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Federalism is an emotive word in Britain today. That is both silly and sad, because federalism, as a form of organisation, is becoming more and more relevant to every complex institution, be it of business or of government. The British have, historically, always been ambivalent about the idea of federalism, encouraging it for their departing colonies or for their old enemies, such as the United States or Germany, but remaining wary of it for themselves. That may partly be because the true nature of federalism has seldom been properly understood in these islands, steeped as they are in the traditions of monarchy.

Federalism is not another word for centralisation, nor does it mean decentralisation; it is both, but both in the right place. Federalism is not a system of imposed uniformity, nor is it just an alliance of common interests; it offers, rather, as much variety as possible and as much uniformity as is helpful in order to give the different interests some common force. The devil is in the detail of federalism, not in the principle.

If we throw out the principle because we do not like the detail, we are depriving ourselves of one of the best ways of handling complexity in organisations. Business after business is, in fact, inching its way towards federalism, without always appreciating that that is what is happening, as they seek to find ways to be big and uniform in some respects, but small, local and different in others; to give people and groups their head, but yet to bind them together. It can be a great boost to their confidence to realise that there is unsuspected theory to give backing to their intuitions.

Federalism offers as much variety as possible and as much uniformity as is helpful

Fortunately, federalism is not a new invention. It has been tried and tested, often to destruction, over the centuries, and there are some well-attested principles. It is not the principles which are in doubt but the difficulty of applying them to particular circumstances. The arguments about federalism would be more productive if the principles were better understood, leaving their application as the topic for debate.

These principles are five in number. They are what distinguish a federation from a confederation, which is only, in reality, an alliance of mutual interests, a federation without a centre, something always liable to fall apart if the interests cease to be mutual. A federation, on the other hand, should be very much more than the sum of its parts. The Commonwealth is a confederation, held together more by sentiment, history and language than by any overriding common purpose. Germany is a federation, with power balanced between its centre and its parts. So is Switzerland, although the balance of power in its case may need adjustment if its currently almost invisible centre (who, even in Switzerland, knows the name of the current president?) is to be enabled to negotiate with the world.

The first principle hinges on that old and ugly word "subsidiarity". Not an invention of Jacques Delors or the negotiators of Maastricht, subsidiarity is an old term from German political theory, turned into a moral axiom centuries ago by the Catholic Church. A papal encyclical in 1941 described it thus: "It is an injustice, a grave evil and a disturbance of the right order for a larger and higher organisation to arrogate to itself functions which can be performed efficiently by smaller and lower bodies". Put more simply - stealing people's decisions is wrong; yet managers do it all the time, in the name of efficiency, as do governments who turn their people into dependents, or parents who cannot bear to see their children taking the wrong decision.

In organisations, as in the European Union, subsidiarity means a sort of reverse delegation, whereby the centre does only what the parts agree that it should do, because it is in all their interests for some things to be done collectively or uniformly. What these things are has to be a matter for negotiation between the partners, for federalism is, and always has to be, a negotiated arrangement, not an imposed one; which is why it is especially appropriate for organisations which are now, increasingly, collections of small alliances and partnership arrangements.

Reverse delegation, if it is done with good will and understanding, results in very small physical centres with a relatively small number of delegated powers, typically focused on the future. Even huge multinational organisations are now realising that the real centre need not contain more than 100 people, excluding some common service functions which may be located nearby but do not have to be. Federal centres should not be breeders of bureaucracy, if only because there are too few people within them to look at all the information that bureaucracy can generate.

Federalism counsels that leadership roles are spread among the partners

The second principle is that of twin citizenship. Despite the claims of sovereignty being sacrosanct, it is perfectly possible to be a citizen of more than one state. A Bavarian is also a German, just as a Texan is an American. Indeed, a triple citizenship is already emerging, as the Bavarian takes on the rights and responsibilities of being a European.

In organisations it is important to realise that one owes something not only to one's immediate group or subsidiary, but also to the larger whole, which means that, occasionally, the immediate interests of the smaller unit must be sacrificed to the interests of the whole and for the ultimate benefit of all. To make this sacrifice realistic, organisations go to a lot of trouble to emphasise the whole, with omnipresent corporate logos, mission and value statements, and internal public relations. Europe needs to do the same if the principle of local costs for the ultimate good of all is to be sustained.

