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Controlling in Organizations

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Title: Slide 1 Last modified by: ITC Created Date: 10/21/2006 8:25:46 PM Document presentation format: On-screen Show Company: Management Department – PowerPoint PPT presentation

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Title: Controlling in Organizations


1
Controlling in Organizations
  • Chapter 10

2
Learning Goals
  1. Explain the foundations of control

2. Identify the six phases of the corrective
control model
3. Describe the primary methods of organizational
control
4. Explain key corporate governance issues and
control mechanisms
3
Foundations of Control
  • Processes for ensuring that behaviors and
    decisions conform to an organizations standards
    and legal requirements, including its rules,
    policies, procedures, and goals
  • How controls and planning support each other
  • Controls help ensure that decisions, actions, and
    results are consistent with plans
  • Controls help maintain or redirect actual
    behaviors and results toward those desired in
    plans
  • Controls help provide essential information
    needed to plan
  • Plans indicate the purposes to be served by
    controls

4
Preventive Controls
  • Mechanisms intended to reduce the likelihood of
    an unwanted event and thereby minimize the need
    for corrective action
  • A few forms
  1. Rules and regulations
  2. Standards
  3. Recruitment and selection procedures
  4. Training and development programs

5
Corrective Controls
  • Corrective Controls
  • Mechanisms intended to reduce or eliminate
    unwanted behaviors or results and thereby return
    the situation to conformity with the
    organizations regulations and standards
  • A few forms
  1. Direct supervision and feedback
  2. Disciplinary action
  3. Procedures for reporting misconduct
  4. Monthly or even daily financial reports

6
Examples of Sources and Types of Control
Source of Control
Preventive
Corrective
Stakeholders
Maintaining quotas for hiring personnel in
protected class
Changing recruitment policies to attract
qualified personnel
Organization
Using budgets to guide expenditures
Disciplining an employee for violating a No
Smoking safety regulation in a hazardous area
(continued)
7
Examples of Sources and Types of Control
(cont'd)
Source of Control
Preventive
Corrective
Group
Advising a new employee about the groups norm in
relation to expected level of output
Harassing and socially isolating a worker who
doesnt conform to group norms
Individual
Deciding to skip lunch in order to complete a
project on time
Revising a report you have written because you
are dissatisfied with it
8
Linkage to Strategic Goals for Effectiveness
Objective controls
To AchieveStrategicGoals
Acceptable controls
Complete controls
Timely controls
9
How Much Organizational Control?
  • Core questions
  1. For what desired behaviors and results should
    organizational controls be developed?

2. What are the costs and benefits of the
organizational controls required to achieve the
desired behaviors and results?
3. What are the costs and benefits of utilizing
alternative controls such as self-managed teams,
informal peer control, or individual self-control?
10
Cost-Benefit Model of Organizational
Control(adapted from Figure 10.1)
11
Internal Control
  • A processeffected by an organizations board of
    directors, management, and other
    personneldesigned to provide reasonable
    assurance regarding the achievement of goals in
    the various categories
  • Major categories of internal control
  1. Effectiveness and efficiency of operations
  2. Reliability of financial reporting
  3. Compliance with applicable laws and regulations

12
Interrelated Components and Layers of Internal
Control
Control Environment
Risk Assessment
Control Activities
Information and Communication
Monitoring
Internal Control
13
Snapshot
Fundamentally, control existsonly to mitigate
risk. So every internalcontrol framework has to
start with a systematic approach to identifying
riskLook at some of the major recent corporate
failures. Where did the problems fundamentally
arise? They occurred primarily because of
breakdowns in thecontrol environment.
Larry Rittenberg, Chairman, COSOCommittee of
Sponsoring Organizations of the Treadway
Commission
14
Limitations of internal control
  • Cannot change a bad manager into a good one
  • External influences may be beyond managements
    control
  • Judgments may be faulty
  • May be circumvented by collusion of two or more
    employees
  • Management can override the control system

15
Corrective Control Model
  1. Define theSystem

4. CollectInformation
2. Identify KeyCharacteristics
3. SetStandards
If okaycontinue
5. MakeComparisons
6. Diagnoseand CorrectProblems
If deviations
16
Snapshot
Many large companies suffer the ravages of
fiefdoms, turf wars and bureaucracy. Its a
problem that begins when individuals, groups, or
divisions try to protect their turfs, reshaping
their environments to gain as much control as
possibleUltimately, fiefdoms lose their ability
to act consistently on behalf of the greater good
of the company.
Robert J. Herbold, Former Chief Operating Officer
of Microsoft, and author of The Fiefdom Syndrome
17
Primary Organizational Control Methods(adapted
from Figure 10.3)
Mechanistic And Organic Control
Automation- Based Control
Market Control
Organizational Control
Financial and Accounting Controls
18
Mechanistic and Organic Control Methods
Mechanistic Control Methods
Organic Control Methods
  • Use of detailed rules andprocedures
    wheneverpossible
  • Top-down authority, withemphasis on
    positionalpower
  • Activity-based jobdescriptions that
    prescribeday-to-day behaviors
  • Use of detailed rules andprocedures only
    whennecessary
  • Flexible authority, withemphasis on expert
    powerand networks of influence
  • Results-based jobdescriptions that
    emphasizegoals to be achieved

