BA 5201 Organization and Management Organizational governance and control

1. BA 5201Organization and ManagementOrganizational governance and control Instructor: Çağrı Topal

2. Organizational economics • How owners of a firm attempt to ensure economic efficiency through different contractual or transactional arrangements • Governance mechanisms to deal with internal and external partners of the firm • Agency theory • Transaction cost theory

3. Agency theory • Organizations: series of contractual relationships between agents and principals • Principals: owners or shareholders of a firm • Agents: people hired by the owners to run the firm and composed of managers and workers • Agency costs: costs associated with monitoring agent behavior and enforcing contracts • Goal: efficient or lowest-cost arrangement of agent-principal relationships

4. Transaction cost theory • Organization: series of transactions within and outside the boundaries • Transaction: exchange of goods and services among groups within or outside organizations • Transaction costs: explicit fees associated with a transaction and implicit costs of monitoring and controlling a transaction • Goal: most efficient arrangement of transactions or lowest possible transaction costs

5. Agency or transaction costsBounded rationality • Owners and managers are unable to process all of the available information and face uncertainty in transactions or contract relationships • Employees, suppliers, and contractors may be in a position to take advantage of the owner

6. Agency or transaction costsOpportunism • Principals are concerned with efficient and effective operation of the organization whereas agents with the satisfaction of self-interest regardless • Moral hazard: Agents will not always fulfill their obligations • Adverse selection: Principals hire the agents that misrepresent themselves as having skills, knowledge, or qualifications not possessed

7. Agency or transaction costsInformation asymmetry • Information related to exchanges or transactions is not evenly distributed • Agents have certain information about shortcomings that is not available to the principal • Asymmetrymotivates key decisions as to which tasks should be conducted within or outside the organization

8. Agency or transaction costsAsset specificity • The assets of an organization is fixed and specific rather than flexible and general or replicable • Specific assetsmay be hard to transfer to another purpose or to sell at a reasonable level • The organization might be locked into certain arrangements and relations with employees, suppliers, and customers

9. Agency or transaction costsSmall numbers • An organization may incur a transaction cost when it is faced with only a small number of potential trading partners • An organization can be more easily exploited by a trading partner

10. Governance mechanisms-ATContracting and monitoring • Owners try to protect their interests by creating either behavioral contracts or outcome-based contracts • Behavioral contracts specify that employees engage in certain types of behavior • Outcome-based contracts tie compensation and rewards to measurable results

11. Governance mechanisms-ATBoards of directors • Boards of directors have a fiduciary functionto safeguard the owners’ interest • Boards are composed of insiders and outsiders • Insiders provide guidance in specific operational issues while outsiders provide a monitoring and oversight function • Boards provide a system of checks and balances against managers’ opportunism • Boards’ monitoring power is questionable

12. Governance mechanisms-ATMarkets as disciplinary forces • Markets can provide feedback about the company’s performance • Market feedback can result in managerial rewards or punishments • Markets can motivate managers to perform better for their own career

13. Governance mechanisms-TCMarket control • Market control relies on prices and competition in external markets to control transaction-related costs • If there are many suppliers and buyers of a good or service, fair prices tend to emerge as long as there is a free flow of information • Market control can be used inside the company if the output price can be determined • Markets fail when there is imperfect competition

14. Governance mechanisms-TCBureaucratic control • The control of a particular transaction is done through the organization’s hierarchy or bureaucracy or mechanistic structure • Control mechanisms may include comprehensive job descriptions and performance appraisal systems, statistical or numerical control systems, budgeting and accounting systems, and work rules or procedural guidelines • Bureaucratic control is used when markets fail

15. Governance mechanisms-TCClan control • Clan control is used when bureaucratic control fails • Clan control is associated with organic structure • Clan control utilizes cultural control • Clan control can be implemented throughselection and training of employees