Session 1: 04.02.

2019
Management control – Definition:
• The process by which management
• … ensures that people (people are the main cost drivers) in the organization carry
out organizational objectives and strategies
• … encourages, enables, or, sometimes “forces” employees to act in the
organizations best interest

Management control includes all the (1) devices & mechanisms (2) managers use to ensure
that the (3) behaviour of employees is consistent with the organizations (4) objectives and
strategies

Positioning management control:

You can not measure people, but you can measure behaviour

Strategy Formation Strategy Execution

Environmental Organisation
Strategy Control design Performance
Analysis design

Objective setting
• Merchant & Van der Stede:
• Objectives are necessary prerequisite for any purposeful activities
• Without objectives, it is impossible…
• To assess whether the employees actions are purposive
• To make claims about an organizations success (only 2% of companies
are listed)
• Objectives can be:
• Financial vs. non-financial
• Quantified, explicit vs. implicit
• Economic, social, environmental, or societal
Strategies define
• How organizations should use their resources (to meet their strategic
objectives)
• Constraints on employees, to focus on what the organizations does best
(CSFs), or arear where it has an advantage over competitors (capabilities)

Human Resource Constraints

• Are our employees likely to behave aligned with our strategy?
• Do they understand what we expect of them?
• Will they work consistently hard and try to do what is expected of them?
• Are they capable of doing what is expected of them?

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The basic control problem…is actually a HRM problem
• Management control is about encouraging PEOPLE to take desirable actions
• That is, it guards against the possibilities that employees will do something
the organization does not want them to do, or, fail to do something they
should do
• Hence management control has a behavioral orientation

If all personnel could always be relied upon to do what is best for the organization, there
would be no need for a management control system

Basic control (HRM) issues

1. Do people understand what is expected of them?
a. Lack of direction – goal/target setting
2. Will people work consistently hard and try to do what is expected?
a. Lack of motivation — incentive systems (compensation & benefit)
3. Are people capable of doing what is expected?
a. Personnel limitation — training & development

Lack of direction
Goal/target setting

• Employees do not know what the organization wants from them (how about senior
management/executives?)
o MBO
o Clarity of goals – visualizations
o Communication – how? Where? In the reporting flow.
• Lack of direction = lack of desired motivation
o Performance appraisal needs clear goal/target setting
• Who sets the goals/targets? (vs. who influences the goals?)
o Management: top-down. Behavior: obedience, compliance
o Employees: bottom-up. Behavior: initiative, engagement

What sort of participation are we talking about?

Motivational problems
When employees “choose” not to perform as their organization would have them perform
• Lack of goal congruence
o Individual goals do not coincide with organizational goals
o Economics: principal-agent theory, on ‘contracting’ and rational decision-making
o Examples: Employee ownership and gain-sharing plans
• Self-interested, opportunistic behavior
o For example, take long lunches, use of sick leaves when not sick, etc.
o More extreme examples: Employee crime (fraud and theft)

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Personal limitation
• People are “unable” to do a good job because of certain peronall limitation they have
• Examples:
o Lack of requisite knowledge, training, and experience
o Employees are promoted above their level of competence (“Peter Principle”:
People are promoted up to their level of incompetence)
o Jobs are not designed properly (Job description ➜ Mandate)

TRAINING
JOB ASSIGNMENT/PROMOTION
JOB DESIGN

Systems Theory (cybernetics. Russian babushka dolls)

• Cybernetic model is overly standard
o Detector – measure of performance
o Assessor – compare with pre-set standard
o Effector – take corrective action
• Many controls don’t focus on measurable performance
o For examples, direct supervision, employee hiring standards, and codes-of-
conduct
• Many controls are proactive rather than reactive (“feedforward” (how to prevent shit
from happening) vs “feedback” (can be automated))
o That is, they are designed to prevent control problems before the
organization suffers any adverse effects on performance

Alternatives
(within the functional paradigm)
• Control problem avoidance ("feedforward”)
o Activity elimination: e.g. subcontracts, licensing agreements, and divestment
– control object is removed
o Automation: e.g. Computers/robots (RPA; Robotics Process Automation)
eliminate the human problems of inaccuracy, inconsistency, and lack of
motivation – controlling process is changed
 Only applicable to “programmable” decision situations; knowledge
firms?
 Centralization: e.g., redesign organizations to avoid control problems –
control context is changed
• Types of measurement categories
• Action controls, result controls and people control
o Control package
o By recruiting people who are not able to perform, you hired an error!

