"Art Kleiner has uncovered a central truth about the way organizations work. His concept of the Core Group clarifies one key reason why rational people often act in seemingly irrational ways within the confines of an institution. Like any deep insight, it makes explicable what had previously been mysterious."--Jim Collins, author of Good to Great and coauthor of Built to Last

"Seminal idea, brilliantly presented, and wonderfully useful."--Warren G. Bennis, author of Geeks and Geezers

"Provides a much needed new perspective on leadership, power, and authority in showing clearly how Core Groups unconsciously guide and control organizations. This is a must read for all managers and would-be leaders."--Edgar H. Schein, Sloan Fellows Professor of Management Emeritus, MIT Sloan School of Management

The Customer
Comes Eighth

Back in the early 1980s, when writing mission statements was just an infant management fad, a division of the Exxon Oil Company held an employee conference to announce their new "core values." Enshrined as number one on the list was this simple sentence: "The customer comes first."

That night, the division executives met for dinner, and after a few drinks, a brash young rising star named Monty proposed a toast. "I just want you to know," he said, "that the customer does not come first." Then Monty named the president of the division. "He comes first." He named the European president. "He comes second." And the North American president. "He comes third." The Far Eastern president "comes fourth." And so on for the fifth, sixth, and seventh senior executives of that division, all of whom were in the room. "The customer," concluded Monty, "comes eighth."

Said the Exxon retiree who told me this story: "There was an agonized silence for about ten seconds. I thought Monty would get fired on the spot. Then one of the top people smiled, and the place fell apart in hysterical laughter. It was the first truth spoken all day."

"The customer comes first" is one of the three great lies of the modern corporation. The other two are: "We make our decisions on behalf of our shareholders" and "Employees are our most important asset." Government agencies have their own equivalent lies: "We are here to serve the public interest." Nonprofits, associations, and labor unions have theirs: "Above all else, we represent the needs of our members."

Of course, if organizations were really set up on behalf of these interests, then they would do a better job, by and large, in serving them. When organizations fail, people tend to assume that their leaders are inept, overwhelmed, or corrupt. But suppose instead that all organizations are doing precisely what they're supposed to be doing. What, then, is their objective? Judging not from their rhetoric, but from their actual behavior and accomplishments, what purpose are most organizations seeking to fulfill?

This book is an effort to answer that question. It starts with the premise that, in every company, agency, institution, and enterprise, there is some Core Group of key people -- the "people who really matter." Every organization is continually acting to fulfill the perceived needs and priorities of its Core Group. It's sometimes hard to see this, because the nature and makeup of that Core Group varies from workplace to workplace, and so do the mission statements and other espoused purposes that get voiced to the rest of the world. But everything that the organization might do -- meeting customer needs, creating wealth, delivering products or services, fulfilling promises, developing the talents of employees, fostering innovation, establishing a secure workplace, making a better world, and, oh yes, returning investment to shareholders -- comes second. Or maybe "eighth." What comes first, in every organization, is keeping the Core Group satisfied.

Core Group dynamics explain why some corporations spend years scrambling frugally for profit, and then squander it on ill-advised mergers, disproportionate pay for their senior executives, or hidden and improper deals. Core Group dynamics also explain why some government agencies block efforts to reform themselves, even when their reputation and potential survival depends on reform. And why some nonprofit organizations persevere against enormous odds to fulfill their idealistic missions, while complacently dismissing potential partnerships that might genuinely help them. Indeed, every organization seems to have its own forms of Core Group-related folly or corruption.

It's because of Core Group dynamics that a depressing number of business corporations have evolved into organizations with one primary purpose: To extract wealth from all constituents (not just the shareholders, but the employees, customers, and neighbors as well) and give it essentially to the children and grandchildren of some of its senior executives. And yet Core Groups are not inherently bad or dysfunctional. Indeed, they represent probably the best hope we have for ennobling humanity -- at least in a world like ours, in which organizations have the lion's share of power, capital, and influence. An organization's Core Group is the source of its energy, drive, and direction. Without an energetic and effective Core Group, all efforts to spark creativity and enthusiasm sputter out.

If you work in an organization, then all this may be second nature to you, so obvious and taken for granted that it barely even registers as important. But when you take a step back, the significance for all of us, even those who don't work in organizations, is unavoidable. We live in a civilization composed of organizations. Indeed, in industrialized countries, the organizational birthrate exceeds the human birthrate. Even though organizations are continually merging, swallowing each other up, or dwindling into inactivity, there are more organizations each year than there were the year before.

