Organizational Development, Agency Theory, and Efficient Contracts A Research Agenda.doc

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1、Organizational Development, Agency Theory, and Efficient Contracts: A Research AgendaMesut AkdereUniversity of Wisconsin-MilwaukeeRoss E. AzevedoUniversity of MinnesotaAbstractThis paper presents an analysis of the Organization Development (OD) function in organizations in light of the precepts and

2、utility of agency theory. It examines how the roles of principals and agents complicate the change and improvement processes and experience and challenge the role of OD professionals. This paper contributes to our understanding of why, even with what appear to be the best of intentions on all sides,

3、 the principals and agents in organizations may interact to cause failure and the implications of this dynamic existing within the organization.Keywords: Agency Theory; Organization Development; Human Resources; ChangeIntroduction and SettingAs organizations strive to improve their performance throu

4、gh a number of developmental strategies available to them, all must recognize that there is the possibility of a variety of internal and external elements which may intervene in the process of change and improvement. While different approaches have been taken to the investigation of those influences

5、 which may limit successful organizational development efforts, we will argue that the principles of agency theory offer significant tools to analyze those elements which may impede the progress desired and interfere with the attaining what is in the organizations best interest.Agency theory, which

6、has broad roots and application, ranging from economics through finance, strategic management, insurance, organizational psychology and accounting through to governmental operations also can be applied to organizational development processes, problems, and questions. We first turn to agency theory i

7、n general and then apply it to issues of Copyright 2005 Mesut Akdere & Ross E. Azevedoorganization development.Agency Theory and Organizational DevelopmentAgency TheoryFirst introduced in the literature of information economics to provide a theoretical model for the relationship between one party (p

8、rincipal) who delegates work to another party (agent), agency theory received attention in the organizational control literature (Ouchi, 1979; Pennings & Woiceshyn, 1986; Thompson, 1967), presenting implications for compensation, risk, and information systems (Eisenhardt, 1985, 1989). Agency theory

9、seeks to explain organizational behavior by focusing on the relationship between managers as agents of the firms and the stockholders as principals. Scholars from economics (Coase, 1984; Williamson, 1985), finance (Jensen & Meckling, 1976), accounting (Baiman, 1990, 1982), and law (Gilson & Roe, 199

10、2), as well as organizational psychology (Abrahamson & Park, 1994; Eisenhardt, 1989; Nilakant & Rao, 1994) and strategic management (Gomez-Mejia, Tosi, & Hinkin, 1987; Hill & Snell, 1989; Hoskisson, Johnson, & Moesel, 1984) have increasingly utilized this theoretical perspective in analyzing executi

11、ve management behavior in large private and public firms.As is true of so many questions about organizations, agency theory focuses on the people within them and how they behave. Given its basis in economics, agency theory posits that the actors in an organization are utility maximizers, striving to

12、 obtain that which is in their individual best interest and which may not be in the best interest of the organization (Eisenhardt, 1989). With an intellectual heritage linking back to Barnards (1938) work on cooperation in organizations, agency theory is focused on the conflict among goals which may

13、 become evident as various individuals perform their jobs within said organizations while acting to get the most for themselves. This approach, however, adds certain new complexities to the picture within the organization.Organization DevelopmentOrganizations as “recursive” systems comprise complex

14、inter-relationships between the elements which make up the system (Coghlan, 1995). As an emerging field of practice, Organization Development (OD) has been practiced in organization across industries to bring change and attain improvement within the organization. The existing literature on OD dates

15、back as far as 1969 when a number of scholars provided various definitions of the field (Egan, 2002). Early theories and practices of OD focus on increasing organizational effectiveness and achieving change. According to Beckhard, OD is a planned, organization-wide, and managed from the top, effort

16、to increase organizational effectiveness and health through well-designed interventions in the organizations “processes” based on behavioral-science knowledge (1969). Beckhards colleague, Bennis, defined OD in the same year: a response to change, a complex educational strategy intended to change the

17、 beliefs, attitudes, values, and structure of organizations so that they can better adapt to new technologies, markets, and challenges and the dizzying rate of change itself (1969). Golembiewski, on the other hand, suggested that OD implies a normative, re-education strategy intended to affect syste

18、ms of beliefs, values and attitudes within the organization so that it can adapt better to the accelerated rate of change in technology, in an industrial environment and society in general, including formal organizational restructuring which is frequently initiated, facilitated and reinforced by the

19、 normative and behavioral changes (1969). Another renowned scholar of the field, French, termed OD a long-range effort to improve an organizations problem-solving capabilities and its ability to cope with changes in its external environment with the help of external or internal behavioral-scientists

20、 consultants, or change agents, as they are sometimes called (1969). According to Blake and Mouton, OD means development of the entire organization or self-sustaining parts of an organization from top to bottom and throughout which must include individual, team, and other organization units integrat

21、ing the management sciences, business logic, and behavioral systems of an organization into an organic, interdependent whole (1969). A final definition of OD in the same year was provided by Lippit, where OD was specified as the strengthening of those human processes in organizations which improve t

22、he functioning of the organic system so as to achieve its objectives through the process of initiating, creating, and confronting needed changes in order to make it possible for organizations to become or remain viable, to adapt to new conditions, to solve problems, to learn from experiences, and to

23、 move toward greater organizational maturity (1969). Over the past three decades, however, the practice and underlying theories of the field of OD have evolved as a result of rapid and dramatic changes in both organizations and in the workforce as well as the globalization of the world economies. As

24、 a result, there have been significant differences in the definitions and interpretations of the field to reflect these changes. According to Dyer, OD is a process whereby actions are taken to release the creative and productive efforts of human beings at the same time achieving certain legitimate o