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Control measurement objectives (obtrusive vs inobtrusive)
Controls can focus on:
• The action taken – ACTION CONTROLS
• The result produced – RESULT CONTROLS
• The types of people employed and their shared values and norms – PEOPLE CONTROLS

OR ANY COMBINATION

Measurement depends on causality (know) and ability (can)

Excellent

Action control
Knowledge of causality

Action control
And/or
(e.g., large projects)
Result control

Results control People control

Poor

(e.g., movie director, antity manager) (e.g., research lab)

High Low
Ability to measure results

Combination of the comlpexity of the enviroment and the ability to measure, and the ability
to measure in the known enviroment.

https://www.icaew.com/technical/business-and-management/financedirection/embracing-
ambiguity [from 00:30 till 18:50]

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Session 2: 06.02.2019
Corporate governance – definition
• The sets of mechanisms and processes that help ensure that companies are directed and
managed to create “value” for their owners while concurrently fulfilling responsibilities
to other stakeholders (e.g., employees, suppliers, society at large)
• Corporate governance deals with controlling the behaviours of top management –
Executive focus. Hence, the corporate governance focus is broader than the MCS focus

The big structures might come back to bite you at a later point in time, if you mismanage
today

How to structure responsibility and accountability

Shareholders
Board of Directors
Board of Management
Employees

Board of management:
• Safeguard the equity investors interests – maximize shareholder value, consolidate
family/state control
• Protect the interest of other corporate stakeholders (employee, customers,
suppliers, competitors, and society at large)

Decision-rights are more important than money in the end.

Board of directors (BoD) – idependance & competence

To carry out their responsibilities, boards must ensure that they are independent and
accountable to shareholders
• Board independence
o “interlocking directories”, “proxy fights”, you scratch my back and I will
scratch yours
• Boards are given ultimate control over management
o Selection and evaluation of senior management
o Review and approve the long-term strategy and important management
decisions (design of equity, compensation policies)
o Delegated to BoD-level committees: Audit committee and compensation
committee

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Prevalence (utbredelse; andel som har en gitt karakteristikk)
Interest in corporate governance has skyrocketed
• The U.S. Sarbanes-Oxley Act (SOX) of 2002
• Listing requirements by stock exchanges designed to strengthen corporate
accountability
• Corporate governance reforms by legislators and regulators in several countries;
mimicking (parts of) SOX
• Most significant and expensive provision is the internal control-related section 404
requirement of SOX: Policies and procedures; Audit committee effectiveness;
Integrity and ethical behavior programs; Whistleblower programs; Tone at the top”

Effectiveness? What works?

• Since internal controls serve both management and financial reporting purposes –
Sarabanes-Oxley Act has directly affected firms´ MCS (complexity costs)
• Strongly depending on context:
o Anglo-saxon: primary governance mechanisms are provided by equity
markets and structures
o Japan (Keiretsu), Korea (Chaebols), India (institutional investors), China (state
ownership): corporate governance is effected by concentrated ownership
o Germany: Bank and insurance companies, employee representation
o Islamic countries: Sharia (religious law)
• Top management changes ➜ corporate MCS changes

Governing ‘socie-ties’
TEDxOxbridge
https://www.youtube.com/watch?v=6D8Ddmvz9v8 [18 min.]

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 Session 3: 25.02.2019
Markets versus Hierarchies – Transaction Cost Economics (TCE)
Assumptions for both organizations and individuals:

Rational Choice

Self-interest directly Should lead to utility-

contributes to: maximizing behaviour

Organization: is a group of individuals

seeking to achieve a common goal, or to Which strictly depends
maximize an objective function. on quality of
information available
Individual (as member): has a personal to the decision maker
objective function, which may or may not
coincide with the common goal.

Environment

Managers Transmit
information to

Other parts of the

Acquire information and use it
environment, including other
for decision making
managers
Take decisions
and give signals

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Hierarchy: command controls

Premises:
1. Centralized and vertical structure
2. Information can be transmitted and assimilated by the different parts of the
organization
Information system for coordination and
Top management Organizational control
environments structure
Operating rules Enforcement rules
Detect violations of
Relative certainty of instructions and
Specific behavior
economics of the Command system administer
instructions issued
various subunits appropriate
punishment
Threats:
Absorption of every piece of information would lead to information overload

Subordinates will always know much more about their activities than higher officials

Markets: Markets control

Premises:
1. Decentralized structure into many subunits
2. External market prices and internal transfer prices are necessary to calculate
profitability of the business unit
Information system for coordination and
Top management Organizational control
environments structure
Operating rules Enforcement rules
Encourage managers
Relative uncertainty General instructions to increase the
of economics of the Market system to maximize an values of the
various subunits objective function objective function as
much as possible
Threats:
The various parts of the organization might work against the common objective function

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Decision making and information processing

Goal: get the right amount The way to process

of information into the information among the
decision-making process at various parts of the firm can
the right time influence its own structure

This approach aims to improve decision-making by:

• Improving data collection and retrieval (ERP systems)
• Building and managing ‘useful’ data bases (CRM systems))
• Graft computer-based models into human information processing and decision
making (machine learning)
• Insert online, real-time information into the decision process

Information processing and task uncertainty

Task uncertainty: When people need more information requirements than what they have,
to cope with the assigned task

The level of uncertainty directly

depends on:

Output diversity Input resoucres utilized Level of tasks difficulty

Number of different
products, services
offered, and customers
served
Difficulty to balance
Number of different work
technical quality in the
locations, resource
production process to meet
requirements, and specialists
customers and clients’
employed to produce output
expectations.

