CORPORATE GOVERNANCE, ETHICS, AND ORGANIZATIONAL ARCHITECTURE

Abstract

Effective corporate leadership involves more than developing a good strategic plan and setting high ethical standards. It also means coming up with an organizational design that encourages the company's managers and employees to carry out its business plan and maintain its ethical standards.In this article, the authors use the term organizational architecture to refer to three key elements of a company's design: the assignment of decision‐making authority–who gets to make what decisions; performance evaluation–the key measures of performance for evaluating business units and individual employees; and compensation structure–how employees are rewarded for meeting performance goals. In well‐designed companies, each of these elements is mutually reinforcing and supportive of the company's overall business strategy. Decision‐making authority is assigned to managers and employees who have the knowledge and experience needed to make the best investment and operating decisions. And to ensure that those decision makers have the incentive as well as the knowledge to make the best decisions, the corporate systems used to evaluate and reward their performance are based on measures that are linked as directly as possible to the corporate goal of creating value.Some of the most popular management techniques of the past two decades, such as reengineering, TQM, and the Balanced Scorecard, have often had disappointing results because they address only one or two elements of organizational architecture, leaving the overall structure out of balance. What's more, a flawed organizational design can lead to far worse than missed opportunities to create value. As the authors note, the recent corporate scandals involved not just improper behavior by senior executives, but corporate structures that, far from safeguarding against such behavior, in some ways encouraged it. In the case of Enron, for example, top management's near‐total focus on boosting reported earnings (a questionable corporate goal to begin with) combined with decentralized decision making and loose oversight at all levels of the company to produce an enormously risky high‐leverage strategy that ended up bringing down the firm.