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Abstract: This article analyzes Total Quality Management as an innovation in organizational technology that can be used by companies to increase the productivity of both labor and capital. As an organizing technology, TQM has three distinguishing features: (1) it is science-based in the sense that individuals at all levels of the organization are trained to use scientific method in everyday decision-making; (2) it is non-hierarchical insofar as it provides a process for decentralizing decision-making in ways that do not correspond to the traditional corporate hierarchy; (3) it is non-market-oriented in that it does not use prices or formal exchange mechanisms, such as transfer pricing systems, to motivate cooperation or the transfer of decision rights.
Despite the potential benefits of TQM, and the many TQM success stories, there is also considerable testimony to the difficulty of establishing and maintaining effective TQM programs. We suggest that one important source of TQM's implementation problems has been the failure to develop a systematic approach to identifying the entire set of organizational changes required by a comprehensive TQM program.
While typically arising out of a concern for product quality, the most successful TQM programs end up becoming efficiency improvement initiatives that involve organization-wide changes in decision-making authority and performance measures. For this reason, effective implementation of TQM requires major changes in all three components of what we refer to collectively as the organizational rules of the game--that is, not only (1) systems for allocating decision rights and (2) performance measurement systems, but also (3) reward and punishment systems. Unlike those quality advocates like Edward Deming who object to the use of monetary incentives to reinforce TQM initiatives, we argue that "the increased decentralization associated with TQM should be associated with a strengthening of the relation between performance and rewards of all types."
Note: This paper draws heavily on our Journal of Accounting and Economics paper of the same title, Volume 18, 1994, pp. 247-287. See the working paper version of this paper "Science, Specific Knowledge, and Total Quality Management".
Abstract: We analyze Total Quality Management (TQM) from an economic and organizational perspective. We find that TQM is a new organizing technology that is science-based, non-hierarchical, and non-market-oriented. It improves productivity by encouraging the use of science in decision-making and discouraging counter-productive defensive behavior. It also encourages effective creation and use of specific knowledge throughout the organization. Effective implementation of TQM generally requires major changes in all three components of the organizational rules of the game, namely systems for allocating decision rights, performance measurement systems, and reward and punishment systems. Note: A revised and shortened version of this paper is published under the same title in the Journal of Applied Corporate Finance, Summer 1997, Vol. 10, No 2. You can download it at: "Science, Specific Knowledge, and Total Quality Management".
Abstract: This paper describes the history of the development of the course Coordination, Control and the Management of Organizations (CCMO) from its initiation by Michael C. Jensen and William H. Meckling at the University of Rochester in 1973 to its current state as one of the most highly demanded elective courses in the second year of the MBA program at Harvard Business School. CCMO regularly attracts between 500 and 600 of the 850 second-year MBA students. CCMO presents a new theory of organizations that draws on economics, finance, psychology, neuroscience, and human resource management. In developing our theory, we focus particularly on four interrelated areas: 1) the nature of human beings and their behavior; 2) compensation, career systems, and performance measurement; 3) task structure, organizational boundaries, and technology; and 4) governance, corporate finance, and organizational performance. This paper presents specifics in each of these four categories. (Forthcoming in The Intellectual Venture Capitalist: John H. McArthur and the Work of the Harvard Business School, 1980-1995, Edited by Thomas K. McCraw and Jeffrey L. Cruikshank, Harvard Business School Press, 1998.) ----------- The CCMO materials are presented in four electronic documents entitled as follows (you can go directly to each document and its abstract by clicking on the title below): 1. This document -- Organizations and Markets: History and Development of the Course and the Field, by Michael C. Jensen, George P. Baker, Carliss Y. Baldwin, and Karen H. Wruck, Dec. 10, 1997 (forthcoming in "The Intellectual Venture Capitalist: John H. McArthur and the Work of the Harvard Business School," 1980-1995, Thomas K. McCraw and Jeffrey L. Cruickshank, eds, (Harvard Business School Press, 1998)). 2. Coordination, Control, and the Management of Organizations: Course Notes, by Michael C. Jensen and William H. Meckling, with contributions from George P. Baker and Karen H. Wruck, April 20, 1998, Harvard Business School Working Paper. 3. Coordination, Control, and the Management of Organizations: Course Content and Materials, by Michael C. Jensen and Karen H. Wruck, April 20, 1998, unpublished manuscript, Harvard Business School. 4. Coordination, Control, and the Management of Organizations: Practice Questions, by Michael C. Jensen, William H. Meckling, George P. Baker, and Karen H. Wruck, with contributions from Carliss Y. Baldwin, and Malcolm S. Salter, April 20, 1998, unpublished manuscript, Harvard Business School. Return to main CCMO abstract.