Responding to task uncertainty

FIRM

Rules: prescribing Hierarchies: Coping with

behaviour in advance for new and unusual situations
handling routing not already prescribed
Uncertainty

Goals: Delegating decisions to lower parts of the firm

pointing out goals to coordinate various subunits

The firm tries to face uncertainty with rules, hierarchies and goals.

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Coping strategies 1
If the firm cannot solve the uncertainty?

It has two strategies:

(1) increase
(2) decrease the
organizational
and/or amount of required
capacity to process
information
information

Coping strategies 2

Increase organizational capacity to process information

Verical inforamtion proessing New lateral relations

Developing new annual operating

plans and budgets replacing the The information processing and
previous ones. This clarifies targets computational capacity is insufficient
without overloading organizational to deal with the organization
hierarchy

Moving the decision making

(decentralizing) to the point where
the information is located, i.e.,
creating self-contained groups

The organizational design must allow the firm to organize and apply a large amount of data
and information.

The data is only knowledge when it comes in a context.

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Coping strategies 3

Decrease the amount of required

information

Implementing self-
Slack resources
contained units

Excessive inventory
levels, long delivery Re-organize the
times, extra machine production process
capacity, overtime etc.

Reduce specialization: members of the units

are involved in every function of production,
reducing the need for information processing
via separate functions

Reduce output diversity. Every subunit has to be

involved with the others.

Coping strategies – Overview

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Roles of accounting in organizations and societies
Uncertainty of cause and effect

Low Answer Machine Ammunition Machine

(means)

High

Learning Machine Rationalization Machine

Low High
Uncertainty of objectives (ends)

Answer Machine
• Problem solving by computation
• Numerical answers to decision making problems

Ammunition Machine
• Highly political decision-making
• Numbers used for negotiation

Learning Machine
• “What-if” analysis
• Explorative and imaginative use of accounting calculations and numbers

Rationalization Machine
• Legitimate past decisions
• Rationalization ex-post

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Session 4: 27.02.2019
(Financial) Result control
Three core elements
Financial responsibility centers
• The distribution of accountability for financial results within the organization
Formal management processes (a.k.a. planning and budgeting)
• Sets performance expectations and standards for evaluating performance
Motivational contracts
• The links between results and various organizational incentives

Financial control
We need to measure what we compete on

Budgets &
Budgeting

Incentive
systems
Accounting
Responsibilty
Performance
Center
Measures

• If money matter the most, we reward on how money is spent...which is lazy!

• Changes in the budget will also affect changes in the incentive system (Telenor).
• The incentive system cannot be related/connected with the three boxes. (A pot
divided on the employees).

Revenue / Sales Centers

Held accountable for generating revenues
• For example, sales departments in commercial organizatons
• For example, fundraising managers in non-for-profit organizations
No attempts to relate inputs to outputs
• However, most revenye center managers are also held accountable for some expenses
(e.g., salespeople´s salaries and commisions)

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Expenses / Cost Centers
Held accountable for expenses / costs
• “standard” or “engineered” expense centers
o Inputs and outputs can be financially measured
o There is a “casual”, means-end relationship between inputs and outputs
 For example, manufacturing departments
• “managed” or “discretionary” expense centers
o Outputs are difficult to measure
o Unclear relationship between inputs and outputs
 For example, R&D and human resources departments

Control in Cost / Expense Centers

Engineered cost centers
• Standard cost vs. actual cost (variance analysis)
o Analysis of the cost that should gave been consumed in producing the output
vs. the cost that was actually incurred
• Additional control “top-ups”
o Volume produced, quality, etc
Discretionary cost centers
• Adhere to the budgeted expenses while completing the tasks of their center
• Subjective, non-financial controls “top-ups”
o For example, quality of service provided
• Personnel controls

Profit centers
Held accountable for generating profits (EBITDA / Operating
Income)
As a performance measure, profit is Comprehensive; it collapses many aspects of
performance-related activity in a single number (‘behavioral reductionism’)

Has the manager influence over both revenues and costs? (‘controllability principle’)
• Charge standard cost-of-goods-sold to sales-focused entities
• Assign revenues to cost-focused entities
• Above leads to Pseudo

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Measuring “profit” in profit centers
Pseudo profit centers
Selected financial statement Gross Incomplete Before-tax Complete
line items margin profit profit profit center
center center center (RARE)
Income statement
Revenue X X X X
Cost of Goods Sold X X X X
Gross Margin X X X X
Advertising and Promotion X X X
Research and Development X X
Profit before tax X X
Income tax X
Profit after tax X

Investment Centers
Held accountable for the returns (profits) on the
investment made
• Objective = return on capital
• Relative criterion: various organizational units use different amounts of allocated
funds / capital.
In fact, managers have two performance (behavioral)
Objectives
• Generate maximum profits from the capital allocated (‘squeeze the lemon dry’;
capital allocation is given)
• Invest in additional resources only when such an investment will produce an
adequate return (capital allocation is flexible)

