Impact of Organizational and Governance Structures on Firm Performance

This essay analyzes the critical role of organizational and governance structures in determining firm performance. It begins by defining organizational structures and their importance in defining hierarchy, job roles, and reporting lines. The essay then delves into various organizational structure types, including functional, divisional, matrix, and flatarchy structures, highlighting their characteristics and applications. It also explores different governance structures, such as traditional, result-based, and policy governance models. Furthermore, the essay examines relevant theories, including open-system and contingency theories, to explain the foundations of these structures. The content emphasizes how these structures and theories are vital contextual factors influencing an organization's growth and success, as well as their impact on overall firm performance. The essay uses academic journal articles to support its arguments.

Running head: ORGANIZATIONAL AND GOVERNANCE STRUCTURES 1
Organizational and governance structures
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Organizational and governance structures are the most important contextual factors in an
organization. While within an organization, the system used to define hierarchy is known as the
organizational structure. It has a special and vital role of identifying various jobs, their functions
and where the actual job holders report to within the organization. When all the jobs, functions
and reporting channels are identified, a structure is henceforth developed to define how
operations in the organization are undertaken for plans to be executed and goals to be achieved
(Ahmady, Mehrpour, & Nikooravesh, 2016). An organizational structure also determines how
information flows from one management level to another. Poor organization structures and
designs have catastrophic outcomes in an organization. It brings about role confusion, poor
coordination between various functions, lack of idea sharing as well as low decision-making
processes. All these negative results cause conflict, stress, and complexity in the organization
(Legerer, Pfeiffer, Schneider, & Wagner, 2009). Governance structure on the other side is the
combination of various management roles and executive functions, oversight functions that have
been organized as structures, as well as policies that are used in decision making and coming up
with management principles (Keping, 2018). Both organization structure and governance
structures blend together and affect the organization's performance as the two are the main
spearheads for all organizational functions.
There are various types of organizational structures. Functional, divisional, matrix, and flatarchy
are the four most common organizational structures that are commonly employed in
organizations. The functional structure is a type of organizational structure whereby an
organization is divided into departments with each department undertaking specific roles or tasks
(Awa, 2016). For each department, there is a departmental director or manager who is
answerable to an executive that is a level higher in the organizational hierarchy. Such executives

ORGANIZATIONAL AND GOVERNANCE STRUCTURES 3
with higher ranks in the leadership and management hierarchy are usually assigned to run and
oversee various departments. A director of marketing, for example, is usually in charge of
supervising the entire marketing department but is answerable to the vice president who in turn is
in charge of overseeing the finance, marketing, and IT departments. This structure has proven
more productive for organizations due to the advantageous fact that employees are assigned to
departments based on their skill sets and functions. While in these departments, they are able to
collectively siphon their skills and abilities by working as a team to execute all duties assigned to
them (Steiger, Hammou, & Galib, 2014). As such, the results obtained are usually desirable and
more satisfactory than what would have been achieved from individual work. Lack of
interdepartmental communication is on the major problem that faces this type of organizational
structure.
The divisional organizational structure is another type that is commonly used by organizations
that are operating across several a number of horizontal objectives. Various groups within the
organization are given room for more autonomy while operating under this type of
organizational structure (Steiger, Hammou, & Galib, 2014). ‘General Electric’ for example has
various divisions that include transport, digital and renewable energy, currents, and aviation
among others. Basically, each division under this structure operates as an individual company.
Each division, therefore, maintains sole and supreme authority over the key aspects of an
organization such as their resources, expenditure on their projects and other managerial aspects
(Fairfield, 2016). Geographical creation of divisions is also common among organizations with
this type of organizational structure. Geographical locations are selected based on the potential
market of the division’s goods or services and accessibility to resources and raw materials vital
for the division in question.

