MANAGERIAL ECONOMICS

12th Edition

By
Mark Hirschey

Organization Structure and

Corporate Governance
Chapter 18

 Organization Structure
Chapter
18
Transactions Costs and the Nature of Firms
The Firms Agency
Problem
OVERVIEW
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 18
KEY 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 peoples 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 Firms 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.