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Faculty Viewpoints

Can a Company Succeed without a Hierarchy?

Inspired by research by Prof. James Baron, the founders of the biotech firm AgBiome created a company with no managers, run by committees of passionately committed employees. Yale Insights talked with Baron about what the company’s example tells us about leadership and organizational structure.

“Just treat people as adults.” This shouldn’t be a radical HR policy, but perhaps it is. Eric Ward, the co-founder of AgBiome, an agriculture-focused biotech firm in North Carolina’s research triangle, describes it as a core value for the start-up. “What happens in traditional companies is that there are a set of incentives put out there that indicate to people that they are not trusted to be proactive and solve problems on their own,” he says in a recent Yale case study. “The trite way of putting that would be people are assumed to be lazy and stupid.”

Having hired capable people, AgBiome puts them in charge of their own work. There isn’t a layer of managers making decisions at the firm, or even a list of job titles; rather, there’s an expectation that teams will “self-assemble around solving a problem.” Committees of employees oversee finance, business development, investor relations, and compensation.

The company’s unusual structure began with an article in the California Management Review. It described five organizational blueprints and the impacts associated with each. While each model had examples of positive outcomes, the data showed that “commitment” model firms, where the employees are passionate about the company and work in long-lasting, family-like structures, have a greater likelihood of surviving and going public.

When Ward and his co-founder Scott Uknes founded their company in 2012, they built on the paper’s insights, creating the non-hierarchical structure and considering internal processes with the commitment blueprint in mind. For example, new employees go through a months-long hiring process, including hourlong reference calls and interviews with numerous employees, to make sure they have both the needed technical proficiency and a willingness to participate in the company culture.

Ward and Uknes eventually contacted one of the authors of the research paper, James Baron, now the William S. Beinecke Professor of Management at Yale SOM, thinking he might be interested in visiting. Baron upped the ante and suggested the company could be a subject for a Yale case study. A firm that eschews hierarchy and other assumptions inherent in most company structures might be a paradoxically effective example to teach MBA students about leadership, HR, and organizational models.

Yale Insights talked with Baron about organizational blueprints, AgBiome’s application and modification of the commitment model, and what students and other organizations can learn from its example.

Q: Tell us about the paper that you wrote that influenced AgBiome’s structure.

While I was at Stanford, I worked with a number of colleagues to trace several hundred emerging companies in Silicon Valley over more than a decade. We looked at the way in which the founders built the companies and how the companies evolved over time. We were able to look at the effect of culture on how firms grew, whether or not they survived, whether or not they went public, if they went public how well they did, how bureaucratic they became, and so forth.

Our paper in the California Management Review intrigued the founders of AgBiome. They built their company around a commitment model and last year invited me to visit. We turned the visit into a Yale raw case.

Q: What is the commitment model?

We found five broad blueprints for organizing companies. The commitment blueprint was one where people were recruited to the firm based on their desire to be part of an enduring, family-like entity. They were controlled by a strong peer culture, and their affection was really to the organization more than to the specific project that they happened to be working on.

Hewlett-Packard in its glory days would be the quintessential commitment organization. The top-tier Japanese companies of the 1980s were commitment companies. People came in at
the entry level and stayed over the course of their career. They were deeply loyal to the organization, not to whatever particular role they were assigned to.

It’s an organizational form that’s been around for a long time and certainly not limited to Silicon Valley.

Q: Why has it worked for tech firms?

We spoke with venture capitalists who follow Silicon Valley companies. None of them forecast that we were going find the commitment model to do so well, but once we achieved the results that we did, they had an interesting explanation. They said startups confront two key issues: success and failure.

In firms that are successful more rapidly than people anticipate, there’s this perennial problem of how you keep people engaged. How do you motivate them to move on to version 2.0? With the commitment model, since people’s affection is really to an abiding organizational entity, they’re much less likely to cash out their stock options and buy an island in the Caribbean or whatever they’re dreaming of doing.

Conversely, when you confront initial failure, since people are attached not to that specific project, but to the premise of the organization itself, they’re more inclined to stay on in the face of a setback, whereas if you’ve recruited star talent to a particular project and that project doesn’t pan out, that talent will leave immediately.

The fact that commitment can help firms cope with either unanticipated success or unanticipated failure may be its biggest strength.

Q: Your study looked at companies in their first decade. Does the commitment model continue to be an advantage as firms mature?

We didn’t find any strong evidence to suggest that it didn’t, and in fact, we found that firms that started with a commitment model but abandoned it paid a pretty steep price because workers who are there because of an abiding love for the organization see the culture change.

Clearly, as organizations get bigger, as they get more diverse, holding a commitment blueprint together becomes more challenging because you can’t rely as extensively on informal interaction and everybody knowing one another in order to propagate the culture.

Q: Is AgBiome typical of organizations using the commitment model?

AgBiome uses committees to make every decision in the firm, including broad strategy decisions, including decisions about the CEO’s compensation. Not all commitment firms have such radical decentralization.

They felt very strongly that being nonhierarchical and participative was going to be critical to their business. I think they have a pretty compelling case that given their strategy and the kind of business that they’re in, a nonhierarchical structure not only enables them to attract and retain better scientific talent, which is critical to their mission, but also allows them to make decisions faster and better, which they argue differentiates them from larger, more bureaucratic competitors.

Certainly, it’s not a model that would fit every industry or every sector. I think knowledge-intensive industries where you require a lot of collaboration and intellectual coordination are the settings where this model is most compelling.

Q: How does the company approach recruitment?

