The Effectiveness Of Management Control In Small Firms

Theories of Governance

Organisations have changed drastically in the last century. To improve their success, these organisations have evolved their decision-making process. Governance is an essential part of this process. Governance is the section of an organisation that tackles group issues by making vital decisions- this is the definition as simple as possible. But this definition becomes limited for the case of international organisations. In this case, governance is the procedures that control all the actions undertaken by the entire organisation and its stakeholders (Coupet, & McWilliams, 2017). Furthermore, governance deals more with the steps leading to the decision instead of the actual decision (Wei, Connery & Hoskisson, 2017). What this means is when it comes to international organisations, governance is not concentrated on growing the organisation instead it simply dictates the guidelines used by the organisation to achieve its objectives.

Governance is broad, it varies from one organisation to the next. Therefore, the correct definition of governance is based entirely on the context. The theories of governance are similar. They do not apply to all organisations but depend on the activities of the organisation and its decision-making process. But even with their distinguished ideologies, all the theories of governance agree on one thing; that rivalry can be settled by both the autonomous government and international organisations that have governmental and non-governmental participants (Sacristán López de los Mozos, Rodríguez Duarte & Rodríguez Ruiz, 2016). These theories can be used to evaluate the governance of an organisation both for-profit and non-profit organisations.

The theories mostly used are agency theories, stewardship theories, resource dependence theories and stakeholders theories.

In any organisation, there exist two groups of people, the first group are the people who own the organisation, for example, shareholders and investors. The second group are the people that are paid to make the organisation run, the managers. From the need to separate these two groups, agency theory emerged. Agency theory argues that the owners (also known as principals) and the managers (called agents) have separate objectives. And these objectives rival each other (Bosse & Phillips, 2016). The theory considers the organisation as an agency. It assumes that the principal experiences agency loss, which means that they do not receive the maximum returns simply because they are not managing the agency themselves (Parker, Dressel, Chevers & Zeppetella, 2018). Instead, they hire agents to manage the business for them, therefore, part of their returns on investment goes towards rewarding these managers. And in order to motivate the agents, agency theory suggests the use of financial incentives. These incentives would help maximize the returns of the principals.

Contributions of Stewardship

Any organisation that adopts this theory and develops a board of directors from its perspectives tend to be very rigid and show authority and control, in monitoring the behaviour of the agents in order to maximize the return of the principals (Schnittfeld & Busch, 2016). This means that this board will micromanage the agent. It would be involved in every decision made because they are responsible to the principals. In the case of non-profit organisations, a board that follows the governance techniques of agency theory tend to exhibit a more hands-on managerial way on behalf of the other stakeholders (Schnittfeld & Busch, 2016).

This theory argues that the managers of an organisation are the administrator of the owners and the two share a similar goal. The growth of the organisation. For this reason, the board that follows this theory is not expected to be controlling as is the case with agency theory (Jan, 2018). They are only expected to support the managers and consequently, they have a chance to motivate the managers and increase the profits by appealing to the potential of the managers and inspiring higher performance (Keay, 2017). The assumption of this theory is that the interaction between the board and the managers is one that promotes guidance, training and an all-involving decision-making process (Jan, 2018).

The theory of resource-dependence as the channel that gives the resources to the managers. These resources are then used to realize the objectives of the organisation (Miles, 2017). The theory suggests that the board should only be there to make available any assistance, for example, labour, finance and mental support. It also recommends that the board intervene for them on behalf of the managers to the owners. For instance, if there exists a member of the board that has some experience on a field that also exists in the company, the theory suggests that this board member assist to guide the managers in a way that helps the company achieve its goals. Other assistance from the members are directed to the organisation directly and not through the managers, for example, looking towards some of their friends to provide funding for the organisation (Voss & Brettel, 2014). In terms of decision making, the resource dependence theory suggests that the decision is made by the managers but with some sort of approval of the board. This is to utilise their expertise and ideas.

This theory suggests that shareholders (owners) are not the only group that claim some stake in the organisation (Zieita, 2017). The entire internal and external environment have a stake in the organisation. Meaning the surrounding community, the employees, customers, suppliers and even the competitors contribute to the existence of the firm. They all have something to lose or gain should the organisation either succeed or fail (Zieita, 2017). Thus, the challenge to the managers is to ensure that all the stakeholders get their share of the organisation- the stakeholders include everyone and not just the shareholders.

CEO stewardship and firm performance.

The theory promotes the idea of an all-inclusive social duty that obliges everyone to act in an ethical manner no matter the cost to the organisation, even if it decreases in the overall profit (Belle, 2017). Given that, the duties of both the managers and the board are well defined; the manager strives to make everyone satisfied and happy while at the same time and in the same conditions increase the profitability of the company (Belle, 2017). The role of the board, on the other hand, is to guide the manager in taking the interests of the stakeholders by making sure that the organisation’s activities consider the rules of the surrounding communities. The company that adopts this tyle of management is mainly focused on sustainability and a stable customer base. Their governance strategy is based on the sustainability and not profits or the interest of the owners.