Responsibility Distribution
Administrateive
and Financial Vice
President (DCC)
SBU Manager (PC)
Group Vice
President (IC)
President (IC) SBU Manager (PC)

SBU Manager (PC) Procurement (CC)

Group Vice
President (IC)
Manufacturing
SBU Manager (PC)
(CC)

Sales (RC)

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Responsibility Accounting
A RESPONSIBILITY CENTER is a subunit in an organization whose manager is held
accountable for specified financial and non-financial results of the subunit’s activities

Cost Centers

Investment Dicretionary
Center Cost Center

Responsibility
Centers

Revenue
Profit Center
Center

Planning and budgeting

Quantitative plans that specify:
• Where the organization wishes to go
• How it intends to get there
• What financial results should be expected
Purposes of planning & budgeting processes
• To enhance management control
• To engage in long(er)-term thinking
• To achieve coordination (top-down, bottom-up, sideways)
• To establish “challenging-but-achievable” performance targets

”Avoiding the Biggest Budgeting Pitfalls”

Separating the Planning from the Control purpose [3:42 minutes]
https://www.youtube.com/watch?v=PmOyL6YnzoI

Planning Cycle
Strategic Planning
• Relatively broad processes of thinking about the missions, goals, and strategies
• Normally a top-management process
Programming Capital budgeting
• Specification of specific action programs to be implemented over the next few years
and specification of the resources each will consume
• It involves managers at different levels (top-down/bottom-up)
Oriental Budgeting
• Short-term financial planning
• Budgets match the organization’s responsibility structure
• Emphasis on quantitative data

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Characteristics of a budget
• Stated in monetary terms
• Covers a period of one year (linked to external reporting)
• Articulates management commitment: managers agree to accept the responsibility
for attaining the budgeted objectives -> performance appraisal & rewards
• Approved by an authority up in the hierarchy (formal)
• Budget can be changed only under specified conditions (inflexible)
• Periodical (calendar) verification: actual financial performance is compared to budget
and variances are analyzed and explained

The 12 beyond budgeting principals

Leadership
1. Values – Govern through a few clear values, goals, and boundaries; not detailed rules
and budgets
2. Performance (governance) – Create a highperformance climate based on relative
success; not on meeting fixed targets
3. Transparency – Promote open information for self-management; don’t restrict it
hierarchically
4. Organization (teams) – Organize as a network of lean, accountable teams; not around
centralized functions
5. Autonomy (trust) – Give teams the freedom and capability to act; don’t micro-manage
them
6. Customers (accountability) – Focus everyone on improving customer outcomes; not on
hierarchical relationships
Process
7. Goals – Set relative goals for continuous improvement; don’t negotiate fixed
performance contracts
8. Rewards – Reward shared success based on relative performance; not on meeting fixed
targets
9. Planning – Make planning a continuous and inclusive process; not a top-down, annual
event
10. Coordination – Coordinate interactions dynamically; not through annual planning cycles
11. Resources – Make resources available as needed; not through annual budget allocations
12. Controls – Base controls on relative indicators and trends; not on variance against plan

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The new performance contracts

Fixed Performance Contract Relative Performance Contract

Targets Your (sales/profit) target is fixed We trust you to maximize your profit
at (£x million) potential to continuously improve
against the agreed benchmark KPI´s
Rewards Your rewards for reaching this You trust us to assess your rewards by
target are x% of profits starting a peer review panel based on your
at 80% and capped at 120% of performance at the end of each year
target
Plans Your agreed-upon action plans We trust you to take whatever action
are attached to this contract’ is required to meet your goals within
agreed-upon governance principles
and strategic boundaries
Resources The agreed resources to support You trust us to provide the resources
the plan are set out in the you need when you need them. We
attached budget statements trust you to keep within agreed KPI
boundaries
Co-ordination Your activities will be We trust you to co-ordinate your
co-ordinated with other budget activities with other teams according
holders according to the agreed to periodic agreements and customer
plan requirements

Hierarchical structure replaced by a network structure

Companies using beyond budgeting

18
Session 5: 18.03.2019
Limitations
• Accounting income does not reflect economic income perfectly, because accounting
measures:
o Are transaction oriented
o Are dependent on the choice of measurement method
o Are conservatively biased
o Ignore intangibles
o Ignore the cost of equity capital
o Ignore risk
o Focus on the past
o ...

We seek...
• A measure
• or a combination of measures,
that leads managers and employees to take the right actions or make the right decision in
order create long-term values

but…

Financial measures of performance often are not, by themselves, sufficient to motivate

optimal management decisions

Worse, financial measures often create pressures for short-term

performance potentially at the expense of long-term value creation
– The myopia problem

Myopia
• The motivational effect of these measurement limitations can be perverse because
managers who are motivated to produce accounting profits or returns can (in the
short term) do so by:
o Not making investments, even worthwile ones
 Investment myopia
o Making operational decisions to shift income across periods, even when
harmful long term
 Operational myopia

19
Overcoming myopia (1 of 6)
Reduce pressure for short-term profit
• Reduce the weight placed on the annual profit target and emphasize other, longer-
term performance indicators, such as market share and technical breakthroughs
o Use subjective performance evaluations?
• Make the short-term profit targets easier to achieve
o Some slack is created to fund longer-term projects
o But what is the motivational effects of “easy” targets?

