Using the knowledge you gained in the Issues in Organizational Leadership about leadership, management, change, culture, and personality to conduct an analysis of the case: Asociacion Chilena de Seguridad (ACHS) (A): Honoring a Legacy, Embracing Change. Use all of the information given in the case study.

Question: What steps should they take in finding a successor to Hieremans.

CASE:

Asociación Chilena de Seguridad (ACHS) (A): Honoring a Legacy, Embracing Change

Leigh Hafrey and Cate Reavis

We knew that the change needed at ACHS would require more than bringing in a new manager or two. We were looking to change the culture and introduce a new value system.

Fernán Gazmuri, President, ACHS Board of Directors

In mid-2010, things were not looking good for Asociación Chilena de Seguridad (ACHS), a workers’ insurance non-profit corporation. Also known as a “mutual,” ACHS provided member companies with risk prevention services and their workers with free, high-quality healthcare and, when needed, salary compensation for work-related accidents and illnesses. ACHS’s accident rates were now rising, even as its financial performance declined. In fact, the 52-year-old organization was losing money for the first time. Workers wanted a better healthcare experience, and companies wanted better risk prevention services. Meanwhile, as ACHS coped with its eroding performance, Chile’s new pro-business, results-oriented president, Sebastián Piñera, was openly communicating his goal of creating a “First World Chile” by 2020.

ACHS was founded in 1958 by Sociedad de Fomento Fabril (SOFOFA), a federation of private industrial companies led by some of the best-known businesspeople in Chile. These included the new company’s CEO, Eugenio Heiremans. During the half-century that followed the founding of ACHS, Heiremans focused on enhancing the dignity of the Chilean worker by improving safety and health conditions; he believed in putting the well-being of people ahead of all else. Now 87 years of age and suffering from a debilitating illness, Heiremans knew it was time to step down. SOFOFA’s Executive Committee asked committee member Fernán Gazmuri, ACHS’s newest board member, to set the change process in motion. Finding the right successor for Heiremans would require a better understanding of how ACHS operated and a leader who could reverse the organization’s decline in performance while maintaining its historical commitment to the safety and health of the Chilean worker.

Chile

Theories abound about the origin of the name “Chile.” One claims that the name came from the Mapuche5 word chili, which meant “where the land ends.” Chile spans nearly 4,000 miles of the south

Pacific coastline and a mere 110 miles from the coast to its eastern borders with Bolivia and Argentina. It shares a 104-mile border with Peru to the north, and in the south ends at Cape Horn, 500 miles north of Antarctica. (See Exhibit 1 for map of South America.) With a population of 17 million, Chile is considered one of the most racially homogeneous nations in Latin America. When asked in a 2011 Latinobarómetro survey what race they considered themselves, 59% of Chileans answered “white,” 25% said “mestizo,” and 8% self-classified as “indigenous.”

Chile is a highly urbanized nation: 90% of the population live in cities, and nearly 40% of that total live in the country’s capital city of Santiago. With an average lifespan of 79 years, approximately 43% of Chile’s population is between the ages of 25 and 54, making it the fastest-aging society in Latin America. By 2030, experts predict, 23% of the population will be in their 60s and older.

Chile’s economy depends heavily on mining. The country produces one-third of the world’s copper, exports of which account for 20% of GDP and 60% of all exports. Chile has the highest GDP per capita (ppp) in Latin America (Exhibit 2).

Augusto Pinochet and the “Chicago Boys”

Many credit Chile’s strong economic position to the policies put in place during the days of its military government under Gen. and then President Augusto Pinochet. Named Commander-in-Chief of the Chilean Army by President Salvador Allende in 1973, Pinochet led a successful, U.S.-backed coup against Allende, who was three years into creating a “classless state without private property.” Allende had told a New York Times reporter shortly after he was elected president in 1970 that “Man is freed when he has an economic position that guarantees him work, food, housing, health, rest, and recreation…. I think Socialism frees man.” By the time of his overthrow, skyrocketing inflation rates, a contraction in industrial output, a thriving black market, a fiscal deficit that was growing due to uncollected taxes, and shrinking foreign-exchange reserves gripped Chile.

