The “Object of Control” Frame Work - Merchant and Van der Stede Flashcards
What is Management Control (MC)?
- The process of ensuring that employee’s behaviour is aligned with organisational goals through the use of financial and non-financial information and monitoring mechanisms
- Influencing behaviors in desirable ways
- MC is internally focused whereas strategic control in more concerned with the external positioning of the firm.
- Financial Services illustrate the importance of MC as poor control systems have seen the miss selling of PPI, tax evasions and interest rate manipulation in the finance sector. UBS fined £29.7 M by FSA over rogue trader. Reputation as a “most valuable asset”.
Under the broad area of management what are the three processes discussed?
• Objective setting - the prerequisite for any purposeful activity and MCS, important in determining success.
• Strategy formulation – define how organisations will use their resources in order to meet their objectives
• Management control – focuses on execution. Are our employees likely to behave appropriately?
1. Understand Expectations
2. Pursue objectives in line with strategy
3. Capability
Why is there a behavioural emphasis?
- People make things happen and businesses rely on people e.g. cost reduction
- People can work against or around systems
- If employees could always be relied on their would be no need for a MCS but are sometimes unable or unwilling to act in the organisations best interest so managers must take steps to guard against the occurrence of undesirable behaviour and encourage desirable.
What problems should management controls address?
- Lack of direction – Due to lack of clarity about organisational goals and instructions for how to meet them. 81% of senior managers understands the value drivers of their business strategy and 13% believe non-management understand them. Employees set goals based on their own views rather than direction from leadership.
- Motivational problems – occurs because the individual vs firm objective do not coincide (individual self-interest). Frederick Taylor’s scientific management says individuals work slowly on purpose. Revenue losses due to surfing internet and fraud. “Every single person in your business is trying to steal from you”. Motivation should be the primary focus of MCSs
- Personal limitations – occurs when a person lacks aptitude, training, stamina, experience or knowledge of the tasks at hand. Promotions to positions above competence. Poor job design. Limits in facing new problems, remembering facts and processing information properly.
What are the mechanisms for control problem avoidance?
- Activity avoidance – Subcontracting, licencing and divestment. Also lose profits. Deutsche bank. Cloud computing. Can increase transaction costs.
- Automation – the use of computers, robots and expert systems to rid human problems of dishonesty, disloyalty, inaccuracy and lack of motivation. Bank trading digital lower risk. Limitations of feasibility and cost. Exposed to programme errors and fraud. Self-serve kiosks in all super markets.
- Centralisation- lower level employees making bad decisions “McDonaldization of things”. Not fashionable and creates “red tape”
- Risk sharing – Insurance!
What are results controls and what determines their success?
• Systems built around the definition of relevant dimensions for performance measurement, setting of performance targets and provision of performance-related rewards.
• Traditionally focused on financial performance but increasingly incorporating both financial and non-financial performance dimensions (e.g., the Balanced Scorecard).
• Results controls work best when there is:
- Goal clarity
- Controllability
- Measurability
What type of organizational structure do results controls facilitate?
- Decentralized - Entrepreneurial model
- Corporate managers can judge the effectiveness and efficiency of each entity whilst leaving the execution of operations to those responsible for the performance of the decentralized entities. Ideal with professionals in businesses with fast changing environment.
- DuPont strategic business units – responsiveness
- It can lead to increased complexity, transaction costs, inefficiencies and inconsistencies – Johnson and Johnson
- It can further lead to corruption – French Carrefour in china
How do results controls eliminate control problems?
- Lack of direction – well defined results inform employees as to what is expected of them and direct employees focus to certain objectives e.g. sales
- Motivation Problems – the result controls reduce motivational problems if the performance targets are effective and incentive for achieving results furthers employees personal benefits
- Personal limitation - result controls promise rewards for good performers which helps organizations attract and retain employees who are confident in their abilities.
What are the four steps in implementing results controls?
- Defining the relevant dimension(s) which results are desired
- Measuring performance in the chosen dimensions
- Setting performance targets for employees to attain for each of the measures
- Providing rewards for target attainment to encourage behaviours.
What are some of the problems with results controls?
- You are what you measure – unprecise metrics can achieve undesired performance
- Jean Tirole showed how they can skew efforts and encourage excessive risk taking we saw in the financial crisis with short term annual Bonuses.
- Public sector – police department human trafficking neglected to solve higher volumes of easy crimes – ill-defined performance targets
What determines the effectiveness of performance measurements?
- Precision – the amount of randomness in the measure - e.g. social responsibility hard to measure - Imprecise measures increase the risk of misevaluating performance
- Objectivity – free from judgemental bias – independent and audited
- Timeliness – minimal time lag for motivation (deferred bank bonuses) and intervention before the issue worsens causing more harm
- Understandability - what they are held accountable for
- Cost efficiency!
When is the use of results controls not appropriate?
• In situations where there are many, significant, uncontrollable influences which affect the available result measures, results controls are not effective.
What is an action control?
- A type of control which involves ensuring that employees perform (do not perform) certain actions known to be beneficial (harmful) to the organization.
- Although action controls are commonly used in organizations, they are not effective in every situation.
- They are feasible only when managers know what types of actions as un(desirable) and have the supervisory ability to ensure that these types of actions (do not) occur.
What are behavioural constraints and give an example?
- They are 1 out of the 4 basic forms of action controls
- Behavioural Constraints are “negative” and a constraining form of action controls
- They make it impossible, or at least more difficult, for employees to do things they should not do. These can be applied physically or administratively.
