Exam 18: Organization Structure and Corporate Governance

Virtual Corporation. The Walt Disney Company is a diversified, international family entertainment and media juggernaut whose operations include world-famous theme parks and resorts. The company also includes a filmed entertainment division, specializing in motion pictures and television shows, and home video products. Disney also offers records, consumer products, a cruise line, radio and television stations, broadcast and cable networks, publishing activities and professional sports enterprises. A. What is the Coase Theorem? B. Use the Coase Theorem to explain Disney's long-term success.

The reservation wage includes a return to:

The emergence of the virtual corporation can be explained by the:

Agency Problem. In 2005, former WorldCom Inc. Chief Executive Bernard J. Ebbers was found guilty on charges of conspiracy, securities fraud and making false filings with the Securities and Exchange Commission in connection with what authorities have described as the largest accounting fraud in U.S. history. He could spend the rest of his life in jail. A. What is the firm's potential agency problem? B. What are agency costs within this firm?

A "flat" organization design reflects a:

The Coase Theorem argues that resource allocation is:

A vertical organization has:

Expenditures necessary to overcome owner-manager conflicts are called:

The quality-control potential of high-tech firms tends to result in:

Stock-market Indicators of Efficiency. According to the Efficient Market Hypothesis, current stock prices reflect all relevant risk and return information. This implies that near-term stock price changes are random and independent. In a rational pricing environment, investing in the stock market is a "fair game" where the expected excess return for each security is zero. Taken literally, this means that every stock at every point in time is an equally good buy (or sell). Within this context, the stock market provides a useful context within which to evaluate managerial decisions. "Good" decisions boost share prices, and "bad" decisions cause share prices to fall. A. Does evidence of inefficiency in the stock market reduce its usefulness as an indicator of managerial efficiency? B. Suppose that the stock market is very efficient, but not perfectly efficient. Can stock prices still be used to provide information about managerial efficiency?

Union organizing expenses are a type of:

Transactions Costs. Humana, Inc., offers managed health care products which integrate management with the delivery of health care services through a network of providers, who in their delivery of quality medical services, may share financial risk or who have incentives to deliver cost-effective medical services. It also offers administrative services products including group life, dental, disability income, workers' compensation, and pharmacy management services. A. Use transactions costs to explain the existence of HMOs like Humana. B. When will less formal contracting arrangements supplant the need for a formal corporate structure?

The natural conflict between owners and managers is called the:

Executive Compensation. Roberto Goizueta did a superb job as head of soft-drink juggernaut Coca-Cola. During the 1980s and 1990s, Goizueta set an enviable standard for CEO performance in terms of global brand development, market share expansion, profitable asset deployment and market value creation. From when Goizueta took charge in 1981 until his death in 1998, Coca-Cola revenues grew at roughly 8% per year, earnings per share soared more than 16% per year, and its stock price skyrocketed a whopping 27% per year. In light of the company's outstanding performance, one can understand why the Coca-Cola board of directors awarded Goizeta generous salary, bonus and stock awards totaling over $1 billion dollars during his tenure. A. Defend the hypothesis that Roberto Goizeta's accomplishments as CEO were worth $1 billion in total compensation. B. Defend the hypothesis that nobody, not even Roberto Goizeta, is worth $1 billion in total compensation.

Horizontal and Vertical Relations. America Online, Inc., is a provider of online services to consumers in the United States. AOL offers subscribers a wide variety of services, including electronic mail, conferencing, news, sports, weather, stock quotes, software, computing support and online classes. These services can be accessed from a range of personal computers using AOL's proprietary software. Microsoft Corp. develops, manufactures, licenses, sells, and supports a wide range of software products, including operating systems for personal computers and servers; server applications for client/server environments, business and consumer productivity applications; interactive media programs; and Internet platform and development tools. Microsoft also offers online services, sells personal computer books and input devices, and researches and develops advanced technology software products. A. Describe how AOL and Microsoft share important elements of a vertical relationship. B. Describe how AOL and Microsoft have important elements of a horizontal relationship.

Organization Design. An effective organization design is one that allocates decision authority to that person or team of persons best able to perform a given task or influence a particular outcome. Decision authority allows individual employees to determine how and when to best deploy the productive resources and valuable information at their disposal. Of course, decision authority confers responsibility. It is thus imperative to monitor and evaluate performance. Managers and all employees must be held accountable for outcomes tied to individual decisions. Accountability can only be measured in terms of the tangible and intangible rewards derived from productive activity, and in terms of the penalties or sanctions tied to unproductive behavior. To minimize the costs of unproductive conflict with the firm, it is essential that the design of the organization effectively allocate decision making authority. A. Describe centralized decision authority. Under what conditions does it work best? B. What is decentralized decision authority, and when does it work best?

Incentive Compensation. Salary and bonus payments tied to short-term performance often constitute a large part of the annual total compensation package earned by top management. Thus, top managers, like the chief executive officer (CEO), typically have huge personal incentives to turn in favorable year-to-year growth in revenues, profits and earnings per share. This can sometimes have the unfortunate effect of focusing managerial attention on near-term accounting performance to the detriment of long-term value maximization. A. Identify some tools companies use to combat such myopic behavior. B. Explain the pluses and minuses of stock options versus stock ownership as effective incentive devices.

High inside ownership at Microsoft reflects the company's:

Nature of the Firm. Dell Computer Corp. designs, develops, manufactures, markets, services and supports a wide range of computer systems, including desktops, notebooks and network servers, and also markets software, peripherals and service and support programs. They are the world's leading direct computer systems company and one of the top five computer vendors in the world. A. Critics of Dell argue that the company is "merely" a retailer bringing together computer manufacturers and customers. Would Ronald Coase agree that this is a shortcoming of Dell? B. In what way must Dell be efficient if it is to enjoy long-term success?

The merger between J.P. Morgan and Chase Manhattan banks that created JPMorgan Chase & Co. was a: