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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Ba 5201 organization and management organizational governance and control

BA 5201Organization and ManagementOrganizational governance and control

Instructor: Çağrı Topal


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