Abstract: This document contains a collection of 99 exam questions from the last 20 years of the Coordination, Control, and the Management of Organizations (CCMO) course. They are given to students at the end of the semester as a vehicle to aid their study for the final exam. These questions are a combination of stand-alone questions and questions that accompany journal and magazine articles. They are organized with the most recent exam questions last, so we recommend that readers start from the last questions and move toward the front of the document in their study. ----------- The CCMO materials are presented in four electronic documents entitled as follows (you can go directly to each document and its abstract by clicking on the title below): 1. Organizations and Markets: History and Development of the Course and the Field, by Michael C. Jensen, George P. Baker, Carliss Y. Baldwin, and Karen H. Wruck, Dec. 10, 1997 (forthcoming in "The Intellectual Venture Capitalist: John H. McArthur and the Work of the Harvard Business School," 1980-1995, Thomas K. McCraw and Jeffrey L. Cruickshank, eds, (Harvard Business School Press, 1998)). 2. Coordination, Control, and the Management of Organizations: Course Notes, by Michael C. Jensen and William H. Meckling, with contributions from George P. Baker and Karen H. Wruck, April 20, 1998, Harvard Business School Working Paper. 3. Coordination, Control, and the Management of Organizations: Course Content and Materials, by Michael C. Jensen and Karen H. Wruck, April 20, 1998, unpublished manuscript, Harvard Business School. 4. This document -- Coordination, Control, and the Management of Organizations: Practice Questions, by Michael C. Jensen, William H. Meckling, George P. Baker, and Karen H. Wruck, with contributions from Carliss Y. Baldwin, and Malcolm S. Salter, April 20, 1998, unpublished manuscript, Harvard Business School. Return to main CCMO abstract.
Abstract: The course Coordination, Control and the Management of Organizations (CCMO) develops a theory of organizations that provides a clear understanding of how organizational "rules of the game" affect a manager's ability to resolve problems, increase productivity, and achieve his or her objective. The course explores the choice of the organizational objective function and the value implications for equity and debt holders, employees, suppliers and society as a whole. The viewpoint of the course is that of a general manager addressing organizational strategy with an internal rather than an external focus. The analysis emphasizes the constraints that external markets, such as capital, supplier, labor, and product markets, place on a firm's internal organizational strategy. The framework developed is analytical, but not mathematical. It provides an understanding of how organizational structure affects performance and how current economic and social forces are reshaping the role of managers, both today and in the future. This documents contains I. CCMO Course Description II. CCMO Course Syllabus III. CCMO Course Reading List, a complete session-by-session reading list for a 35 session version of the course. IV. CCMO Assignment Questions, a complete set of session by session assignment questions for a 35 session version of the course. ----------- The CCMO materials are presented in four electronic documents entitled as follows (you can go directly to each document and its abstract by clicking on the title below): 1. Organizations and Markets: History and Development of the Course and the Field, by Michael C. Jensen, George P. Baker, Carliss Y. Baldwin, and Karen H. Wruck, Dec. 10, 1997 (forthcoming in "The Intellectual Venture Capitalist: John H. McArthur and the Work of the Harvard Business School," 1980-1995, Thomas K. McCraw and Jeffrey L. Cruickshank, eds, (Harvard Business School Press, 1998)). 2. Coordination, Control, and the Management of Organizations: Course Notes, by Michael C. Jensen and William H. Meckling, with contributions from George P. Baker and Karen H. Wruck, April 20, 1998, Harvard Business School Working Paper. 3. This document -- Coordination, Control, and the Management of Organizations: Course Content and Materials, by Michael C. Jensen and Karen H. Wruck, April 20, 1998, unpublished manuscript, Harvard Business School. 4. Coordination, Control, and the Management of Organizations: Practice Questions, by Michael C. Jensen, William H. Meckling, George P. Baker, and Karen H. Wruck, with contributions from Carliss Y. Baldwin, and Malcolm S. Salter, April 20, 1998, unpublished manuscript, Harvard Business School. Return to main CCMO abstract.
Abstract: This paper examines how compensation systems can facilitate or hinder value creating change in organizations. It draws on ideas and evidence, both old and new, from theory and practice and examines four critical ways in which well-designed compensation systems create value in organizations. Specifically, compensation systems: 1. Improve the motivation and productivity of employees, 2. Promote productive turnover in personnel, 3. Mobilize valuable specific knowledge by allowing effective decentralization and, 4. Help overcome organizational inertia and opposition to change. The paper also addresses the issue of timing in the implementation of a new compensation system. Conventional wisdom in the field of organizational behavior advocates changing compensation systems only after new "strategy and structure" are designed and implemented. In contrast, I provide arguments and evidence in support of changing compensation systems "early", more specifically after managers identify and adopt an over-arching objective for the firm, but before they have completely specified how that objective translates into a new strategy and/or structure.
Abstract: Academics and practitioners from a wide range of backgrounds agree that bringing about sustainable, productive changes in organizations is difficult. They disagree, however, on why this is the case. Consequently, they disagree on the most effective approaches to analyzing and solving organizational problems, and on the most effective approaches to implementing solutions. At the heart of the disagreement are differences over the factors that motivate individuals to change their behavior. Behavioral changes on the part of individuals are required for organizational change, and compensation systems affect behavior. Thus, it is critical to consider the role that compensation systems play in the process of organizational change. The paper explains why establishing a strong, positive relation between rewards and performance is critical to bringing about value-creating organizational change. Throughout it draws on ideas and evidence, both old and new, from theory and practice. The ways in which well-designed compensation systems create value in organizations are grouped into four broad categories. Specifically, compensation systems: 1. Improve the motivation and productivity of employees, 2. Promote productive turnover in personnel, 3. Mobilize valuable specific knowledge by allowing effective decentralization, and 4. Help overcome organizational inertia and opposition to change. The paper also analyzes the issue of timing in the implementation of a new compensation system. Conventional wisdom in the field of organizational behavior advocates changing compensation systems only after new "strategy and structure" are designed and implemented. In contrast, I provide arguments and evidence in support of changing compensation systems "early." By early, I mean that compensation systems should be redesigned after managers identify and adopt an over-arching objective for the firm, but before they have completely specified how that objective translates into a new strategy and/or structure.
Abstract: This paper presents clinically-based studies of two acquisitions that received very different stock market reactions at announcements one positive and one negative. Despite the differing market reactions, we find that, ultimately, neither acquisition created value overall. In exploring the reasons for the acquisition outcomes, we rely primarily on interviews with managers and on internally generated performance data. We compare the results of these analyses to those from analyses of post-acquisition operating and stock price performance traditionally applied to large samples. We draw two primary conclusions. (1) Our findings highlight the difficulty of implementing a successful acquisition strategy and of running an effective internal capital market. Post-acquisition difficulties resulted because: (a) managers of the acquiring company did not deeply understand the target company at the time of the acquisition; (b) the acquirer imposed an inappropriate organizational design on the target as part of the post-acquisition integration process; and (c) inappropriate management incentives existed at both the top management and division level. (2) Measures of operating performance used in large sample studies are weakly correlated with actual post-acquisition operating performance.
