BACK TO ACCOUNTABILITY 57
T
here are serious consequences of no
accountability. There is abuse of unchecked
power; management is rewarding itself
for bad performance.
Back to
Accountability
Geoffrey R. King
Management Decision. Vol 29 No 8, 1991, pp 57-59
MCB University Press Limited, 0025-1747
Accountability
An examination of management literature reveals that many
books do not touch at all upon the subject of accountability,
specifically the accountability of managers of large
corporations. Thirty years ago, Ernest Dale[1] raised this
question of managerial accountability. His view was that
the theoretical owners of companies, namely the
shareholders, really did not exercise much control over
the professional managers. As a result, there was little
accountability; managers tended to run the business for
their own ends, leading quite often to undesirable results.
Unless this situation were changed, the Federal
Government might have to intervene, although Dale makes
a strong case for independent review.
What is Accountability?
Accountability is defined by Otto Forcheimer[2] as a
management philosophy whereby individuals are held liable
or accountable for how well they use their authority and
live up to their responsibility of performing predetermined
activities. The concept of accountability implies that if
predetermined activities are not performed, some type
of penalty or punishment will be justifiably forthcoming.
Also implied is that some reward will follow if
predetermined activities are performed well[3]. There is
an obligation, according to Sisk[4] that subordinates are
accountable to their superiors for the proper exercise of
authority and performance of assigned responsibilities.
In addition, there is also an absoluteness of accountability;
"although responsibility may be assigned to and authority
may be delegated to subordinates, accountability to one's
superior can neither be assigned nor delegated".
This concept of obligation, together with reward or
punishment, is also described by Professor Paul
Krugman[5], who states that the only way to encourage
risk taking where it is appropriate, without absolving
managers from the consequences of their actions, is to
place ultimate decision-making power in eachfirmin the
hands of someone who will receive handsome rewards
if thefirmsucceeds and lose massively if it does not.
This someone, he says, is effectively the firm's owner.
Management Accountability
However, this is fairly much the situation set out 30 years
earlier in Professor Dale's "To Whom is Management
Accountable? "[1]. Dale noted the "trend toward increasing
power by internal managers and the lessening or
elimination of their accountability". He further notes that
in many corporations there are no owners, in the sense
of beneficial owners, who hold enough shares to exercise
direct influence on management. If the link between
ownership and control is entirely dissolved, management,
said Dale, has no real basis for its position. He thought
that the solution to this problem was stricter regulation
by government agencies or "public directors" appointed
by the government on the Board of Directors, or perhaps
an independent review by the Securities and Exchange
Commission.
There are serious consequences of no accountability.
There is abuse of unchecked power; management is
rewarding itself for bad performance. An example of this
occurred with Drexel Burnham Lambert which reportedly
paid up to $350 million in bonuses to its managers shortly
before it filed for Chapter 11 bankruptcy[6]. Dale also
referred to economic consequences of forecasts based on
what the CEO wanted to see happen rather than the facts.
On this question of lack of accountability, "another point
of view is that business has no direct lines of accountability
to the people; therefore it is unwise to allow business
activities in areas where it is not accountable[7].
What Are the Checks on Management?
Dale refers to the professionalism of the managers as one
check on their power; another check is "social
responsibility". A further check, although not very
effective, lies in the role of the small stockholders as partial
owners. Yet another possibility, although not very likely,
is the "public director'', not appointed by government but
independent enough of internal management to provide
independent review. Institutional investors could be a
powerful check on management, except that they have
many reasons, including selling of the stock, for a policy
of non-intervention. Dale's conclusion for the dilemma is
that the case for independent review is strong.
 58 MANAGEMENT DECISION 29,8
Accountability versus Responsibility
Accountability differs from responsibility. The managers
of Drexel Burnham Lambert were responsible for the
effective operation of the company, but do not seem to
have been really accountable to anyone. Responsibility is
defined as the obligation to carry out one's assigned duties
to the best of one's ability, whereas accountability means
having to answer to someone for one's actions, taking the
consequences either credit or blame[8].
Money as a Motivator
Money is not the only motivator, as Charles McDermid[9]
pointed out 30 years ago. However, he also pointed out
that "in most organizations, there are employees,
especially in the upper echelons, for whom money and
money-making have become functionally autonomous. For
such individuals, money has a direct significance not
dependent upon its purchasing power".
