Management Control

Management Control and Uncertainty
This page intentionally left blank

Management Control and
Uncertainty
Edited by
David Otley
Lancaster University, UK
Kim Soin
University of Exeter, UK
with the
Management Control Association

Selection and editorial content Management Control Association 2014
Individual chapters Contributors 2014
Softcover reprint of the hardcover 1 st edition 2014 978-1-137-39210-7
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First published 2014 by
PALGRAVE MACMILLAN
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In October 2012, during the early planning stages of this volume, the
members of the Management Control Association were saddened to hear
of the untimely death of Professor Clive Emmanuel of the University of
Glasgow, where he had worked since 1997 until his retirement just a
year before his death. Clive had been a long-standing member of the
Association and will be particularly remembered for the contributions
he made to running the doctoral programmes which now take place
immediately before the triennial conferences. His enthusiasm, collegial
attitude and friendly disposition will be remembered by us all.
A full obituary was published in Management Accounting Research
in March 2013 and is reprinted here. In addition, a special issue in
Management Accounting Research published in June 2013 was also dedi-
cated to Clives memory. Finally, the second chapter consists of a review
of his contribution to the literature on transfer pricing by Martine Cools
who had worked extensively with him in recent years.
This volume is dedicated to his memory.
This page intentionally left blank
Contents
List of Figures ix
List of Tables x
Preface xi
Notes on Contributors xiii
Obituary: Clive Emmanuel 19472012 xxiv
1 Management Control and Uncertainty 1

David Otley and Kim Soin
2 Transfer Pricing: Insights from the Empirical

Accounting Literature 14
Martine Cools
3 Management Control Research: A Review of

Current Developments 30
Roland Spekl and Anne-Marie Kruis
4 From Make-or-Buy to Coordinating Collaboration:

Management Control in Strategic Alliances 47
Shannon Anderson and Henri Dekker
5 Researching the Human Side of Management Control:

Using Survey-Based Methods 69
Sally Widener
6 Management Control under Uncertainty:
Thinking about Uncertainty 83
David Otley
7 Managing through Uncertainty 97

Mike Bourne
8 Uncertainty as a Determinant of Performance

Measurement and Compensation Systems:
A Review of the Literature 114
Margaret Abernethy and Julia Mundy
vii
viii Contents
9 Controlling Creativity and Innovation:

Paradox or Necessity? 134
Jan Pfister
10 Managing Management Controls 149

Sophie Tessier
11 Feel the Risk: Strategic Investment Decisions in an

Uncertain World 162
Elaine Harris
12 Management Control and Uncertainty:

Risk Management in Universities 178
Kim Soin, Christian Huber and Sharon Wheatley
13 Management Control, Regulation and Investment

Uncertainty in the UK Electricity Generation Market 193
Liz Warren
14 Management Control Research and the Management of

Uncertainty: Rethinking Knowledge in Management 207
Olivier Saulpic and Phillipe Zarlowski
15 Cultural Theory of Risk and the Notion of Management

Accountants as Strategists 224
Philip Linsley and Alexander Linsley
16 The Existential Perversity of Management

Accounting and Control 239
Alan Lowe and Ivo De Loo
17 Middle-Range Thinking and Management Control Systems 255

Jane Broadbent and Richard Laughlin
Index 269
List of Figures
7.1 The Performance Alignment Matrix 107

7.2 Feedforward anticipatory control: sophistication levels 109
11.1 Risk-as-feelings perspective 166
12.1 Elements of an institution-wide risk
management framework 182
13.1 Investment factors in the UK electricity
generation market 197
13.2 De-rated capacity margins 197
13.3 Chart revealing real options theory with Combined
Cycle Gas Turbine investment applications 202
15.1 Grid-group model 226
17.1 Alternative Research Approaches 257
ix
List of Tables
3.1 Most influential journals in Accounting & Taxation 34

3.2 Top 25 papers in Management Control from the
20 most influential journals 35
3.3 Method choices 37
3.4 Major themes 38
8.1 Uncertainty as a determinant of performance
measurement and compensation systems 118
9.1 Comparison of case examples 144
12.1 Evidence from our web-based research 184
x
Preface
This book has been written on behalf of the Management Control

Association (MCA) by authors who are either members or closely associ-
ated with it. It seeks to present up-to-date thinking on various aspects of
the design and operation of management control systems, in particular
the role played by uncertainty, because this is both an important and
relatively neglected topic.
The Management Control Association comprises a group of academics
who are interested in advancing knowledge in this field. It grew out of
a workshop group initially at Manchester Business School, but spread
across a few universities in northern England. By 1988, it was plan-
ning its first international conference and incorporated itself into an
Association having charitable status and limited by guarantee. It now
has members in several European countries with a few in North America.
Its conference is run on a triennial basis with the 9th such event being
held at Nyenrode University in the Netherlands in 2013. This volume
contains three of the plenary addresses from this conference. It also runs
quarterly workshops, mainly in the UK, but also in northern Europe,
where papers in course of preparation can be presented in a critical but
supportive atmosphere, with the aim of enabling the authors to improve
them before publication in mainstream journals. Finally, it offers seed-
corn funding to assist in the development of research projects. The
authors and editors have agreed to donate all royalties from this work to
the Association to support its work.
Details of the Association and how to become a member are given on
its website: managementcontrolassociation.ac.uk .
Since its foundation the MCA has been involved with three books,
most recently a volume titled Management Control Systems: Theories,
Issues and Performance co-edited by Tony Berry, Jane Broadbent and
David Otley, the second edition of which was published by Palgrave
Macmillan in 2005. Two earlier books, New Perspectives in Management
Control and Critical Perspective in Management Control were published in
the 1980s and were each co-edited by Professor Tony Lowe.
At a late stage in the editorial process of this volume, we learnt of the
death, after a long illness, of Professor Tony Lowe in March 2014. Tony
was the founding father of the Management Control Association. He
had been involved in the doctoral workshop on management control
xi
xii Preface
at Manchester Business School until he left for Sheffield in 1971. He

then took on the task of running a wider group focussed on Sheffield,
Manchester and Lancaster named the Management Control Workshop
Group. This went on to become the Management Control Association
in 1988 and Tony was actively involved until his retirement (and indeed
for some considerable time afterwards). His influence was felt by a large
number of people across a much wider spectrum of interests, and there
will be tributes in several journals over the next few months. Given his
central role in the Management Control Association, it is only fitting
that we make this brief acknowledgement to his contribution in this
volume.
David Otley
Kim Soin
April 2014
Notes on Contributors
Margaret Abernethy holds a research position as the Sir Douglas

Copland Chair of Commerce and the Chair of Managerial Accounting at
the University of Melbourne, Australia. Margaret is a leading researcher
in her area of expertise as evidenced by numerous publications in the
leading international accounting journals including The Accounting
Review, Contemporary Accounting Research and Accounting Organizations
and Society. She is also on the editorial board of eight leading interna-
tional journals and an editor of Contemporary Accounting Research. Her
research has received in excess of $1 million in competitive research
grants to support projects in a variety of industries. She is an expert in
cost accounting, budgeting, performance management and compensa-
tion design. Margaret has provided expert advice to both the public and
private sectors; she serves on a number of public sector boards, was a
Commissioner for the City of Monash and has worked as a researcher and
advisor in large public hospitals. Margaret returned to the Department
of Accounting in mid-2012 after over eight years as Dean of the Faculty
of Business and Economics at the University of Melbourne. She was
awarded the Telstra Business Woman of the Year (Government and
Community) in 2008 for her outstanding contribution to higher educa-
tion. In 2011, she was elected Fellow of the Academy of Social Sciences.
Shannon Anderson is Professor of Management at the UC Davis

Graduate School of Management. Previously she taught at the University
of Michigan, the University of Melbourne and Rice University. She
received her doctorate and Masters in Business Economics from Harvard
University and her BSE in Civil Engineering from Princeton University.
Anderson has conducted extensive research on how firms use manage-
ment control practices to mitigate risk and facilitate collaboration in
inter-firm transactions. She teaches courses on strategic cost manage-
ment, management accounting and management control to MBA
students and to practising executives. Andersons research has been
published in leading management journals, including: The Accounting
Review, Contemporary Accounting Research, Accounting Organizations and
Society, Production and Operations Management, Management Science,
Manufacturing and Service Operations Management, Accounting Horizons
xiii
xiv Notes on Contributors
and the Journal of Management Accounting Research. Her work has

been recognized with the American Accounting Associations Notable
Contribution Award (2006) and with the American Accounting
Associations Management Accounting Sections Notable Contribution
to the Literature Award (2003, 2006, 2012) and the Greatest Impact on
Management Accounting Practice Award (2010). Andersons research
has been funded by competitive grants from the AICPA, the Institute
of Internal Auditors, the Institute of Management Accountants, the
National Science Foundation and the Australian Research Council.
Michael Bourne is Professor of Business Performance at the Cranfield

University School of Management. He is a Chartered Management
Accountant and a Chartered Engineer. He has authored over 100 publi-
cations including The Handbook of Corporate Performance Management,
Balanced Scorecard, Instant Manager and Successful Change Management in
a Week. His research is at the interface of performance measurement
with strategic management and control systems. Mike spent 15 years
in business, spanning the valve, paper and board, building materials,
machine tool and airline catering industries. He held a number of
positions, with roles in production management, strategy and acquisi-
tions, IT, HR, commercial and general management, including director-
ship positions in subsidiary companies. He gained his PhD from the
University of Cambridge in 2001, researching the design and implemen-
tation of balanced performance measurement systems. He has spent the
past 15 years working with companies supporting senior management
teams through the process of clarifying and executing their strategy. His
approach is to take a stakeholder approach to clarifying strategy and
enabling implementation through alignment of activity to the goals of
the organization.
Jane Broadbent is Professor of Accounting at Royal Holloway University

of London. She trained as an accountant in the NHS before taking a
sociology degree as a mature student at the University of York. She
started her academic career at the University of Sheffield where she also
obtained her Masters and her PhD. She has since worked at a number
of universities and has held a number of senior academic posts in Royal
Holloway and at the University of Roehampton. Jane has written exten-
sively in the use of accounting in the context of management control,
particularly in relation to the public services where she has undertaken
a long-standing programme of research with Richard Laughlin. Jane
takes a critical and interdisciplinary approach to her research and is also
committed to engagement with policy-makers and practitioners.
Notes on Contributors xv
Martine Cools is Associate Professor at KU Leuven campus Antwerp

and a guest professor at ITTMA, Universiteit Antwerpen, Belgium. She
obtained her PhD in 2002 from the University of Antwerp. (Her thesis
was titled International Transfer Pricing: Tensions between Management
Control and Tax Requirements.) Her research is not only on transfer
pricing in multinational enterprises, but also on the design and use of
management accounting and control within and between organiza-
tions. Her recent papers analyse the role of management control within
organizations for stimulating the creativity of individuals and groups,
for steering responsibility centres, as well as the role of management
control in franchising and publicprivate co-operation. In addition, she
investigated cost management in the logistics sector, and the financial
and non-financial indicators of the value added by design. Her work
has appeared in journals including Journal of Management Accounting
Research; Review of Business and Economics; Accounting, Organizations and
Societies and Transportation Research-Part E.
Henri Dekker is Professor of Management Control in the Department

of Accounting at the Vrije University, Amsterdam. Since earning his PhD
in 2003, his research has primarily focussed on the themes of manage-
ment accounting and control in inter-firm relationships, and firms use
of performance measurement systems and incentive provision. Dekkers
work has been published in a variety of leading journals including
Accounting, Organizations and Society, European Accounting Review, Journal
of Management Accounting Research, Management Accounting Research,
Management Science and Organization Science. His research has been
recognized by the David Solomons Prize (2003) and by several awards
of the Management Accounting Section of the American Accounting
Association, including the Best Early Career in Management Accounting
Award (2009), the Greatest Impact on Management Accounting Practice
Award (2010) and the Notable Contribution to the Management
Accounting Literature Award (2012). Dekker currently is Associate Editor
at the European Accounting Review and serves on the editorial boards of
Accounting, Organizations and Society, Journal of Management Accounting
Research and Management Accounting Research.
Ivo De Loo is Professor of Management Accounting and Control at the