(continued)
19
Mechanistic and Organic Control Methods
(cont'd)
Mechanistic Control Methods
Organic Control Methods
  • Emphasis on extrinsicrewards (wages,
    pensions,status symbols)
  • Distrust of teams, based onan assumption that
    teamgoals conflict withorganizational goals
  • Emphasis on both extrinsicand intrinsic
    rewards(meaningful work)
  • Use of team, based on anassumption that team
    goalsand norms assist inachieving
    organizationalgoals

20
Market Controls
  • The collection and evaluation of data related to
    sales, prices, costs, and profits for guiding
    decisions and evaluating results
  • Market controls require
  1. The costs of the resources used in producing
    outputs to be measured monetarily
  2. The value of the goods and services produced to
    be defined clearly and priced monetarily
  3. The prices of the goods and services produced to
    be set competitively

21
Financial Controls
  • Mechanisms for preventing or correcting the
    misuse and misallocation of resources, especially
    monetary resources
  • Comparative financial control evaluation of a
    firms financial condition for two or more time
    periods
  • Ratio analysis selecting two significant figures
    (or a combination of a number of figures),
    expressing their relationship as a fraction or
    percent, and comparingthe value for two or more
    periods of time
  • Example return on investment (ROI) ratio is net
    profit before tax divided by net worth and is a
    measure of the efficiency of total assets in
    generating net profits

22
Financial Controls
  • Budgetary control the process of
    monitoring,comparing, and evaluating actual
    expenditurelevels in various categories in
    relation to budgetedamounts, and making changes
    as needed during the budget time period
  • Purposes of budgeting
  1. Help in planning work effectively
  2. Assist in allocating resources
  3. Aid in controlling and monitoring resource
    utilization during the budget period

23
Financial Controls
Common Types of Budgets in a Business
Sales budget
Capital budget
Materials budget
Research anddevelopment budget
Labor budget
Cash budget
24
Activity-Based Costing Model(adapted from Figure
10.4)
Cost View
Resources
Resource Cost Assignment
Process View
Activities
Input Information
Performance Evaluation
Activity Cost Assignment
Goods And Services
25
Automation-Based Controls
  • Automation the use of self-regulating devices
    and processes that operate independently of people
  • Machine control utilizes self-regulating
    instruments or devices to prevent and correct
    deviations from preset standards
  • In continuous process or robotic operations,
    machines control other machines

26
Corporate Governance? What is Corporate
Governance?
  • The pattern of relations and controls between the
    stockholders, the board of directors, and the top
    management of a company
  • Expectations set by the organization through
    policies, procedures, practices and guidelines
  • Communication makes sure that expectations are
    understood throughout the organization, and that
    there is proper training
  • Accountability holds people accountable for
    meeting the expectations that have been set

27
Corporate Governance A Sample ofKey Terms and
Elements
Bylaws
Annualreport andAnnualmeeting
Board ofdirectors
Proxystatement
Annual meeting
28
External Control Mechanisms
Laws and regulatory agencies
Possibility of being acquired
Proxy statements voting by shareholders
Lawsuits by stakeholders
29
Sarbanes-Oxley Act
  • Eleven major sections dealing with such issues as
  1. Auditor independence

2. Corporate responsibility
3. Enhanced financial disclosures
4. Conflicts of interest
5. Corporate accountability
30
Sarbanes-Oxley Act
  • Certification requires CEOs and CEOs of publicly
    traded companies to personally testify/sign
    that valid financial accounting processes have
    been established and used
  • Auditability requires companies to develop and
    publish internal processes so that outsiders can
    confirm the existence of appropriate controls
  • Disclosure companies must report financial
    results and material changes in corporate
    financial condition or operations on a rapid and
    current basis
  • Criminal accountability
  • Whistle-blower protection

31
Internal Control Mechanisms
  • Independent Boards of directors
  • Compensation contracts that attempt to align the
    interests of top executives with those of
    stockholders
  • Corporate bylaws that set ground rules for the
    responsibilities of top executives and board
    members
  • Evaluation of CEO by the Board
  • Strategic allocation of corporate resources by
    Board
  • Exercise of fiduciary responsibility and control
    by the Board
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