Effective Management Control Systems & Delegation Strategies

Posted on Aug 27, 2025 in International Business Economics

Delegation of authority is a matter of degree. A subunit manager may take decisions:

• Completely autonomously.
• Following general instructions from upper management.
• Informing upper management afterwards.
• Consulting upper management prior.
• After obtaining explicit authorization from upper management.
• Never, only executing orders from upper management.

Causes of Management Control Problems

Lack of Direction

Some employees perform inadequately simply because they do not know what the organization wants from them. When this lack of direction occurs, the likelihood of desired behaviors occurring will be haphazard. Thus, one function of management control involves informing employees as to how they can direct their contributions to the fulfillment of organizational objectives.

Motivational Problems

Even when employees understand what is expected of them, some do not perform as the organization expects because of motivational problems. Employees sometimes act in their own personal interest at the expense of their organization’s interests (e.g., falsifying data, requesting undeserved incentive pay, financial fraud).

Personal Limitations

The final behavioral problem that MCSs must address occurs where employees who know what is expected of them, and who may be highly motivated to perform well, are simply unable to perform well because of any of a number of other limitations. Some of these limitations are person-specific. They may be caused by a lack of aptitude, training, experience, stamina, or knowledge for the tasks at hand. Sometimes jobs are not designed properly, causing even the most physically fit and apt employees to become tired or stressed, leading to on-the-job accidents and decision errors.

Characteristics of Effective Management Control

The cost of not having a perfect control system can be called a control loss. Because of control costs, perfect control is rarely the optimal outcome; what is optimal is control that is sufficient at a reasonable cost. It must be future-oriented because the goal is to have no unpleasant surprises in the future. Effective control is crucial because organizational success depends on a good Management Control System (MCS).

Organizations that fail to implement adequate MCSs can suffer asset loss or impairment, revenue deficiencies, excessive costs, inaccurate records or reports, leading to poor decisions, legal sanctions, or business disruptions. At the extreme, organizations that do not control performance on one or more critical dimensions can fail.

Control Problem Avoidance Strategies

Management Control Systems (MCSs) are not always the best way to achieve effective control; sometimes problems can be avoided. Four prominent avoidance strategies are activity elimination, automation, centralization, and risk sharing.

Activity Elimination

Turning over potential risks, and the associated profits, to a third party through mechanisms such as subcontracts, licensing agreements, or divestment.

Automation

Managers can sometimes use computers, robots, expert systems, and other means of automation to reduce their organization’s exposure to some control problems. These automated devices can be set to behave appropriately; when operating properly, they usually perform more consistently than humans. Computers eliminate the human problems of inaccuracy, inconsistency, and lack of motivation. Once programmed, computers are consistent in their processing of transactions, and they never have dishonest or disloyal motivations.

Centralization

In this strategy, top management reserves the important (and sometimes less important) decisions for themselves, and in so doing, they prevent lower-level employees from making poor judgments.

Risk Sharing

Sharing risks with outside entities can limit potential losses, such as buying insurance to protect against certain types of potentially large losses, purchasing fidelity bonds for employees in sensitive positions (e.g., bank tellers) to reduce the firm’s exposure, or entering into a joint venture agreement.

Management Control Alternatives

For control problems that cannot be avoided, or for which avoidance is not chosen, managers must implement one or more control mechanisms that are generally called management controls. The collection of these mechanisms forms a Management Control System (MCS), which may include:

• Hiring people who can be relied upon to serve the organization well.
• Providing modest performance-based incentives.
• Establishing sets of policies and procedures that employees are expected to follow.
• Utilizing a large professional internal audit staff, while others only ensure minimal compliance with regulatory requirements in this regard.

Principal-Agent Relationships and the Agency Problem

Basic formulation: Y = j (e, q), where:

• Y: the subunit’s output
• e: the agent’s effort
• q: environmental factors, uncertainty
• j: how effort transforms into output

Core Concepts of the Agency Problem

Conflict of Interests

The agent prefers less effort (e), while the principal desires more output (Y).

Information Asymmetry

The agent knows more about e, j, and q. The principal pays an incentive so the agent will exert more effort (e) and reveal information about j and q. The incentive (IN) is a function of Y: IN = f(y).

Costs and benefits associated with delegation include:

• Loss of efficiency due to delegation (EL)
• Cost of incentives (IN)
• Monitoring costs (MC)
• Opportunity costs due to delegation (OP)
• Managerial empowerment (ME)
• Managerial specialization (SP)

Opportunity Costs of Delegation

The agent may face challenges such as:

• Inability to resolve certain issues quickly enough due to lengthy decision-making processes.
• Failure to take advantage of opportunities arising from unforeseen changes in the market or in general.
• Failure to identify unforeseen threats.