Centre of Information, Management Accounting & Control Systems
at Nyenrode Business University. He is also responsible for the PhD
programme at Nyenrode. Ivos primary research interests are the roles
and identity of management accountants, and research methodology,
with particular reference to mixed methods research. A recent project
xvi Notes on Contributors
on management accounting had its focus on differences in practices

between subsidiaries of an international company in the Netherlands
and the UK. This project, in which he participates with Alan Lowe, is
about to publish a video dealing with perceptions of change under the
auspices of the ICAEW. Ivo has over 15 years of experience in university
education and has developed several accounting and research methods
curricula for various universities. Before joining Nyenrode, he was an
associate professor of Management Accounting at the Open University
of the Netherlands. Ivo holds a PhD from that university. His papers
have been published in journals such as Management Accounting Research,
Accounting History, Qualitative Research in Accounting & Management,
Accounting Education, Journal of European Industrial Training and Public
Administration Quarterly. He joined the editorial board of Qualitative
Research in Accounting & Management in June 2014.
Elaine Harris is Professor of Accounting and Management and was

appointed Director of the Business School at University of Roehampton,
London, in 2010. Prior to that, she was Professor and Head of Department
of Accounting and Finance and Faculty Head of Postgraduate Studies
at De Montfort Universitys Leicester Business School. Elaine has held
various management roles in both higher education and accountancy
practice, having first qualified as an accountant at MacIntyre Hudson
in 1983. Elaine has been Chair of the Management Control Association
since 2010 and was previously Chair of the Committee of Departments
of Accounting and Finance, part of the British Accounting and Finance
Association (BAFA), for four years. She has served on ACCAs research
committee, CIMAs lifelong learning policy committee (previously the
Education Board) and has examined 15 doctoral theses. Her research
is focussed upon the balance among financial, non-financial and risk
factors in the way managers exercise judgement in strategic invest-
ment decision-making in organizations. She has used action research
and longitudinal case methodologies to explore how people use their
intuition as well as rational analysis in evaluating prospective projects.
She is author of Strategic Project Risk Appraisal and Management and has
published in a range of academic journals such as British Accounting
Review, Journal of Accounting and Organizational Change (including a prize-
winning paper with Clive Emmanuel in 2010), International Studies of
Management and Organization and International Journal of Risk Assessment
and Management.
Christian Huber is Lecturer at the Helmut Schmidt University

University of the Federal Armed Forces in Hamburg, Germany. He
Notes on Contributors xvii
previously worked at Innsbruck University where he received his PhD

and from which he holds degrees in Organization Studies, Management
and Economics. His work was published in journals such as Human
Relations, Management Accounting Research, Journal of Management Inquiry
and the Journal of Business Ethics. His research interests include manage-
ment accounting, risk management, public sector organizations, finan-
cial regulation, valuation and the use of literature in organizational
theory.
Anne-Marie Kruis is Associate Professor of Management Accounting

and Control at Nyenrode Business University. She studied general and
business economics at Erasmus University Rotterdam, where she also
worked for two years as a PhD student. She obtained her PhD in Business
Administration at Nyenrode in 2008. As well as being a teacher in the
Master of Science in Controlling programme, she serves the university
as a member of the exam committee. Her main research interests are the
design and effectiveness of Management Control Systems, the roles/use
of Performance Measurement Systems and the Levers of Control frame-
work. Her work has been published in journals such as Management
Accounting Research and the Journal of Accounting Education.
Richard Laughlin is Professor Emeritus of Accounting at Kings College

London and Visiting Professor of Accounting at Royal Holloway
University of London. He qualified as a Chartered Accountant before
taking a Masters at the University of Birmingham. His first academic
appointment was in 1973 as a lecturer in Accounting and Financial
Management at the University of Sheffield where he completed
his doctorate as a staff candidate. He was promoted to Professor of
Accounting at the University of Sheffield in 1991. In 1995, he moved
to the University of Essex before moving to Kings College London in
1999. He retired as a full-time Professor of Accounting at Kings in 2010.
He has published extensively over his career exploring the nature and
role of accounting in organizations and society adopting a range of
interdisciplinary and critical social science perspectives. Many of these
publications have come from a long-standing programme of research
and policy and practice engagement in the public services with Jane
Broadbent.
Alexander Linsley holds a degree in Economics and Management from

the University of Oxford. He has worked at Deloitte, Sarment, and as
a research associate at the University of York. The research projects he
has undertaken at the University of York investigate topics related to
xviii Notes on Contributors
financialization, the global credit crisis and bank risk reporting. He

currently undertakes projects constructing and analysing large, complex
datasets. These datasets draw on decision-making research to prepare
market insights reports. His research interests are in the areas of behav-
ioural finance and neo-Durkheimian institutional theory.
Philip Linsley is Head of the Accounting and Finance group at the

