Agency Theories To establish a framework for analyzing potential agency problems, it is important, to first identify theoretical constructs surrounding the firm. In the context of agency, Fama (19…
Management of Effective Organizations
Effective organizations include structures that align with external environmental factors, positively engage and improve internal factors, and contain managers practicing the art, craft, and science of management. This article documents the necessary components of effective organizations and discusses the effects of an organizations environment on its structure. Additionally, principles of effective management are addressed relative to the constructs of art, craft, and science (Mintzberg, 2009). Further, the author investigates the imperfect nature of management, reflective behaviors, analytic proficiencies, worldly outlooks, collaborative constructs, and proactive functioning that managers might employ in the practice of management. Next, the work evaluates the importance of management engaging organizational personnel, the introductions of new hierarchies, and constructs of effective organizational communication. This is followed by, an overview of decision making and problem solving principles that lend to an integration with the confluence of art, craft, and science in management. Finally, the author considers the efficacy for authentic leadership practices and their potential impact on an organization and its personnel
Hodson, and Sullivan (2012) suggest, that organizational structure is the recognized arrangement of relationships throughout the varied components of a group, business, or organization, and between the assorted members belonging to these entities. Various organizations such as federal and state governments, manufacturing businesses, service oriented enterprises, or educational institutions all exist to serve different purposes. However, it is likely many of these organizational types share similar organizational structures (Hodson, & Sullivan, 2012). Organizational structures are shaped by influential factors such as an organizations size, purpose, arrangement, or vision. Scholars investigating organizational structure have identified key constructs that frequently influence organizational structure. These foundational constructs involve the complexity of organizational dimensions, types of formalized dimensions through which activities are regulated, and the extent to which the organizations leadership is centralized (Hodson, & Sullivan, 2012). Theorists indicate that the effectiveness of an organization frequently improves when it’s structural composition matches the unique circumstances of the organization (Ostroff, 1999). Contingency theorists suggest, that an organizations environment often influences its structure (Ostroff, 1999). For example, external environmental factors such as pronounced variability in the organizations market sector, frequently found in operating areas such as technology, pharmaceutical, or biotechnology sectors, might dictate that organizational performance would benefit from a loose structure (Hobson, & Sullivan, 2012). Whereas, organizations functioning in more predictable sectors, such as the financial or service sector , might fare better operating under a more fixed structure (Hobson, Sullivan, 2012). This author suggests, that effective organizations are often the result of corporate visions formulated by a management-leadership complex that develop the organizations operations, processes, and strategies in a manner that best suits the organizations external environment (Guerra, 2009). Further, effective organizations strive to utilize management practices that are communicative, engaging, gratifying, innovative, adaptive, and problem solving oriented (Guerra, 2009).
Principles of Effective Management
Some scholars suggest that management takes place at the intersection of multifaceted behaviors and traits amalgamating the art of creative insights and vision; the craft of experience developed through learned proficiency; and the science of incorporating a fusion of analytical evaluation and formulating a dynamic equilibrium across the spectrums of communication, engagement, innovation, and problem synthesis that creates organizational order from disorder (Guerra, 2009; Mintzberg, 2013). This writer suggests, that effective management might be considered a merger of both leadership and managerial traits resulting in a management-leadership complex. That is, in the modern work environment, effective management involves developing and employing leadership traits such as intensity of effort, integrity, vision, and collaborative communication. Further, today’s organization, require manager-leaders skilled in incorporating these behaviors into the art, craft, and science of modern management. (Guerra, 2009; Mintzberg, 2013).
Mintzberg (2009) posits, that successful managers suffer from the human condition of being imperfect. Suggesting, that the key to imperfect managers being successful rests in the fact that their imperfections are not ruinous in relationship to their operating environment (Mintzberg, 2009). Further, that these successful imperfect manager-leaders might operate from a structure of contextual threads incorporating reflective behaviors, analytic proficiencies, worldly outlooks, collaborative constructs, and proactive functioning (Mintzberg, 2009).