Overcoming myopia (2 of 6)
• Control investments with preaction reviews
Operational expenses Developmental expenses
“Today” businesses “Tomorrow” businesses
Financial result controls Combination of non-financial
performance indicators
and action controls

Overcoming myopia (3 of 6)
Extend the measurement horizon
• Measurement congruence
o The longer the period of measurement, the higher the correlation between
accounting income and economic income
• Use long-term incentives?

Overcoming myopia (4 of 6)
Measure changes in “shareholder value” directly
• Valuation difficulties
o Measurement precision and objectivity of future cash flows for non-publicly
traded entities?
• Cost?
o Expensive to do on a recurring, ongoing basis

Overcoming myopia (5 of 6)
• Improve accounting profit measures
o Adjust depreciable lives of fixed assets, adopt current-value depreciation,
charge depreciation for older assets
o Capitalize expenditures related to long-term investments
o Recognize profits more quickly
o Impute a cost-of-equity on income statement
o Put leases on the balance sheet, etc.
• Cost of developing performance reports for control purposes?

20
Overcoming myopia (6 of 6)
Measure a set of drivers of future financial performance
• Use non-financial performance measures
• Balanced scorecard
o The BSC includes financial measures that tell the results of actions already
taken
o It complements the financial measures with operational measures on
customer satisfaction, internal processes, and the firm’s innovation and
improvement activities

Why do companies need balance scorecard?

The source of value has shifted from tangible to intangible assets

percentage of market value related to…

Intangible assets 38% 62% 85%

Tangible assets 62% 38% 15%
1982 1992 2000

Creating values from intangible assets is different…

Intangible assets do not have a direct impact on financial
results — They have second- or third-order impacts

Training
Service Customer Customer
Revenue
Quality Confidence Relations
Information
technology

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Balanced Scorecard

Causality Time
Financial
Perspective
Lagging Past

Business
Customer
Process
Perspective
Perspective
Leading Present

renewal and
Innovation
Perspective
Predicting Future

Bottom-line measures
• Are like a “compass” leading manager in the desired direction
• Allow managers greater autonomy
o The managers can decide what intermediate measures to focus on achieving
the desired financial result
o The managers can achieve the desired financial result by putting different
combinations of inputs and outputs together

But…… Complexity provides challenges:

o Identifying right measures, measurement rules, and importance weightings
o Developing the measurement systems
o Setting properly challenging performance targets for many measures
o Linking to incentive compensation (Bermuda Triangle + Intangibles)
o Keeping up-to-date (avoiding obsolescence)

22
Believing in Reality: Summary
Individualism: positive, rational, and market beliefs
• The assumption is that organizational phenomena are stable and independent of our
observations (positivism);
• Neo-classical economics – individual behavior is used to explain how entire economic
systems work: the product of a sum of individual behaviors;
• MACS provide “neutral” information to rational decision makers.
Functionalism: on being “fit”
• Emphasis on achieving goals (e.g. effectiveness and efficiency);
• The goal is to make MACS function more effectively (to achieve better regulation and
control of the status quo);
• The idea of “fitness” (failure is explained due to dysfunctionality: the lack of fit
between design and action; information needed and information produced).
Contextualism: culture, society and resistance
• Human beings are political and social animals, and society has an enormous, and
sometimes unavoidable, effect on them;
• Cornerstone: the passive conditioning of individuals by institutions;
• Radical structuralist vs. radical humanist

Believing in Relations: Summary

The focus is not only on getting the organization to run more smoothly, but also to produce
rich and deep understandings of how managers and employees in organizations understand,
think about, interact with, and use MACS.

Do not believe in the existence of any one single, objective, concrete organizational reality.
Each organizational participant interprets the situation in his or her own way. This
understanding becomes very real because they react to events and situations on the basis of
these personal meanings.

The organizational world is been constructed as a result of interactions, actions, and

networks.