University of York Management School. Philip has significant experi-
ence as an academic lecturer and researcher and teaches in the areas
related to finance, accounting and risk. His research interests are risk-re-
lated and include investigating risk disclosure within the annual reports
of financial and non-financial firms, risk and culture, risk management
and risk systems. He is particularly interested in the ideas of Professor
Dame Mary Douglas and in applying her cultural theory of risk to the
accounting and finance field.
Alan Lowe is Professor of Accounting and head of accounting group

at Aston Business School, Birmingham, UK. He is also joint editor of
the British Accounting Review. His current research projects cover areas
including management accounting practices and financial reporting,
transparency and accountability. In the area of financial reporting, an
80-page monograph for ICAEW focussed on the opportunities presented
by digital reporting initiatives which make use of recent developments
in regulatory policy, and internet enabled digital communication tech-
nologies. A coherent methodological frame can be seen in most of this
research, which uses a socio-technical perspective in order to explain the
impact of accounting and other information technologies. This includes
research and publications in enterprise resource planning and Casemix
systems in the health sector. Other research interests include the impact
on management accounting systems of changes in management philos-
ophies, methods of performance measurement, issues related to the
management of intellectual capital and the application of qualitative
research methodologies. His recent articles have appeared in Accounting
Auditing and Accountability Journal, Accounting Organizations and Society,
British Accounting Review, Critical Perspectives on Accounting, European
Accounting Review, European Journal of Information Systems, Information
Technology and People, Management Accounting Research, Organization
Studies and Organization.
Julia Mundy is the manager of, and a senior researcher at, the Centre for
Governance, Risk and Accountability at the University of Greenwich.
Following ten years experience in the investment management and
Notes on Contributors xix
financial services sectors, she undertook her PhD at the University of

Melbourne in the management control systems and organizational
learning before joining the University of Greenwich in 2003. Her
research interests are in the areas of performance measurement and
management, budgeting and performance-related pay, and she has
provided expert advice to firms in sectors including financial services,
publishing and social housing. Julia has published in top international
journals, including Accounting Organizations and Society, Management
Accounting Research and the Journal of Management Accounting Research.
Julia is editor-in-chief of the Journal of Applied Accounting Research. She
is the Honorary Secretary of the Management Control Association and
a committee member of the Research Advisory Board of the Institute of
Chartered Accountants of England & Wales. She is an associate member
of the Institute of Chartered Secretaries and Administrators.
David Otley is Distinguished Professor of Accounting and Management

(Emeritus) at Lancaster University Management School, where he has
been on the staff since 1972. Until his retirement in 2011, he was also
Associate Dean (Finance and Resources) for LUMS. He is a Fellow of the
British Academy of Management (1994) and received the Distinguished
Academic award of the British Accounting Association in 2001. He also
served as a president of the Management Accounting section of the
American Accounting Association in 2010 and on the Strategy Committee
of the AAA. He was a founder member of the Management Control
Workshop Group since being a doctoral student at the Manchester
Business School, and has served as chairperson on two occasions. His
research interests are centred upon the area of performance manage-
ment and the design and use of management control systems. He has
published extensively in the field, including a textbook, Accounting for
Management Control, co-authored with Clive Emmanuel in 1985, and
served as the founding General Editor of the British Journal of Management
from 1989 to 1998. He has also been an associate editor of Management
Accounting Research since 1994.
Jan Pfister is Postdoctoral Researcher at Turku School of Economics,

Finland, and Honorary Visiting Fellow at Lancaster University
Management School, UK. His research covers a range of topics related
to management accounting and management control systems.
Current research projects with large multinational companies focus on
how control systems are interrelated with leadership style, how they
enable innovation and how they are embedded in the organizational
cultures of the case organizations. By doing so, the research is based
xx Notes on Contributors
on an interpretive and interdisciplinary approach that considers the

institutional, social and organizational contexts in which perform-
ance measurement and control systems are designed and operated. He
teaches advanced courses on cost management, strategic management
accounting and management control systems at the undergraduate and
postgraduate levels at the University of Turku.
Olivier Saulpic is Professor, Head of the Management Control

Department at ESCP Europe Paris campus and co-director of the Health
Management Innovation Research Centre. He also co-founded, with
Philippe Zarlowski, the Management Control Research Group (Macorg).
He conducts field-based research on performance measurement and
management systems, in particular in the health sector with the aim of
integrating a technical and a socio-organizational perspective on these
systems. His interests cover the systems design, their use, their appro-
priation by individuals, their link with accountability schemes and
their interaction with persons identity. He is also interested in the link
among research, teaching and practice. This interest is reflected in the
organization of workshops on that topic, in research projects that follow
both academic and empirical aims, in executive education experiments
introducing research and in the participation to textbooks.
Kim Soin is Associate Professor of Accounting and Management at the

University of Exeter Business School. She is a visiting associate at the
Centre for the Analysis of Risk and Regulation (CARR) at the London
School of Economics (LSE) and the Sustainable Leadership, Governance
and Policy Research Group (SLGP), University of Plymouth Business
School. Kims research is interdisciplinary in nature and is located at the
interface of accounting, organizational theory and management. Her
current research focusses on the UK financial sector and the effects of the
financial crisis in 20072009, how to improve corporate governance and
rebuild trust and reputation in banks and regulators, risk management
regulatory systems, management accounting change and the effects of
marketization, and (de)regulation in UK universities. Kim has published
in journals such as Organization Studies, Organizational Research Methods,
Journal of Management Studies, Management Accounting Research, Journal
of Management Inquiry and European Accounting Review. She has under-
taken consultancy work for a number of financial services companies
on regulatory compliance and is on the editorial board of Qualitative
Research in Accounting & Management. Kim has been a Council member
of the Management Control Association (MCA) since 1995 and has
been actively involved in organizing their international conferences,
Notes on Contributors xxi
workshops and doctoral colloquiums as well as contributing chapters to

past MCA monographs.
Roland Spekl is Professor of Management Accounting and Control at

