Business & Corporate Law Practice

AN INTRODUCTION TO CORPORATE STRUCTURES

Aimee Luke
| August 29th, 2024

INTRODUCTION
Corporate organisations are established for diverse reasons. A Corporate Organisation functions and is run in ways that reflect the true essence of its formation and incorporation. 
When a company is created, it can adopt a range of corporate structures depending on the industry and the way it wants to function.  Forming an official corporate structure can help businesses run as efficiently as possible, assist employees understand where they belong into the organisational hierarchy, and improve employee relations and communication between employees and the different levels of management. Hence, the corporate structure of one organisation differs from another.  
CORPORATE STRUCTURE
Within a firm, the arrangement of several departments or business units is referred to as the corporate structure. Corporate structures can vary greatly throughout organisations, depending on the objectives of each and the industry in which they operate.  Typically, each department carries out a specific task while continuously working together to accomplish company objectives and core values.
Organisational frameworks are used extensively by businesses of all sizes. They establish a specific hierarchy inside an organisation. A successful organisational structure specifies each employee's role and how it fits into the larger system. The organisational structure defines who does what so that the company can achieve its goals.  
TYPES OF ORGANISATIONAL STRUCTURES
On a global scale, there are four major types of structures that are incorporated by most businesses.  Other subtle structure types most often than not, are closely or remotely drawn from the major structures. The four major structures include:
1.    FUNCTIONAL STRUCTURE: A functional Structure involves the organisation of employees in a firm based on their areas of expertise.   Employees in this structure are categorised into departments according to how comparable their task descriptions, skill sets, and accountabilities are. This facilitates efficient decision-making by enabling effective communication amongst individuals in a department. Businesses that include divisions like accounting and IT are excellent examples of functional structures.
Furthermore, this structure is usually most effective in larger businesses where several employees perform similar functions. Business owners have more time to concentrate on their long-term objectives when departments are structured on employees' abilities and matching roles within the organisation, while department heads oversee the objectives of their teams. There might not be enough workers in smaller businesses with similar talents to warrant putting them in different departments.  

ADVANTAGES OF FUNCTIONAL STRUCTURE
•    Easy Training: A functional structure focuses on specific and limited areas of expertise. For example, employees in the finance and accounting department are given training as it relates to finance and accounting.
•    Coordination and Organisation: A functional system is highly organised because members of a particular department are all specialist. Everyone knows what is expected hence productivity is heightened.
•    Skill Growth: This structure promotes and establishes skill growth and specialisation.  
            DISADVANTAGES OF FUNCTIONAL STRUCTURE
•    Segregation: This structure enhances departmental roles hence members that do not belong to the same department do not get to interact frequently. In this kind of organisations, employees hardly recognise themselves.
•    Conflict of Interest: Most times, team work is seen within departments and hardly ever outside that structure and this can affect the overall interest of the business or organisation. When subsets are all working on separate goals, it is harder to see the bigger picture.
•    Delay in Decision Making: There is often delay in decision making and a lack of proper communication outside departments.  

2.    DIVISIONAL STRUCTURE
Business operations are categorised using this framework according to target markets, goods, services, or clientele. Creating work teams that can generate comparable goods that meet the needs of various groups is the aim of the divisional organisation. Geographical structures, in which regional divisions are established to supply goods or services to certain areas, are a typical illustration of divisional structures.    
A corporation with semi-autonomous units is described by the divisional organisation.  The parts of the organisation that have independent governance and function inside the broader organisation are known as semi-autonomous units. An M-form or multi-divisional form are other names for a divisional structure. Units inside the organisation with varying degrees of autonomy function autonomously while adhering to the group's overarching objectives.


ADVANTAGES OF DIVISIONAL STRUCTURE
•    Accountability and Transparency: Divisions have management groups that lead them. These management groups enhance accountability because individuals are accountable for their actions directly. 
•    Improves Company Culture: This structure allows for a cross connection of unique perspectives at different levels and this in turn boosts company culture.