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When functional organizational structure and projected organizational structures are blended,
they give rise to the matrix structure. In this organizational structure, employees are obligated to
report to two or more superiors depending on the project being undertaken or current situations
(Owens, 2008). In an engineering firm, for example, an engineer could be reporting to only one
boss. A new project may come up and the engineer is required to work on the project due to his
area of expertise. For the duration that the new project will be underway, the engineer will have
to report to his old boss in charge of the normal daily operations as well as to the new manager in
charge of the new project. Reporting to more than one superior and knowing exactly what to tell
each one of the bosses could be very challenging for employees.
A flatarchy structure is a blend of flat organizational structure and functional organizational
structure. This type of structure, therefore, allows more room for decision making in all levels of
an organization (Legerer, Pfeiffer, Schneider, & Wagner, 2009). The vertical appearance of the
hierarchy structure of an organization is also flattened. A company, for example, with an existing
innovation system can operate in its current organizational structure. Employees are however
strongly encouraged to come up with new ideas and apply them whenever applicable and thus
giving them a potential to come up with new flat teams. The main benefit of this structure is that
there is always room for more innovation within the organization where it is practiced.
There are also several types of governance structures. The traditional model of governance sees
to it that the operations are overseen by the board but through various committees that have
already been established through various functional lines such as Human Resources (Ebers &
Oerlemans, 2013). Managerial functions are however delegated to the executive director. Result
based governance structure on the other side has the executive director as a board member but
cannot vote. He has however had significant influence when it comes to policymaking.

ORGANIZATIONAL AND GOVERNANCE STRUCTURES 5
Committees are tasked with the roles of guiding governance, monitor and audit the performance
of the executive director, organization and of the board. Policy governance model is another type
of governance structures. Here, policies are mainly used by the board to govern by establishing
governance approaches, organizational aims and management limitations (Grandori, 1997). It is
in the policies that the relationship of the executive director with the board is clearly defined.
There are also various theories that have been used to explain organizational and governance
structures in existence. The open-system theory was coined owing to the fact that traditional
theories never considered the emotions and motivators among other human factors that influence
and drive people in the workplace (Legerer, Pfeiffer, Schneider, & Wagner, 2009). The theory
stated that since businesses are never closed, they have other forms of subsidiaries, divisions,
facilities, and labor. Subsequently, there is no feasibility for the organization to be run centrally.
Various departmental managers or division heads would, therefore, be required to be in charge of
all operations within the entity. Understanding their motivations with an aim of improving their
performance, therefore, becomes an issue of importance. Contingency theory on the other side
focuses more on the overall growth of a business rather than its resources. The theory
consequently backs on an assumption that when the assets, resources, and capital of a business
are increasing, an organizational structure that is static is unproductive (Ebers & Oerlemans,
2013). The theory, therefore, insists that governance structures should be aiming at identifying
new threats and opportunities that will propel the organization to achieve the desired growth.
It can, therefore, be concluded that organizational structures are the key contextual factors that
determine the growth of an organization. Organizational structures have been highlighted as
essential players in the determination of an organization's hierarchy, various jobs and the relevant
authorities to which every job holder reports to. Further on, the essay has also brought into the

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limelight the various types of organizational structure as well as governance structures. The
essay has concluded by discussing a variety of theories that form the foundations of various
types of organizational and governance structures.

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References
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Challenges in Management and Organization: Organization. Procedia - Social and
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Awa, K. I. (2016). Functional structure and operational issues: An examination of core
challenges and remedies. IOSR Journal of Business and Management, 18(1). Retrieved
from http://iosrjournals.org/iosr-jbm/papers/Vol18-issue1/Version-3/A018130104.pdf
Ebers, M., & Oerlemans, L. (2013). The Variety of Governance Structures Beyond Market and
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Fairfield, K. D. (2016). Understanding Functional and Divisional Organizational Structure.
SAGE journals. Retrieved from https://doi.org/10.1177/2379298116661843
Grandori, A. (1997). Governance Structures, Coordination Mechanisms, and Cognitive Models.
Journal of Management and Governance. doi:10.1023/A:1009977627870
Keping, Y. (2018). Governance and Good Governance: A New Framework for Political
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https://link.springer.com/article/10.1007/s40647-017-0197-4
Legerer, P., Pfeiffer, T., Schneider, G., & Wagner, J. (2009). Organizational Structure and
Managerial Decisions. International Journal of the Economics of Business. Retrieved

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from https://doi.org/10.1080/13571510902917483
Owens, J. (2008). Matrix Organization Structure. Journal of Education for Business. Retrieved
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Steiger, J. S., Hammou, K. A., & Galib, H. (2014). An Examination of the Influence of
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