Nyenrode Business University. Before joining Nyenrode, he held various
academic positions at Erasmus University Rotterdam and worked as an
auditor and consultant in a large public accounting firm. He holds an
MSc and PhD (cum laude) from Erasmus University. Rolands research
interests are in the field of the economics of organizational control, the
design of effective management control structures, performance meas-
urement systems and management control in public sector organiza-
tions. His work has been published in journals such as Management
Accounting Research, Accounting, Organizations and Society and European
Accounting Review.
Sophie Tessier is Associate Professor at HEC Montral. After obtaining an

undergraduate degree from HEC Montral in Management Accounting,
Sophie worked for three years as a financial analyst (cost accounting
and general accounting). At the same time, she completed the CMA
(Certified Management Accountant) requirements. She then completed a
Masters (MRes) in Accounting and Financial Management, and a PhD in
Accounting and Finance at Lancaster University Management School in
the United Kingdom, under the supervision of Professor David Otley. Her
research interests are management control systems, management control
packages, organizational change, organizational culture, and rules and
routines. She is also interested in qualitative methods through the study
of qualitative methods per se and concepts development. Finally, she is
interested in energy-related issues, such as energy efficiency. Sophie has
published in Accounting, Auditing, Auditing & Accountability Journal, Critical
Perspective in Accounting, International Journal of Qualitative Methods and
Management Accounting Research. She is also a member of the advisory
board of Qualitative Research in Accounting & Management. She is currently
the co-director of Pole e3: expertise in energy and environment, a part-
nership with industry leaders in the energy sector sharing knowledge on
sustainability practices. She is also the founder of the Association de
Contrle de Gestion, a Qubec-based network of researchers interested
in management control. In addition to her research work, she teaches
introductory and advanced courses in management accounting. She is
also the author of several case studies and practitioner-oriented articles.
Liz Warren is Principal Lecturer at the University of Greenwich where

she teaches at both undergraduate and postgraduate levels in the areas of
xxii Notes on Contributors
Management Accounting and Strategic Financial Management. In these

subject areas, she has taught in the UK, France, Hong Kong, China and
across Malaysia. Prior to joining academia, she was an accountant in the
automobile industry. Lizs research interests rest primarily in manage-
ment accounting, the changing role of the management accountant and
the UK energy sector. In particular, the role of policy and the impact that
management accounting has within this process is the subject in many
of her current publications. She is also one of the authors of a textbook
on management accounting. She received her PhD from Southampton
University. She is an active member in the Management Control
Association, the European Network for Research in Organisations &
Accounting Change, British Institute of Energy Economics and the
International Association of Energy Economics.
Sharon Wheatley is Lecturer at BPP University Business School where

she teaches Enterprise Risk Management and Operations Management
at both undergraduate and postgraduate levels. In addition, she super-
vises research projects within MSc and MBA programmes. She received
her PhD from Kings College London. Her primary research interest is
the implementation and outcomes of formal risk management processes
in organizations. Prior to taking up her academic role, Sharon worked
as a management systems auditor within GEC Marconi, and was Chief
Engineer (processes) for the Product Assurance Group of BAE Systems.
Sally Widener is Associate Professor of Accounting at Clemson

University. Previously she was on the faculty at the Jones Graduate
School of Business at Rice University and at Colorado State University.
She holds a continuing position as a visiting professor at Nyenrode
Business Universiteit in the Netherlands and lectures internationally on
her research. Since earning her PhD from the University of Colorado at
Boulder in 1999. She has published in journals including the Journal of
Accounting Research, Accounting, Organizations and Society, Contemporary
Accounting Research and Behavioral Research in Accounting. Her research
investigates behavioural and economic outcomes of the design and
use of performance measurement and control systems. In particular,
she is interested in gaining a better understanding of the design and
use of controls and their outcomes in a framework intended to balance
control and innovation. She received the David Solomons Prize from
Management Accounting Research for the best paper published in 2006.
Widener is an associate editor of Behavioral Research in Accounting and
serves on the editorial boards of Journal of Management Accounting
Research, Management Accounting Research and Advances in Management
Notes on Contributors xxiii
Accounting. Widener has received several teaching awards including

the Jesse H. Jones Graduate School of Management Alumni Teaching
in Excellence Award. She is a Certified Public Accountant in the state
of Texas and a Certified Internal Auditor. Prior to earning her PhD she
spent 12 years working as an auditor with PricewaterhouseCoopers, in
various internal audit and controllership positions with a Fortune 500
company, and in retail management.
Philippe Zarlowski is Professor at ESCP Europe, Paris campus, in the

Management Control Department. His present teaching and research
interests are focussed on management control, performance measure-
ment and management systems, governance and accountability and
public sector transformation. He conducts and supervises research
projects on the interactions between performance systems, organi-
zational and institutional change, notably in the public sector and in
health care. He is also interested in research methods and methodology
in management, and in management education. With Olivier Saulpic,
he co-founded the Management Control Research Group. He has been
a member of the board of AFC, the French academic association in
accounting, management control and auditing. At ESCP Europe, he has
participated in the creation, and serves as the scientific director, of the
Deloitte chair on Public Service and Managerial Performance, and he
is the co-editor of the French academic review Politiques et Management
Public. Prior to joining ESCP Europe, he held academic positions at ESSEC
Business School, Paris Dauphine University and University of Tours. He
has been a visiting scholar at Pompeu Fabra University, Barcelona and at
SCANCOR research centre, Stanford University.
Obituary: Clive Emmanuel
19472012
Reprinted (with permission) from Management Accounting

Research 24 (2013) 12
Contents lists available at SciVerse ScienceDirect

Management Accounting Research
journal homepage: www.elsevier.com/locate/mar
Clive Emmanuel died suddenly on 7