The third principle, of interdependence, is the glue of the federation, The smaller parts must not be dependent only on the centre, because that tilts the balance of power too much one way. Federalism, therefore, counsels that the necessary centres of excellence, or leadership roles, are spread among the partners, just as the various European institutions are spread among the member countries.

A variable geometry, as it is fashionably called, then connects relevant parts of the organisation for different projects or functions, since it is well understood that each member has its own particular identity, strengths and weaknesses, which allow it to contribute to some common tasks but not to all, to draw strength and help in some areas and to give it in others. "A good food guide" was how one corporate chairman described part of his job-as he dealt with requests from individual units for help and advice. The requests came not from the centre but from the relevant member units - the task of the centre being to facilitate, but not, in itself, to deliver. The ability of each unit to contribute something to the whole, as well as to draw from it, binds the federation together as well as ensuring that no one unit is likely to become strong enough to go it alone.

The fourth principle, of a common law, ensures that all parties to the federation work to a common set of rules and standards in the things that really matter. Multinational organisations speak of their "bible" but fortunately most of these corporate bibles are only a few pages long. Organisations also need a common information system to accompany a common law so that the different parts can talk to and deal with each other.

Federalism is a form of democracy entirely appropriate for our times

It could be argued that this common system translates into a common currency when nations combine, but information systems do not demand economic convergence, while a common currency does. Where such convergence does not happen it has to be created if the common currency is to work, and that means, ultimately, transferring payments from the richer to the poorer. The pull of the twin citizenship would have to be very strong to stand the strain of such generosity.

The fifth and last principle is that of the separation of powers. This separation is seen at its most obvious in the American constitution, with legislative, executive and judicial functions clearly differentiated. Managers have traditionally found it easier to combine the three, a combination which amounts to a dictatorship in practice. But the new principles of a separate chairman and chief executive, non-executive directors on the board, audit committees for this and that, are all diluting that dictatorship and moving corporations in the federal direction.

Parliament in Westminster still clings to its claim of parliamentary sovereignty, but the combined power of legislature and executive is beginning to diminish as select committees discover their powers, and the European Court exerts its judicial supremacy in the field of human rights.

A separation of powers makes life more difficult for those in charge, but it does spread the power around and thus protect one from a bad dictator or a mischievous oligarchy. Federalism has always seen itself as the antidote to any undue concentration of power, and only in desperate straits will the member bodies cede power to one group or to one person, and then only for a limited period. It is, after all, a basic precept of political theory that great power must be limited in tenure, and that tenure is only tolerated if the power is constrained. Politicians and top managers ignore this precept at their peril.

Federalism is neither good nor bad in itself. It is a form of democracy entirely appropriate for our times - times which require large agglomerations of resources for some purposes but which also want a local variety, and as much local autonomy as is possible. To go it alone in a global world is hard for any small group, or indeed for any nation. Temporary alliances of mutual interest, confederations are fragile. The transaction costs involved in maintaining them often exceed their benefits, and it is not easy to ensure that some do not benefit more from the alliance than others. Federations, too, have their transaction costs, for much has to be done by negotiation and agreement rather than by central diktat. But the sense of twin citizenship can be deeply reassuring, because we know that we are locked into something bigger than ourselves while at the same time preserving our own identity.

It would be a tragedy for Britain if federalism were to be seen to be a dirty word

It is becoming clear that we have to rethink the way we run things, in our institutions and our businesses as well as in the governance of the country, The age of the machine is passing, and with it organisations shaped and designed like machines. We need a model more suited to the human beings who are now the main if not the only assets of those organisations, a model more suited to democracy - more flexible, more susceptible to influence from its members - a model which can learn from itself as well as instruct and control.

It would be a great shame if the struggles of the EU to find the right form of federalism were to persuade those in other spheres that federalism was too difficult. It would be an even greater tragedy for Britain if federalism were to be seen to be a dirty word, inappropriate for any decent Briton, because our institutions would then be deprived of a form of organisation which might be their salvation. It would, instead, be a pleasing irony if Britain, which has so despised federalism as a form of government, were now to embrace it in its businesses and institutions. It would be more pleasing still if we stopped calling it names and got on with applying the principles, because, whether we realise it or not, we are all moving that way, but it is never sensible to walk backwards into the future.

Charles Handy is an independent writer and broadcaster. He writes in more detail about federalism in "The Empty Raincoat", and his latest book is "The Elephant and the Flea", both published by Hutchinson. The opinions expressed in this article are those of the author and not necessarily those of Federal Union. This article was first published in The Independent on 6 February 1992.