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Characteristics Agency theory Nerve Center Accounting Labour process Dialectic
Symbolism Controls
Type of Individualism Functionalism Contextualism Contextualism: Contextualism:
paradigm Radical Radical
structuralist humanist
Intellectual Hobbes, Smith, Parsons, March, Mayer Engels, Marx, Plato, Hegel,
Forerunners Spencer Mead, Merton & Rowan Braverman Adorno
Major thesis Agents will use Managers act Managers use Capitalistic Managers at
asymmetrical as information accounting interests the centre of
information to nerve centers information for appropriate the opposed
pursue self- whose main defensive and technical and processes
interest with role is the offensive financial (autonomy and
guile collection, actions or information of delegation vs.
storing, and ritualistically or the labour power and
dissemination symbolically to process to control)
of information formally weaken and
comply to exploit wage
environmental labour
demands and
institutional
pressures
Central focus Asymmetrical Manager’s Manager’s Asymmetrical Asymmetrical
informational information impossibility to power relations power
relations processing process relations,
behaviour information, dialectical
and relations external tension
pressures
Main concepts Moral hazard, Decisional, Accounting as Commoditisation, Historical path
signalling, interpersonal ritual alienation, dependency
asymmetric and ceremonies, deskilling, and evolution,
information, informational legitimacy, class change
residual roles, symbolism, contradiction,
claim sharing nerve center isomorphism, expropriation of
management decoupling surplus value
Advocacy Owners Managers Accountants Wage labour Managers,
position and accounting workers wage labour
itself workers

24
Session 6: 20.03.2019
Results controls
Involves rewarding individuals for generating good results (or punishing them for poor
results)
• Results accountability
It influences actions because it causes employees to be concerned about the consequences
of the actions, they take
• However, employees’ actions are not constrained
• On the contrary, employees are empowered to take whatever actions they believe
will best produce the desired results

The Results Control recipe (MBO(Management by Objectives))

1. Defining the performance dimensions
a. What you measure is what you get: therefore,…if not congruent with the
organization’s objectives, the controls will actually encourage employees to
do the wrong things!
2. Measuring performance on these dimensions
a. Objective > financial >
i. market-based: for example, stock price
ii. accounting-based: for example, ROA > non-financial: for example,
market share, customer satisfaction
b. Subjective: for example, managerial characteristics (“being a team player”
3. Setting performance targets
a. Motivational effects
4. Providing rewards (or punishments)
a. “Incentives” – monetary and non-monetary

Conditions for effective results control

Results controls work best only when all of the following three conditions are present:
• Superiors/managers must know what results are desired in the areas being
controlled
• The individuals whose behaviors are being controlled must have significant influence
on the results in the desired performance dimensions
• Superiors/managers must be able to measure (Cognitive work is difficult to measure)
the results effectively

25
Ability to influence results
• The person whose behaviors are controlled must be able to affect the results in a
material way in a given time span
o Controllability principle (If a sales person is held accountable for R&D, the
sales person will seek information regarding R&D. Espesially in tech and
pharma)
• If the results are uncontrollable, the controls tell us little about the actions that were
taken:
o Good actions will not necessarily produce good results
o Bad actions may equally be obscured
Ability to measure results effectively
• The effectiveness of results measures must be judged by their ability to evoke the
desired behaviors
• Measurement properties
Congruence; Controllability; Precision; Objectivity; Timeliness; Understandability;
Cost efficiency

Pros and cons of results controls

Pro:
• Behavior can be influenced while allowing significant autonomy
• They yield greater employee commitment and motivation
• They are often “inexpensive”
For example, performance measures are often already collected for reasons not
directly related to management control (e.g., financial reporting)

Con:
• Often less-than-perfect indicators of whether good actions have been taken
• They shift risk to employees (due to uncontrollable factors); hence, they often
require a risk premium for risk averse employees
• Sometimes conflicting functions:
o Motivation to achieve
 Targets should be “challenging”
o Communication among entities
 Targets should be slightly conservative

Action controls
• Ensure that employees perform (or do not perform) certain actions known to be
beneficial (or harmful) to the organization
• Prevention/detection (FAA failed with the Boeing 737 Max)
o Most action controls are aimed at preventing

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Effectiveness of action controls
They are usable and effective only when managers:
• Know what actions are desirable
Difficult in highly complex and uncertain task environments (e.g., research engineers
or top-level managers)
• Have the ability to make sure that the desirable actions occur
For example, effectiveness of organizational procedures (SOPs)
• Consist of behavioral constraints
Physical: Locks, passwords, limited access, etc.
Administrative: Restrictions on decision-making authority, ‘separation of duties’

Pre-action reviews
Scrutiny of action plans, investment proposals, budgets, and business cases
• Review and approval
• Part and parcel in (capital) budgeting processes, which are otherwise mainly a results
control mechanism

Action accountability
Holding employees accountable for the actions they take (Bribes, enviromental stuff, and so
on...)
It requires:
1. Defining what actions are (un)acceptable
2. Communicating these unacceptable actions to employees
a. For example, work rules, policies and procedures, codes-of-conduct
3. Observing or otherwise tracking what happens
a. Direct observation/supervision
b. Periodic tracking (e.g., mystery shoppers)
c. Evidence of actions taken (e.g., activity reports)
4. [Rewarding good actions, or] punishing actions that deviate

Pros and cons of action controls

Pro:
• The most direct form of control
• Lead to documentation of the knowledge of what works best (‘best practices’)
o Organizational memory
• An efficient way of coordination
Increase the predictability of actions and reduce the amount of interorganizational
information flows to achieve a coordinated effort

Con:
• Only for “routine” jobs
• May discourage creativity, innovation and adaptation
• May cause sloppiness
• May cause negative attitudes
For example, little opportunity for creativity and self-actualization
• Sometimes very costly