25、rganizational goals such as being profitable, competitive, and sustainable (1997). French and Bell, define OD as a long-term effort, led and supported by top management, to improve an organizations visioning, empowerment, learning, and problem-solving processes, through an ongoing, collaborative man

26、agement of organization culturewith special emphasis on the culture of intact work teams and other team configurationsusing the consultant-facilitator role and the theory and technology of applied behavioral science, including action research (1999). Another definition of OD is provided by Cummings

27、and Worley, where they defined OD as a system wide application of behavioral science knowledge to the planned development and reinforcement of organizational strategies, structures, and processes that lead to organization effectiveness (2001). The most current definition of OD is based on a survey s

28、tudy. According to Warrick, OD is a planned, systems, collaborative, and primarily behavioral science based process for understanding and changing organizations and improving their present and future health and effectiveness (2002). As a process that utilizes behavioral sciences to achieve planned a

29、nd systematic change to organizational culture over a sustainable period of time for attaining organizational effectiveness and efficiency, OD has been regarded as a relative field or a sub-field of Human Resources (HR) (Sammut, 2001; Ulrich, 1998; Smith, 1996; McKee, 1997). Furthermore, there is a

30、continuous effort calling OD to be more comprehensive, better integrated, and capable of incorporating dimensions that have been previously excluded or defined out of the mainstream of theory and practice (Katz & Marshak, 1996).Principal-Agent RelationshipAll employment relationships have some form

31、of principal-agent relationship. It is sometimes described as the unending effort of the employerthe principalto get the agentthe employeeto work. Thus, the idea is there are two actors in the employment relationship: principals and agents. First, the individuals within the organization are divided

32、into two groups; the principals and the agents. These are characterized, within an organizational hierarchy in Figure I. From the OD perspective, ranging from the stock-holders at the top of the organization to the OD practitioner at the bottom, the principals direct the agents in delegated/assigned

33、 tasks on their behalf. We note that many play both roles in the organization; thus the CEO is a principal with respect to the Vice President for HR and an agent in relation to the Board of Directors. Agency theory assumes that employer-employee contracting occurs atomistically in which the amount a

34、nd nature of incentives to perform consistently with organizational objectives are largely determined by job characteristics and the amount of risk each employee takes in a given position. Hence, agency theory emphasizes the importance of the ability to monitor employees work efforts. Consequently,

35、from this perspective agency theory considers the organization as an agent negotiating contracts containing disparate elements with every individual employee (assumedly with equal bargaining power)ContractsIn an OD employment setting there exist official (legal) and unofficial (psychological) job co

36、ntracts. Unofficial contracting occurs when both partiesthe employer and the employeeverbally agree on the job and its requirements and compensation. In a way, they establish a psychological contract accepting that the employee will begin to work at an agreed upon time under stated terms and conditi

37、ons of employment. The legal contracting occurs when both parties sign an official employment document that specifies the details of the position such as the pay, deliverables, and other work arrangements. The contract also may spell out future change activities, the resources that will be committed

38、 to the process, and how OD practitioners and organization members will be involved (Cummings & Worley, 1997). Agency theory thus defines the employment relationship as a contract in which employeeagentsupplies labor to the employerprincipalin exchange for income and other rewards with a focus on th

39、e structure of that relationship. Simply put, the question is whether the contract is formed in a way which drives the agent to behave in the best interest of the organization. The questions of economic rationality, information asymmetries, and differences in the risk attitudes of workers and the fi

40、rm are among the factors of this theory which need to be recognized in the contract. These values and principles, derived from economics, are among the basic concerns of the organizations in drawing up the contract and OD professionals need to deal with them as part of their responsibility. In any O

41、D intervention, there is always the presence of both psychological and legal contracting in which both partiesthe organization and the OD professionalagree on the process that will be implemented to achieve and sustain change. Therefore, agency theory presents significant tools and utility for OD in

42、terventions. Nevertheless, contracting process itself is not sufficient to prevent any potential problems. From the principal-agent perspective, there are two potential major problems here: communication and conflict of interest. Asymmetry of InformationConsidering the principal-agent relationship i

43、llustrated in Figure I, there are information asymmetries to consider. Communication may not always be effective. For a variety of reasons, the charge given to agents by the principals may not be clear and understood. It may be because of bad transmission from the principal, it may be because of poo

44、r reception by the agent, or it may be deliberate concealment. Asymmetry of information occurs when the principals ability to monitor the agents behaviors and work is limited, restrained, or interrupted by other factors known only to the agent. In such situations, agency theory argues that the agent

45、s may decrease their performance or may even shirk because of their ability to conceal such performance “deficiencies” from the principals. Information asymmetries may thus be classified as differences in motivation and differences in knowledge. From the perspective of difference in motivation, one

46、only has to consider Malcolm Gladwells The Talent Myth (2002) in which he argues most convincingly that much of the downfall of Enron was because of the companys emphasis on each employee maximizing his/her self-interests with the ultimate result that the interests of the organization were at best i

47、gnored or at worst subverted. On the other hand, from the perspective of differences in knowledge, the practice of General Electric in which employees that perform at the bottom 10 percent are laid off is exemplary (Grote, 2000). In this case, the perspective of the VP for HR (an agent) may differ f

48、rom that of the CEO (principal) because of the knowledge that the bottom 10 percent are performing well on an absolute scale. In some cases, information asymmetries occur as a result of both differences in motivation and knowledge as is the case for the Post-it Note concept of 3M Company. Neverthele

49、ss, in a situation of information asymmetry, the principal will not have full access to information; thus, creating a potential opportunity for the agent to gain by keeping certain information inaccessible to the principal. When an OD intervention is conducted by external consultants, the possibility of information asymmetries increases. OD consultants are ethically liable to ensure the flow of the information at any point to prevent any potential principal-agent problems. In a