Fairness, Justice, Subjectivity,

Objectivity and Goal congruence in Management

Control Systems

Presented By Group 2
Aditya Parchure
Dhaval Mistry
Keerthan Surathkal
Koushik Chakraborty
Nikhil Nayak
 Background

• Intention of MCS is to motivate managers to accomplish

Organizational goals.
• Incentives include rewards, promotions
• Designed to achieve the greatest possible goal congruence
• The paper attempts to show that organizational justice may act
as a link between formal and informal control elements.
Two stable states :
• Ideal goal congruence (System is lawful and the user is fair)
• Total goal incongruence (where the system is unlawful and the
user is unfair)

Two unstable states :

• Goal congruence is occasional (unlawful system used fairly)
• Perverse (lawful system used unfairly)
Justice is seen as a central element of control system design and
use.
• Literature on MC has focused on formal
controls
• But wherever a process is implemented,
formal and informal controls co exist.
• Hence it is unusual that research on design
control systems that lead to goal congruence
has been undertaken.
• One needs to find a consistent link between
the two
• In this presentation we show how
organizational justice may play this role in
formal and informal control elements.
• Past literature considers fairness and goal
congruence the principal criteria for
evaluating control system design.
• This presentation shows how fairness is
related to justice
• In empirical research, fairness has been
considered to be the perception of
organizational justice.
• This research considers fairness as central; but
has been designed to test specific hypothesis,
rather than build a theoretical framework.
• Fairness is considered important on a practical
level.
• Small organization-No fairness control systems
• Unfairness may arise leading to unjustifiable
differences in rewards between organizational
units or individuals whose performance is similar.
• Top management reacts by establishing
additional formal controls to maintain minimum
levels of fairness
• Yet this still leaves room for unfairness when the
system is misused.
• We can distinguish between two kinds of fairness,
one embedded in rules, the other a quality of the
actions of managers.
• First, we explore the concepts of MCS, goal
congruence and fairness.
• Second, we identify the objective and subjective
elements in goal congruence and fairness.
• Third, we define the role of justice and fairness in
organizations
• Fourth, we show that formal control systems are
not enough to guarantee goal congruence.
• Lastly, we show that both justice in the system
and fairness in the decision maker are needed in
order to achieve stable goal congruence.
Concept of management control systems
• “An organization without some form of control is
impossible”
• Managerial tasks entail setting goals, monitoring
execution, evaluation results, and allocating
rewards and punishments.
• A substantial part of managerial activities therefore
have to do with management control.
• Definitions of MCS have evolved over time.
• Anthony’s definition stresses organizational
objectives that are fixed and taken as given , and
effectiveness and efficiency as measures of success
in achieving them.
• Twenty three years later the definition again changed
and was less mechanical and more strategically
oriented.
• There is an explicit recognition that managers
“influence organizational members”
• Eccles definition says about creating conditions which
will improve the probability that desirable outcomes
will be achieved.
• Sharp contrast to the previous two definitions.
• First the control is probabilistic
• Objectives are not assumed to be set before they are
achieved.
• i.e. outcomes should not be limited to previously set
objectives because even better outcomes may be
possible.
 Definition of formal MCS
• Goals and strategies are set
• Converted to an annual budget for each
responsibility center
• Actual performance is measured and assessed
• Rewards and punishments are allotted to each
responsibility center.
• Applies to systems with more certainties.
• In rapidly changing, highly uncertain
environments, however a formal control system
may not be beneficial.
• Hence Informal structures are needed to
influence the control process
• Organization without control system is impossible and small organizations
have very rudimentary formal of control system.
• Hence informal system plays a vital role at any stage of development.
• Both the systems take large part of the top management’s time: to set
goals, evaluate results and allocate rewards and punishments.
• Hence MCS always have formal and informal components in organizations.
• MCS system can be formal, informal or mix of both.
• In small companies it is informal and only evaluation of the organization
and its units will be informal as will be associated rewards and
punishments.
• Organizations with formal control system are difficult to find. The closest
example of formal one can be the public sector still there exists
arbitrariness.
• These systems are less flexible and injustice does not appear in the form of
arbitrariness rather in the form of unjust rules which is difficult to change.
• A formal control system can not exist alone in the organization there is
some degree of subjectivity exists. Hence most of the case mix system exist.
Goal Congruence:
• Goal congruence is the central purpose of MCS.(Anthony and Govindrajan)
• Actions people are led to take in-accordance with the self- interest are