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Personnel/cultural controls
“People controls” (for short) ensure that employees:
• Will control their own behaviors
o Personnel control
o Self-monitoring
• Will control each other
o Cultural controls
o Mutual monitoring

People controls are part of virtually every management control system, and indispensable in
… “flatter and leaner organizations with empowered employees”

Personnel controls
Personnel controls build on employees’ natural
tendencies to control themselves, because most people…
….have a conscience that leads them to do what is right
….find self-satisfaction when they do a good job and see their organization succeed

Labels …
• Self-control
• Peer-to-peer control
• Intrinsic motivation
• Ethics and morality
• Trust and atmosphere
• Loyalty

Implementing personnel controls

Generally, it is about …
“… finding the right people, giving them a good work environment and the necessary
resources”

1. Selection and placement

a. Finding the right people to do a particular job
2. Training
a. Give employees a greater sense of professionalism
b. Create interest in the job by helping employees to understand their job better
3. Job design + provision of necessary resources
a. So that motivated and qualified employees have a high probability of success
(e.g., equipment, staff support, absence from interruption)

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Cultural controls
Cultural controls or mutual monitoring tap into social pressure and group norms and values.
…..are effective because members of a group have emotional ties and a sense of
responsibility to one another

Cultures are built on shared …

• Traditions
• Norms
• Beliefs
• Ideologies
• Attitudes
• Ways of behaving

Designing cultural controls – part 1

Codes of conduct
• Codes of ethics, corporate credos, mission statements, etc.
• Formal written documents with broad statements of corporate values, commitments
to stakeholders, and the ways in which top management would like the firm to
function
• Fundamental guiding principles of the company
Group-based rewards
• For example, profit-sharing, employee ownership of company stock
• These are cultural controls (although of a results control nature) because the link
between group (individual) performance and rewards is stronger (weaker)

Designing cultural controls – part 2

Intra-organizational transfers
• Improve the socialization of individuals in an organization and alleviate the formation
of incompatible goals and perspectives
• Improve identification with the organization as a whole as opposed to subunit
identification
Physical and social arrangements
• For example, office plans, interior decor, dress codes and vocabulary, etc.
Tone at the top
• Top management statements must be consistent with the culture they are trying to
create, and their behaviors should be consistent with their statements (‘walk the
talk’)

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Session 7: 08.04.2019
Control and “good” control
“Good control” is when there is …
• a “high” probability that the firm’s objectives will be achieved
• a “low” probability that major unpleasant surprises will occur

In this respect, tight control is “good” because it

provides a high degree of certainty that people will act
as the organization wishes (assuming away harmful
side-effects)

Tight action controls – part 1

Behavioral constraints
• Physical
o Extra protection usually costs more
• Administrative
o Restricting decision-making to higher organizational levels provides tighter
controls if:
 Higher-level personnel can be expected to make more reliable
decisions
 Those who do not have authority, cannot violate the constraints
Pre-action reviews
• Become tighter if the reviews are frequent, detailed, and
performed by diligent and knowledgeable persons

Tight action controls – part 2

Action accountability
The amount of tightness of control generated by action accountability, depends on:
o The definition of (un)desirable actions
 Definitions must be specific, yet complete
 For example, “act professionally” vs. “obtain three competing
bids before releasing a purchase order”
 Definitions must be understood and accepted
o The effectiveness of the action-tracking system
 Employees should feel that their actions are noticed, and noticed
relatively quickly
o The reinforcement provided
 The significance of the rewards or punishments

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Tight results control – part 1
The achievement of tight results controls depends on:

The definitions of the desired results areas

• Congruence and completeness
o Choosing measurable performance dimensions that reflect an organization’s
“true” objectives. For example,…..
o # visitors for the success of a museum?
o # of patents for the success of R&D departments?
Annual profits for a firm with significant growth prospects?
• Specificity
o Disaggregation + quantification. For example,…
“keep customers happy” vs. “less than 1% customer complaints”

Tight results control – part 2

The performance measures
• Precision (amount of “noise”): high = good
• Objectivity (freedom of “bias”): high = good
• Timeliness (“lag” between occurrence and measurement): short lag = good
• Understandability: high = good
The reinforcements provided
• Are the links between results and rewards:
o Direct (no ambiguity or chance for misunderstanding)
o Definite (no excuses possible)

Tight people controls

The tightness of personnel controls depends a
great deal on the overlap between individual and
organizational objectives
– Selection and training: “indoctrination” and
absorption of behavioral standards and norms
Cultural controls are often more stable
– For example, strong “company cultures”

Control combinations
In order to achieve tighter control, use multiple forms of controls that can either reinforce
each other or overlap
• To achieve (tighter) control over all the factors critical to the entity’s success,
including those that are hard to measure (by means of results controls) or
“proceduralize” (by means of action controls)
• Explicitly aim for redundancy

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The Distance between Controllers and Controlled