Abstract: A persistent and puzzling empirical regularity is the fact that many firms adopt conservative financial policies. These "under-leveraged" firms carry substantially less debt than predicted by dominant theories of capital structure (Graham (2000) and Myers (1984)). This paper examines the phenomenon of financial conservatism by studying firms that adopt a persistent policy of low leverage. Our major findings are as follows. 1) Conservative firms follow a pecking order style financial policy. A high flow of funds and substantial cash balances allow them to fund the bulk of discretionary expenditures internally. 2) Financial conservatism is largely transitory. Seventy percent of low leverage firms drop their conservative financial policy; almost 50% do so within five years. 3) Conservative firms stockpile financial slack or debt capacity. Their "stockpiles" are utilized later to finance discretionary expenditures, particularly acquisitions and capital expenditures. 4) Financial conservatism is not an industry-based phenomenon. Conservative firms do, however, have relatively high market-to-book and operate relatively frequently in industries thought to be sensitive to financial distress. 5) Conservative firms do not have low tax rates, high non-debt tax shields or face severe information asymmetries.
Abstract: A hot growth stock in the 1980s, L.A. Gear's equity fell from $1 billion in market value in 1989 to zero in 1998. For over six years as revenues declined precipitously, management tried a series of radical strategy shifts while subsidizing the firm's large losses through working-capital liquidations. The L.A. Gear case illustrates that asset liquidity (broadly construed, not limited to excess cash) can give managers substantial operating discretion during financial distress. It also shows (i) that debt covenants can be stronger disciplinary mechanisms than requirements to meet cash interest payments, (ii) why debt contracts typically constrain earnings instead of cash flow, (iii) why cash balances are not equivalent to negative debt, and (iv) why debt maturity matters. We find that many firms have highly liquid asset structures, thus their managers have the potential to subsidize losing operations should the need arise.
Abstract: Through a series of cases, articles and other readings this module develops the concepts of corporate governance and control, and examines their relation to the organizational rules of the game, and to the creation and distribution of value. The "organizational rules of the game" refers to an organization's systems for 1) allocating decision rights, 2) measuring performance, and 3) meting out rewards and punishments, as defined by Jensen and Meckling (1992). Each of the sessions focuses on issues relevant to when, why and how ownership, governance and control create or destroy value in organizations. The module is comprised of 16 sessions based on cases, clinical articles and related readings. The module note describes the organization and structure of the course module, a description of materials for each session, and a set of student assignments and assignment questions for each session. Particular sessions or groups of sessions from this module can be used in a course whose primary materials comprise academic journal articles and textbook readings. This can involve intermingling case-based sessions with other types of materials or assigning materials from an Ownership, Governance and Control of Organizations session to students to form the basis of a project or paper.
Abstract: This paper examines the role that organization structure and contract design played in resolving economic and political problems that arose during Germany's privatization process. We find that German officials structured organizations and contracts in a way that made credible the government's commitment to rapid privatization. This credibility served to protect the process from political and social opposition. In addition, it enabled Germany to attract talented private sector managers to its privatization effort. This began with the establishment of an independent privatization agency, the Treuhand. It culminated with the creation of another set of independent organizations called Management KGs, to which the Treuhand outsourced part of its restructuring, management and privatization work.
Abstract: Eastern Airlines' bankruptcy illustrates the devastating effect of court-sponsored asset stripping-using creditors' collateral to invest in negative net present value "lottery ticket" investments-on firm value. During bankruptcy, Eastern's value dropped over 50%. We show that a substantial portion of this value decline occurred because an over- protective court insulated Eastern from market forces and allowed value-destroying operations to continue long after it was clear Eastern should be shut down. The failure of Eastern's bankruptcy demonstrates the importance of the court's role in protecting a distressed firm's assets, not only from a run by creditors, but also from overly optimistic managers.
