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Management With Little Hierarchy

March 14, 2004|Tom Petruno

Capital Group Cos. is the holding company for $840 billion of assets. Yet it has no chief executive -- and never has.

That unusual management structure, or lack of structure, is typical of the firm, launched in Los Angeles in 1929. The company prides itself on being extraordinarily egalitarian.

The management concept was set by the company's late founder, Jonathan Bell Lovelace, and nurtured by his son Jon, now 77.

For example, the company has senior officers who nominally head up units within the organization. But those same officers also typically manage slices of Capital's mutual fund portfolios, alongside much more junior associates.

The firm's structure "often appears vague" to outsiders, according to Charles Ellis, author of the new book "Capital: The Story of Long-Term Investment Excellence" (John Wiley & Sons, 2004).

Within the company, however, the intent is clear, he said: to promote dynamism and the free exchange of ideas. "The firm disperses decision-making power widely.... Since stable structure is all too often the dangerous enemy of dynamic strategy, Capital avoids such tangible indicators of organizational status as vested titles, different size offices and hierarchical reporting," Ellis writes.

Those guiding principles extend across the company's mutual fund arm, Capital Research & Management; its foreign money-management unit, which controls $135 billion (the company is the largest investor in emerging markets); and Capital Guardian Trust, which manages $145 billion for U.S. institutional investors.

A free-form organization like Capital's conceivably could spin out of control. When management consultants try to answer why the firm has prospered -- growing from 274 people in 1970 to more than 6,000 worldwide today -- a few reasons stand out, Ellis said.

For one, Capital is privately held, owned by 350 of its senior people. So it answers to itself and to its clients, not to disparate public shareholders.

Also, on Wall Street, Capital is known for hiring the brightest -- and for molding jobs to people, rather than the other way around, Ellis said.

What's more, compensation is generous, he said. Capital associates "get paid quite well."

Most important, Ellis said, is that the company ingrains in its employees that success should never be taken for granted.

In a recent profile of the firm in an online financial-industry newsletter, RunningMoney.com, one expert used "network theory" to explain Capital's organization.

Network theory "posits that complex systems work best as hub-and-spoke networks, without top-down chains of command," the newsletter said.

However it works for Capital in producing strong investment returns, the long-term challenge is to keep it working.

Ellis, who began research for his book nearly eight years ago -- and has interviewed dozens of Capital employees along the way -- said that within the company one question the senior people ask is whether younger staffers, who weren't in the business during the terrible stock market environment of the 1970s, understand just how difficult it can become.

"You don't really know what people are like under that kind of dreadful pressure," he said.

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-- Tom Petruno

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