Reflective traits involve learning from one’s encounters in the world surrounding them; investigating the possibilities in alternative routes, and accessing the effectiveness of current actions, in a manner that juxtaposes prior experiential learning, against existing conditions and results (Mintzberg, 2009). Mintzberg (2009) suggests, one method of utilizing reflection might include asking relevant reflective questions, such as. Where does my information come from? How can I more effectively collaborate with my associates? Do I have sufficient frames of reference and understanding of the issues I am addressing? What information do I need to relay to my superiors, peers, and subordinates? How can I effectively transmit information to co-workers so that they can make informed and timely decisions? Analytic proficiencies involve manager-leaders ascertaining, evaluating, and using relevant information in ways that allow them to integrate the results of their analysis into the art, craft, and science that form the practice of management (Mintzberg, 2009). Exercising a worldly outlook encompasses the notion of being immersed in the worlds of others. This principle suggests, that manager-leaders benefit from improving their understanding of backgrounds, traditions, customs, and processes of other cultures, work-groups, and organizations (Mintzberg, 2009). Collaborative manager-leaders engage in the work of building environments that support people in their efforts to work together (Mintzberg, 2009). Further, Mintzberg (2009) indicates, that collaboration necessitates managers connecting with their employees in a manner that builds trust, exhibits caring, inspires them to improve as individuals and groups, and places a premium on listening. Finally, proactive functioning entails the behavior of being initiative seeking. Proactive manager-leaders must develop a proactive approach that engages them in the events, issues, people problems, and opportunities germane to their organization (Mintzberg, 2009).
The Importance of Management Engaging Personnel.
Highly effective manager-leaders utilize their knowledge, skills, and abilities relative to the practice of the art, craft, and science of management to develop environments that fully engage employees in the vision and objectives of the organization (Mintzberg, 2009). Engagement involves the intricate and vibrant activities that denote an employee’s distinct and personal connection with their organization (Kataria, Restogi, & Garg , 2013). Engaged personnel sense their work to be personally fulfilling and typically devote their efforts and time whole-heartedly (Kataria, et. al., 2013). Research indicates, that organizational citizenship behaviors impact employee interpersonal relationships, relationships between workers and management, and share a strong correlation with organizational effectiveness (Kataria, et. al., 2013). This author posits, that managers wanting to maximize employee engagement will take into consideration factors that drive engagement, and organizational citizenship behaviors (Mintzberg, 2009; Kataria, et. al., 2013). Additionally, manager-leaders might consider the influence of the effects of group social capital. Hongseok, Labianca, and Myung-Ho (2006) imply, that the construct of group social capital contains the collection of resources found in the social connections existing in the social makeup of groups, and the official and unofficial arrangements of an organization. Further, these researchers argue, that an abundance of group social capital will result in enhanced organizational effectiveness and performance (Hongseok, et. al., 2006). Management entities seeking to improve organizational effectiveness should improve their understanding of the social groups functioning in their organization (Hongseok, et. al., 2009). Specifically, managers should comprehend the relationships that connect and interact across the hierarchical structures in their organization (Hongseok, 2009). Further, management can enhance these relationships buy building collaborative environments and through effective organizational communication.
The changing world of business, and the impacts of the global economy have resulted in organizations moving from organizations featuring vertical hierarchies to enterprises employing structures more horizontal in nature (Malone, 2010; Ostroff, 1999). While, vertical organizational structures remain, they are commonly associated with organizations requiring rigid controls, they are often found in military organizations, government organizations, or healthcare organizations (Malone, 2010). However, we have acknowledged the shaping effects that an organizations external environment plays in deciding organizational structure (Hodson, & Sullivan, 2012). The recent shift to an expanding global economy has created an external environment that resulted in corporate down-sizing and large organizations outsourcing work to contracting companies (Malone, 2010). The resulting impact on organizational culture include a shift to organizations that are flatter, and that utilize decentralized control (Malone, 2010; Ostroff, 1999). These impacts have the potential to increase the importance of management’s ability to collaborate and engage employees across corporate groups in ways that maximize group social capital (Malone, 2010; Hongseok, et. al., 2006). The evolving nature of the global economy, and its effects on organizational structure and work place groups place increased importance on management’s ability to communicate. (Malone, 2010; Bisel, Messersmith, & Kelley, 2012).
Positive and engaging organizational environments are typified by open and sincere communication across the organizational structure (Mishra, K., Boynton, & Mishra, A., 2014). Management-employee relationships based in communication competence builds trust and dedication, in turn, these trust building communicative flows enhance employee engagement (Mishra, K., et. al., 2014). While on the other hand, poor management-employee communication may deter important information flows emanating from bottom up communicators (Bisel, et. al., 2012). An important by-product of trust and commitment building communication, along the management-employee continuum, is an enrichment of the communication structures that build and sustain social corporate capital (Bisel, et. al.; Hongseok, et. al., 2006).