Abstract: There has been substantial research on both asset restructuring and top management changes. The connection between the two, however, has received little attention. Here, we examine spinoffs as events through which top management is restructured. Our main findings are: 1) both firm-specific human capital and more general human capital, such as governance expertise and top management experience, affect the composition of spinoff firms' top management, 2) the structure of spinoff top management is related to the value created by a spinoff, and 3) for a subsample of firms, spinoffs serve as a form of management dismissal, with the opportunity to manage a smaller, weaker spinoff firm serving as a "consolation prize."
Abstract: Using data from private placement contracts, we analyze relationships between investors and issuers, and their impact on corporate governance and performance. Most investors have a relationship with the issuer pre-placement and many new relationships are formed through the placement agreement. New relationships are largely governance-related (board seats and/or 5% or greater blocks), but also include key business partnerships and/or employment arrangements. We have three main findings. First, new relationships drive the positive stock price response at announcement; placements lacking new relationships are non-events. Second, investors with relationship ties to the issuer are more likely to gain directorships as part of the placement. Third, new relationships are associated with stronger post-placement profitability and stock price performance. Overall, our findings are consistent with private placements creating value when they are associated with increased monitoring and strong governance.
private placement, private equity, equity issuance, relationship investing, relationship investor; hierarchy of investors; agency theory; asymmetric information; entrenchment; specific investment; relationship-specific investment, governance, blockholders, ownership concentration
Abstract: This paper presents clinically-based studies of two acquisitions that received very different stock market reactions at announcement one positive and one negative. Despite the differing market reactions, we find that ultimately neither acquisition created value overall. In exploring the reasons for the acquisition outcomes, we rely primarily on interviews with managers and on internally generated performance data. We compare the results of these analyses to those from analyses of post-acquisition operating and stock price performance traditionally applied to large samples. We draw two primary conclusions. (1) Our findings highlight the difficulty of implementing a successful acquisition strategy and of running an effective internal capital market. Post-acquisition difficulties resulted because: (a) managers of the" acquiring company did not deeply understand the target company at the time of the acquisition; (b) the acquirer imposed an inappropriate organizational design on the target as part of the post-acquisition integration process; and (c) inappropriate management incentives existed at both the top management and division levels. (2) Measures of operating performance used in large sample studies are weakly correlated with actual post-acquisition operating performance."
Abstract: Along with their more effective governance systems, top private equity firms have developed a distinctive approach to reorganizing companies for efficiency and value. The author's research on private equity, comprising over 20 years of interviews and case studies as well as large-sample analysis, has led her to identify four principles of reorganization that help explain the success of these buyout firms. Besides providing a source of competitive advantage to private equity firms, the management practices that derive from these four principles are now being adopted by many public companies. And, in the author's words, private equity's most important and lasting contribution to the global economy may well be its effect on the world's public corporations those companies that will continue to carry out the lion's share of the world's growth opportunities. This article explains how, over the past 25 years, the private equity market has helped reinvent the market for corporate control, particularly in the U.S. What's more, the author argues that the effects of private equity on the behavior of companies both public and private have been important enough to warrant a new definition of the market for corporate control one that, as presented in this article, emphasizes corporate governance and the benefits of the competition for deals between private equity firms and public acquirers. In the early 1980s, during the first U.S. wave of debt-financed hostile takeovers and leveraged buyouts, finance professors Michael Jensen and Richard Ruback introduced the concept of the market for corporate control and defined it as the market in which alternative management teams compete for the right to manage corporate resources. Since then, the dramatic expansion of the private equity market, and the resulting competition between corporate (or strategic) and financial buyers for deals, have both reinforced and revealed the limitations of this old definition.
Abstract: This paper studies the association between a firm's stock returns and subsequent top management changes. Consistent with internal monitoring of management, there is an inverse relation between the probability of a management change and a firm's share performance. This relation can result from monitoring by the board, other top managers, or blockholders. However, unless share performance is extremely good or bad, logit models have no predictive ability. No average stock reaction is detected at announcement of a top management change.
