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

1、agency theory and organization development 17organizational 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 i

2、n organizations in light of the precepts and 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 w

3、hy, even with what appear to be the best of intentions on all sides, 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 a

4、nd settingas organizations strive to improve their performance through 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

5、 approaches have been taken to the investigation of those influences 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 attain

6、ing what is in the organizations best interest.agency theory, which 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

7、processes, problems, and questions. we first turn to agency theory in 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 eco

8、nomics to provide a theoretical model for the relationship between one party (principal) 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 c

9、ompensation, risk, and information systems (eisenhardt, 1985, 1989). agency theory 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 (je

10、nsen & meckling, 1976), accounting (baiman, 1990, 1982), and law (gilson & roe, 1992), as well as organizational psychology (abrahamson & park, 1994; eisenhardt, 1989; nilakant & rao, 1994) and strategic management (gomez-mejia, tosi, & hinkin, 1987; hill & snell, 1989; hoski

11、sson, johnson, & moesel, 1984) have increasingly utilized this theoretical perspective in analyzing executive 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

12、basis in economics, agency theory posits that the actors in an organization are utility maximizers, striving to 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 barna

13、rds (1938) work on cooperation in organizations, agency theory is focused on the conflict among goals which may 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

14、 picture within the organization.organization developmentorganizations as “recursive” systems comprise complex 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

15、industries to bring change and attain improvement within the organization. the existing literature on od dates 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

16、 achieving change. according to beckhard, od is a planned, organization-wide, and managed from the top, effort to increase organizational effectiveness and health through well-designed interventions in the organizations “processes” based on behavioral-science knowledge (1969). beckhards colleague, b

17、ennis, defined od in the same year: a response to change, a complex educational strategy intended to change the 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). golembi

18、ewski, on the other hand, suggested that od implies a normative, re-education strategy intended to affect systems 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,

19、 including formal organizational restructuring which is frequently initiated, facilitated and reinforced by the 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 abili

20、ty to cope with changes in its external environment with the help of external or internal behavioral-scientists 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 organizati

21、on from top to bottom and throughout which must include individual, team, and other organization units integrating 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 b

22、y lippit, where od was specified as the strengthening of those human processes in organizations which improve the 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 organizatio

23、ns to become or remain viable, to adapt to new conditions, to solve problems, to learn from experiences, and to 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 dram

24、atic changes in both organizations and in the workforce as well as the globalization of the world economies. as 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

25、 to release the creative and productive efforts of human beings at the same time achieving certain legitimate organizational 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 organ

26、izations visioning, empowerment, learning, and problem-solving processes, through an ongoing, collaborative management 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

27、applied behavioral science, including action research (1999). another definition of od is provided by cummings 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 pro

28、cesses that lead to organization effectiveness (2001). the most current definition of od is based on a survey study. according to warrick, od is a planned, systems, collaborative, and primarily behavioral science based process for understanding and changing organizations and improving their present

29、and future health and effectiveness (2002). as a process that utilizes behavioral sciences to achieve planned and 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

30、-field of human resources (hr) (sammut, 2001; ulrich, 1998; smith, 1996; mckee, 1997). furthermore, there is a 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 theo

31、ry and practice (katz & marshak, 1996).principal-agent relationshipall employment relationships have some form 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

32、 in the employment relationship: principals and agents. first, the individuals within the organization are divided 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 t

33、op of the organization to the od practitioner at the bottom, the principals direct the agents in delegated/assigned 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 boar

34、d of directors. agency theory assumes that employer-employee contracting occurs atomistically in which the amount and 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 positi

35、on. hence, agency theory emphasizes the importance of the ability to monitor employees work efforts. consequently, from this perspective agency theory considers the organization as an agent negotiating contracts containing disparate elements with every individual employee (assumedly with equal barga

36、ining power)contractsin an od employment setting there exist official (legal) and unofficial (psychological) job contracts. 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 psycholo

37、gical contract accepting that the employee will begin to work at an agreed upon time under stated terms and conditions 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 othe

38、r work arrangements. the contract also may spell out future change activities, the resources that will be committed 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 i

39、n which employeeagentsupplies labor to the employerprincipalin exchange for income and other rewards with a focus on the 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

40、questions of economic rationality, information asymmetries, and differences in the risk attitudes of workers and the firm 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 organiz

41、ations in drawing up the contract and od professionals need to deal with them as part of their responsibility. in any od 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

42、be implemented to achieve and sustain change. therefore, agency theory presents significant tools and utility for od interventions. nevertheless, contracting process itself is not sufficient to prevent any potential problems. from the principal-agent perspective, there are two potential major proble

43、ms here: communication and conflict of interest. asymmetry of informationconsidering the principal-agent relationship illustrated 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 princip

44、als may not be clear and understood. it may be because of bad transmission from the principal, it may be because of poor 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, restr

45、ained, or interrupted by other factors known only to the agent. in such situations, agency theory argues that the agents 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 class

46、ified as differences in motivation and differences in knowledge. from the perspective of difference in motivation, one only has to consider malcolm gladwell's the talent myth (2002) in which he argues most convincingly that much of the downfall of enron was because of the company's emphasis

47、on each employee maximizing his/her self-interests with the ultimate result that the interests of the organization were at best ignored 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

48、bottom 10 percent are laid off is exemplary (grote, 2000). in this case, the perspective of the vp for hr (an agent) may differ from 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

49、as a result of both differences in motivation and knowledge as is the case for the post-it® note concept of 3m company. nevertheless, 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

50、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-age

51、nt problems. in another case, if an od consultant creates information asymmetries by not revealing the details of the intervention accurately, then the reliability of the intervention is at stake. external od consultants, due to the nature of their contract with the organization have the capability

52、to create such asymmetries of information. from the ceo to the od consultant, the existence of asymmetric information and its potential impact on organizational change efforts needs to be managed and controlled in the best interest of the organization. this leads to the message of agency theory to o

53、d: it is the responsibility of the principals (e.g., hr managers) to structure the od intervention contract in a way which induces the agents to act in the best interest of the organization.conflict of interestthe second problem is that there may be conflicts of interest between the principal and th

54、e agent. each group, because of its own self-interest, may work to improve its own position without working to improve the position of the organization. it is potentially possible to have some type of conflict of interest as both agents and principals may have different and even conflicting motivati

55、on about the work, the organization, and what they expect from them. the agency theory assumption with respect to the behaviors of the actorsbe they principal, agent, or bothin the system is that they are economically rational, self-interested, and utility maximizers (fama, 1980; hausken, 1996a), im

56、plying that in practice each actor will attempt to do the most to further his or her own interests with varying degrees of interest in the success or welfare of the organization. for example, the top management of a firm may try to influence an external od consultant by offering him/her some additio

57、nal incentives to ensure organizational change takes places within their respective frameworks (rothwell, sullivan, & mclean, 1995; french & bell, 1999). in this situation, the top management may not necessarily be interested in working toward organizational goals, but rather toward their ow

58、n personal interests.to this point we have reviewed the nature of the application of agency theory to the process of organizational development. the objective has been to show the linkages between the mechanisms described and operated by principal-agent relationships and the practices of od. the gen

59、erality of this approach needs additional focus and we will now turn to some guidelines for the specifics which are in need of inquiry.summary and a new directionthe identified inter-connection between od and agency theory has not been the subject of substantial academic inquiry to date. it seems appropriate, given the lack of inquiry in this subject, to propose that such inquiry be instigated and that a set of propositions or guidelines for that research b