One communication construct that might restrain trust and commitment is the hierarchical mum effect (Bisel, et. al., 2012). An example of the mum effect might include “facework strategies” whereby, employees choose to remain silent rather than loose face among other employees by communicating controversial information held by a social group in the organization (Bisel, et. al., 2012). To diminish the impacts of these mum strategies manager-leaders must work to establish open and engaging communicative relationships with employees (Bisel, et. al., 2012). Understanding potential communicative roadblocks such as the mum effect, striving to develop open communication that builds trust and commitment, and the relationship between communication and group social capital are principles the manager-leader must employ in the art, craft and science of management (Mishra, K., et. al., 2014; Bisel, et. al., 2012; Mintzberg, 2013).
Decision Making and Problem Solving
Adair (2013) suggests, that a common bridge model for decision making and problem solving exists. This model incorporates three primary components that include defining the aim or problem, generating feasible options, and choosing an optimum course (Adair, 2013). Perhaps, more important than having a ready-made model for problem solving, is attaining and developing competence in identifying, evaluating and addressing decisions and problems (Adair, 2013). According to Adair (2013) three particular competencies manager-leaders might utilize are awareness, understanding, and skill. Awareness involves being aware of potential problems that exist or decisions that need to be made (Adair, 2013). The competency of understanding implies, that both management and employees must comprehend which step in the decision resolution model they are in. For example, using the bridge model the team must identify if they are in the defining the problem step, option generation step, or choosing an optimum course step. Lastly, developing problem solving skill requires that one must utilize the context of their experiences, corporate knowledge, and prior problem solving background to ask the right questions, of the proper people, at the proper time (Adair, 2013; Keeney, 2004). In the end, this author suggests that decision making and problem solving, regardless of the model used, aligns with the construct that effective management is a set of learned dexterities one incorporates practicing the art, craft, and science of management.
In justifying the necessity for authentic leadership one only need review a list of corporate scandals that entailed unauthentic leadership behaviors. In 2001, the Enron scandal culminated in bankruptcy, centered in unethical accounting, that resulted in losses of $74 billion (Larsson, & Eid, 2012). In 2002, WorldCom leadership manipulated corporate earnings and assets resulting in losses of $180 billion and associated job losses impacting 30,000 individuals (Larsson, & Eid, 2012). In 2008, Lehman Brothers attempted to cover up the existence of $50 billion in risky loans, on which the organization defaulted, and later went bankrupt (Larsson, & Eid, 2012). Authentic leadership is exercised through the confluence of leadership principles based in the practice of owning one’s actions and acting with self-awareness (Larsson, & Eid, 2012). Leaders become self-aware through introspection based on their ethics, personal values, motivations, and aspirations (Larsson, & Eid, 2012). Additionally, authentic leaders self-regulate their outlook and behaviors (Larsson, & Eid, 2012). Self-regulative practices utilize the constructs of balanced processing, relational transparency, and authentic behavior (Larsson, & Eid, 2012). Balanced processing engages the practice of objective analysis, relational transparency contains the ideology of consistently presenting the true self, versus a distorted representation of one’s self, and authentic behavior includes the correlation of behaviors based in introspective regulatory practices (Larsson, & Eid, 2012). Authentic leaders utilize constructs such as affirmative modeling and emotional contagion to develop increased levels of self-awareness, positive self-image development, and enhanced inner regulation among organizational members (Larsson, & Eid, 2012). It is the authors opinion, that this leadership archetype aligns well with the principles of management practiced through the intersection of art, craft and science.
The information presented here identifies the essential elements that comprise an organizations structure, principles management and their effects on the personnel in the organization, and offers an opinion on authentic leadership. The work offers an evaluation on the effects of an organizations environment relative the make-up of its structure. The author endeavors, to discuss a system of management that functions at the intersection of art, craft, and science. Expands on the imperfect nature of management and focuses on management practices involving reflection, analysis, worldliness, collaboration, and proactivity. Additionally, the work evaluated the import of management and employee engagement, recent evolutions in hierarchical arrangement, and the impacts of utilizing effective communication strategies. The author then provides an overview of decision making and problem solving skills that enhance management practices. The work culminates with an evaluation of authentic leadership and offers a justification for manager-leaders utilizing its principles in today’s workplace.