also in the best interest of the organization.
• In the imperfect world, perfect goal congruence doesn’t exist.
• It tells the MCS not to encourage individual against the best interest of
organization.
• In order to evaluate Management Control practices,
2 issues:
1. What management practices motivate people to take their own self-
interest?
2. Are these actions in the best interest of the organization?
• Controller must select the objective and measures in such a way that a
good decision by any manager is also a good decision by the organization,
according to Vancil (1973).
• So how the controller should design the control system.
• Goal congruence is parallel to the “incentive compatibility” by Hurwich.
Contd…
• He tried to answer that how institute to be designed when self- interested
manager try to take the advantage by manipulating the variables.
• It put foundation of design & implementation of such system that shows
how society’s allocations and decisions depend on agent’s action and
ability of communication.
• Depending upon the goal whether it is aligned, partially aligned or totally
misaligned researchers have differentiated the organization as normative,
coercive or instrumental.
• In practice organizations are close to instrumental and so problem is to
find the solution that provide inducements to the individual to contribute
to the organizational goal.
• Incentive compatibility is a desirable characteristics; but it is limited to
formal system and tangible variables.
• So question arises
• Is there no need of proper design best align with individual and
organizational goal and how should be designed for goal congruence?
Fairness and Controllability:
• For Vancil, ’Fairness’ means- Manager must believe that the summary
financial measurement used to report on his performance is appropriate
and encompasses the factors he can control .
• Hence he relates fairness to controllability and to some extent it is
objective.
• But he again expresses that fairness is not a fact rather a perception and
hence subjective in nature.
• Evaluation based on controllable performance can be considered to be
“fair” and this is one of the tenets in management accounting.
• Fairness concept used in transfer pricing: In an organization transfer
pricing is a fair way to allocate profits to different responsibility centers.
• But it is beyond the controllability criterion. Transfer pricing is called as
‘fair outcome’ distribution and hence rejects the conception of those
which can be influenced
• Hence fairness in setting transfer prices is more likely to be a norm of
distributing income than a norm of control process.
 Subjectivity and Objectivity in congruence and
fairness:
• Fairness: Fairness has both subjective and objective element.
• There is no general rule for transfer pricing that is ‘fair’ and hence always
there exists room for decision and hence partly subjective.
• The people affected by this have own subjective perception of this fairness
decision.
• Vancil considers fairness is the perception of manager and so manager
subjectively assess what they consider to be fair and how fair it is?
• But there is also an objective dimension and most common is the
“Controllability” principle. Also manager know what they want when they
ask for controllability to be included in their evaluation.
• Yet it is imperfect in implementation and subjective perception of the
manager.
• Goal Congruence: It has also both subjective and objective elements.
• When there is agreement of long-run objective, it is not clear that what
short-run objective to be purdued to achieve the long run objective.
• In general, short run maximization does not lead to long run maximization.
Efforts:
• If MCS is considered to be one of the main instruments of corporate
governance, the we need to acknowledge that MCS design and operation
are most important.
• So we have to identify the needs of MCS , both in its design and use.
• By including fairness we can better understand how different levels of goal
congruence are attained in the long run.
 Justice in Organization
• Justice can be studied in two ways
• How to design a just system
• Address perception of system decision
• Two ways have remain separated and have produced
different results
• Philosophical enquiries : what systems to be adopted in
order to be just
• Empirical research : different system characteristics –
fair or not
• Researchers earlier explicitly used philosophical
theories
 How Just Systems Need to be
Designed
• Aristotle : Justice a virtue and a part of human
character
• Do what is just and wish for what is just
• A man is just when he acts justly by choice
• Lawfulness : quality of system
• Fairness : quality of acts
• Comprehensive set of laws to establish
relationships, distributions and contributions
leading to just outcomes
• Final goal - Human happiness
 How Just Systems Need to be
Designed
• Fairness is application of lawful system with
corrections to account for personal and external
circumstances that are specific to individual case
• It includes attenuation of toughness of this
system when situational and personal factors are
taken in to account
• Acts of Justice require that the authority that
decides over the system exercise virtue of a just
person
• Distributive justice : Equal merit deserves an
equal share of total
 Justice perceptions
• Why people have justice motivation?
• How judgments are formed?
• Consequences of different justice perceptions &
justice policies applied in organizations
• Research on developing guidelines to help