After taking power, Pinochet called on a group of Chileans who had been educated at the University of Chicago under the Nobel Prize-winning, neoliberal economist Milton Friedman to help him save the Chilean economy. This group of economists came to be known as the “Chicago Boys.” Their free-market, minimal-state intervention economic philosophies led to curtailing state participation in the economy. They encouraged export growth, removed trade barriers, and privatized social security and state companies. Labor unions, which under Allende had been actively involved in Chilean politics and permitted to engage in collective bargaining both at the enterprise and industry levels, saw their influence severely limited. The 1979 Labor Plan outlawed union confederations, allowed collective bargaining only at the company level, and prohibited unions from requiring members to pay dues. During a strike, a company could impose a lockout, temporarily lay off workers, and hire replacements.

From 1986 to 1997, the Chilean economy grew on average 7.5% annually. Friedman, who noted how remarkable it was that Chile’s military junta “adopted the free market arrangements instead of the military arrangements,” soon dubbed it the “Chilean Miracle.” In addition to his economic plan, Pinochet engaged in political and social reforms, one consequence of which was the killing or disappearance of over 3,000 political opponents and the torture of tens of thousands. Inequality

High unemployment and increasing levels of poverty and income inequality led to Pinochet being voted out of office in 1990. Friedman noted that Pinochet’s ouster was an indirect result of the free market policies that governed Chile during the 1970s and 1980s. As he reflected some years later,

“The Chilean economy did very well, but more important, in the end the central government, the military junta, was replaced by a democratic society. So the really important thing about the Chilean business is that free markets did work their way in bringing about a free society.” The center-left coalition governments known as Concertación, which led Chile from 1990 to 2010, increased social spending as a way to tackle the country’s level of poverty. The poverty rate fell from 45% in the mid-1980s to 15% by the mid-2000s. In concert with improved levels of poverty, the university student population soared from 200,000 in 1990 to 1.1 million in 2010.20 The country’s GDP continued to grow, albeit not quite at the levels it had under the last years of Pinochet (Exhibit 3). Chile’s economic growth and social and political stability were recognized with its acceptance into the OECD in 2010, making it the first South American country to be admitted.

However, as one academic pointed out, “Only a minor sector of society benefitted from [Chile’s] productivity growth.” Inequality, brought on by the free market policies put in place under Pinochet, remained a glaring problem with the vast majority of Chileans not represented in its growth figures. Chile had the most uneven distribution of wealth in the OECD. According to the World Bank, between 2005 and 2009, the highest 20% of income earners accounted for 57% of total income and the lowest 20% just 4.5%. As one researcher found, 20% of Chileans had incomes equal to those of a developed country while the rest had incomes of a middle- or low-income country. Another researcher noted that nine out of ten workers in Chile made less than the average minimum salary in developed countries.

Throughout their history, the three private mutuals had operated without significant competitive threats. While new mutuals were permitted to enter the sector, the legal requirements were fairly restrictive (Exhibit 4). Since the 1968 law set the member rates, mutuals could only differentiate themselves on their ability to lower accident rates, which would lower the rates companies were required to pay.

The mutual system experienced significant growth as Chile’s economy grew. As more companies were started in Chile beginning in the late 1980s and into the 1990s and 2000s—between 2007 and 2010, an average of 28,000 new companies were started every year30—the need for worker insurance grew. More workers and higher salaries led to greater income for mutuals.

Given their socially conscious focus, many wondered how the non-profit mutuals survived during the Pinochet/“Chicago Boys” era. Heiremans, who knew Pinochet and had been close to his military government, offered an explanation.

Risk Prevention and Safety ACHS was originally founded to provide risk prevention and safety services to companies throughout Chile in order to bring down the nation’s accident rate. The organization helped its member companies avoid accidents by providing training programs to introduce environmental and health safety (EHS) competencies. These included hygiene programs to prevent occupational illnesses; fire and biohazard agent training; and psychosocial programs to develop and sustain a culture of safety. ACHS’s work in risk prevention and safety extended to the community at large with campaigns that addressed how to avoid day-to-day public transportation accidents, prevent swimming pool accidents, and educate children about the importance of EHS at home.