Michael L. Cosmah
Adair, J. E. (2013). Decision Making and Problem Solving Strategies (Vol. 2nd ed). Philadelphia, PA: Kogan Page.
Guerra, H. S. (2009). Effective organisations in the international arena / Effective organizations in the international arena. Pensamiento & Gestión, (26).
Hodson, R. & Sullivan, T. (2012). The social organization of work. Australia, Belmont, Calif.: Wadsworth.
Hongseok Oh, Labianca, G. (Joe), & Myung-Ho Chung. (2006). A MULTILEVEL MODEL OF GROUP SOCIAL CAPITAL. Academy of Management Review, 31(3), 569–582.
Kataria, A., Rastogi, R., & Garg, P. (2013). Organizational Effectiveness as a Function of Employee Engagement. South Asian Journal of Management, 20(4), 56–73.
Keeney, R. L. (2004). Making Better Decision Makers. Decision Analysis, 1(4), 193–204.
Larsson, G., & Eid, J. (2012). An idea paper on leadership theory integration. Management Research Review, 35(3/4), 177–191.
Malone, T. W. (2010). Decentralization Is the New Center of Command. IESE Insight, (4), 38–45.
Mintzberg, H. (2013). Simply Managing : What Managers Do and Can Do Better (Vol. 1st ed). San Francisco: Berrett-Koehler Publishers.
Mishra, K., Boynton, L., & Mishra, A. (2014). Driving Employee Engagement: The Expanded Role of Internal Communications. International Journal of Business Communication, 51(2), 183–202.
Ostroff, F. (1999). The Horizontal Organization : What the Organization of the Future Looks Like and How It Delivers Value to Customers. New York: Oxford University Press.
To establish a framework for analyzing potential agency problems, it is important, to first identify theoretical constructs surrounding the firm. In the context of agency, Fama (1980) suggests, that management-agents and risk-bearing principals utilize a nexus of contracts. That is, management carries out various contractual responsibilities through coordinating in put activities through managerial decision making (Fama, 1980). On the other hand, principals contract to undertake varying degrees of risk to finance the activities of management and the organization (Fama, 1980). The resultant outcomes of these factors of production create a contract based firm consisting of agents and principals endeavoring to create value for the firm (Fama, 1980). Closely aligned to agency theory, is Milton Friedman’s supposition implying that the primary concern of the contractual based firm is to increase shareholder profits (MacAleer, 2003).
A third theoretical perspective regarding agency problems might be found in stakeholder theory. Contemporary stakeholder theory is often grounded in Freemans Strategic Management: A Stakeholder Approach (1984). Here, stakeholders are identified as individuals or groups holding an interest in a firm’s activities or those impacted by the firm (Freeman, 1984). These stakeholders are often identified as primary stakeholders having prescribed roles in a firm, having authoritative responsibilities in a firm, or those with contractual relationships to a firm, and secondary stakeholders include all other individuals, groups, or societal parties impacted by the firm and its outputs (Freeman, 1984). A foundational component of stakeholder theory, intimates that, the role of the management-agent is to attain balance between the concerns of all stakeholders (Shankman, 1999). One might posit, that stakeholder theory expands the firm based contractual construct in a manner that engages both primary and secondary stakeholders (Shankman, 1999; Rose, 2004).
Examples of Potential Agency Problems
In September of 2016, the United States (U.S.) Department of Justice (DOJ)indicated that Deutsche Bank (DB) would be subject to a $14 billion fine for its role in propagating mortgage backed securities products linked to the 2007-2010 era global financial crisis (Valentini, 2016). Some suggest, that managers and executives at DB failed to fulfill their firm based, others might argue societal based, contractual agreements supporting shareholder value (Valentini, 2016; Freeman 1984; Shankman, 1999).
In September of 2015, the U.S. Environmental Protection Agency (EPA) announced that Volkswagen (VW) engineers installed illegal software in its diesel engines capable of overriding emissions monitoring systems (Tuttle, 2015). In December 2015, VW admitted that firm had installed emissions monitoring defeat devices in U.S. diesel vehicles (Tuttle, 2015). The EPA estimates these devices resulted in emissions 40 times the allowable rate to be released into the atmosphere (Tuttle, 2015). Two days following the September 2015 announcement VW stock plummeted 55% resulting in a loss $55 billion in market value (Tuttle, 2015).