People have always used organizations to amplify human power. Individuals didn't build pyramids or cathedrals; tribal and feudal organizations did. But since the industrial revolution, and in the past 150 years in particular, organizations have become powerful in unprecedented ways. They are faster than they have ever been, operating with the perpetual acceleration of computers and wireless communication. They are interconnected through vast global webs of trade and distribution, webs that (among other things) make most human beings virtually dependent on organizations for food, shelter, and transportation. They are pervasive; there are almost no sustainable ways of making a living without organizations, and organizations dominate the political system, instead of paying fealty to it.

It's as if some giant invisible species suddenly invaded the Earth around 1850, reshaping civilization in its image, obviously here to stay -- and yet almost nobody seems to see it clearly. Nobody really knows how it works, or even what it does. Some people go to business school to master these new creatures, and end up being mastered by them.

The left protests against globalization, capitalism, big corporations, and Wall Street; the right excoriates big government, corrupt labor, or liberal media. But when you strip away the rhetoric, both sides seem to be driven by the same basic dynamic. They feel excluded from, rejected by, opposed to, and trampled on by the Core Groups of organizations associated with the other side.

If we are going to act effectively in a society of organizations, we need a theory that helps us see organizations clearly, as they are. We need to observe this new species in its natural habitat, to track its behavior, and to study its relationships with predators and prey. Only then can we ask: Why does it operate this way? And what, if anything, could be different? Only then can we learn to use organizations, instead of feeling like we are being used by them. Only then can we move organizations away from being simply the property and tools of the few, and develop their potential for the rest of us. Only then can we form real relationships with the members of this new species, as employees, neighbors, cocreators, participants, leaders, and even lovers of organizations.

In short, if we want to not just live within society, but establish ourselves as leaders and creators, then we have to understand the dynamics of the Core Group.

The root of the word "core" is the Latin cor, or heart, and the Core Group is the genuine heart of an organization. Management writer Arie de Geus, in his book The Living Company, calls the Core Group the "we" of the organization -- the central proprietors of its interests. They usually include most, but not all, of the people at the top of the organization chart. Plus others. The Core Group members are the center of the organization's informal networks, and symbolic representatives of the organization's direction. Maybe they got into the Core Group because of their position, their rank, or their ability to hire and fire others; maybe because they control a key bottleneck, or belong to a particular influential subculture. Maybe their personal charisma or integrity got them in. In the end, it probably doesn't matter that much how they got in. What matters is that they matter.

The Core Group won't be named in any formal organization chart, contract, or constitution. It exists in people's hearts and minds. Its power is derived not from authority, but from legitimacy. Its influence is not always conscious, or even visibly apparent, but it is always present in the implementation of actual decisions. It is the fundamental aspect of organizational culture that makes visitors to a workplace scratch their heads sometimes: "What are those people thinking?"

It is impossible to imagine an organization without a Core Group. And if you could imagine one, why would you want to create it? Start-ups need entrepreneurial Core Groups who put themselves at risk for the company's future. (People start organizations in the first place precisely because they want to be in a Core Group, if only to see what it would be like. I should know; I cofounded a consulting firm largely for that reason.) Large, well-run companies need a Core Group of senior leaders who can permanently merge their identities with that of the organization. Government agencies and nonprofits need Core Groups that can take a visible stand on behalf of the organization's principles. Even the most hierarchically strict organizations, like military units, depend on their Core Groups to maintain, among other things, the level of mutual respect that soldiers need to operate above and beyond the limits of their orders.

As we'll see throughout this book, there is always an implicit, somewhat unconscious bargain of mutual commitment in organizations: The people of the organization agree to make decisions on behalf of the Core Group, while the Core Group members agree to dedicate themselves as leaders to the organization's ultimate best interests. When it works, the result of this arrangement is greatness. Indeed, behind every great achievement, there is almost certainly a great organization (even when it seems like the achievement is that of a single individual). And behind every great organization there is certainly a great Core Group.

Great or miserable or in-between, the Core Group sets the organization's direction. The organization goes wherever its people perceive that the Core Group needs and wants to go. The organization becomes whatever its people perceive that the Core Group needs and wants it to become. If a goal is perceived as irrelevant to the Core Group, then it will not be reached, no matter how worthy it is, how ardently it is advocated, or even how stringently it is mandated by law or regulation. (At most, the organization will pretend to pursue it, grudgingly complying with the rules.) If a goal is perceived as close to the heart of the Core Group, then the organization will get there, come hell or high water. Moreover, just as every coherent human group comes to embody a set of values, ideas, and attitudes, the Core Group nearly always becomes an unconscious microcosm of the whole. If Core Group members think or act in a particular manner, or with particular attitudes, those percolate throughout the hierarchy. If Core Group members are cold to each other and to employees, then the whole enterprise becomes like a frozen wasteland. If the Core Group somehow warms up, then a little Santa's Workshop begins to develop amidst the tundra.