October 2012, having made a substantial
contribution to the discipline of
management accounting during his long
academic career. He had been a member
of the editorial board of Management
Accounting Research since 2006.
He started his working life in 1964

firstly as an assistant cost accountant
for the Steel Company of Wales in Port
Talbot, and then as an organisation and
methods officer, studying for an HNC is
Business Studies on a part-time basis. He moved on to take a BSc in
Economics at UWIST graduating in 1971, and then to take an MA in
Financial Control at Lancaster University with sufficiently impressive
results that he was asked to stay on to do a PhD on corporate transfer
pricing, a topic in which he would retain a strong interest for the
remainder of his life.
His first academic post in 1974 was at Lancaster where he devel-
oped courses concentrating on the behavioural side of management
accounting with David Otley who had joined there in 1972. Their first
joint published paper came out in 1975 on the usefulness of residual
income, predating Stern Stewarts popularisation of EVA by over a decade!
Their collaboration would continue over the next 10 years culminating
in the publication of a textbook Accounting for Management Control in
xxiv
Obituary xxv
1985, which would be widely used in British universities for the next
decade and more. But by this time Clive had moved back to Wales as a
senior lecturer at the University College of Wales, Aberystwyth, being
promoted to Reader in 1996. He moved to the University of Glasgow in
1997 as the Ernst and Young Professor of Accounting, a post he retained
until his retirement. He undertook many roles in Glasgow, acting as
Head of Department from 1991 to 1994 and being the Director of the
Centre of International Accounting for some 20 years from 1991.
His academic work centred on the topics of transfer pricing and
segmental reporting, moving from an initial focus on domestic transfer
pricing into the complex arena of international transfer pricing. Around
half of his 36 refereed journal publications are on this issue and his
work culminated in 2010 with two publications that reflect the span of
his interests. The first (with Martine Cools and Ann Jorissen at Antwerp
University) is a masterly review of issues in management control in tax
compliant, multinational enterprises which use transfer pricing. The
second (with A. Mura) analyses the Early Italian contribution to transfer
pricing! As his editorial board memberships indicate, any journal editor
who required an authoritative and helpful review of an article on transfer
pricing would immediately think of how to persuade Clive to take on
yet more reviewing work. Beyond this he had interests in other areas of
management accounting, including capital budgeting where he recently
completed a CIMA research project on the role of managerial judgement
in this field, and also in the area of managerial motivation and reward
systems.
But he did not just stay at home. He was an associate professor in
the School of Business at the University of Kansas from 1980 to 1982
and has also held appointments at Michigan State University and in
Moscow, Deakin, Sydney, Antwerp, Sardinia and Slovenia. He was
an active member of the American Accounting Association and the
European Accounting Association as well as being a Council Member of
the British Accounting and Finance Association and joint editor of the
British Accounting Review from 2006 to 2008.
He enjoyed collaborating with other people, whether fellow academics
or research students in different countries. And he has been a long time
member of the Management Control Association, a Council member
since 2003, and responsible for (jointly) organising its doctoral colloquia
in both 2007 and 2010.
It is in this latter activity that his interests, skills and abilities combined
to make his contribution outstanding. Student presentations were
always listened to carefully and with evident interest, his comments
xxvi Obituary
were perceptive but always gentle, and students were subtly steered into
an improved direction almost without realising it. And as the activities
moved on into the social events of the evening, Clive was always at the
centre of a small and lively group actively discussing a topic of joint
interest.
It is a great joy that the academic community was able to recognise
some of the contributions he made to it, most particularly in the award
of the Lifetime Achievement Award of the BAFA in April 2012. This
award was presented by Professor Elaine Harris who made the following
comments:
Clive was always at his best at conferences: contributing papers,

making constructive criticism of even the weakest presentations.
His approach was always How can I help this person or this project
along? His warmth, collegiality and openness to others are legen-
dary, as is his generosity.
He had other interests, most notably in rugby and singing, as befits a

Welshman. Throughout his life he had successively played, coached
and supported rugby football and was still an active member of his
local rugby club. He had been a long-time member of the Glasgow
Philharmonic choir, and it was entirely fitting that a choir of some thirty
male members of that group sang at his funeral in Killearn Kirk, and that
their repertoire was centred around Welsh melodies.
He leaves his wife Gill, and his three children Bethan, Rhiann and
Owain, and will be sadly missed by all. We have lost a caring scholar
who always did what was best for the wider community.
David Otley*
Lancaster University Management School,
United Kingdom
Elaine Harris
University of Roehampton Business School,
United Kingdom
*
Corresponding author.
E-mail address: d.otley@lancaster.ac.uk
(D. Otley)
1
Uncertainty
David Otley and Kim Soin
Management control is about the process of steering organizations

through the environments in which they operate, to achieve both short-
term and longer-term goals. These goals will differ from organization to
organization because their stakeholders are different and the compro-
mises between different stakeholder demands will be resolved in different
ways, in part dependent on the relative power of different stakeholder
groups in each context, and also on the past history and trajectory of
the organization. However, the longer-term goals will almost inevitably
include the survival of the enterprise itself, as this generally is in the
interests of most stakeholder groups, most of the time.
In addition, the environment in which organizations operate is itself
constantly changing and may be very difficult to predict. Thus, the
context within which the organization is being steered is highly uncer-
tain and may change, sometimes quite quickly and radically. It is a moot
point as to whether the rate of environmental change, or the degree
of uncertainty which organizations now have to face, has increased in
recent years. We certainly seem to perceive it as increasing, although
this may be partly due to the future being less predictable than the past.
It is always difficult to try to look back and envisage how previous situ-
ations we faced looked at the time, without having our perceptions
coloured by the way events actually turned out, and the consequences
for ourselves.
What is remarkable is the fact that the literature on management
control has generally not explicitly acknowledged the nature of the envi-
ronment in which organizations operate as being subject to high degrees
of uncertainty. Indeed, management control systems (MCS) themselves
have tended to be regarded as static and unchanging, rather than
dynamic. This book is entitled management control and uncertainty
1
2 David Otley and Kim Soin
to address this issue more cogently, but it needs to be recognized that