In these aforementioned cases involving potential agency problems, one might find, various and differing conflicts of interest among the actors of these firms. For example, engineers at VW concocting felonious software to dupe regulators, or executive managers at DB proliferating credit default swap vehicles that subjected shareholder investments to out-sized risk (Valentini, 2016; Tuttle, 2015).
Proponents of classic agency theory might suggest goal conflicts surrounding the divergence of management-agent decision making from the interests of principals (Shapiro, 2005). Agency theory adherents, often infer, that agency problems involve goal conflicts impacting Friedman’s intimation, that the central role in agency relationships is in achieving the economic paramount of expanding profit (MacAleer, 2003; Shankman, 1999). For example, poor incentives that diminish agent engagement and congruence with principal party interests, might entice agents to devise opportunities to improve their personal position (Shapiro, 2005).
Conversely, theorist aligned with firm based stakeholder principles consider the notion that managerial agents are often inundated with conflicting interests among both internal and external competing forces (Shankman, 1999; Shapiro, 2005). Despite theoretical approaches, each of these architypes, might agree the agency problem exists and the impacts on the firm are manifold (Shapiro, 2005). Agency problems involving each of these examples might include potential impacts to wealth of principal investors and the investments of holders of the firms’ securities. Further, societal impacts might include the potential for monies in the form of taxes to bail out the companies, were they to falter, the potential for job losses predicated on the firms weakened financial positions, and in the case of VW, environmental impacts with potentials to affect the health and well-being of societal members. Thus, exists the potential for impacts to multiple stakeholders including agents, principals, employees, and society (Tuttle, 2015; Valentini, 2016).
Congruence on Agency Problem Primacy
This writer suggests, that to support the position of the primacy of agency problems one might identify common ground between competing theoretical views. Further, this position might be augmented if these views can be harmonized in a manner that combines these competing theories in a supportive methodology. To that end, the author submits, that Friedman’s position of the firm’s existence as an economic engine, classic agency views supporting the management-agent to principal contract, and stakeholder views combined provide a self-propagating contractual system.
Consider, that in order to continue growing as an economic engine stakeholder management agents must provide returns, economic and otherwise, across stakeholder types including, employees, shareholder-principals, and society (Shankman, 1999; MacAleer, 2003). In other words, the interests of all stakeholders contain intrinsic value to the agency (Shankman, 1999). Further, agency intrinsic value across stakeholder groups is manifest through implicit societal contracts with firms (Shankman, 1999). These contracts provide the grounds, some might add liberty, upon which the firm operates as an economic engine endeavoring to create wealth for principals, while at the same time, they allow the firm to fulfill its contracts with principals, stakeholders, and society (MacAleer, 2003; Shankman, 1999; Shapiro, 2005). On these ground, the author submits, that conflict of interest problems interfering with the agencies operations impact the most fundamental component of the agency, its liberty granted through contracts, both internal and external, to operate as an economic engine (Fama, 1980; Freeman, 1984; MacAleer, 2003; Shankman, 1999).
Fama, E. F. (1980). Agency Problems and the Theory of the Firm. Journal of Political Economy, 88(2), 288–307.
Freeman, R.E. (1984). Strategic Management: A stakeholder approach. Boston, Ma: Pitman.
Keown, A. J., Martin, J. D., & Petty, J. W. (2014). Foundations of finance: The logic and practice of financial management (8th ed.). Upper Saddle River, NJ: Prentice Hall.
McAleer, S. (2003). Friedman’s Stockholder Theory of Corporate Moral Responsibility. Teaching Business Ethics, 7(4), 437–451.
Shankman, N. A. (1999). Reframing the debate between agency and stakeholder theories of the firm. Journal of Business Ethics, 19(4), 319–334.
Shapiro, S. P. (2005). Agency Theory. Annual Review of Sociology, 31, 263–284.
Tuttle, H. (2015). Volkswagen Rocked by Emissions Fraud Scandal. Risk Management, 62(10), 4,6-7.
Valentini, F. B. (2016, October 5). French Lawmakers Say Deutsche Bank U.S. Fine Could Cause Crisis. Bloomberg.com. Retrieved from http://www.bloomberg.com/news/articles/2016-10-05/french-lawmakers-say-deutsche-bank-u-s-fine-could-cause-crisis