Can workplace democracy work across organisations?

Ricardo Semler's story is what business legends are made of. Semler was all of 19 when he joined the family business, Semco, a manufacturing company based in So Paulo, Brazil. The company was doing poorly. Semler felt the company had no future unless it radically changed its ways. He told his father he needed a free rein - or he would quit. His father gave in.

Semler became the CEO of the company in 1980 at the age of 21. His first action on day one was to fire 60 per cent of the managers. He then proceeded to turn the traditional corporate model upside down in ways that have made Semco an icon of workplace democracy. At Semco, employees decide their production quotas, set their own salaries as well as decide what class to fly when they travel and which hotels to stay at. They come and go whenever they please, have a say in deciding who gets to be their boss and have full access to all financial information. The company gets along very well even in Semler's absence. When Semler is away on vacation, he doesn't leave a contact number nor does he call in to check on what's happening. These are only some of the seemingly crazy things that happen at Semco.

And, yet, there's a method to its madness. By trusting its employees and empowering self-driven teams, Semco has multiplied its productivity and profits manifold. When people read about the way Semco is run, they ask in disbelief: You mean, a company can actually work like this? The Semco model is based on three principles: democracy, profit-sharing and information. The three principles are all interdependent. Leaving out any one would render the other two meaningless.

To Semler, democracy at the workplace means giving employees all along the line a say in decision making. For this to happen, three conditions must be met. First, business units in a company need to be reasonably small. Being large-sized is an obstacle to democracy at the workplace. Semler thinks the optimum size for a business unit is 150 employees - at that size, people have a sense of belonging. Beyond this size, things get too impersonal. So Semler keeps his business units at that level.

Secondly, hierarchy must be kept to a minimum. Semler has only three levels in his company: counsellor, partner and associate. Counsellors form the corporate office of the company - they are the people who provide overall direction. At any given time, there are only five or six counsellors.

The next level comprises partners. These are the heads of divisions. Finally, there are the associates. Some of the associates may be temporary team leaders - these team leaders are called 'coordinators'. So there are just three work levels and four job titles. The only person an associate reports to is the coordinator. No coordinator reports to another coordinator. Thirdly, for democracy to be possible at the workplace, the pyramid - a metaphor for the small number at the top lording over a large base of employees at the bottom - needs to be inverted.

At Semco, the pyramid gets inverted in several ways. Nobody's hired or promoted until he has been interviewed and accepted by his subordinates. Twice a year, subordinates evaluate managers. The company takes anonymous feedback every year from every employee about company credibility and top management competence. Some important decisions are decided by vote in the relevant decision-making group. Semler himself has been outvoted several times.

Workers have a say in the wages they get. Some of the workers belong to unions. For them, wages are determined through collective bargaining. For the others, the starting point is a survey of salaries in the market. The data is made available to workers, who are then asked to specify how much they would like to be paid. By and large, workers determine wages that are reasonable in relation to their contribution. If it turns out that somebody's pay is not justified by the contribution he makes, it's conveyed to him. He can then be asked to do some other job - or leave. Democracy at Semco is reinforced by two other principles: profit-sharing, and transparency or extensive sharing of information. Semler believes that profit belongs as much to the workers as to the shareholders. He's clear that profit-sharing is an important motivational tool. Most companies would readily agree. But the link between performance and reward in the typical company isn't always obvious. It's always the person above you or at the top who decides who is to get what sort of reward. Besides, many companies limit profit-sharing to a small pool of employees, mainly top management. At Semco, profit-sharing happens in a different way. All divisions have a profit-sharing plan. Twice a year, 23 per cent of post-tax profit of each division goes to the division itself. Three people elected by the employees of the division decide how it's to be shared within the division. In most divisions, the profit is equally shared amongst employees. Perhaps that's why profit-sharing at Semco works. The criteria for profit-sharing are clear and the sharing itself happens with the involvement of all employees. Unlike in 75 other companies, it's not the bosses who decide how much each underling receives.

The third principle at Semco is: transparency or sharing of information. Semco shares the balance sheet, profit and loss statement and cash flow statement of every division with the members of the division every month. After some experimentation, the number of items in the three reports was pruned to seventy, which made it easier for employees to understand the numbers. Budgets are compared with monthly results. Semler sums up his philosophy, 'Participation gives people control of their work, profit-sharing gives them a reason to do it better, and information tells them what's working and what isn't.' Semler's sensitive to the central problem of the corporation that Peter Drucker highlighted: the dichotomy between the principles of a liberal society and the way companies work.

Semco's way of resolving this dichotomy has been to do away with working hours, dress codes, rules, regulations and manuals. It trusts workers to do the right thing in every situation. In So Paulo, where traffic jams were maddening, it made no sense to specify working hours. It was left to workers to determine their timings. They coordinated with each other and arrived at a schedule that was convenient to all. Semler has brought into his company the spirit of participation and free expression that animate a democracy.

There are many other elements that make Semco tick. The company insists on job rotation every two to five years to prevent boredom. It believes in job security. Procedures for removing people over the age of fifty or those who have been with the company for more than three years are complicated. Long-serving employees cannot be given marching orders all of a sudden, with the security guard escorting them out after they have received the pink slip. Trust in employees is taken to what normal companies would regard as an extreme: there are no security searches, audits of petty cash and the like. Semler explains the philosophy, 'We just refuse to humiliate 97 per cent of the workforce to get our hands on the occasional thief or two-bit embezzler.'

Does it all work? In 2012, Semco was said to be growing revenue and profit at 40 per cent. Are Semco's practices replicable at all? Or are they something that happened in one special company with one special person at the top? In his autobiography, Maverick, Semler answers this question with a telling anecdote. Semler had finished speaking to a group in Brazil, when one member of the audience, a doctor, wanted to know whether all that Semler had said meant anything for his hospital-and-pharmacy business. Semler asked for permission to talk to the smallest pharmacy in the business, which accounted for one per cent of sales. Permission was granted. Semler spoke to the employees of the pharmacy a few times and sent them a copy of his book. The doctor agreed to leave all decisions to those employees. Six months later, as agreed, the doctor called to report the results. The pharmacy had three employees, two women with shopkeeping experience, and a young man who was the pharmacist. They all disliked the irregular working hours which came in the way of their social lives.

With their newly found freedom to take decisions, they rescheduled the hours amongst themselves so that each was left with some leisure time. The medicine boxes had been arranged at the pharmacy in alphabetical order. This required the employees to often climb tall ladders. The employees decided it made more sense to arrange them according to how frequently they were taken down. Then, they bought an inexpensive computer to keep track of stock. They started taking inventory at night and on holidays when customers were few. They started ordering supplies themselves in order to maximise profits. They also proposed that the pharmacy stock a number of items such as swabs, bandages and shampoo, which weren't normally stocked by hospital pharmacies. Finally, the employees ended up proposing a profit-sharing plan. The doctor-owner was amazed at the change in the small pharmacy. He became a convert to Semco's philosophy. Perhaps, not every single thing that Semco does can be replicated by a multibillion-dollar company with a large complement of relatively low-skilled workers and where the CEOs keep changing. But the broad message of Semco's success is hard to ignore: Workplace democracy is not incompatible with financial performance.