9781118041581

Organizational Design 609

firm’s other six geographically dispersed lines. The marketing department can

electronically make available customer information to the production and dis-

tribution departments. Besides her traditional departmental responsibilities,

a marketing manager might work online as a member of an interdisciplinary

team charged with managing a new-product launch.

In many respects, IT systems foster decentralized decision making within

firms. Delegation allows the local manager (with superior information and expe-

rience) to make appropriate decisions. At the same time, effective IT systems make

it easier for higher company executives to monitor the local manager’s actions

and performance and to coordinate those actions with others’ (if coordination is

necessary). Because IT systems make it easier to monitor and measure worker

performance, they go hand in hand with greater reliance on incentive pay for

managers. In addition, IT systems tend to displace human managers in handling

routine, rule-based job functions. For instance, today it takes only a handful of

managers to operate and monitor a large-scale, automated cement-making plant.

Separation of Ownership and Control

in the Modern Corporation

An important example of the principal-agent problem occurs in large publicly

held corporations. Such corporations are owned by vast numbers of share-

holders (principals) and managed by directors (agents). Shareholders elect

the board of directors, who oversee corporate management.

This organizational form confers significant benefits in the financing of

the firm. In issuing shares, the corporation gets access to a vast supply of finan-

cial capital, funds that would be difficult or impossible to secure from a single

owner or even from a limited number of partners. Broad-based equity markets

allow investors to diversify across many firms and business sectors with the

added protection of limited liability. (Limited liability means that the share-

holders risk losing their investment, but no more than that. Creditors of the

corporation cannot pursue the personal assets of shareholders.)

However, shared ownership in the modern corporation does not imply

shared control. In modern public corporations, shareholders do not have the

right to manage. Setting day-to-day management decisions according to share-

holder votes, besides being extraordinarily costly and impractical, would surely

generate poor decisions. Rather, the organization vests decision-making respon-

sibilities and control in a cadre of professional managers acting on behalf of

shareholders.

The problem is that shareholders have little practical control over the selec-

tion of top management or how top management performs once in place. Two

roadblocks prevent shareholders from wielding voting power over the board

and top management. First, management controls the voting and proxy

process. (A shareholder uses a proxy to direct management in how to vote the

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