The principal must make decisions with regard to the subunit with less information than the agent.

Impact of Managerial Empowerment

This effect is the inverse of opportunity costs. The more authority an agent has, the fewer decisions must be made by the principal (who has less information); the easier it will be for the agent to respond swiftly; the easier it will be for the agent to take advantage of unforeseen opportunities and to identify unforeseen threats.

Benefits of Managerial Specialization

The delegation of specific tasks to an agent allows for professional specialization in that area. The principal can also hire personnel already specialized in that area. Specialization can increase the organization’s efficiency beyond the capabilities of the principal.

Results Controls

Results controls involve rewarding individuals for achieving good results or punishing them for poor results. They influence decisions and actions because they motivate employees to be concerned about the consequences of their decisions and actions.

Elements of Results Control

Defining Performance Dimensions

“What you measure is what you get.” Hence, if not congruent with the organization’s objectives, the controls will actually encourage employees to do the wrong things!

Measuring Performance

Performance can be measured through:

• Objective financial measures (e.g., accounting-biased).
• Objective financial market-based measures (e.g., stock price).
• Objective non-financial measures (e.g., market share, cycle time, waste).
• Subjective measures (e.g., managerial characteristics like “being a team player”).

Setting Performance Targets

Targets have:

• Motivational effects.
• Allow for interpretation of performance.

Providing Rewards or Punishments

These can include:

• Salary increases
• Bonuses
• Promotions
• Job security
• Recognition, etc.

Conditions for Effective Results Controls

Results controls work best only when all of the following three conditions are present:

1. Superiors/managers must know what results are desired in the areas being controlled.
2. The individuals whose behaviors are being controlled must have significant influence on the results in the desired performance dimensions.
3. Superiors/managers must be able to measure the results effectively.

Results control requires that employees’ actions are not constrained; they should be empowered to take whatever actions they believe will best produce the desired results.

Action Controls

Action controls ensure employees perform (or do not perform) specific actions known to be beneficial (or harmful) to the organization. These are implemented through action accountability, behavioral constraints, pre-action reviews, and/or redundancy.

Effectiveness of Action Controls

Action controls are usable and effective only when managers:

• Know Desirable Actions

  This is difficult in highly complex and uncertain task environments (e.g., for research engineers or top-level managers).

• Ensure Desirable Actions Occur

  Managers must have the ability to make sure that the desirable actions occur.

Action Accountability

Holding employees accountable for the actions they take. This requires:

• Defining acceptable and unacceptable actions.
• Communicating these definitions to employees (e.g., work rules, policies and procedures, codes of conduct).

Observing and Tracking Actions

• Direct observation / supervision.
• Periodic tracking (e.g., “mystery shoppers”).
• Evidence of actions taken (e.g., activity reports).

Rewarding or Punishing Actions

Rewarding good actions or punishing actions that deviate from standards.

Behavioral Constraints

Physical Constraints

Locks, passwords, limited access.

Administrative Constraints

Restriction of decision-making authority, separation of duties.

Pre-action Reviews

Scrutiny of action plans and budgets, involving review, modification, and approval processes.

Redundancy

Assigning more people to a task than strictly necessary (e.g., backup personnel or computing facilities). This can be costly and may induce conflicts and frustration.

In practice, most action controls are aimed at preventing undesirable behaviors.

People Controls

People controls involve individuals controlling their own behaviors (“personnel control” or “self-monitoring”) and controlling each other’s behaviors (“cultural controls” or “mutual-monitoring”).

Personnel Controls (Self-Monitoring)

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

Implementing Personnel Controls

Generally, it is about finding the right people, giving them a good work environment, and the necessary resources, through:

• Selection
• Placement
• Training
• Job design
• Provision of necessary resources

Cultural Controls (Mutual-Monitoring)

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

Cultures are built on shared traditions (norms, beliefs, and ideologies) and attitudes (ways of behaving).

Shaping Organizational Culture

Five ways to shape culture:

1. Codes of Conduct

   Codes of ethics, corporate credos, mission statements, etc., are 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. These are fundamental guiding principles of the company.

2. Group-Based Rewards

   Examples include bonuses, profit-sharing, and employee ownership of company stock. These represent cultural controls rather than results controls because the link between individual performance and rewards is often weak.

3. Intra-Organizational Transfers

   These improve socialization of individuals in an organization and inhibit the formation of incompatible goals and perspectives, and improve identification with the organization as a whole as opposed to subunit identification.

4. Physical and Social Arrangements

   Examples include office plans, interior decor, dress codes, and vocabulary.

5. Tone at the Top

   Top management statements must be consistent with the culture they are trying to create, and importantly, their behaviors should be consistent with their statements.