managers improve justice perception
• Many desirable outcomes may be adversely
affected by perceptions of injustice
• Research in subjective perception of justice- what
makes people perceive managerial actions as fair
 Justice perceptions
• Subjective dimensions of justice : 1) system
characteristics 2) managerial behavior and actions
• Formal- Procedural justice & Informal –Interpersonal
justice
• Interpersonal justice goes beyond procedural decision
making and focuses on outcome
• Procedural and distributive justice interlinked – people
accept less favorable outcome if the procedure
delivering it is fairer
• Are people able to clearly distinguish between different
aspects of justice
 Justice perceptions
• Informational justice : Perception of justice
attaching to the information received when a
personal interaction takes place
• Combined with interpersonal justice to form
interactional justice
• Three types of justice in all – Distributive,
Procedural, Interpersonal
• Empirical findings vs Philosophical theories
• Theoretical link of MCS and justice…
 Justice vs. Fairness
 As per Aristotle, justice is the sum of lawfulness and fairness,
 So, justice & fairness are not readily interchangeable,
 A system can be lawful or unlawful, whereas an act can be just or
unjust, fair or unfair,
 People perceive different types of things as being (un)fair or
(un)just,
 There is a distinction between the justice or fairness of the system
and the justice or fairness of the decision maker,
 Two aspects have been labelled: distributive and procedural
justice (for the system’output or procedure) and interpersonal
justice (for the decision maker).
 Lawfulness and Control Systems
 A formal management control system is lawful if
a. goals for the organization as a whole are set to integrate
individual goals,
b. Goals are distributed across subunits according to personal
competences,
c. each subunit is evaluated based its actual achievements,
d. Rewards received by the organization’s members are not
below minimum level,
e. The system should include ways of repairing injustice.
 Relation Among the Factors
 Vancil argued that fairness (mainly defined as controllability) and
goal congruence are interactive in management control system
design,
 It fails to answer the possible cause and effect relationship
between fairness and goal congruence,
 Empirical research inquire the importance of fairness perceptions
in the design of management control systems,
 Research included the positive effect of giving people voice and
explanation during the management control process ,
 Later emphasised on fairness perceptions and mechanisms to
lead higher performance,
 Later the studies focussed on aspects of controllability principle as
fairness.
 Relation Among the Factors
 It is evident that managers become willing to accept being
evaluated on factors they can influence,
 But necessarily expect to have full control over internal factors
and overlook the external factors,
 Link the perceptions of justice and satisfaction arising from
management control systems to a positive behaviour towards
organization and supervisor,
 The model of Burney et al. omits an important variable:
interpersonal justice.
 That model fails to infer any causality relationship and so leave
unexplored some points of justice being an important input for
guaranteeing different levels of management control system
efficiency(or goal congruence).
 Justice Sufficient as Formal System?
 In the context of justice, the formal system has to do with
lawfulness, so it is sufficient to have a lawful control system,
 But management control systems rely exclusively on suboptimal
controls where output is not measurable and the activities
performed are not perfectly observable,
 And under bounded rationality it is impossible to establish a
contract that anticipates every possible contingency arising
from future fulfilment of the contract,
 The use dimension makes it imperative to go beyond formal
justice requirements,
 Power needs to be delegated in the expectation that people
will honour the trust placed in them,
 Hence the control systems are merely not to include formal justice
requirements or lawfulness, rather it has to dealt by fairness.
 Justice, Fairness and Goal congruence

• Ideal goal congruence

• Perverse goal congruence
• Occasional goal congruence
• Total goal congruence

Control system formal design

Lawful Unlawful
Fair Ideal goal congruence Occasional goal congruence
Action taken by decision maker
Unfair Perverse goal congruence Total goal congruence
Implications for empirical research

• Theoretical explanation of Justice and Fairness.

• Providing tentative set of testable hypothesis.

Hypothesis1.1- In a system perceived as lawful and being fairly, people will

show high commitment and will increase over time.
1.2- In a system perceived as lawful and being fairly, people will
show high commitment and will increase over time.

Hypothesis2.1- Perceptions of lawfulness of MCS will decrease when the

system is perceived to have been unfairly.
2.2- Individuals identification with organizational mission decreases
when the system is perceived to be used unfairly.
Cont…..

• Hypothesis3.1- Perceptions of overall of MCS increase when the system

manager is perceived to have acted fairly.
3.2- In an unlawful control system that is perceived as being fairly,
people believe in the future justice of the system.

• Hypothesis4.1- In a system perceived as unlawful and as being used unfairly,

people will predispose to engage in unethical behaviour.
THANK YOU