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CFO on Demand ®

Managerial Control Systems

Lic. Oscar Villalobos T.

ovillalobos@up.edu.mx
Mobile (55) 4351-9286
 Concepts to cover

Chapters
11. Remedies to the Myopia Problem
12. Using Financial Results Controls in the presence of Uncontrollable
Factors

13. Corporate Governance and Board Directors

14. Controllers and Auditors
15. Management Control – Related Ethics Issues
16. The effect of Environmental uncertainty, Organizational Strategy
and Multinationality on Management Control Systems

17. Management Control in not-for-profit Organizations

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 Ch. 13 Corporate Governance and Board of
Directors
Board of directors:
• Shareholders delegate the authority of control to a board
of directors
o The board is given ultimate control over
management
o It monitors and approves management decisions
o It chooses, dismisses and rewards managers

• Two main control responsibilities:

1. Safeguard the equity investors’ interest by ensuring
that management seeks to maximize shareholder
value
2. Protects the interest of other corporate stakeholders
(employees, customers, suppliers, etc.)
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 Director´s duties:

• Duty of care: make and delegate in an informed way

• Duty of loyalty: advance corporate over personal interest

• Duty of good faith: be faithful and devoted to the interest

of the corporation and its shareholders

• Duty to not waste: avoid deliberate dissipation of

shareholder value

• All of these duties are enforced by the legal system

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 Board independence and competence

Board independence

• Boards must ensure that they are independent and

accountable to shareholders

Board competence

• Boards are given ultimate control over management

• They are singularly responsible for the selection and

evaluation of CEO and senior management

• Boards also review and approve the corporation’s long-

term strategy and important management decisions
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 Audit committees

• Audit committees provide independent oversight over

companies financial reporting processes, internal controls,
and independent auditors

• They enhance a board, allowing them to focus on the

corporations financial reporting-related functions

• In publicly held corporations, audit committees must be

financially-literate outside directors

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 Compensation committee

• Deal with the compensation and benefits provided to

employees and particularly to top management

• They rely on the companies HR function for staff support

• Often have outside consultants to help

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 Corporate Governance

• This is the sets of mechanisms and processes that help

ensure that companies are directed and managed to
create value for their owners while at the same time
fulfilling responsibilities to other stakeholders

• Corporate governance deals with controlling the behaviors

of top-level management

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 Various forms of Corporate Governance

• Many mechanisms and institutions can have corporate

governance effects

• In Anglo-American economies, the primary governance

mechanisms are provided by equity markets and structures
that support or result from them.

o Laws and regulations

o Boards of directors
o External auditors
o Governance ratings
o Takeover threats

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 Various forms of Corporate Governance
• In some Western European and Asian cultures relatively
more corporate governance is effected by concentrated
ownership

• Keiretsu (Japan)
• Chaebols (Korea)
• Institutional investors (India)
• State ownership (China)

• Governance in Germany is heavily influenced by national

banks, insurance companies, and employee representation

• Scandinavian countries rely more on culture

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• Islamic cultures follow Sharia Law (religious law)
 Corporate Governance relation to
Management Control

• Corporate governance systems and management control

systems are linked

• A corporate governance perspective is slightly broader than

MCS focus

• A Management Control System focus takes the perspective

of top management and asks what can be done to ensure
proper behavior of employees in the organization

• The corporate governance focus is on controlling the

behaviors of top management, and through their direction,
everyone else at the firm

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 Prevalence
Because of major business scandals (2008) a large focus has
been put on corporate governance

• The U.S Sarbanes-Oxly Act of 2002

o To improve transparency, timeliness, and quality
of financial reporting.
o Section 404 is most important related to internal
control
✓ It mandates an evaluation of effectiveness of
a firms internal control by both firms
management and the firms external auditors
✓ State whether or not internal control systems
are effective
o Section 302: certifies that management has
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reviewed financial statements
 Prevalence
o Section 401: financial information of any relevant
off-balance sheet obligations that may exist

• It also led to corporate governance reforms in many

countries
• Legislative response to number of corporate
scandals that sent shockwaves through financial
markets
• ENRON TYCO WORLDCOM
• SOX – strengthen corporate oversight and improve
internal corporate control (MCS)
• Protect shareholders from fraudulent representation
• Investors need to know that financial information is
truthful and that independent third party has verified
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accuracy
 “True leadership is the
essence of good
corporate governance”

Dr. SandeepTare

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