all control takes place under conditions of uncertainty: it does now, and
it always has done. In this book, we try to redress some of this balance
by examining different aspects of management control systems in the
modern world whilst paying more explicit attention to the ubiquitous
nature of uncertainty.
The scope of management control has developed considerably since
Robert Anthony defined the term in 1965. In its original form, manage-
ment control was seen as an internal activity designed to coordinate the
actions of managers within a single organization. It was also explicitly
separated from the activities of both operational control and strategic
planning. Despite attempts to broaden its scope to include behavioural
considerations, its primary focus was on formal information systems and
reporting, primarily those of management accounting. There has been
considerable progress in the following 50 years, especially concerning
the use of non-financial information, where Kaplan & Nortons
Balanced Scorecard marks a watershed. This can be seen as part of a
wider trend to reintegrate strategic considerations as well as operational
issues back into the scope of management control. In addition, atten-
tion was initially given to inter-organizational control arrangements,
with specific reference to control along a supply chain. This was then
extended to include wider collaborations and the area is well surveyed
in Chapter 4 by Shannon Anderson and Henri Dekker. A complementary
development has been the inclusion of a wider group of stakeholders, to
include parties external to the organization in addition to suppliers and
shareholders, particularly customers, national governments and regula-
tors. Associated with this has been specific consideration of uncertainty
in the development of risk management processes, and the use of these
procedures has become a compulsory part of governance practices.
The way in which these developments have been mirrored in wider
practices is well illustrated in Chapter 2, where Martine Cools reviews
research in transfer pricing, with particular reference to the work of
Clive Emmanuel. This chapter was not commissioned with this intent
in mind, but it does show how transfer pricing practices first focussed
on internal decision-making within a single organization, albeit one
that was sub-divided into operating divisions. The procedures used were
intended to promote better coordination of economic decisions, whilst
allowing for divisional autonomy. In essence this reflected a common
organizational design, at the time, of keeping as much of the value
chain as possible within the ownership of a single over-arching organi-
zation in a divisional structure. As organizations became more global,
Management Control and Uncertainty 3
attention switched to the tax consequences of the chosen transfer

pricing practices and mechanisms. Given that companies had opera-
tions in several different countries, each with distinct taxation regimes,
mechanisms for optimizing the overall tax cost to the company began
to dominate. However, as might be expected, the taxation authorities
in each individual country became concerned about the potential loss
of tax revenue from these processes, and demanded a much more trans-
parent and justifiable set of procedures to avoid taxable profits being
exported. Eventually fiscal compliance and management control came
back together as companies increasingly adopted the use of a single set of
books for all purposes, perhaps driven by the potential consequences of
being seen to have different accounting numbers for different purposes,
even if that could be rationally justified.
The following chapters are loosely organized into a developmental
order. Following the review of Clive Emmanuels work in Chapter 2,
the subsequent three chapters draw on plenary sessions given at the
ninth International Management Control conference held at Nyenrode
University in The Netherlands during September 2013. These plenaries
were intended to give an up-to-date overview of current thinking in
management control research. In Chapter 3, Roland Spekl and Anne-
Marie Kruis attempt to identify some trends, both from a review of
recent literature and from papers presented at the conference. They note
that research in this area has become concentrated mainly in Europe,
perhaps perversely caused by the control and performance evaluation
mechanisms used in US business schools! Shannon Anderson and Henri
Dekker examine the move from supply chain management towards
coordinating wider collaborations between organizations in Chapter 4,
and focus on some of the issues surrounding management control in
strategic alliances. They highlight the extent to which innovation in
management controls has been central to the emergence, diversity and
stability of hybrid organizational forms. Finally, in Chapter 5, Sally
Widener considers the research methods used in management control
research, and enters a plea for a return to the use of survey methods,
albeit only when conducted in a proper manner, illustrating the value
of this with examples from her own work.
There then follow a number of more conceptual chapters. In Chapter 6,
David Otley argues that uncertainty is not an external phenomenon that
can be objectively measured, but can only be understood as a subjec-
tive judgement dependent upon the predictive abilities of individuals
and groups. Given that we understand the future only imperfectly,
he suggests that a key issue in evaluating managerial performance is
distinguishing between intended outcomes and luck. He includes some

practical routines that may be useful in managing in uncertain situa-
tions. This is followed by Mike Bourne giving an overview in Chapter 7
of the use of different management controls that have changed over
time. He details how management controls in practice have come to
be viewed primarily as the implementation of strategy in a rapidly
changing environment. He uses two case studies to illustrate two very
different approaches by companies trying to cope with a dynamic and
uncertain environment. In Chapter 8, Margaret Abernethy and Julia
Mundy review the literature on the role of uncertainty on performance
evaluation in general and on compensation systems in particular. They
find that increasing uncertainty is associated with the development of
a more diverse set of performance measures, in particular the increased
use of non-financial measures. Moving on to the specific topic of inno-
vation in Chapter 9, Jan Pfister examines the potential conflict between
control and innovation, using two case studies to illustrate two very
different approaches to managing this. He also identifies a trend to move
from measures of financial outcomes towards a broader set of measures
reflecting the whole activity of an organization. In Chapter 10, Sophie
Tessier provides an overview of how control systems can themselves be
managed and controlled. She argues that the need for such management
is a consequence of change and uncertainty, and considers the different
practices that are involved at different levels of monitoring, from that
of the individual control through to overall corporate governance and
risk management. Finally, Elaine Harris considers strategic investment
decisions in Chapter 11, and discusses how these decisions can be made
in an uncertain world. She complements the use of familiar quantita-
tive appraisal techniques with the need for a more intuitive approach,
whereby managers feel the risk as well as attempting to measure it.
Next, there are two chapters based on empirical studies. In Chapter 12,
Kim Soin, Christian Huber and Sharon Wheatley examine the imple-
mentation of risk management processes in UK universities, where
they have become a required part of the regulatory environment. They
conclude that there is a delicate balance to be maintained between box
ticking to demonstrate compliance and extracting real value from the
activity. Failure to use risk management procedures proactively can
result in decoupling, defensiveness and fear. Liz Warren then examines
the effect of regulation and uncertainty in the UK electricity genera-
tion market in Chapter 13. This demonstrates how governments can
themselves generate uncertainty rather than absorbing it, and spells
out the consequences of this in the practices of firms operating in the
electricity generation market. In particular, she outlines the idea that

