Organizational Theory, Design,

and Change
Text and Cases
Fourth Edition
Gareth R. Jones

Copyright 2004
Prentice Hall

Learning Objectives
1.

2.

3.

Identify the various stakeholder

groups and their interests on an
organization
Understand the choices and
problems inherent in distributing
the value an organization creates
Appreciate who has authority
and responsibility at the top of
an organization
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Learning Objectives
4.

5.

Describe the agency problem

that exists in all authority
relationships and the
mechanisms available to control
illegal and unethical behaviors
Discuss the vital role played by
ethics in constraining managers
and employees
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Organizational
Stakeholders

Stakeholders: people who have an

interest, claim, or stake in an organization
Inducements: rewards such as money,
power, and organizational status
Contributions: the skills, knowledge, and
expertise that organizations require of
their members during task performance
Stakeholders are motivated to participate
in organizations if their inducements
exceed their contributions.
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Table 2-1: Inducements

and Contributions of
Stakeholders

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Inside Stakeholders

Shareholders the owner of the

organization
Managers the employees who
are responsible for coordinating
organizational resources and
ensuring that an organizations
goals are successfully met
The workforce all nonmanagerial employees
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Outside Stakeholders

Customers an organizations
largest outside stakeholder group
Suppliers provide reliable raw
materials and component parts to
organizations
The government
Trade unions
Local communities
The general public
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Organizational Effectiveness:
Satisfying Stakeholders Goals and
Interests

An organization is used
simultaneously by various
stakeholders to achieve its goals.

Shareholders: return on their investment

Customers: product reliability etc.

To be viable, an organization has to

satisfy the interests of all groups that
have interests in the organization.
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Competing Goals

Organizations exist to satisfy

stakeholders goals.
But which stakeholder groups goal is
most important?
In the U.S., the shareholders have first
claim in the value created by the
organization.
However, managers control organizations
and may further their own interests.
Goals of managers and shareholders may
compete. Copyright 2004
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Top Managers and

Organizational Authority

Authority: the power to hold people

accountable for their actions and to
make decisions concerning the use of
organizational resources
The board of directors: monitors
corporate managers activities and
rewards corporate managers who pursue
activities that satisfy stakeholder goals.

Inside directors: hold offices in a

companys formal hierarchy
Outside directors: hold positions on the
board of many companies
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Top Managers and

Organizational Authority

Corporate-level management:
the inside stakeholder group that
has ultimate responsibility for
setting company goals and
objectives

Chain of command: the system of

hierarchical reporting relationships in
an organization
Hierarchy: a classification of people
according to authority and rank
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The Chief Executive Officers

(CEO) Role in Influencing
Effectiveness
Responsible for setting the

organizations goals and

designing its structure
Selects key executives to occupy
the topmost levels of the
managerial hierarchy
Determines top managements
rewards and incentives
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The CEOs role in

influencing organizational
Controls the allocation of scarce
effectiveness
resources such as money and decision-

making power among the

organizations functional areas or
business divisions
The CEOs actions and reputation have
a major impact on inside and outside
stakeholders views of the organization
and affect the organizations ability to
attract resources from its environment.
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The Top-Management
Team

Line-role: managers who have direct

responsibility for the production of goods
and services
Staff-role: managers who are in charge of
a specific organizational function such as
sales or research and development (R&D)
Top-management team: a group of
managers who report to the CEO and COO
and help the CEO set the companys
strategy and its long-term goals and
objectives
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The Top-Management
Team

Corporate managers: the

members of top-management
team whose responsibility is to
set strategy for the corporation as
a whole

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Other Managers

Divisional managers: managers

who set policy only for the division
they head
Functional managers: managers
who are responsible for developing
the functional skills and
capabilities that collectively
provide the core competences that
give the organization its
competitive advantage
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Figure 2-1: The TopManagement Hierarchy

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An Agency Theory
Perspective

Agency problem: a problem in

determining managerial
accountability which arises when
delegating authority to managers
Are shareholders are at
information disadvantage
compared to top managers?
Top managers and shareholders
may have
different
goals.
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The Moral Hazard Problem

Two conditions create the
moral hazard problem.

Very difficult to evaluate how well

the agent has performed because
the agent possesses an information
advantage.
The agent has an incentive to
pursue goals and objectives that
are different from the principals.
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Solving the Agency

Problem

Use governance mechanisms:

The forms of control that align the

interests of principal and agent so that
both parties have to incentive to work
together to maximize organizational
effectiveness

Stock-based compensation
schemes: monetary rewards in the form
of stocks or stock options that are linked
to the companys performance
Promotion tournaments and career paths
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Top Managers and

Organizational Ethics

Ethics: moral principles or beliefs

about what is right or wrong
These beliefs guide individuals in
their dealings with other individuals
or groups.
Ethics help people determine the
moral responses to situations where
the best course of action is unclear.
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When is a Decision
Acceptable on Ethical
Grounds?
If managers can answer yes to the
following questions:

Does the decision fall within accepted

values or standards that apply in the
organization environment?
Am I willing to communicate the
decision to all stakeholders affected by
it?
Would the people with whom I have
significant personal relationships
approve Copyright
of the decision?
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Sources of Organizational
Ethics

Societal ethics: codified in a societys

legal system, in its customs and practices,
and in the unwritten norms and values that
people use to interact with each other
Professional ethics: the moral rules and
values that a group of people uses to
control the way they perform a task or use
resources
Individual ethics: the personal and moral
standards used by individuals to structure
their interactions with other people
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Why Do Ethical Rules

Develop?

Ethical rules and laws emerge to

control self-interested behavior by
individuals and organizations that
threaten the societys collective
interests.
Ethical rules also reduce
transaction costs, that is the costs
of monitoring, negotiating, and
enforcing agreements with people.
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Why Does Unethical

Behavior Occur?

Personal ethics ethics

developed as part of the
upbringing and education
Self-interest weighing our own
personal interests against the
effects of actions on others
Outside pressure pressures
from the reward systems, industry
and other forces
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Creating an Ethical
Organization

Organizations need to create

environments that encourage ethical
behaviors.
Put in place incentives to encourage
ethical behavior and punishments to
discourage unethical behaviors
Managers can lead by setting ethical
examples.
Managers should communicate the
ethical values to all inside and outside
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Designing an Ethical
Structure and Control
Design an organizational structure
System

that reduces incentives to act

unethically
Take steps to encourage whistleblowing encourage employees to
inform about an organizations
unethical actions
Establish positions of ethics officer
and committee
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Creating an Ethical
Culture

Values, rules, and norms that

define an organizations ethical
position are part of its culture
Behaviors of top managers are a
strong influence on the corporate
culture.
Creation of an ethical corporate
culture requires commitment from
all levels.
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Supporting the Interests

of Stakeholder Groups

Find ways to satisfy the needs of

various stakeholder groups
Pressure from outside stakeholders
can also promote ethical behavior.
The government and its agencies,
industry councils, regulatory
bodies, and consumer watchdogs
all play critical roles in establishing
ethical rules.
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