Management changes, stock price performance, governance
Abstract: SUBJECT AREAS: mergers and acquisitions; value creation; corporate governance; boards of directors CASE SETTING: 1994; USA; pharmaceuticals This case series provides an opportunity to explore the factors influencing the market for corporate control, and the boardroom dynamics associated with hostile takeover offers. In August 1994, the board of directors of American Cyanamid (Cyanamid) voted unanimously to support the hostile tender offer made for the company by American Home Products (AHP). At $9 billion, the deal was the largest merger and acquisition transaction of 1994. It made AHP the fourth largest pharmaceutical firm in the US. The (A) cases present the perspective of one of Cyanamid's long-time outside directors, Paul W. MacAvoy, on the effectiveness of American Cyanamid's governance processes, management practices and events surrounding the takeover. The (B) case presents letters from managers taking issue with MacAvoy's interpretation of events. They include letters from Albert Costello, then Cyanamid's Chairman and CEO, Larry Ellberger, then Cyanamid's VP of Corporate Development and Planning, and David Culver, another outside director. The (A) and (B) cases are intended to be assigned together. At issue is whether Cyanamid's board will endorse AHP's hostile offer in spite of the fact that management has been exploring an alternative transaction that involves an asset swap with SmithKline Beecham. In addition, the cases allow students to explore how differently individuals perceive the same events, and how these differences affect behavior and decision-making. The cases highlight the difficulty boards face when the successful completion of an acquisition threatens the survival of a firm whose continuation is important to managers. It also illustrates how boardroom norms and board structure can impede effective corporate governance.
Abstract: REQUESTS FOR COPIES: To receive a copy of this case, please contact Harvard Business School Publishing. E-Mail: MAILTO:custserv@hbsp.harvard.edu Phone: (800) 545-7685 or (617) 495-6117 Fax: (617) 495-6985 Postal: HBS Publishing, Customer Service Department, 60 Harvard Way, Boston, MA 02163 http:://www.hbsp.harvard.edu Situation: Cytec was created through a spin-off by American Cyanamid that packaged a poorly performing division with substantial environmental and retirement liabilities. The stock market's assessment of Cytec's prospects was grim, but Cytec's managers believed that through changes in corporate culture and strategy they could create value. In fact, as the (B) case shows Cytec experienced dramatic performance improvement, earning a stock return of 345% over the first two years of its life as a free-standing public company. Underlying Cytec's increase in stock price was a substantial turnaround in both profitability and cash flow. Pedagogy: This case provides a dynamic context in which to explore the organizational and management implications of spin-offs. It provides a description of the contractual arrangements that define the terms of the spin-off, and the tensions associated with the negotiations to arrive at these terms. The case also illustrates how the management practices of a parent corporation affect divisional performance, and how changing inappropriate management practices provides an opportunity to create value. It emphasizes the interconnectedness of what are often considered the soft aspects of management, such as shaping corporate culture and mission and the hard aspects such as increasing profitability and creating shareholder value. Careful study of the spin-off's terms and of management-led initiatives at Cytec stimulates active discussion of techniques for managing changes in strategy, structure and culture in organizations. Cytec's spin-off allowed it to break from counter-productive aspects of Cyanamid's management style and adopt practices that were more effective and more suitable to its business. The outcome was both the development of a healthier corporate culture and the creation of value for shareholders.
