Management Control Systems in a Global Economy

By John C. Lere and Kris Portz

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SEPTEMBER 2005 - In an increasingly global economy, accountants may find themselves working for a foreign-owned multinational corporation; employed by a U.S.-based multinational corporation and designing and implementing a management control system for a recently acquired or opened subsidiary in another country; or responsible for the design and implementation of a management control system for a U.S.-based company that employs a large number of recent immigrants.

An accountant employed by a foreign-owned multinational corporation may be faced with a management control system that differs from U.S. practices. An accountant who has dealt with successful design and implementation of management control systems may find that proven practices may not work well in other countries or in divisions and companies in the United States that employ workers with diverse cultural backgrounds. Differences in cultures can affect the appropriateness and effectiveness of the practices that make up a management control system.

Accountants face two questions when involved with situations where traditional U.S. management control systems and practices may not be the most appropriate or effective: In what meaningful, relevant ways do cultures differ between countries? And what do these differences imply about the elements that make up a management control system?

How Cultures Differ

Understanding differences between cultures can be complex. Although several studies have examined cultural differences, one of the most comprehensive was conducted by Geert Hofstede. From 1967 to 1973, Hofstede collected and analyzed data from more than 100,000 individuals working in more than 70 countries. From those results, and later additions, Hofstede developed a theoretical framework that identifies four primary dimensions that differentiate cultures: power distance, individualism/collectivism, masculine/feminine, and uncertainty avoidance. He used these dimensions to distinguish the cultures of 50 countries and three regions. Later, with Michael H. Bond, Hofstede added a fifth dimension, Confucian dynamism, which has been used to distinguish cultures among 23 countries. Hofstede’s taxonomy is a widely used framework for differentiating among cultures.

Power distance. In his 1991 book, Cultures and Organizations: Software of the Mind, Hofstede defines power distance as “the extent to which the less powerful members of institutions and organizations within a country, expect and accept that power is distributed unequally.” According to Hofstede, workers in large power distance countries, where centralized power tends to be accepted, “expect to be told what to do,” while workers in small power distance countries, where there tends to be less tolerance of centralized power, “expect to be consulted.”

Individualism/collectivism. The individualism/collectivism dimension addresses whether the individual or the group is a focus. In an individualist society, individuals tend to act according to their best interest. The focus of management is on hiring and managing individuals, not groups. In a collectivist society, employees tend to act according to the best interest of the group to which they belong. This does not always align with their individual interests. Hiring focuses on the group to which one belongs and management techniques focus on the group as a whole.

Masculine/feminine. Hofstede’s masculine/feminine dimension is less about gender than about gender roles. At the masculine end, there is a high degree of gender role differentiation: “Social gender roles are clearly distinct (i.e., men are supposed to be assertive, tough, and focused on material success whereas women are supposed to be more modest, tender, and concerned with the quality of life).” At the feminine end, there is a low level of discrimination between genders: “Social gender roles overlap (i.e., both men and women are supposed to be modest, tender, and concerned with the quality of life).”

Uncertainty avoidance. Uncertainty avoidance focuses on the level of tolerance for uncertainty and ambiguity within the society. This dimension relates not to risky situations, but rather to unknown or unfamiliar situations.

A country with a strong uncertainty avoidance culture has a low tolerance for uncertainty and ambiguity. This tends to result in a society that institutes laws, rules, regulations, and controls in order to reduce the amount of uncertainty and ambiguity. Countries with weak uncertainty avoidance cultures tend to have less concern about uncertainty and ambiguity and more tolerance for a variety of options. This type of society would be less rule-oriented and would more readily accept change.

Confucian dynamism. The Confucian dynamism dimension is often characterized as one of long-term versus short-term orientation. Important values in countries labeled “long-term orientation” include persistence, using status to order relationships, thrift, and having a sense of shame. Important values in countries considered “short-term orientation” include personal steadiness and stability, protecting your “face,” respect for tradition, and reciprocation of greetings, favors, and gifts. Individuals and companies in cultures with a short-term orientation tend to adapt to change more rapidly, because long-term traditions and commitments do not become impediments to change.

Different Cultures and Management Control Systems

The potential implications of cultural differences on management control systems are vast. Hofstede’s framework can indicate how differences in cultures can affect the appropriateness and effectiveness of the various practices that make up a management control system. There are potential impacts of the differences on each of Hofstede’s five dimensions.

Power distance. Sweden, Norway, Great Britain, and Israel are small power distance countries, as is the United States. The cultures of Asian and Central and South American countries are generally large power distance. A large power distance tends to be associated with centralization and less participative decision-making, whereas a small power distance tends to be associated with decentralization and greater participative decision-making. Therefore, management control practices consistent with centralization tend to be more effective in large power distance countries. For example, in a centralized organization, management control is likely to remain at high organizational levels, there is likely to be little if any delegation, and managers may have limited authority to make decisions. As a result, measures of performance focusing on following plans and procedures laid out by top management are more likely to be effective in companies in large power distance countries than are measures focusing on the outcomes of decisions made. Therefore, one would expect little, if any, use of accounting measures, such as profit, variances, return on investment (ROI), and residual income, as indicators of managers’ performance in large power distance countries.

Practices consistent with a decentralized organization will tend to be more effective in small power distance countries. In a decentralized organization, managers perform more independently and can develop and apply leadership qualities, problem-solving skills, and decision-making skills. Therefore, measures focusing on the outcome of decisions made are more likely to be appropriate and effective in small power distance countries.

