Daniel F. Muzyka and Professor Lawrence A. Weiss
Performance pressure has been building on most businesses, especially during the recent economic crisis. Unfortunately, these pressures all too often tempt managers and employees - with their biases and human weaknesses - to undertake inappropriate actions that don’t align with the strategic goals of their organizations.
While many organizations have put in place computer-based systems to catch “anomalies” or attain higher levels of personal accountability, cost reduction pressures have caused firms to reduce their overall investment in human oversight.
We believe that this has contributed to the continuing stream of reports of fraud in the news. The misdeeds we read about extend beyond Wall Street to the medical establishment, not-for-profit agencies, religious organizations and individuals.
One stunning example of the impact these actions can have on a corporation is Pfizer Inc.’s agreement to pay the US government $2.3 billion – representing 29 percent of its R&D budget - to settle allegations that it improperly promoted a number of products, including the pain medication Bextra.
On a lesser scale, many smaller organizations have reported outright thefts due to undetected holes in their technology infrastructures, and large write-offs due to inappropriate managerial investments that went unreviewed due to downsizing.
The bottom line is that managers need to be more attuned to managerial disorganization and white collar crime. This message has clearly come through due to the recession - where some companies materially contributed to their own economic woes or were more vulnerable because of senior management’s obsessive focus on unsustainable elements of their business at the expense of all else. All of this suggests that we need more strategic as well as operational monitoring, review and control.
The notion that shareholders and senior management have largely succeeded when they select and empower a group of people to run an enterprise has gone to far.
Given human nature, oversight and direction are still important. Also, the existence of review mechanisms drives appropriate behavior – that which gets measured gets done, and oversight, in and of itself, can reduce inappropriate corporate actions.
Managers will respond to incentives and disincentives in the same way as the rest of the population. While government may need to change some rules, it remains management’s role to ensure an appropriate focus on measurement and control within the firm. Managers must strive to create, install, and monitor effective control systems.
This is especially difficult in tough economic times, as these are expensive and the best ones never show a return – until losses and fines appear. However, like inspectors at a meat processing facility, keeping the plant clean and safe will keep customers and shareholders happy, while managers retain their jobs - and stay out of jail.
So how should you improve the situation in your organization? The answer generally fits into four areas:
Corporate philosophy and culture
Managers should create and articulate a corporate culture where individuals feel accountable, in as supportive a way as possible. To support the implementation of values that exist in the absence of explicit rules, we may need “ethics commissioners” to help in interpreting rules and provisions for people to blow the whistle on inappropriate behaviour.
Strategic management
A firm’s strategic direction, goals and programs should be clearly articulated, with properly aligned metrics, to measure whether what is being asked for is being done. Incremental review mechanisms are key to evaluating overall performance. This is particularly true in the area of new product development and innovation. For entrepreneurial businesses, venture capitalists regularly practice incremental review, particularly surrounding rounds of investment, to measure compliance with, and achievement of, overall strategic objectives.
Continuous learning
The most effective organizations identify areas where they wish to undertake reviews for the purposes of learning and control. Calling in external reviewers or an accrediting body to review operations and provide benchmarks is a useful exercise and is part of the “control suite” for many successful organizations. Getting unbiased comparative insight and benchmarks can have a profound impact on organizations and can help guide management focus and investment.
Control
Finally, it is important to regularly review the existence and nature of control processes and procedures. It is too easy for these mechanisms to become outdated or inappropriate given environmental or operational changes. We have heard too many horror stories where companies essentially hoped their managers and staff would act in the firm’s best interest as its cost-cutting efforts reduced the overall activity level by corporate auditors. Firms leave themselves exposed if they fail to ensure an adequate level of internal and external human auditing activity. There is a caveat. We are not arguing for the imposition of large numbers of rules which hamstring management with excessive goals and objectives. Doing so would stifle innovation, frustrate the team and, eventually, lead to poor comparative performance.
Rather, we are arguing for senior management to continuously review how they monitor and control their organizations.
Like most things in life, maintaining adequate control is all about keeping balances. We are suggesting that you review your balance today.