23-08-2013, 03:26 PM
THE NEXT GENERATION OF MANAGEMENT CONTROL SYSTEMS: JUSTICE AND FAIRNESS AS ANTECEDENTS OF GOAL CONGRUENCE
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Abstract
Management control systems are intended to motivate managers to ensure that organizational
goals are accomplished. They do this by rewarding and promoting people according to certain
criteria. Usually, they are designed to achieve the greatest possible goal congruence, where
people pursue personal goals that conduce to the organizational goal.
The literature on management control has focused mainly on formal controls, as they are easier
to study empirically. Generally speaking, though, formal and informal controls coexist. In this
paper, we attempt to show that organizational justice may act as a link between formal and
informal control elements.
We find that there are two stable states, which we have labeled total goal congruence (where
the system is formally fair and the user is fair) and total goal incongruence (where the system is
formally unfair and the user is unfair); and two unstable states, in which goal congruence
is occasional (unfair system used fairly) or perverse (fair system used unfairly). We conclude
with some propositions, which can be used to generate hypotheses that we believe will
stimulate, at the core of the management control systems literature, a new stream of research in
which justice is seen as a central element of control system design and use.
Introduction
Management control systems are intended to motivate managers to ensure that organizational
objectives are accomplished. They do this by rewarding and promoting people according to
certain criteria. Usually, they are designed to achieve the greatest possible level of goal
congruence, where people pursue personal goals that conduce to the organizational goal.
The literature on management control has focused mainly on formal controls (e.g. see Chenhall,
2003; Davila and Foster, 2007; Davila, Foster, and Li, 2009a) because the elements of formal
controls are more visible and more easily measurable, making them easier to study empirically.
In general, however, wherever a process of control is implemented, formal and informal
controls coexist (Anthony and Govindarajan, 2003, p. 98). In the formal management control
literature, management control systems design has evolved to capture intangibles by including
more complex indicators, using what is called a balanced scorecard (Kaplan and Norton, 1992;
Kaplan and Norton, 1993). The balanced scorecard is thought to produce a greater alignment
with organizational strategy (Epstein and Manzoni, 1997; Kaplan, 1996). In a four-case study,
Chapman (1998) suggested that management control systems have a complementary role as
devices for coping with uncertain environments.
The Challenge of Management Control Systems
According to Otley and Berry (1980), organizational control is a much neglected subject. Thirty
years on, the situation is hardly any better, in spite of technical progress in tools such as the
Balanced Scorecard or better information based on advances in IT (Kaplan and Norton, 1992, 1993).
In the same article, Otley and Berry quote Tannenbaum (1968) as saying that “an organization
without some form of control is impossible,” which should be obvious. Managerial tasks entail
setting goals, monitoring execution, evaluating results, and allocating rewards and punishments. All
these tasks are part of the management control process. A substantial part of managerial activities
therefore has to do with management control.
A formal control system can be defined as a management control structure (i.e., the structure of
responsibility, properly specified and defined) and a management control process by which
1) goals and strategies are set, and 2) converted to an annual budget for each responsibility
center; 3) actual performance is measured and assessed, and 4) rewards and punishments are
allotted to each responsibility center (Anthony and Govindarajan, 2003).
Achieving goal congruence
Goal congruence is “the central purpose of a management control system” (Anthony and
Govindarajan, 2003, p. 98). Having made this central statement, Anthony and Govindarajan go
on to say that “in a goal congruent process, the actions people are led to take in accordance with
their perceived self-interest are also in the best interest of the organization.” They recognize that
usually, in a imperfect world, perfect goal congruence does not exist, but insist that management
control systems need at least “not to encourage individuals to act against the best interests of the
organization” (Anthony and Govindarajan, 2003, p. 98). In a more practical vein, they argue that
in order to evaluate any management control practice, there are two crucial questions to be
answered: 1) What actions does the management practice motivate people to take in their own
self-interest?, and 2) Are these actions in the best interest of the organization?
