Responsibility Centers, Decision Rights, and Synergies

ABSTRACT We consider the optimal allocation of decision rights over noncontractible specific investments. Risk-averse business unit managers each engage in general (stand-alone) operations and invest in joint projects that benefit their own and other divisions. Which of the managers should have the authority to choose these investments? With scalable investments, we show that decision rights should be bundled in the hands of the manager facing the more volatile environment. With discrete (lumpy) investments, on the other hand, decision rights should be split between the managers, provided they face comparable levels of uncertainty in their general operations. Splitting decision rights better leverages the inherent investment complementarity, counter to conventional wisdom. Our model generates empirical predictions for the equilibrium association of organizational structure and managers' incentive contracts: bundling of decision rights results in pay-performance sensitivity (PPS) divergence across divisions; splitting them results in PPS convergence. JEL Classifications: M41; D23; D86.

C2 Agility for Emergency Management: Examining the Katrina and Sandy Responses

The Command and Control (C2) Agility theory developed by experts from the Command and Control Research Program based upon analysis of military operations, posits that a C2 approach is characterized by three dimensions: (1) allocation of decision rights, among entities, (2) patterns of interaction, and (3) distribution of information. An entity’s C2 approach is agile when these three dimensions can be changed as required due to a change in circumstances. The Institute for Defense Analyses has produced a handbook C2 by Design to guide operationalization of the C2 Agility theory. C2 agility becomes salient as complexity increases; and the complex, dynamic nature of disaster response environments suggests the applicability of C2 Agility theory to emergency management. This article builds on early NATO study panel findings that used disaster response case studies to validate C2A theory, and draws on existing case literature to identify what factors influenced C2A during Hurricane Katrina and explore how lessons learned from that response impacted C2A during the subsequent US response to Hurricane Sandy. The analysis uses C2A assessment factors from C2 by Design to examine these cases and recommends how the US government can achieve improved C2A during future responses to complex disasters.

The future of corporate governance in knowledge-dispersed companies.

Corporate governance focuses its attention on the structure of the firm and the allocation of decision rights between owners and managers basically, plus other stakeholders. The field has developed extensively during the last decades inspiring reforms and practices as well as learning from them. Most of the analysis though takes into consideration the XXth Century firm, rightfully so since CG is a very practical field in the overlapping map of law, economics and finance. The firm has probably been one of the most successful institutional innovations of the last centuries. Five hundred years ago only a few of them existed, today they are pervasive. Nevertheless, we cannot expect the firm to be the same a hundred years from now as it is today. And if companies are going to be different, how will their corporate governance be affected? The present article does not expect to give an answer to such question. It only attempts to provoke debate and speculation about a possible evolution of the firm based on one single aspect of change: the increased use of dispersed knowledge. After suggesting some development and analyzing present innovations in that direction, we will open up to consideration how those potential changes may affect corporate governance. Of course, there are no specific conclusions, just a call to open our minds to future possible scenarios.

THE FUTURE OF CORPORATE GOVERNANCE IN KNOWLEDGE-DISPERSED COMPANIES.

Corporate governance focuses its attention on the structure of the firm and the allocation of decision rights between owners and managers basically, plus other stakeholders. The field has developed extensively during the last decades inspiring reforms and practices as well as learning from them. Most of the analysis though takes into consideration the XXth Century firm, rightfully so since CG is a very practical field in the overlapping map of law, economics and finance. The firm has probably been one of the most successful institutional innovations of the last centuries. Five hundred years ago only a few of them existed, today they are pervasive. Nevertheless, we cannot expect the firm to be the same a hundred years from now as it is today. And if companies are going to be different, how will their corporate governance be affected? The present article does not expect to give an answer to such question. It only attempts to provoke debate and speculation about a possible evolution of the firm based on one single aspect of change: the increased use of dispersed knowledge. After suggesting some development and analyzing present innovations in that direction, we will open up to consideration how those potential changes may affect corporate governance. Of course, there are no specific conclusions, just a call to open our minds to future possible scenarios.

Complementarities In Organizational Design Of Franchising Networks

This study investigates complementarities between components of the organizational design of franchising networks. We examine three components of governance, rarely distinguished as such in previous studies involving franchising: allocation of decision rights, performance measurement and incentives. We also analyze interdependencies between these variables. In particular, interdependencies seem more evident between the incentive system and the allocation of decision rights to franchisees, and between the incentive system and performance measurement. We also provide evidence of the role of three franchisee characteristics in franchising’s organizational design: multi-unit ownership, age of the relationship, and geographic distance. Implications for chain management are provided.

Allocation of Decision Rights Between the Parent Company and Its Subsidiaries

This article examines the determinants of allocation of decision rights between the parent company and its subsidiaries, and the economic consequence of suboptimal power structure. Based on China’s unique double disclosure for the parent company and the whole group, we construct a decentralization index to measure how decision rights are allocated within the group companies. We find a more decentralized (centralized) power structure for the groups with more uncertain (certain) external environment and with poorer (better) internal information quality. We also show that the groups with suboptimal power structure have weaker future performance.

Organizational Design and Control Choices

Building on new insights from organizational economics, management accounting researchers have highlighted how incentive contracts and performance measure choices complement structural arrangements in firms. We discuss how “slow-moving” elements in organizational design, such as the allocation of decision rights to local managers and interdependencies between different parts of the production function, affect the working of incentives and performance measures. We pay attention to the empirical challenges that researchers face in this area and argues that mixed-method approaches in which economic models are combined with empirical evidence can help to build a body of evidence that is robust and admits cross-study accumulation of knowledge. Finally, we illustrate how recent economic models that incorporate other-regarding preferences can help to bridge the gap between economics-based research in management accounting and more traditional approaches that rely on the behavioral sciences.