1st Scenario 2nd Scenario

Shared data simultaneously Redefinition of information,

accessible from many and perceptions of space
locations and distance

Creating more complex

Reducing distance between relationship between
the two subjects subjects in terms of
information and control

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Session 8: 10.04.2019
Cost of control
Control benefits
• A higher probability that people will both work hard and direct their energies to
serve the organization’s interests
Control costs
• Direct out-of-pocket costs
o Quantifiable: e.g., cost of cash bonuses, internal audit staff
o Difficult to quantify: time spent on planning and budgeting activities, on pre-
action reviews, etc.
• Harmful side-effects (Covered over the next slides)
o Behavioral displacement
o Gamesmanship
o Operating delays
o Negative attitudes

Behavioral displacement
…..occurs when the control system encourages behaviors that are not consistent with the
organization’s objectives

• With results controls - when the measures are incongruent with the organization’s
true objectives, often due to:
o Poor understanding of the desired results
o An over-emphasis on “measured” results
 Not all of what counts, is countable!
• With action controls – when….
o Means-ends inversion
 Employees are induced to pay more attention to what they do, and
lose sight of the goal they try to accomplish (grades vs learning)
o Rigid, non-adaptive, and bureaucratic behavior: the rules become the goal
itself

Gamesmanship (Trying to use the system (data manipulation osv))

…. actions taken to improve performance indicators without producing any positive
economic effects
• Data manipulation
o Trying to “look good” by fudging the control indicators
 Data management: affecting the reported results through accounting
methods (e.g., reserves) or operating methods (e.g., delaying
expenses)
 Falsification: reporting erroneous data
• Creation of slack resources
o Consumption of resources in excess of what is required (“sandbagging” or
“buffering”)

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Operating delays
Mostly associated with action controls
- notably, delays caused by:
• Lengthy review processes
• Cumbersome authorization layers (“moving the buck around”)
o Bureaucratic organizations

When responsiveness is important, operational delays are costly

Negative attitudes
Job tension, conflict, frustration, resistance
• Often coinciding with harmful behaviors, such as gaming, lack of effort, absenteeism,
and turnover
Action controls often irritate employees
• It is difficult for people to enjoy following a strict set of procedures for a long period
of time
Results controls
• When there is a lack of employee commitment to the performance targets
o For example, when targets are too difficult, not meaningful, and
uncontrollable
• When performance evaluations are perceived as being unfair (“distributive justice”
and “equitive justice”)

Managing Cross-Cultural Remote Teams.

https://www.youtube.com/watch?v=QIoAkFpN8wQ

Adaptation costs
Factors that affect MCSs across countries
• National culture
o People’s tastes, norms, values, social attitudes, religions, personal priorities,
and responses to interpersonal stimuli
• Local institutions and enforcement
o Government agencies, banking systems, labor unions, financial markets,
accounting rules, regulations, etc.
o https://www.transparency.org/whatwedo/tools
• Local business environments
o Stage of economic development, political risk, inflation, labor availability,
labor quality, labor mobility, etc.
o https://www.transparency.org/whatwedo/tools

34
National culture differences
Direct effect on MCS because control is behavioral
https://geerthofstede.com/culture-geert-hofstede-gert-jan-hofstede/6d-model-of-national-
culture/

Individualism potentially affects …

• Incentives based on individual vs. group performance
• Propensity of engaging in myopic, self-centered behavior
Power distance potentially affects …
• Degree of centralization of decision-making
• Degree of participation in setting performance targets
Uncertainty avoidance potentially affects …
• Degree of subjectivity in performance evaluations
• Degree of formality of planning and budgeting processes
Masculinity potentially affects …
• Degree of performance-based rewards

Local institutions
Labor unions
• Use of performance-based rewards (merit-based vs. seniority-based)
Financial markets and stock-market valuations
• Frequency of profit measurement
• Use of short-term incentives
• Likelihood of myopic behavior
Accounting regulations
Enforcement agencies & procedures

Local business environments

Risk and uncertainty-related factors
• Business risk
o Military conflicts, terrorism, corporate espionage, etc.
• Political risk
o Adverse: forced production, prohibition of layoffs, price controls
o Protective: tariff barriers, subsidies, research support, etc.
• Stage of economic development
o Age and size of corporations, degree of computerization, degree of
development of financial information, and control systems
Inflation
• Financial risk (e.g., use of flexible budgeting)
Labor availability, quality, and mobility
• Use of action controls, personnel controls, and long-term incentives

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Foreign currency translation
Local managers bear foreign currency translation risk,
if their performance is measured in home-country currency
• Can subsidiary managers control this risk?
o Authority to make cross-border investment, product sourcing, or marketing
decisions
o Authority to write purchase or sales contracts in one currency or another
o Authority to make foreign exchange transactions (hedging, swaps, arbitrage)
If not, then….
• Evaluate manager in local currency
• Treat foreign exchange losses and gains “below the line”
• Calculate foreign exchange variance and treat it as uncontrollable
• Flex the budget to end-of-year currency rates

36