Roughly 17% of ACHS employees worked in risk prevention and safety, which accounted for 15% of the organization’s operating costs.

Healthcare ACHS ran 97 primary healthcare centers throughout the country and a trauma hospital in Santiago. The organization also co-owned 12 regional clinics with its competitor MSCCC, resulting from a 2005 alliance when excess capacity led the organizations to merge some of their locations.36 ACHS co-owned an additional seven clinics with other partners.

Other Stakeholders

Aside from its own employees, ACHS’s key stakeholders included affiliated companies, workers at affiliated companies and their unions, and the government. For affiliated companies, ACHS’s value proposition was the degree to which it helped curtail work-related accidents and illnesses, thereby lowering the variable fee that affiliates paid to ACHS. For many years, affiliated companies had voiced dissatisfaction with the organization’s risk prevention and safety services, and believed that the organization had focused too much on healthcare.

Workers, and the unions that represented them, looked to ACHS for the free healthcare provided when a work-related accident or illness occurred and for financial compensation services when they were unable to work. While workers were satisfied with the healthcare they received, especially when compared to the quality provided by public healthcare clinics, they complained about the amount of time they had to wait to see a doctor.

The government’s demands on ACHS shifted depending on which political party or coalition led the government. For example, President Michelle Bachelet was an outspoken defender of workers’ rights during her time in office from 2006 to 2010. During her term, ACHS focused more on the workers’ experience by continuing to improve the quality of healthcare they received. Pro-business president Piñera, elected after Bachelet, stressed the importance of liberal, open, competitive markets to keep Chile on its development trajectory. He questioned the ability of a group of non-profits to lead the workers’ insurance industry and sought a for-profit competitor to shake up the industry landscape.

Time for Change

The year 2010 marked the first year ever that ACHS had run an operational deficit.39 For several years, the organization’s operating expenses had been growing faster than its operating income. Between 2006 and 2009, operating income grew 5.3% while operating expenses (excluding administrative costs) grew 7.2%. Administrative costs were up 8.6% over the same time period. Operating results had tumbled 27.2% (Exhibit 6). Meanwhile, the organization’s retirement fund faced a $40 million liability.

However, ACHS’s stakeholders were arguably more concerned with its apparent struggle, along with the entire mutual system, to lower the nation’s accident rate (Exhibit 7).40 As one manager explained it, ACHS could no longer lower its rate by its previous means—implementing rules and regulations, providing procedures, and hoping that employees complied. Member companies voiced their dissatisfaction with ACHS’s risk prevention efforts, and many of the larger ones handled risk prevention and safety in-house.

SOFOFA’s executive community had chosen Fernán Gazmuri to take the lead in determining how to turn around ACHS. Gazmuri was the president of Citroën Chile, a substitute board member at ACHS since 2002, and a permanent member beginning in 2010. He began by carefully broaching the subject of a successor with Heiremans. Gazmuri also proposed that ACHS hire an outside consulting company to assess what the organization did well and not so well, and to determine the depth and breadth of change needed. While Gazmuri knew that neither of these conversations would be easy, he believed that Heiremans would have to bless any change initiative for it to succeed, and do so publicly.

Fortunately, Heiremans offered no resistance, and ACHS’s other board members also agreed with Gazmuri’s recommendations, though they never did so in front of Heiremans. (The two other board directors representing member companies had each been on the ACHS board for more than 20 years and had close personal relationships with Heiremans.) Heiremans relinquished his CEO position in June 2010, and resigned from the board in October 2010. He died two months later, but by then ACHS employees knew that he had approved the need for new leadership and the assistance of outside consultants. During his final months, Heiremans did not participate in discussions on the type of leader ACHS should seek, but he did share with Gazmuri his concern that the inevitable dismissal of some employees would disrupt ACHS’s paternalistic and fraternal culture. He recommended that the changes be made slowly, in order to reduce the negative impact they would have on the organization.