Abstract: SUBJECT AREAS: mergers and acquisitions; value creation; corporate governance; boards of directors. CASE SETTING: 1994; USA; pharmaceuticals. Case No: 9-897-048, American Cyanamid: (A)-Board Response to a Hostile Takeover Offer Case No: 9-897-064, American Cyanamid: (B)-Management's Response to the (A) Case Case No: 9-897-178, American Cyanamid: (A) & (B) Combined Case No: 9-898-120, American Cyanamid: (C)-Epilogue Case No: 5-897-161, Teaching Note This case series provides an opportunity to explore the factors influencing the market for corporate control, and the boardroom dynamics associated with hostile takeover offers. In August 1994, the board of directors of American Cyanamid (Cyanamid) voted unanimously to support the hostile tender offer made for the company by American Home Products (AHP). At $9 billion, the deal was the largest merger and acquisition transaction of 1994. It made AHP the fourth largest pharmaceutical firm in the US. The (A) cases present the perspective of one of Cyanamid's long time outside directors, Paul W. MacAvoy, on the effectiveness of American Cyanamid's governance processes, management practices and events surrounding the takeover. The (B) case presents letters from managers taking issue with MacAvoy's interpretation of events. They include letters from Albert Costello, then Cyanamid's Chairman and CEO, Larry Ellberger, then Cyanamid's VP of Corporate Development and Planning, and David Culver, another outside director. The (A) and (B) cases can be assigned together. For the convenience of instructors doing so, a single case document containing both the (A) and (B) case (9-897-178) is available (this price of this combined case is half of the price of (A) and (B) ordered separately). At issue is whether Cyanamid's board will endorse AHP's hostile offer in spite of the fact that management has been exploring an alternative transaction that involves an asset swap with SmithKline Beecham. In addition, the cases allow students to explore how differently individuals perceive the same events, and how these differences affect behavior and decision-making. The cases highlight the difficulty boards face when the successful completion of an acquisition threatens the survival of a firm whose continuation is important to managers. It also illustrates how boardroom norms and board structure can impede effective corporate governance.
Abstract: This paper examines the role of financial policy as a catalyst for organizational change. The subject is Sealed Air Corporation, a company with substantial free cash flow that undertakes a leveraged special dividend. While the stock price response to announcement is typical, Sealed Air exhibits dramatic, sustained, post-dividend performance improvement. Evidence indicates this performance results from managers? conscious and successful use of financial leverage as a tool to disrupt the status quo and promote internal change, including establishing a new objective, changing compensation systems, and reorganizing manufacturing and capital budgeting processes.
Abstract: The course Coordination, Control and the Management of Organizations (CCMO) was initiated at the University of Rochester in 1973 by Michael C. Jensen and William H. Meckling. This course became one of the most highly demanded courses at the Simon School of Business and at the Harvard Business School (after it was ported to HBS by Jensen in 1985). As an elective in the second year of the Harvard MBA program, the course regularly attracts between 500 and 600 of the 850 second-year students. At HBS, Karen H. Wruck played a major role in bringing new ideas and materials to the course, especially in the area of corporate governance and control, and in her contributions to the course architecture. CCMO presents a new theory of organizations that draws on economics, finance, psychology, neuroscience, and human resource management. CCMO is taught by the Organizations & Markets (O&M) Unit at the Harvard Business School which is devoted to the interdisciplinary development of a modern theory of organizations and markets that is useful both to social scientists and managers. The faculty who regularly teach the course are: Michael C. Jensen, George P. Baker, Karen H. Wruck, Carliss Y. Baldwin, and Malcom S. Salter. In developing our theory, we focus particularly on four interrelated areas: 1) the nature of human beings and their behavior; 2) compensation, career systems, and performance measurement; 3) task structure, organizational boundaries, and technology; and 4) governance, corporate finance, and organizational performance. The CCMO materials are presented in four electronic documents entitled as follows (you can go directly to each document and its abstract by clicking on the title below): 1. Organizations and Markets: History and Development of the Course and the Field, by Michael C. Jensen, George P. Baker, Carliss Y. Baldwin, and Karen H. Wruck, Dec. 10, 1997 (forthcoming in "The Intellectual Venture Capitalist: John H. McArthur and the Work of the Harvard Business School," 1980-1995, Thomas K. McCraw and Jeffrey L. Cruickshank, eds, (Harvard Business School Press, 1998). 2. Coordination, Control, and the Management of Organizations: Course Notes, by Michael C. Jensen and William H. Meckling, with contributions from George P. Baker and Karen H. Wruck, April 20, 1998, Harvard Business School Working Paper #98-098. 3. Coordination, Control, and the Management of Organizations: Course Content and Materials, by Michael C. Jensen and Karen H. Wruck, April 20, 1998, unpublished manuscript, Harvard Business School. 4. Coordination, Control, and the Management of Organizations: Practice Questions, by Michael C. Jensen, William H. Meckling, George P. Baker, and Karen H. Wruck, with contributions from Carliss Y. Baldwin, and Malcolm S. Salter, April 20, 1998, unpublished manuscript, Harvard Business School.
