Coordination, Control, and Agency Problems in Organizations

Coordination and Control Bases

In the model of team production, activities are coordinated and determine the productivity of team members. Determining the individual productivity of team members is hampered by technical issues and opportunistic behavior. This requires mutual monitoring and production standards, often overseen by a supervisor to prevent avoidance. This incurs costs for the company.

To produce efficiently, companies must manage two types of costs:

• Costs of collective action
• Control costs

Thus, there are two lines of organizational guidelines:

• Hierarchical organizational solutions
• Participatory organizational solutions

Hierarchical solutions are based on mutual surveillance among members or supervision by a higher authority. When a supervisor is present, coordination can also be achieved by decentralizing decisions. The induction of solidarity encourages group members to adopt values where they are willing to subordinate their interests to those of the company, replacing the criterion of individual utility with collective utility. Negotiated organizational solutions facilitate cooperative outcomes.

Efficient recruitment defines four different internal market types based on the degree of specificity (k) and separability (s) of work:

• Instantaneous market (k0, s0)
• Original equipment (k0, s1)
• Bond market (k1, s0)
• Team relationship (k1, s1)

These factors influence maintaining the employment relationship and providing necessary incentives.

Authority Delegation and Control

Agency Relationships: Principal and Agent

Authority is delegated to the agent who performs functions designated by the principal. This leads to the 'Agency Problem'. Agency costs arise from monitoring the agent to ensure compliance with their duties. The agency problem is often greater at higher levels of the company, although it occurs at any level where decisions are made and authority is delegated.

The pursuit of self-interest and corresponding shirking can lead to a voluntary breach of the agency relationship. Involuntary non-compliance is related to bounded rationality and information asymmetries.

There are two classes of control mechanisms for this problem:

• Internal or Direct: These have a direct and noticeable effect on agent behavior regarding compliance with the principal's objectives. Examples include the board of directors, incentives, and contracts.
• Market or Indirect: These result from the market's assessment of the company's efficiency and its managers. Neither the principal nor the agents can directly influence these market assessments. Examples include the stock market (market for corporate control), the market for company acquisitions, and the market for products and managerial talent.

The board of directors and corporate governance practices are primary control mechanisms for the agency problem. Specialization in the decision-making process is another important control mechanism, involving distinct stages:

1. Generation of alternative proposals.
2. Selection of one alternative.
3. Practical implementation.
4. Evaluation and control (often by a supervisor or entrepreneur).