Those who cannot remember the past are condemned to repeat it.

George Santayana

The Wizard of Oz: Pay No Attention

Control: Enron, BPold Ch. 13, new Ch. 14

Control: Enron, BPold Ch. 13, new Ch. 14

Planning Leading Organizing Controlling

We’ll discuss: Did Enron violate control system principles/ mechanisms?Any parallels to BP/Amoco—Texas City explosion, Gulf spill?

Control systems: regulate activity bureaucratic: budgets, rules, policies, proceduresmarket: pricing, economic informationclan control: culture, norms, values

Have you ever experienced evidence of poor controls?

Lax top managementNo policiesNo agreed-upon standards“Shoot the messenger” managementNo periodic reviews of people or plansBad information systemsNo ethics in the culture

Control

Control - any process that directs individuals toward the achievement of organizational goals

Four steps:1. Set performance standards

Standard - expected performance, a benchmark

2. Measure performance

3. Compare to the standardsPrinciple of Exception - a managerial principle—control is enhanced by concentrating on the exceptions to or significant deviations from the expected result or standard

But, need data about the norm (e.g., SPC)4. Correct or reinforce

Control: 3 Ways to Get It

Bureaucratic Control—budgets, rules, regulations, authority

Market Control—pricing mechanisms and economic information to regulate activities

Clan Control—culture, norms, values, shared goals

Bureaucratic controls

Feed-forward controlbefore operations begincreate plans, structures, policies, procedures, and rules

Concurrent control while plans are being carried out direct, monitor, and fine-tune activities

Feedback control Audits, performance dataUse information about results to correct deviations from

the acceptable standard

Bureaucratic controls

Bureaucratic controls

Accounting policies and audits—Internal—ensure our numbers are accurate, draw conclusions

about past, present, and futureExternal—similar, bound by law to be objective and legal

Board of directors—committed to but not controlled by us,dispassionate semi-outside guidance and decision-making.

Consultants—help us (why keep separate from auditors?)

Regulators and politicians—balance needs of firm, industry, society

HR practices, decision-making policies, organizational structure

Bureaucratic controls: Financial

Budgets: What are our plans and expectations?Sales, Production, Cost, Cash, Capital, Master budget

Income Statement: How did we do?Revenue – Expenses = Net Income

Balance Sheet: What’s our status? Assets: Values of things we own

Liabilities: What we owe to creditors

Stockholders’ Equity: The remainder—belongs to owners

Current Ratio – Can we pay short-term liabilities?

Debt-Equity Ratio – Can we pay long-term liabilities?

Return on Investment (ROI) – Is it worth investing in us?

Bureaucratic controls: FinancialExample: Whitewing

1 of 3000+ Enron off-balance sheet Special Purpose Entities (SPEs)(from whistleblower Sherron Watkins’ book)

Downsides to bureaucratic control

Rigid bureaucratic behavior—gotta follow the rules

Tactical behavior—focus on short-term goals and methods, not long-termManagement Myopia: Focusing on short-term earnings and profits at the expense of longer-term strategic obligations

Resistance—people might dislike, cheat, not comply

Market controls

Price indicates how well we do things, value of goods and servicesCompetition means we have to be good to succeed

External: Stock priceStock analysts—give honest appraisals of firmOpinion makers/advisors—help firm, but in context of stakeholders.

Internal:Using profitability, market share to evaluate employeesCapital allocation processUsing external labor market rates to determine pay rates

Clan controls

Culture: norms, values, shared goals

What do we want?—what are our company and individual goals?How do we get it?—what is acceptable or desirable?Dissent versus conformityTrust versus distrustHow do we share rewards?How do we deal with problems?

Enron: Bad bureaucratic, market, clan controls

Any parallels to BP/Amoco—Texas City explosion, Gulf oil spill?

What we just did: Control

Why control systems?

Bureaucratic controls: Financial and others

Market controls: External and internal

Clan controls: Culture

Next time: Communication (old Ch. 12, new Ch. 13)