This "functional autonomy" of money can be just as
destructive for a corporation as was the desire for gold
shown by King Midas; in order to obtain a good income
at year end the CEO may have engaged in short-run
activities detrimental to long-range growth. He may, for
example, have sold off a very useful asset, thus raising
the net profit for the year, and his own, assuming that
his salary and bonuses are related to the company's net
income, as is usually the case. "Short-term performance
has been the dominant factor in determining the CEOs
compensation, both regular and deferred[10, p. 16].
In addition, the emphasis on short-term financial
performance has left many US companies unable to
compete with foreign competitors. Japanese and German
managers, not tied to such short-term policies, can afford
to make strategic investments. Rather than cut R&D
budgets to improve yearly earnings, Japanese companies
form coalitions with each other and the government to
encourage technological innovation and ultimately, capital
formation[10, p. 17]. This short-term emphasis does not
reward operations specialists who see the strategic
investments that need to be made. It does not reward the
intellectually curious manager who wants to understand
the differences and similarities among foreign management
philosophies. And most important, it does not reward
change and the ability to think creatively[10, p. 18].
Comparisons with Japan
Perhaps due to a philosophy about being competitive at
all costs, in the US we have "buried leadership" according
to Warren Bennis[11], "by rewarding destructive achievers".
US companies are not meeting the test of global
competitiveness; our prosperity is borrowed, not earned.
Top managers think that they are the cause of America's
serious, and worsening competitiveness problem[12]. And
discussing the failure of US automakers to build small cars
years ago, Ouichi[13, p. 15] says that the companies
systematically gave their leaders a strong incentive to
maximise profits now by building big cars. Of course that
short-run profit maximisation has led to long run losses.
Yoshi Tsurumi[14] makes a comparison between what he
terms "J firms" and "A firms". J-types are more
commonly found in a business environment characterised
by any one of three determinants of sudden change: global
competition, technological innovation, and rapid growth.
A-type firms are more preoccupied with short-term profits
and domestic markets. J-type firms commonly rely on
shared goals among executives and employees for
motivation and discipline, while A-type firms rely more
on explicit job descriptions, bureaucratic rules and
individualised reward and punishment to control individual
behaviour.
Egalitarianism and Elitism
A significant difference between Japanese managers and
American managers, according to Robert E. Cole[15], is
that: "there is a fundamental egalitarianism in Japanese
industry that is quite impressive and is apparent to most
careful observers: "Japanese managers believe in their
labor force. They believe that given the opportunity, their
labor force can and wants to contribute to organizational
goals." American managers, for many reasons, see
themselves as an elite whose superior education entitles
them to make all the important decisions. Ouichi[13, p.
44] refers to the Japanese set of mechanisms which
provide for the social support and emotional release
necessary for emotional equilibrium as "wholism".
Another significant difference mentioned by Thomas B.
Lifson[16] is the orientation towards the individual as the
centre of society versus the group as the centre of society.
The membership comes first, and then the individual, and
only after that the functional specialisation. Membership
is a source of reward in Japan; and what Lifson calls "social
contracting", "of informally allocating credit and informally
evaluating who has done what, makes it possible for
innovation champions to emerge in organizations"
Such championing takes place at all levels of an organization.
It can only take place in an environment in which it's not
thought that change must come from the top and that change
must be a formal process initiated by documentation.
Egalitarianism and Compensation
Many US managers, of the A-types, receive executive
compensation at about five times the amount received by
the Japanese J-types. Perhaps this difference is due to
the "social contracting" described by Lifson. Yoshi
Tsurumi[14] states:
Nowhere is the contrast between Japanese J-types and
American A-types more striking than in the way in which
they absorb external economic shocks, such as sudden sales
declines or loss of market share to competitors. In times
of crisis the American executives of A-type firms typically

have a tendency to behave like "neutron bombs'', zapping
their managers, engineers, rank-and-file workers off the
payroll while salvaging machinery, mortar, and brick. To
protect his own compensation package that often ranges from
$750,000 to as high as $1 million or more annually, it is not
at all unusual for the chief executive officer of an A-type firm
to decide to lay off 75 to 100 of his $10,000-a-year employees.
