The problem with non-hierarchical groups is the behind-the-scenes leaders, whom the powers-that-are trust. And therefore automatically unofficially become leaders.
It looks like officially he isn't the boss, but for almost all practical purpose he is.
The worst thing that happens in such places is, those people using their power to help their buddies, gangs and yes men for their own benefit and political power. If you are not one of them you are screwed.
The thing is that this exists just as well in hierarchical groups though. I've yet to encounter an organization where the hierarchical structure accurately represents the actual power structure.
What's happening here is that in flat organizations it's the -only- power structure and thus becomes more pronounced to our brains which are hard-wired to pattern match for the social power structures.
Another way of looking at this is to see the hierarchical power structure as an abstraction that evolved to address the discomfort (some) people have with a more fluid power structure like at Valve.
The interesting part here is that different people have different tolerance for this though; so much so that it's one of Hofstede's main cultural dimensions called 'Power distance'. [2]
Formal hierarchies allow better distribution of responsibility and separation of personal relationships from work relationships. They also enable less politically/socially savvy people to get into powerful positions with their merit. Informal power structures in hierarchal groups have less power and they happen only between peers.
In informal hierarchies relationships become personal and political. In anarchy, everything is politics and personal.
From what I can tell your comment essentially reaffirms what I said, except that on this part:
> Informal power structures in hierarchal groups have less power and they happen only between peers.
I think, unless you work in a very strict command-and-control style company, you're heavily underestimating the influence of the average informal power structure.
The promotion of yes-men and buddies of leaders is something that happens just as well in structured organizations. I've seen incapable people promoted to a position of power, and talented, hard working people held back despite their merits.
In structured organizations there may be rules and processes to handle promotion and management, but I've seen them being gamed by people in power more than I've seen them being used for improving anything.
I've seen a lot of bad decisions being made, but speaking out about them is often not appreciated, so by now I've given up on trying to fix those problems and I just occasionally lament them in the coffee room.
(Note: I work for a formerly large multinational, whose structure and processes have mostly been rusted in place. I, and many of my colleagues, are leaving the company for the lack of a clear direction, which is a result of poor management over more than a decade.)
And when it's really rigid and doesn't seem to reflect the world that's happening, people will simply work around that structure. I remember working one time at a large R&D firm, with very clear and explicit requirements of position as a function of education + experience. e.g. If you didn't have both a PhD and at least 15 years of experience you couldn't be a level 5. People with 3 M.S. and 25 years were stuck forever at level 4.
It made career advancement a game of getting the organization to fund your educational "goals" so you could get a better position.
Turns out though that this left large gaps in the organizational structure where there simply wasn't anybody internal who was qualified to move into a position so they turned to outside hires. As it turns out, outside hires were simply exempt from many of these promotion requirements. So career advancement ended up with people quitting, going someplace else for a few months, then getting hired back into the position they wanted to be promoted to in the first place.
What you describe sounds awfully like what Michael Young had in mind when he created the term "meritocracy" - which is actually quite different, and rather more interesting, than its common usage:
e.g. The UK Civil Service is probably very proud of being a meritocracy - where the "best" people are promoted. However, none of their definitions of "merit" actually relate to ability to perform current or promoted roles!
I've seen things like this before. I call them KafCos.
Generally, any organization that has an arbitrary structure that is used to assign roles to individuals in a way that statistically aligns with a usual hierarchy, using some quantifiable metric that makes one group smaller than another.
There's this self-destructive modality that organizations can enter into where politics matter more than product and people worry about their own resume and ego more than functioning as a team to do something greater than the sum of the parts.
If you take any pride in your craft, that's the ultimate red flag to run like hell.
This is general problem with any organization made from humans. Hierarchies don't make them go away, they just make them manageable and less distracting.
Believe me, if you could compare similar sized organization with same people working with and without hierarchies, you would pick one with hierarchy 8 times of 10.
Nepotism and cliques are bad, but worse is when the behind the scenes/informal leaders are able to make someone else look like the leader, and that person ends up being the strawman for whatever doesn't go as planned.
In places like government you get all sorts of oddball organizational dysfunction, as you generally have a top layer of politically appointed leaders and lower stratums of career/professional leaders who usually cannot be removed and may or may not play ball with the leadership.
It looks like officially he isn't the boss, but for almost all practical purpose he is.
The worst thing that happens in such places is, those people using their power to help their buddies, gangs and yes men for their own benefit and political power. If you are not one of them you are screwed.