders the commitment of the execution team, and their faith in the perspectives and the direction the company is following. The direct interaction with the employees, and the ESOP is clearly such a direct relationship, is representing one of the parallel communication channels described in the previous point; good ESOP structuring and monitoring will clearly help the company to become healthier and more efficient.‍

I hope that now the hourglass analogy is clear, and that you will find it useful to apply this framework when you analyse and structure a company. Please check again our content page for more articles related to investing, managing your equity, and making your company a better place.