Individualism/collectivism. Out of the 53 countries and regions studied by Hofstede, the United States scored the highest (most individualistic) on the individualism/collectivism dimension. Other individualistic countries include Australia, Canada, Great Britain, and the Netherlands. Collectivistic countries include Colombia, Costa Rica, Ecuador, Guatemala, Panama, El Salvador, Indonesia, Pakistan, Portugal, and Taiwan.

Because individuals tend to act for their best interest in individualistic cultures, work and incentives should be designed so that acting in the best interest of the employee coincides with acting in the best interest of the employer. Organizations may want to set up individual-level rewards and hold individuals accountable for results. Training may also be more individual-based.

The tendency to act according to the best interest of the group in collectivistic cultures means that there may be less need to use rewards and performance measures to align the interest of the individual with the interest of the group or organization. Management may find it more effective to emphasize work-unit cohesiveness and provide team-based rewards and training.

Masculine/feminine. Japan, Austria, Great Britain, and the United States have an above-average ranking (more masculine) on the masculine/feminine dimension. Denmark, Sweden, and Norway rank low on this dimension (more feminine).

A major impact of this dimension on management control systems is apt to be on how the rewards used to align the interests of managers with the organization are defined. Because achievement, heroism, assertiveness, and material success are valued in a masculine culture, workers in these cultures tend to emphasize performance and growth, focus on excelling to be the best, believe work is central to life, and find job recognition is important. Therefore, opportunities for high earnings, recognition, advancement, and rewards based on merit are apt to be effective motivators in masculine cultures.

In feminine cultures, relationships, modesty, and caring for the weak are important values. Work is less central to life; quality of life, time off, and vacations are given greater emphasis by organizations in feminine cultures. Financial rewards are apt to be less effective in such a culture.

Uncertainty avoidance. Countries with a strong uncertainty avoidance ranking and a low tolerance for ambiguity include Greece, Guatemala, and Portugal. Weak uncertainty avoidance countries include Jamaica, Singapore, Denmark, and the United States.

Because strong uncertainty avoidance implies discomfort with unfamiliar situations, individuals in such a culture would want guidance for any situation they might face. To accommodate this, effective management control systems operating in strong uncertainty avoidance cultures will tend to have many formal or informal rules that limit the decision making of managers.

Individuals in a weak uncertainty avoidance culture are less uncomfortable with uncertainty and ambiguity. Companies in such a country tend to be less rule-oriented than companies in strong uncertainty avoidance countries.

These differences are likely to influence the responsibility delegated to managers and the measures used to evaluate and reward performance. In rule-driven companies in strong uncertainty avoidance countries, the role of a manager might not be to make decisions, but rather to see that the rules or procedures are followed. Accounting measures are less likely to be used to indicate performance than as targets to be strictly followed. Accounting measures as overall indicators of performance would be more appropriate in weak uncertainty avoidance cultures.

Confucian dynamism. Long-term orientation countries include Hong Kong, Taiwan, South Korea, and Singapore; the United States is a short-term orientation country. Differences in this dimension are likely to affect the types of measures used to evaluate performance and the types of incentives offered.

Profit-based measures, such as profit growth, ROI, and residual income, tend to focus more on short-term performance and, therefore, are more likely to be used to evaluate performance in short-term oriented cultures. Measures such as sales growth, customer satisfaction, and employee training tend to reflect a long-term orientation.

While financial incentives may be effective in short-term oriented cultures, rewards that convey status, such as titles and promotions, may be more effective in long-term oriented cultures.

Recognizing Cultural Differences

When designing a management control system to be used in multiple countries or with employees from several countries, there are several points to remember:

  • Differences in culture can impact the effectiveness of the practices that can be combined to make up a management control system. Practices that work well in the United States may not be effective in other countries or with employees from other countries.
  • When benchmarking, a company’s culture should be considered. Because culture can affect the appropriateness of management control system practices, benchmarking against a company with a dissimilar culture may be ineffective or undesirable.
  • Additional training may be necessary to help bridge the gap between the management control system and the local culture.

Responding to Cultural Differences

Studies have indicated several ways that multinational companies have responded to differences in culture. Some companies select subsidiary managers whose attitudes more closely reflect the culture of the multinational’s home country than that of the subsidiary country, and use postings to the home country to modify the employees’ attitudes. Other companies have modified their home-country system to reflect differences in a subsidiary country’s culture. If the management control system is to be designed or modified to reflect differences in culture, there are important points to recognize:

  • Systems designed to operate in highly decentralized U.S. companies are likely to be less effective the larger the power distance or strength of uncertainty avoidance that characterizes the subsidiary’s country. A more centralized system may be appropriate.
  • Delegating to individuals, which is common in the United States, is apt to be less accepted in collectivistic countries. Because in collectivistic cultures the focus is on the group, efforts should be made to delegate decision making and implementation to the group.
  • Collectivism may result in less need for external incentives than in the United States.
  • In subsidiaries in countries at the feminine end of the masculine/feminine dimension, rewards recognizing quality of life may be more effective than the financial rewards common in the United States.
  • Performance measures reflecting a longer-term orientation, such as sales growth and market share, may be more meaningful in a long-term orientation culture. Nonfinancial rewards, such as rank and title, may also carry greater meaning than financial rewards. Greater emphasis on long-term measures can result in improved system effectiveness in long-term orientation culture.

John C. Lere, PhD, is a professor of accounting, and Kris Portz, CPA (inactive), PhD, is an associate professor of accounting, both at St. Cloud State University, St. Cloud, Minn.




















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