MANAGERIAL ECONOMICS12th Edition

ByMark Hirschey

Organization Structure and Corporate Governance

Chapter 18

Chapter 18OVERVIEW

●Organization Structure●Transactions Costs and the Nature of Firms●The Firm’s Agency Problem●Organization Design●Decision Management and Control●Corporate Governance●Ownership Structure as a Corporate

Governance Mechanism●Agreements and Alliances Among Firms●Legal and Ethical Environment

Chapter 18KEY CONCEPTS

● organization structure● vertical relation● horizontal relation● transactions costs● information costs● decision costs● enforcement costs● Coase Theorem● agency problem● agency costs● excessive risk-taking problem● other people’s money problem● managerial myopia problem● board of directors● end-of-game problem● information asymmetry problem● insiders● accounting earnings manipulation● income inflation● income smoothing● organization design● decision authority● centralized decision authority● decentralized decision authority

● flat organization● vertical organization● tasks● jobs● team● decision management● decision control● economic expectations● economic realizations● corporate governance● corporate stakeholders● ownership structure● inside equity● institutional equity● agency theory● amenity potential● regulatory potential● quality control potential● ownership control potential● franchise agreements● strategic alliances● Sarbanes-Oxley Act● reputation capital● business ethics

Organization Structure

● What Is Organization Structure?○ Organization structure is described by vertical and

horizontal relationships.● Transactions Costs and the Nature of Firms

○ The firm is simply a collection of contracts. ○ Efficiency depends upon ability to minimize costs of

coordinating productive activity.● Coase Theorem

○ Resource allocation is efficient if transaction costs remain low and property rights can be freely assigned and exchanged.

The Firm’s Agency Problem

●Sources of Conflict Within Firms○Conflicts can exist between the self-seeking

goals of (agent) managers and the value maximization goal of (principal) stockholders.

●Types of Agency Problems○Excessive risk-taking or risk-avoidance

problems can emerge. ○Executives can be short sighted. ○ Information asymmetry can complicate

monitoring.

Organization Design

●Resolving Unproductive Conflict Within Firms○ Allocate decision making authority.○ Monitor and evaluate performance.○ Reward productive behavior.

●Centralization Versus Decentralization○ Decision rights must be assigned for effective

Management and Control○ Constructive management demands ongoing

assessment.

Corporate Governance

●Role Played by Board of Directors○BOD helps corporation effectively manage,

administer and direct economic resources●Corporate Governance Inside the Firm

○Organization design is an essential corporate governance mechanism.

○ Internal markets established among divisions can better balance supply and demand for divisional goods and services.

Ownership Structure as a Corporate Governance Mechanism●Dimensions of Ownership Structure

○Inside equity.○ Institutional equity.○Widely-dispersed outside equity.○Bank debt.○Widely-dispersed outside debt.

●Is Ownership Structure Endogenous○Ownership structure varies among firms in a

manner consistent with profit maximization.

Agreements and Alliances among Firms

●Franchising○Franchise agreements are voluntary

contractual arrangements outside the firm.●Strategic Alliances

○Formal operating agreements between independent companies.

○These combinations are increasingly used to improve foreign marketing.

○Strategic alliances arise when participating companies enjoy complementary capabilities.

Legal and Ethical Environment

●Sarbanes-Oxley Act○Radical redesign of federal regulation of

corporate governance and reporting.○ Independent audit committees must now

comply with a new host of requirements.○CEOs and CFOs personally certify reports.

●Business Ethics○Ethical behavior is good business.○Top firms have high ethical standards.