The informal elements of goal congruence
At the organizational level, even where there is agreement about the long-run organizational
objectives, it is not immediately clear what short-run objectives should be pursued in order to
achieve them. For instance, the actions that will maximize firm value in the long term cannot
necessarily be determined objectively in the short term. Indeed, as a general rule, short-term
value maximization does not lead to long-term value maximization.
Much the same applies at the level of the individual. People may have an idea of what they want
in the long run, but will not necessarily know, under bounded rationality, what they should do
now in order to achieve those longer-term objectives. They may be misled by the attractiveness of
a short-run course of action that is not optimal in its long-run effects and that may jeopardize the
desired ultimate outcome. People can have long- and short-term motivations that contradict each
other. We have already mentioned how some recent literature has tried to link economic theories
with behavioral theories to explain how formal systems interact with peoples’ motivations to lead
to long-term organizational success (Gottschalg and Zollo, 2007). In this literature, management
control systems play a crucial role as antecedents of peoples’ motivations.
What perceptions of justice do people have about design and acts?
The way justice is studied in organizations is mainly through perceptions of justice. The study
of justice perceptions has become popular in recent years. The literature is growing, as attempts
are made to better understand how people perceive certain features of organizations as just or
unjust, and how they direct their actions and behaviors in light of such perceptions. This is an
area of increasing interest, both in the field itself and in multidisciplinary approaches (as
an example of surveys of the field, see, for instance, Fortin, 2008; Greenberg, 1987).
Major analyses in the field have been directed towards understanding what justice is (Adams,
1963, 1965; Cropanzano and Ambrose, 2001), why people have justice motivations (Cropanzano,
Goldman, and Folger, 2005; Folger, 1998), how judgments are formed (Cropanzano and Folger,
1989; Folger, 1986; Folger and Cropanzano, 2001), and what the consequences are of different
justice perceptions and justice policies applied in organizations (Cropanzano, 1993). Some
research has concentrated on how to establish guidelines to help managers improve justice
perceptions (Cropanzano et al., 2007). People care about justice, and many desirable
organizational outcomes may be adversely affected by perceptions of injustice. Caring about
employees’ justice perceptions therefore seems likely to pay off, and establishing policies to
improve those perceptions can be considered proper managerial behavior (Cropanzano et al.,
2007). In light of this deeper knowledge, justice variables have come to be considered very
important inputs.
Formal fairness
Organizations need to set their goals so as to encompass individual goals (Simon, 1964). They must
also avoid arbitrariness (Leventhal et al., 1980). In general, involving individuals in the budgeting
process has been one of the tenets of recent literature on participative budgeting (Chenhall, 1986;
Chenhall and Brownell, 1988; Shields and Young, 1993). At the same time, procedures that allow
recipients to take part is one of the requisites of the procedural justice literature (Lindquist, 1995).
Giving people a say and offering explanations during management control processes has been
found to have a positive effect (Libby, 1999; 2001; Van den Bos, Vermunt, and Wilke, 1996).
Generally speaking, managers react more positively when procedurally just management control
systems are implemented (Taylor, Masterson, Renard, and Tracy, 1998). Findings suggest that
management control system designs that are developed following due process lead to greater
procedural justice perceptions (Taylor, Tracy, Renard, Harrison, and Carroll, 1995).
A Model of Management Control Systems and Organizational Justice
Justice is closely and crucially related to management control systems. Showing this
relationship, which has been neglected in previous management control systems research, is the
main objective of this paper. As a rule, research has set out to show empirically how just or
unjust the outcomes of management control systems are perceived to be. Conceptually,
however, the relationship between fairness and management control systems has not been
studied in sufficient depth to find meaningful ways of linking the two. After proposing the two
important aspects of the fairness of control systems, namely formal and informal fairness, we
shall attempt to link them with goal congruence, in order to show that they are antecedents of
different possibilities of goal congruence.
We present a model in which fairness is included in the design and use of the system. The
relationship between formal fairness, informal fairness and goal congruence is shown in
Table 1. As we have seen, formal fairness is associated with the formal control design, while
informal fairness is associated with the control action taken by the decision maker. A control
system design can be either formally fair or formally unfair, while the use of the system can be
either fair or unfair.