To properly examine the contributions of stewardship to governance, it is only fair that the performance of a firm that engages in stewardship be evaluated. This can be done by looking the manager’s stewardship in relation to a firm’s performance or going to the top office, the CEO. The stewardship ability and goals are what drives a firm, which only means that they stewardship is directly related to the firm’s performance.

For-profit CEOs’ actions that are connected to stewardship have an effect on the performance of the organisation. Studies have shown that CEO stewardship can increase firm performance (Park, Kim, Chang, Lee & Sung, 2018). This is mainly supported by CEO duality- where the CEO is both the chairman of the board and the leader of the firm. CEO duality gives one person the chance to create and install strategy.

Agency theory argues that boards are only created to monitor the performance of the manager in reference to the fulfilment of the organisational goals. But stewardship theory argues otherwise, it stresses the need for board independence which would reduce the firms spending and formulate a better avenue for monitoring the performance of the managers and therefore, increasing the performance of the organisation (Felício & Rodrigues, 2013). In fact, the theory recommends that some members of the board be hired from outside the company and even unqualified personnel (Bhatt & Bhatt, 2017). This is because these members will implement new approaches to monitoring which, as mentioned above, increases an organisation’s performance.

Many scholars argue that agency theory predicts a negative relationship between board size and the performance of the organisation. Their argument is based on two reasons; first, that the increase in the number of board members would also increase communication-related problems in the organisation. And second, that increasing the size a board will result in a reduction of managerial control which will pose problems for the organisation in that control and management will be separated (Dodd & Dyck, 2015). Their argument claims that the process of making decisions and communication will be greatly slowed in bigger boards than in smaller boards.

Board independence and firm performance.

There is a strong relation between board size and board independence. Since the invention of corporate culture, CEOs have tried to dominate the board. Reseach shows that smaller boards are vulnerable to manipulation from CEOs. But a board with many members would force the CEO to waste much time looking for and gaining agreement (Farooq, Ullah & Kimani, 2015). Therefore, the independence of the board is much higher when the board is larger and the powers and reach of the CEO are reduced. As such the CEO would find it difficult to dominate the board. Lastly, there is a fallacy that the costs of an organisation are reduced with bigger boards. Some scholars argue that clients and creditor would presume that a company with a big board have more monitors for their money (Pintea & Fulop, 2015). This can improve the value and the performance of the organisation.

For the case of employees, in a stewardship run organisation gain the better trust of their employees. This is because employees are able to see the vision of their managers and share that vision. This makes them work more efficiently to achieve the organisation’s goals (Belle, 2017).

Another group affected by stewardship is the customers. Stewardship is an involving theory, everyone has a part to play. And given that the customer feels close to the business when allowed to participate, this theory can increase the performance of a firm because it allows customers to share in the vision of the company with more relatable products (Ballesteros-Sola, 2015).

Just like the technological world, the world of business is fast changing. Most companies are going global, expanding into new markets. This change requires that an organisation have very dependable and high-quality products which come alongside influential and ethical leadership (Crews, 2016). Effective governance and effective leadership are just one and the same thing, they go hand-in-hand. Without effective leadership, governance is dead in the water.

Effective leadership has many characteristics, in the forefront is competence. A leader that is not competent in any way cannot effectively guide an organisation. In terms of good governance, competency of a leader constitutes good governance in that when offering services of the company to the customers, the leader will show effectiveness and efficiency (Akhtar, Humphreys & Furnham, 2015). This is extended to the usage of the organisational resources. With a lack of efficiency, leaders are biased in their service delivery which may lead to misappropriation of company funds.

The next quality is openness. It is simply what it sounds like, but its importance for leadership is that it promotes free movement of information, which may be vital for the achievement of organisational goals. The general public is also included in the flow of information (Crews, 2016). They deserve to know about the organisation and express their own opinions. But the trick for leaders is to know what information that the public need and which ones are too sensitive to put in the hands of the general public. An effective leader will be careful not to release classified information while at the same time satisfying the public need for information. This promotes good governance.

Openness is also evident in transparent working system and protocols. Meaning, the decision-making process is known to everyone and is followed to the latter and that anyone who is to be influenced in any way by that decision has access to the information pertaining to the decision (Crews, 2016). This information is provided in less cryptic or reduced forms to make it comprehensible. This is one of the bases of good governance.

Good governance dictates an inclusive and equitable (Akhtar, Humphreys & Furnham, 2015). When leaders create an environment of openness and transparency and invite participation of the public especially to criticise, they provide the best conditions for effective governance. The most vulnerable in the society should be allowed a chance to be heard, through this process their interest and ideas can be represented. The same can apply to the context of an organisation. For effective leadership to ensure, leaders have to offer a chance to the vulnerable of the company (Akhtar, Humphreys & Furnham, 2015). These are the factors of effective governance.

Conclusion

In conclusion, governance is not just a factor that affects the organisation alone. An organisation has ties and relationship with the outside world, as previously discussed, some organisations are big enough to participate in the problem-solving occurrences in the society. When they participate, they bring with them their governance culture from within the organisation. The corporate culture within an organisation is bred from the theory used by its managers to govern it. These are essential factors that have to be considered by the organisation’s leaders to promote the most friendly culture that can be emulated by the society.

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