Mistakes made by management in misreading market trends
or in introducing shoddy products will be paid for by rank-
and-file employees at the bottom of the corporate hierarchy
in an A-type corporation.
Under similar circumstances, Japanese executives would first
cut their own salaries and bonuses, asking for similar income
reductions temporarily from middle management, and lastly
from the rank-and-file workers. Afterward, chief executives
and employees together look for marketing and technical
solutions to their competitive problems. They do not
automatically resort to financial solutions such as rearranging
different lines on the company balance sheet. When market
demand rebounds and customers return, Japanese firms
generally have sufficient resources ready to supply what their
customers demand.
What Can Be Done?
Dale[1] proposed stricter regulation by government
agencies or "public directors" appointed by the
government on the Board of Directors, or perhaps an
independent review by the Securities and Exchange
Commission. Thirty years have passed, and little has been
done in this direction. Robert J. Samuelson[17] states that
hostile takeovers:
represent one way to overhaul inefficient companies.
More important, they prod companies to stay efficient. Few
hostile takeovers actually occur. It's the mere threat that
keeps executives on their toes. Like the rest of us, they
do best when they're ultimately accountable for how well,
or how badly, they perform.
What hostile takeovers really jeopardise, he says, is the
job security and status of top executives. Shareholders
class action suits are becoming commonplace in corporate
America; but attorneys say that if executives operated in
the best interest of shareholders, none of these suits would
be filed[18].
Taking a more positive and optimistic view, there are three
additional steps towards management accountability:
(1) A growing use of employee stock ownership plans.
Not only do these give employees a stake in the
company, they provide a voice to help control its
destiny.
Geoffrey R. King is based at the Department of Management, School of Business Administration and Economics, California
State University, Fullerton, USA.
BACK TO ACCOUNTABILITY 59
(2) Although this is yet only on the horizon, with a
growth of employee ownership, CEOs may be
elected instead of being appointed.
(3) A concentrated form of ownership or control, which
may be a necessary condition for Ouichi's Type Z
company[13, p. 179].
References
1. Dale, E., "To Whom Is Management Accountable?", The
Great Organizers, McGraw-Hill, New York, 1960, pp.
175-216.
2. Forcheimer, O., "Accountability for Functional
Executives", Advanced Management Journal, April 1972
pp. 15-20.
3. Certo, S.C., Principles of Modern Management, W.C
Brown, Dubuque, Iowa, 1983, p. 212.
4. Sisk, H.L., Management and Organization, South-Western
Publishing Co., Cincinnati, Ohio, 1977, pp. 236-38.
5. Krugman, P. R., "The Tough Reality of Capitalism", Los
Angeles Times, 18 February 1990.
6. Los Angeles Times, 24 February 1990.
7. Davis, K., Frederick, W.C. and Blomstrom, R.L.,
Business and Society, McGraw-Hill, New York, 1980, p.
38.
8. Plunkett, W.R. and Attner, R.F., Introduction to
Management, Kent Publishing Co., Boston, Massachu-
setts, 1983, p. 199.
9. McDermid, C.D., "How Money Motivates Men",
Business Horizons, Winter 1960, pp. 94-100.
10. Charan, R. and Freeman, R.E., "Planning for the
Business Environment of the 1980s", The Journal of
Business Strategy, Fall 1980.
11. Bennis, W., "Breaking Away'', Los Angeles Times, 30 July
1989.
12. Webber, A.M., "Too Much Borrowed Is Making Us
Blue", Los Angeles Times, 18 October 1989.
13. Ouichi, W.G., Theory Z, Avon Books, New York, 1982,
p. 151.
14. Tsurumi, Y., "The US-Japan Economic Partnership:
Central Pillar of the Pacific Age", Pacific Basin Quarterly,
Spring 1989, p. 14.
15. Cole, R.E., "Learning from the Japanese: Prospects and
Pitfalls", Management Review, September 1980, p. 25.
16. Lifson, T.B., "Adaptation: A Key to Organizational
Health", in Richards, M.D. (Ed.), Readings in
Management, Cincinnati, Ohio, 1986, pp. 503-6.
17. Samuelson, R.J., "Shareholders Find a Vital Tool
Blunted", Los Angeles Times, 9 August 1989.
18. Kristof, K.M., "Shareholders Class-Action Suits Are a
Growth Industry", Los Angeles Times, 5 March 1990.