ba 5201 organization and management organizational governance and control
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BA 5201 Organization and Management Organizational governance and control. Instructor: Çağrı Topal. Organizational economics. H ow owners of a firm attempt to ensure economic efficiency through different contractual or transactional arrangements

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organizational economics
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
agency theory
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
transaction cost theory
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
agency or transaction costs bounded rationality
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
agency or transaction costs opportunism
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
agency or transaction costs information asymmetry
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
agency or transaction costs asset specificity
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
agency or transaction costs small numbers
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
governance mechanisms at contracting and monitoring
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
governance mechanisms at boards of directors
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
governance mechanisms at markets as disciplinary forces
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
governance mechanisms tc market control
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
governance mechanisms tc bureaucratic control
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
governance mechanisms tc clan control
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