- Physical – locks, ID card scanners, Passwords etc retail inventory shrinkage – staff stealing – CITV, observation mirrors and tip lines! Data protection “Honey Pots”
- Administrative – limits employee’s ability to perform all or a portion of tasks/actions. Whether they can approve expenditures and to what amount. This is dependent on managers doing their jobs. Separation of duties making it impossible for one person to complete the whole task.
- Poka-yokes are combination and physical and administrative designed to make a system fool-proof
What are Pre-action reviews and give an example?
- Pre-action reviews involve the scrutiny of actions plans. Reviewers can approve or disapprove the proposed actions, request modifications, or ask for a more carefully considered plan before granting approval.
- Budget setting, NHS Business Cases and NHS Journals
What is action accountability and give an example?
- Holding people responsible for their actions (rather than their results)
- Defining, communicating, observing, rewarding/punishing
- Policy’s, contracts or codes of conduct
- Monitoring and supervision – GPS truck drivers
- Nurse Check List
Which action controls prevent and which detect?
- Prevent – behavioural constraints (locks, badges), pre-action reviews, redundancy
- Detect – Action Accountability, all info needs to be gathered before harm can be spotted
Action controls are only effective when:
- Organisations can determine what actions are un(desirable) – need to be up to date, well defined and not too tight.
- Organisations are able to ensure that un(desirable) actions (do not) occur. – Management override – AllFirst Finance – FOREX. Fraud survey, 1/5 could have been prevented if management had done a sufficient job of reviewing. Another 1/5 could have been prevented had there not been an override of management controls. Hard to measure – length of calls but what if the customer is difficult?
What are personnel controls and what do they do?
- Personnel controls build on employees natural tendencies to control or motivate themselves
- Clarify expectations, they help ensure each employee understands what the organization wants
- Personnel controls help ensure each employee is able to do a good job; that they have all the capabilities (experience, intelligence) and resources (information and time) needed to do the job.
- Some personnel controls increase the likelihood that each employee will engage in self-monitoring a force which pushes most employees to want to do a good job, natural commitment.
Give three examples of personnel controls
Selection and Placement
• Organizations devote considerable time to it and there is much literature surrounding how to do it best.
• Selection - referencing checking increases after fraud increases, skills match to job requirements. Home Depot – computer system pre-screened candidates with correct skills and experience. Social Media.
Training
• A common way to increase the likelihood that employees will do a good job. Provides good information about what actions and results are expected.
• Positive motivational effects as it give a greater sense of professionalism.
• It can be formal (classroom) or informal (mentoring)
Job Design and Provision of Necessary Resources
•A well designed job to make sure motivated and qualified employees have a high probability of success. Some organisations do not give their employees a chance to succeed.
• Employees need a particular set of resources in order to do a good job; information, equipment, staff support or freedom from interruption.
• In large organizations particularly there is a strong need for transfers of information to maintain coordination of well timed, efficient actions and decisions.
What are cultural controls and what do they do?
- Cultural controls are designed to encourage mutual monitoring; a powerful form of group pressure on individuals who deviate from group norms and values.
- In some collectivist cultures such as Japan, incentives to avoid anything that would disgrace oneself and one’s family are paramount.
- Cultures are built on shared traditions, norms, beliefs, values, ideologies, attitudes and ways of behaving. These cultural norms are embodied in written and unwritten rules that govern employee’s behaviours.
Give examples of cultural controls
Codes of Conduct
• These are formal written documents which provide broad, general statements of organisational values, commitments to stake holders, and the ways in which mgmt. would like the organisation to function.
• Messages should be reinforced in formal training sessions and informal discussions
• 4/5 FTSE 100 companies had explicit code of conduct in 2010
• Value based approach to drive ethical decision making and improve the organizations reputation.
• E-learning modules, ethics hotlines and whistle-blowing mechanisms.
• Surveys show that pressure to obtain results, systems that reward results over means, fear of job losses and general cynicism towards the code of conduct contributes to realised misconduct
Group Rewards
• Providing rewards or incentives based on collective achievement also encourages cultural control. E.g. Profit Sharing or Gain Sharing. Encouraging employee stock ownership with effective corporate communications to keep employees informed and enthusiastic encourages employees to think like owners. Culture of ownership and engagement to the mutual benefit of organizations and their employees. Employee engagement is a critical aspect of the organizations overall financial success.
• Group rewards can encourage – on the job training of new employees, teamwork and the creation of peer pressure on individual employees to exert themselves for the good of the group.
• UK Fast, instead of individual cash rewards the money is pooled into a team event. These create shared memories, help team bonding, increase appreciation of people’s different personalities and reinforce the company’s values of being supportive.
Other Approaches To Shape Organisational Culture.
• Intra-organisational transfers or employee rotation – help to transmit culture by improving the socialization of employees throughout the organisation, giving them a better appreciation of the problems faced by different parts of the organization.
• Physical arrangements (office plans, architecture, and interior décor)
• Social arrangements (dress code, institutional habits, behaviours and vocabulary)
• Silicon Valley – informal cultures, casual dress, open office, delivers messages about innovation and employee quality.
• Disney – employees “cast members” “on and offstage”. A work shift is a “performance” and a job description is a “script”
• Tone at the top – management shaping culture from the top. There actions, behaviours and statements. Listening to whistle-blowers e.g. Sally Masterson Lloyds HBoS victimisation.
