Corporate Governance &
Organizational Structure
The Structural Foundation
of the Modern Corporation
What led to the collapse of these
once outstanding companies?
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Enron
Boosted profits and hid debts totaling over $1
billion by improperly using off-the-books
partnerships; manipulated the Texas power
market; bribed foreign governments to win
contracts abroad; manipulated California
energy market.
What led to the collapse of these once
outstanding companies? (cont’d)

WorldCom
Overstated cash flow by booking $3.8 billion
in operating expenses as capital expenses;
gave founder Bernard Ebbers $400 million in
off-the-books loans.
What led to the collapse of these once
outstanding companies? (cont’d)

Global Crossing
Engaged in network capacity "swaps" with
other carriers to inflate revenue; shredded
documents related to accounting practices.
The scandal sheet goes on
and on…So what went wrong?
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Adelphia
Arthur Andersen
Duke Energy
Dynergy
K-Mart
Qwest
Xerox
Who are the major stakeholders in
a modern corporation?
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Investors
Corporate executives
Employees
Suppliers
Customers
etc
What relationship does corporate
governance deal with?
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Investors (via Board of Directors) vs.
corporate executives
Definition of corporate governance:
A relationship among stakeholders that is
used to determine and control the strategic
direction and performance of organizations.
Why is corporate governance
needed?
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Separation of Ownership and Managerial
Control
Agency Relationship
Agency Costs (incentive, monitoring,
enforcement costs, and financial losses due
to insufficient governance)
Product diversification as an example
How does corporate
governance work?
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Internal Governance Mechanisms
External Governance Mechanisms
What are the internal
governance mechanisms?
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Ownership Concentration (blockholders,
institutional investors)
Board of Directors (insiders vs. outsiders,
diversity; strategic control vs. financial
control)
Executive Compensation (salary, bonuses,
long-term incentive compensation)
What are the external
governance mechanisms?
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Market for corporate control
Executive labor market
What relationship does organizational
structure deal with?
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Corporate executives vs. employees
Why is organizational structure important?
Strategy implementation depends on
organizational structure.
What is the relationship between
strategy and structure?
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Structure for a mom-and-pop store
Structure for GE
The relationship:
Strategy determines structure;
structure affects strategy. (Chandler, 1962)
What are the three generic
organizational structures?
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U-Forms (Unitary/Functional Structures)
M-Forms (Multidivisional Structures)
H-Forms (Holding/Conglomerate Structures)
What are the advantages of the
U-Form structure?
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Specialization
Centralization
Economies of scale in monitoring
As a firm grows and diversifies, what are
the problems of using the U-Form
structure?
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Strategic complexity/loss of strategic control
Loss of accountability
What are the features of the MForm structure?
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A Multi-divisional structure is designed to manage
diversification while controlling bureaucratic costs
and control-loss problems.
M-Forms decentralizes operating decision-making to
the business unit/division level where all necessary
competitive and operational decisions are made.
Strategic decision-making responsibility is retained
at the headquarters level. The HQ also monitors
division’s performance by using both objective
market/output measures and subjective
performance measures .
What is the H-Form structure?
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Holding or Conglomerate structures seek to
exploit the advantages of internal capital
markets
Examples:
Mitsubishi
Samsung
Tyco
Iridium Case:
Group Discussion Questions
1. Did Iridium have a sound strategy in the beginning?
2. Was Iridium’s strategy well implemented as a whole
and in individual functional areas?
3. What were the primary factors that led to Iridium’s
failure?
4. What could have been done to prevent Iridium’s
failure in terms of both strategic planning and
implementation?