Corporate governance can be centralized or decentralized. A centralized structure gives decision-making authority to senior positions, while a decentralized structure gives employees and frontline managers the authority to make strategic decisions. The board of directors represents the highest level of power in an organization. Centralized organizations allow the least amount of creativity and flexibility for staff, while decentralized organizations encourage open communication and collaboration.
Corporate governance structures are usually organized in a centralized or decentralized way. A centralized organization typically gives decision-making authority to those in senior positions. The structure of the organization is a horizontal hierarchy. Decentralized companies, on the other hand, give employees and frontline managers the authority to make and execute strategic decisions.
Most corporate governance structures are composed of a board of directors, a management team and departments which may be organized by function, division or a combination of both. The board of directors usually represents the highest level of power, control and authority in an organization. They vote on corporate directives and help define executive strategies. In terms of a publicly owned company, the board of directors also acts as a sort of liaison between the company’s management team and its shareholders.
The structure of a centralized organization makes front-line staff and managers accountable for implementing executive management policies and procedures. Of the two major corporate governance structures, it allows the least amount of creativity and flexibility for its staff. They are usually not involved in the decision-making process that directly affects how they do their jobs. Some organizations solicit feedback from frontline employees, but implementation of those suggestions can often be delayed or ignored.
Also sometimes referred to as traditional organizations, centralized organizations give each position very specific responsibilities and authorities. Positions are also ranked by level of supervision and importance. Those people who hold positions higher up the hierarchy of the organization possess greater amounts of control and decision-making ability. Corporate governance structures that model a traditional management style place most of the decision-making with high-level positions, who can rarely interact with the final consumer of the company.
Conversely, a decentralized organization gives lower-level employees the authority to make decisions that directly impact the company’s customer or employees’ job activities. They don’t have to move up the chain of command to get approval before taking action. A decentralized organization will directly involve all employees in decisions affecting processes, procedures, and policies that could improve business conditions or work efficiency. Of the two corporate governance structures, decentralized organizations tend to favor a more collaborative environment.
Another benefit for decentralized organizations is that the structure encourages more open communication. It also tends to lead to higher levels of employee motivation and job satisfaction. Decentralized organizations are also referred to as flat or organic.
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