Ricardo Semler became CEO of his family’s company, which produced parts for Brazil’s struggling shipbuilding industry, at the age of 21. On his first day he fired 60% of the management team and began diversifying the company’s businesses. At the age of 25, after suffering fainting fits through exhaustion, he implemented a new and radical form of worker democratization and participation. Job titles were removed; employees appointed their managers and employees set their own wages. The CEO position rotates every six month and transparency ensures everyone in the company knows what each person earns. Semco grew from revenues of $4 million in 1982 to $212 million in 2003, during a very difficult period in the Brazilian economy. Ricardo Semler published the bestsellers Maverick, in 2001, and The Seven Day Weekend, in 2004, which explain his management philosophy and experiences at Semco.
Question: In recent years Semco hasn’t published consolidated company accounts, is the business still experiencing double-digit growth?
Ricardo Semler [RM]: It has become impossible to consolidate – we have started so many joint ventures with other, larger public companies [such as Cushman and Wakefield and Johnson Controls] and we are minority investors in the Tarpon investment fund, which has interests in many companies, and so in the last six of seven years we have lost our ability to consolidate results. But [in recent years] we have gone through more explosive growth. The sum is many times greater than it was six, seven years ago.
Q: And you warn about measuring success by revenue growth?
We don’t measure success in that way. Because then you are stuck to the format of saying I have reached a certain amount and then next year I have to do 6% more. And then the people and the organisation get dragged along behind the main goal which is to get the right numbers. It’s a dangerous format because what you are as an organisation, what you are able to able withstand in terms of growth and people, gets ‘dis-considered’ because you are just running after the numbers.
Q: Has your anti-hierarchical approach to management restricted the pool of potential joint venture partners?
If we were to take the assumption that we need businesses that are already sensitive to this we are already reducing the gamut of possible partners. Also, there are no businesses or groups of people that we who are not receptive, once we decide to do something in terms of making it easier for their employees to work. The people are always receptive to it, in any industry or any size. It’s those that own it or manage it that are the restriction.
Q: You now work with some very large companies. How do they react to your rule of breaking business units down when they get above 100 or so employees? Aren’t they in the economies of scale mindset?
I think we have found in any situation the defence of the economies of scale don’t break down when you try to understand the diseconomies of scale that they have built into their cost. For example, companies think that it is an advantage to have an HQ and that everyone should travel to, but they ignore the fact that one person may be travelling 1 hour 40 minutes each way. Companies think that’s not their problem what happens before 9am and after 5pm. That’s just silly. That’s just an ostrich approach because it is costing you – and the question is: how much is it is costing you? Traditionally, understanding the person as a whole is never part of the business problem. For example, we recently took over a business that had an enormous amount of low salaried people working with for a bank doing maintenance, security and cleaning. There were 900 people working at the many of the bank’s locations and no one had ever done a study of where they lived and what units they had been allocated to. It’s a crime that no one had done that in 12 years. Some of these are very interchangeable functions and so we put everybody at a location within 5 kilometres of their home. It had an enormous impact on their quality of life, which led to greater productivity. This is such a very simple task. And we have done the same thing with working as home [in other business areas]. We incorporate the time a person works at home as a company cost, and that scares managers off from asking people to work [in their leisure time].
Q: Has that been effective?
RS: It has worked dramatically. If managers suddenly think they are going to be charged for someone working at home on a Sunday night, they then realise it can wait until Monday morning.
Q: You famously don’t have an HR department?
RS: Yes, we used to have two people but one retired.
Q: Why is that?
RS: We can’t understand how dealing with people is anything but the essence of all the relationships in the business. And it’s a bit of a kop-out for a manager to say ‘I don’t know how to solve a problem – why don’t I send you to HR’, who are ‘touchy-feely’. And then when you come back [from HR] let’s talk about the real thing you do, which is selling widgets or whatever. And so to our mind if you need an HR department then you are already segregating people into completely different portions of their abilities.
Q: But has your approach influenced HR professionals, for example with regards to your approach for hiring?
RS: We just try to use intuition and common sense and other things that have been lost. Having an HR department makes it very difficult to make intuition your number one factor – so, for example, we take applicants and look at their CVs just to get the ability issues out of the way. Then we put those people who can do the job into a big meeting and we ask our staff – those who turn up on a voluntary basis – just tell us which people you would hire but don’t tell us why. Because telling us why will confuse the whole issue. And we ask: don’t write down scores … but if 11 out of 14 people say ‘her’ then ‘she’ has the job. But don’t tell me why. Large companies need to know points, and have reasons for hiring decisions. We say that’s a tremendous drawback for an organisation when hiring.
Q: What else is important in recruitment?
RS: Getting people from outside your own industry is vital to break down inertia and the emulation format which is so strong. The fact you can’t differentiate between any airline’s seats, or a mid size car of any make, or computers or cell phones is because the people are working in the same industry and it makes it almost impossible to break out of this mode.
Q: Just how does your unique internal approach lead to competitive advantage with clients?
Our commitment to delivering what we promised isn’t institutional. It’s not based on corporate rules. Our commitment comes from the fact that we said would, and we find a way internally to make that happen. Our people have the autonomy to decide and to deal with people externally and internally and so over time the relationship becomes one of trustworthiness and then clients are willing to pay more. In all our businesses we are more expensive [than the competition]. In no business are we cost-based. And so in all these cases the customer is coming back because he is getting something that a structured organisation can’t always promise even though the brochure might say it can. The number of times we are late on delivery, or late on completion, is a very tiny fraction.
Q: Has Brazil’s recent economic stability lessened the comparative competitive advantage that Semco’s derives from its flexibility?
I can’t find any correlation in the economic environment and how people work together. The features of human nature are so strong that the conditions they are working in are secondary. Our competitiveness or our ability to generate new products and services seems to be completely uncorrelated to the external business environment.
Q: Are you not surprised others have not tried to copy your approach more fully?
RS: No, because the leap of faith is very hard for the person in control. The ones that have power have to give that away and there is no real good exchange for the risk at that moment. If you said, look, I guarantee in five years time you will feel more relaxed, staff will be happier, employee turnover will be lower and revenues will be up … First, I am not able to guarantee that, it depends how you implement [‘the employee democratisation’ process]. And second, before you find out you have to lose control.
Q: Could your approach be used in the public sector?
RS: There is no restriction. I have had some examples of working with government departments but, again, as you go up [the chain of command] the question is who is willing to lose control? And so, again, you are stuck on the same question. Our approach is really about how people work together and whether the organisation is an NGO, hospital or government department makes no difference. It’s about how you get people to stabilise their relations so their life is more worthwhile. And therefore they commit, and therefore they deliver, and therefore the customer comes back. And that customer could be the general public.
An edited version of this interview was first published in People Management Magazine