Thus, if you want to know what an organization stands for, start by exploring the characteristics and principles of its Core Group. If you want to invest in a company, look not just at its business prospects and trading history, but at the quality and reliability of its Core Group. If you want to lead an organization to great new things, start by fostering the kind of environment in which a great new Core Group can emerge. If you need to change or influence an organization, you can't do it unless you understand which aspects of the Core Group are open to change, in what ways, and by whom. Finally, if you remain unaware of the nature of an organization's particular Core Group, then that organization will be opaque, ungovernable, and dangerous to you -- even if you are ostensibly the person in charge. You may go through your career, for instance, thinking that "the customer comes first," acting as if that premise were true, and wondering why you never seem to get the rewards and recognition you think you deserve.

The Core Group theory emerged from watching organizations at play. Trained as a journalist, in 1979, I began covering Silicon Valley and the emerging precursors to the Internet for the counterculture publication that Stewart Brand had founded, the Whole Earth Catalog. Every once in a while, a corporation invited some of us Whole Earthers to advise them on the prospects for these strange new technologies. At one such meeting in 1982, some senior executives of the Atari Corporation asked for advice on the potential value of their new product, a home computer. I remember walking out still puzzled by two questions: Why would this buttoned-down organization (which Atari had become after its purchase by Time-Warner) want advice from Whole-Earth-Catalog-style hippies? And why wouldn't these leading-edge technology executives already know their own business? (Now, of course, I know the answer to both questions; this company, which had ejected its technology-savvy founder and been acquired by Time-Warner, had a new Core Group in place that was in over its head.)

By 1985, when Atari had already entered its inevitable decline, I had grown bored with writing about technology. Behind every technology story, after all, was a much more interesting business story, and behind every business story was a much more interesting story about management culture. I drifted to writing about advertising and then management, covering the quality movement and other business fashions of the late 1980s. This in turn led to a consulting job helping an MIT lecturer named Peter Senge develop a book about systems thinking in organizations -- a book which ultimately became the 1990 best-seller The Fifth Discipline. Around the same time, I spent six years researching and writing my own book, The Age of Heretics, about the social movement to change large corporations from within.

As part of these and other endeavors -- cocreating several Fifth Discipline follow-up "Fieldbooks," writing regularly on "Culture and Change" for the business magazine strategy+business, working part-time as a management consultant, helping develop a series of organizational oral histories called "learning histories" at Massachusetts Institute of Technology, and conducting a course on the future at New York University's Interactive Telecommunications Program -- I have interviewed more than a thousand people in depth, from a wide variety of organizations, about their aspirations, experiences, and frustrations in the workplace. The Core Group theory sums up the common threads I've perceived in all of those conversations. It also reflects a series of in-depth conversations conducted during the past five years with leading organizational thinkers and thoughtful organizational participants about the Core Group concept and its implications.

In the rest of the chapters of this book, I hope to articulate "who really matters" in a way that transcends both cynicism and naiveté, charting the boundaries and influence of the Core Group and discovering the most effective ways to manage it, live with it, and influence organizations for the better.

Several chapters will focus on the topics that come to mind when people think of hierarchy and authority: Power (especially in Chapter 9, "Power and Legitimacy"), Privilege (which is discriminatory by nature because it's a kind of love, with all the hope and abuse that this implies; see Chapter 4, "A Very Special Kind of Love"), and organizational or business Success (which is intimately linked with the distinctive knowledge of the Core Group, as discussed in Chapter 7, "A Core Group Way of Knowledge").

I'll feel that this book is successful if it helps some readers through the thickets of Core Group-dominated office politics and if it inspires a few CEOs or senior managers to rethink their organizational practices. If the role of Core Groups is as prevalent and significant as I think it is, then perhaps this book can help spark new forms of dialogue about the nature of corporate governance and the role of Core Groups and organizations in society at large.

Most of all, I'd love to see this book help bring some great Core Groups into being. There's a great deal at stake: the profitability and health of the organizations around us, and the life, liberty, and pursuit of happiness of the rest of us who must live with them.

Copyright © 2003 by Art Kleiner