1. Chapter 15 Corporate Governance in New Organizational Forms

2. Scope of Chapter 15 Growing concern about corporate governance [CG]
The agency problem
Double agency
Multiple agency
Problems of CG in conventional organization
Problems of CG in new organizational forms
Devolved initiative
Partnerships
Ways forward

3. Growing Concern about Corporate Governance
Historically, concern about power of big business owners; today concern about power of top executives in large corporations
Major recessions of early 1980s, 1990s and 2000s, exposed fraudulent or incompetent management
Led to crisis of confidence in major corporations and a focus on how they are governed
Specific concerns: executive fraud, ‘fat-cat’ pay, loss of savings and pensions, dishonesty to consumers, environmental distasters, exploitation in developing countries

4. Doubtful Assumptions of Corporate Governance Theory
The dominant theory of corporate governance is rooted in a conventional, often legalistic, model of organization
This model assumes that businesses are tightly-coupled hierarchies, so that accountability can focus exclusively on their top corporate managers.
In practice, this model did not work as prescribed, and today corporations are fast discarding it anyway

5. The Agency Problem
Agency theory lies at the heart of conventional approaches to corporate governance, but it overlooks complications identified by organizational analysis.
In particular, the presence of:
Double agency
Multiple agency

6. Double agency
The process of holding managerial agents to account involves two sets of agency relationships: Owners/stakeholders and corporate management
(strategic control) Corporate management and operational staff
(operational control)

7. Double Agency: The Second Agency Relationship
The key assumption in the governance literature, that the Board of Directors has the capacity to make sure that the managers of capital do the right thing by the owners of capital, is premised on the assumption that corporate managers can in turn control the behaviour of their agents within the firm
There is a double agency relationship involved here, and hierarchy has been the traditional approach to making it effective

8. Failure of the Second Agency Relationship
Failure of the second agency relationship can vitiate the first one, even in conventional hierarchies, through: Control loss – corporate intentions not realized
because of pressures for autonomy Distortions in a firm’s policies due to biased
information being passed to top management

9. Problems for Internal Control: 1. The Breach of Trust
Takeovers and downsizing have led to a “breach of trust” that employees had in corporate management
The loss of trust compromises internal control

10. Problems for Internal Control: 2. Hierarchy
Hierarchy is the conventional basis for governing the second agency relationship (insider control)
In practice hierarchy has not worked as prescribed:
control loss
distortion of information
de-motivation of employees
Tightening up the hierarchy is not a solution
Moreover, firms are today moving beyond traditional hierarchical forms and these pose new governance challenges.

11. The double agency problem is increased by contemporary moves from hierarchical to non-hierarchical forms of organization: E.g. Distributed authority to semi-autonomous self-organizing units Tolerance for intra-organizational diversity of form Decomposition of integrated firms into networked value chains

12. Multiple Agency (and Ownership): “Boundaryless organization”: increased use of partnerships and strategic alliances partners are owners and at the same time agents for each other. Additional dimension of potential conflict JV managers are agents for the partners, but often subject to role-conflict regarding principals’ expectations.

13. The Changing Nature of Ownership: A Further Complication
Shift from materials to information-intensive economy
Ownership of knowledge assets therefore becomes critical: knowledge workers, knowledge of suppliers and customers
Growing use of virtual organization: control of assets not dependent on their ownership

14. Implications for Corporate Governance

15. Organizational Forms: Implications for Agency and Control
See Table 15.1, Chapter 15

16. Double Agency in New Organizational Forms
Move away from hierarchy to flexible structures
Increasing employment of knowledge workers
Team work arrangements
New policies towards employees
Information sharing
Greater understanding by employees of the organization’s strategies and finances
Require more inclusive approach to control

17. Implications of Devolved Initiative
Flexible firms depend on the innovativeness and goodwill of employees. This means that their judgement has to be taken into account.
Such firms therefore rely on output control, with targets agreed with employees.
When firms depend on innovation and creativity, control is diffuse and management has to rely on shared understanding and corporate culture.

18. Implications of Networks and Partnerships
Firms organizing their value-chains into loosely-coupled networks risk opportunism and breakdowns in collaboration
They have to develop an approach to control that goes beyond the legal protection of brands, technology and ownership. It has to rely on trust as well.
It is also increasingly necessary to monitor the ethical standards of partners’ behaviour.

19. Ways Forward for Corporate Governance in New Organizational Forms
Recognize limits of contract and hierarchy as governance mechanisms
Mutual monitoring and transparency
A broader approach to control
The fostering of trust (see Chapter 14)
Cooptation of agents into ownership (see Chapter 7)