Abstract: SUBJECT AREAS: Leveraged Buyouts, Labor Unions, Restructuring, Governance, Negotiation Strategies, Performance Measurement, Politics of Finance. CASE SETTING: USA, Texas, grocery stores, $15.2 billion sales (1993), 1078 stores (1993), 1980-1993. Situation: After years of deteriorating financial performance and eroding market share, Safeway Inc., the largest public grocery store chain in the United States, found itself the target of a hostile takeover offer. After considering its options, management decided to take the company private in a $4.3 billion leveraged buyout sponsored by Kohlberg Kravis and Roberts. Safeway's lack of competitiveness stemmed, in part, from the fact that it paid its unionized workforce a 33% premium over competitive market wages. Following the LBO, the company undertook massive asset sales and the renegotiation of uncompetitive labor contracts to achieve wage parity. The (A) case begins with the controversy surrounding the shutdown of the Dallas division following a standoff with organized labor. The (B) case reviews of Safeway's asset sales and post-buyout financial performance, and ends with a discussion of the controversy surrounding Wall Street Journal reporter Susan Faludi's Pulitzer Prize-winning expose of the LBO's human fallout. The (C) case focuses exclusively on this controversy by presenting the media response to the LBO and its aftermath, including full text of Faludi's interview with Safeway CEO Peter Magowan, and her subsequent Journal article. Pedagogy: The cases motivate a discussion of the market for corporate control as a control force, and social costs and benefits to society from restructuring, particularly when employment and wages are at stake. Students sort out the relative influence of rigid labor contracts, divisional cross subsidization, and strong managerial reliance on historical accounting measures as sources of Safeway's performance problems. Using material in the (A) case, students conduct their own due diligence to determine relative the extent to which lack of wage parity affected the firm's profitability, its ability to make capital expenditures, and it's ability to offer better prices to consumers. It also allows students to understand how cross subsidies from stronger to weaker units constituted a material waste of cash flow by management. Through the (B) and (C) cases, students are given the opportunity to consider the financial results from the LBO, and are asked to critically evaluate the controversy surrounding the impact of the LBO on employees, their communities, and society at large.
Abstract: SUBJECT AREAS: Leveraged recapitalization, capital structure, compensation, internal control, performance evaluation. CASE SETTING: 1989, Packaging materials and systems industry. Situation: Less than a year after Sealed Air embarked on a program to improve manufacturing efficiency and product quality, the company borrowed almost 90% of the market value of its common stock and paid it out as a special dividend to shareholders. Management purposefully and successfully used the leveraged recapitalization as a watershed event, creating a crisis that disrupted the status quo and promoted internal change. Internal changes included establishing a new objective, changing compensation systems, and reorganizing manufacturing and capital budgeting processes. Pedagogy: The case provides an exciting, controversial context in which to explore how financing decisions affect organizational structure, management decision-making and firm value. It can be used as an introductory finance case in which the students apply basic cash flow forecasting techniques to explore alternative dividend and capital structure decisions (a supporting EXCEL spreadsheet is available directly from the case author). For more advanced finance classes, the concept of free cash flow, its effect on stock market prices and firm value, and the disciplinary role of high leverage can be analyzed. In organizational behavior classes, the case can be used as a vehicle to discuss the difficulty of promoting internal change and the desirability of Sealed Air's approach to forcing quick change on the organization. In all contexts, the case generates a lively class discussion in which students struggle with conflicting views about the desirability of high leverage, how leverage affects short and long run performance and techniques for managing organizational change.
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