DISADVANTAGES OF DIVISIONAL STRUCTURE
•    High Operation Cost: An Organisation that uses the divisional structure may generally enjoy an increase in revenue. However, it involves higher cost for operation and this is so because there is need for a centralised corporate division to oversee the rest of the company.
•    Fosters Silo Mentality: A sense of exclusivity and physical and psychological isolation may be ingrained in employees by the silo mentality. Although independence comes at the expense of separating their work from other divisions, divisions that operate independently tend to develop closer relationships with one another. Establishing collaborative projects between several departments, like a software company's sales campaign combining several products into a single package, is one strategy to prevent this.

3.    MATRIX STRUCTURE
The matrix structure combines functional and divisional components. This structure enables decentralised decision making, greater autonomy, and more inter-departmental connections, resulting in increased productivity and innovation. Despite all of the benefits, this structure has greater expenses and may result in conflicts between vertical functions and horizontal product lines.

ADVANTAGES OF MATRIX STRUCTURE
•    Flexibility: This structure involves various experts from diverse fields to move the objectives of the company. This involvement causes flexibility between assignments and duties. Employees are not just working in departments which enhances seclusion but employees work together to achieve a particular goal. 
•    Informed Decisions: Communication flows with a certain hierarchy in a traditional functional setting. However, the cross-functional nature of matrix structures allows for free flow of communication between leaders and employees.

4.    HYBRID STRUCTURE

Similar to the Matrix Structure, the Hybrid Structure blends functional and divisional structure. Rather than a grid organisation, the Hybrid Structure splits its activities into departments that can be functional or divisional. This structure enables the use of resources and knowledge in each function while preserving product specialisation across divisions. Many major organisations use hybrid structures.   Examples of hybrid structure includes joint ventures and business groups.

ADVANTAGES OF HYBRID STRUCTURE
•    Flexibility: This structure is more flexible than the functional and divisional structures. It’s flexibility allows for a smooth running of company or business objectives. 
•    Development of Cross Functional Skills: In hybrid structures, departments or groups are formed based on both specialisation and services. Thus, employees with different skills and mindset interact daily to achieve tasks. This cross communication and interaction aids in the personal growth of employees.
            DISADVANTAGES OF HYBRID STRUCTURE
•    Conflict: This is a major disadvantage of the hybrid structure. Conflicts arise from the daily interactions employees and employers have. There could be dilemmas between project managers and their subsidiaries or vice versa. 
•    Administration overhead: Time, effort and sometimes money is lost in the process of rectifying conflicts that arise from hybrid structured corporations. The meetings that are usually organised to settle such disputes also creep into the time that would have been spent on more productive areas of work.  

COMPONENTS OF A TYPICAL CORPORATE STRUCTURE
Most corporations have a three-tier Organisational Structure:
1.    Board of Directors: The board of directors is a group of individuals chosen or elected to provide governance for the organisation. In for-profit organisations, the board represents the shareholders. In other organisations, the board of directors acts in the best interests of numerous stakeholders, which may include contributors, communities, and others who benefit from a non-profit organization's work. The board of directors is responsible for hiring the CEO and other firm leaders, determining their salary, and conducting frequent performance reviews. If the CEO proves unsuccessful, the board can vote to replace him.
2.    Corporate Officers: Corporate officers are the second level of an organization's hierarchy. Corporate officers, sometimes known as the management team, are appointed by the board of directors and are directly accountable for the company's day-to-day operations. The CEO, CFO, and COO are typical members of the management team.
3.    Shareholders: These are individuals who own a portion (or shares) of a publicly traded corporation. They are also usually referred to as stockholders. Shareholders can be individuals, corporations, or organisations, and the number of shareholders is determined by the company entity form. For example, a S Corporation's maximum number of stockholders is 100. However, a C corporation can have an unlimited number of shareholders.

 

CONCLUSION
Every Organisation needs a functional corporate structure. Every member has a unique role to play in ensuring that the company’s objectives are met. It is impossible to have a corporation that is not hinged on an organisational structure. Corporations are enabled to operate through the functionality of it’s components which includes the Board of Directors, the Management and Shareholders. Each corporate organisation functions differently and as such the organisational structures used by corporations should be in tandem with the purpose and drive of the company in a way that fosters productivity and growth.

 

 


Aimee Luke
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