Because it’s so important that commitment firms recruit people who share their values and can function as part of a team, by definition, they are much more selective. Anybody who recruits with AgBiome discovers very quickly that it’s a different kind of organization. They need scientific specialists, but much more emphasis is put on, “Is this person going to fit our culture and be somebody that will flourish with the rest of the team?” and less on concrete technical skills.

They handle recruitment in a very different and extended way. They interview your references extensively before they even talk to you. Recruits meet many, many people throughout the organization. Because the best way of guaranteeing that someone’s going to be a full-fledged member of the team is to involve the team very actively in the recruitment process, it tends to go much more slowly. They’re very careful to make sure that people aren’t surprised when they show up on day one about what they’re getting themselves into.

One of the concomitants of the commitment model is that growth has to be more measured and more focused than it might otherwise be.

Q: How successful are they in finding good fits?

There are some cases where people make it through who are not a match, and there’s some selection out of those misfits. A few more have left voluntarily to go back to school, but when we asked them about turnover, they kind of laughed and said, “That’s just not a problem that we have.”

They say AgBiome is not for everybody. But they believe that the kinds of scientific and technical talent that they’re trying to recruit, A, those people want to work on really cool stuff in an unencumbered way, and B, many of them find it really interesting to have the opportunity to play a role in the broader governance of the organization, which workers do in this organization.

“AgBiome raises questions for students about our assumptions about what an organization needs to look like.”

They sit on committees, that, as I said, determine compensation or business development priorities. Employees get a much broader exposure to the organization and interesting variety added to their work by virtue of being a part of its governance.

Q: How does an organization with no titles and no hierarchy handle advancement?

Advancement means growing deeper and deeper in your area of professional expertise and growing deeper and deeper in assuming responsibility for the governance of the organization. As people do that, they are recognized for it, but not by moving up a well-defined bureaucratic hierarchy.

They have a recognition committee that works with the compensation committee. When people have, in the view of the committee, passed a professional milestone, achieved greater depth of responsibility and greater professional expertise, they will celebrate that with a recognition. That usually would include an increase in compensation and some kind of honorific recognition.

Q: As the company itself grows, how does it keep this family-like structure without becoming unwieldy?

The idea the company uses to describe growth is cellular division. That’s the mindset that their scientists come to naturally, so they have adopted a model of spinning off cells that are to be no larger than 50 to 70 people—a size at which people can manage relationships with one another in a trusting way. There’s neuroscience that supports that view.

These folks make all of their organizing decisions based, not on intuition or some diffuse set of value commitments, but on careful review of scholarly research. When they decided that they were going to move to this model of cells, they went to the anthropological literature to find the optimal sizes of tribes, which is where the 50 to 70 size comes from.

They’ve now created four of these cells and something called a cell senate, which is intended to coordinate between and among the cells. There’s a lot of structure that’s required to hold this thing together. As they get bigger and more diverse, the question will be whether the effort that is required to eschew hierarchy ends up becoming an encumbrance itself, whether people are spending so much time on committees that they’re not able to actually focus on their regular nine-to-five job.

Q: What can other companies learn from this?

The founders of AgBiome buy into a core set of assumptions, which if you don’t buy into them, would make it hard to move in the direction that they’ve moved. The way that they put it is, if you look at the people that you’re hiring, they’re carrying on complicated lives in which they’re exercising a lot of responsibility in their finances, in the rearing of their children, in caring for their parents, in serving as members of their community. They argue many organizations seem to presume employees are not trustworthy and their job should be specialized as narrowly as possible in order to minimize the scope of damage that they can do to the organization.

They believe that the same degree of efficacy and trustworthiness that you see people displaying in the other arenas of their lives should be the starting point in thinking about how you build an organization. They also believe that management is best done by people themselves.

Now, that’s a bit controversial to a school of management, where many of our students fancy themselves as being specialized overseers of employees, but the folks at AgBiome would say, to the extent that you can minimize the reliance on specialized managers, it’s not only less expensive, it’s much faster in terms of decision-making, because it removes these intermediate layers that have to be gone through whenever decisions need to be made.

Q: Is there a C-suite team or other version of upper management?

Scott Uknes and Eric Ward are the co-founders and co-CEOs. They really do work jointly. Eric and Scott are talked about as if that’s almost one word. They do have a few people in C-suite roles, a CFO and the head of HR. But, even there, they exercise their roles differently. They act more as a resource to the employee committees than the sole decision maker within the domain of their job title. Clearly, as the firm gets bigger it would not be a surprise to see more specialized senior roles. They now have somebody in charge of sales, so they are starting to develop a leadership team.

Of course, over time they’re going to get more formal. There will be more specialization, but I don’t see that as an indictment of the model. The goal for them is to try to minimize, but not eliminate entirely, hierarchy and specialization. I don’t think the question is, do they still look like they looked when they were first founded? The question to ask is, do they still look less bureaucratic and nonhierarchical than an otherwise comparable firm in their industry?

Q: How does this raw case fit into the Employee course that you teach to first-year MBA students?

Many of the cases that we studied are large, long-lived organizations. I wanted one that was at the other end of the evolutionary spectrum. A young tech-oriented start up in the Research Triangle in the process of developing its HR architecture is compelling.

AgBiome raises questions for the students about our assumptions about what an organization needs to look like, some of these assumptions that we talked about before: the role of management, whether workers can and should be trusted to make critical decisions or whether those decisions really ought to be vested in the senior ranks of the organization. When the folks from AgBiome got in touch, it seemed like a really propitious opportunity.

AgBiome is a very strongly mission-driven organization that believes that it is harnessing science for the purpose of helping feed the world and promote agricultural development. The virtue of a compelling mission that drives the leadership that you are engaged in is a really important takeaway from the case.

Department: Faculty Viewpoints