sustainability does not just concern environmental impacts, but also
requires the maintenance of conditions necessary to maintain a stable
provision of peoples basic needs, in this case those of having reliable
power supplies.
The final part of the book moves on to consider the roles of manage-
ment control research in enabling us to better understand how manage-
ment control can (and should) work under conditions of uncertainty.
In Chapter 14, Olivier Saulpic and Phillipe Zarlowski examine how
management control research informs practice through the teaching
academics engaged in various degree and training programmes. They
argue that managers need to be educated about the contextualized
character of management knowledge, and thus not expect off the
shelf solutions to be available to every problem faced. This is followed
by Philip Linsley and Alexander Linsley in Chapter 15 reviewing the
development of the management accounting practices which support
control through the lens of cultural theory. It sets the changes in the
roles perceived to be undertaken by management accountants in the
context of cultural changes in the UK and US, most notably the move
from a hierarchical to an individualistic culture. Next, in Chapter 16,
Alan Lowe and Ivo De Loo present a radical critique of management
accounting and control practices, arguing that an excessive emphasis
on excellence can itself prove threatening to organizational health. By
regarding economic organizations as serving primarily instrumental
purposes, popular performance measurement practices may fail to lead
to desired outcomes. Avoiding this perverse outcome requires a radical
change in some organizational cultures. Finally, Chapter 17 presents an
overview of the Middle-Range Thinking approach by Jane Broadbent
and Richard Laughlin. Given the preceding critiques, this approach
tries to reconcile the possibilities inherent in over-arching theories with
the contextual specificity that is required in practice. They conclude
by arguing that the middle-range approach provides a basis for both a
meaningful theoretical engagement with organizations, and the devel-
opment of useful theory, which they demonstrate with practical exam-
ples from their own research.
The remainder of this introduction will identify some key themes
that emerge from many of the chapters that follow. These include
an overview of how uncertainty has been conceptualized, and where
the consequences of different approaches seem to lead; the connec-
tion of uncertainty with ideas of late modernity; the increasing role of
external regulation of organizations and the role of practices such as
risk management in governance; and the responses of organizations to

external as well as internal pressures.
Conceptions of uncertainty and their consequences
For obvious reasons, the major cross-cutting theme of the work in this
book is the idea of uncertainty and its consequences. However, the
conceptualizations of uncertainty vary significantly across chapters,
ranging from it being seen as an objective, external factor which can
be measured through to a view that it is a subjective perception which
needs to be observed and reacted to. There are also a variety of views
as to whether uncertainty has increased in the recent past, and varying
ideas of how control systems may either help in dealing with it, or may
themselves compound the problems that it brings.
The world has always been subject to considerable uncertainties,
especially when understanding of how natural events were caused was
less well developed. Until quite recently events such as disease, natural
disasters and crop failures were generally regarded as inexplicable (or
the work of a deity) and few actions could be taken either to prevent
them, or to deal with their consequences. So it might be assumed that
as scientific understanding has increased, the world has become more
predictable, certainly in its physical aspects. As organizations became
larger and more complex in the last 100 or so years, they were also seen
as being able to act as buffers against uncertainty. Parts of an organiza-
tion, most typically the production functions, could be buffered from
external change and allowed to develop well-programmed routines that
led to considerable operating efficiency. The impact of external events
could be buffered by the overall organization to give a more predictable
internal environment, well insulated from sudden external changes.
The downside of such buffering was that the impact of external changes
could be consolidated into a single internal shock, such as the closure of
a whole plant. It is arguable that one purpose of a management control
system was to allow the information about external circumstances to
permeate the boundaries of the organization to allow gradual adapta-
tion without the need to constantly adjust to circumstances that might
only be transitory.
However, other features of the last century have operated in the
opposite direction. As organizations have become more global and
inter-connected, changes in one part of the overall economic system
have begun to affect every other part, and the speed of transmission
of such changes has increased enormously. The recent global financial
crisis has demonstrated that we are not immune to events happening

far away and in sectors other than our own. Organizations need to react
to external changes, especially those caused by competitive pressures,
increasingly quickly and this itself generates increased uncertainty.
Indeed the actions taken by organizations to cope with uncertainty may
themselves engender increased levels of future uncertainty rather than
containing it. Thus, uncertainty is emerging from an increased number
of sources, both external and internal.
In addition, there are social changes which seem to have generated
an expectation that events should be both predictable and controllable,
and that any impact of unexpected events is an unfortunate lapse of
good management practice. Activities which used to be considered as
fundamentally uncertain are now expected to be totally predictable.
Travel is one example. Not so long ago, travel was regarded as both
potentially dangerous and certainly unpredictable, whereas today even
a slight disruption to long distance travel arrangements is regarded
as a major failure. Aircraft and trains are expected to run to a highly
accurate timetable and any disruption is seen as unacceptable. So,
even if overall uncertainty may have reduced, the standard of what is
seen as acceptable has risen. Organizations therefore seem pressured to
promise highly predictable outcomes, and increasingly adopt systems
designed to deliver these. For example, the requirement to produce
annual, quarterly and even more frequent predictions of earnings is
now regarded as almost mandatory. Organizations are subject to pres-
sures of varying intensity to demonstrate that they can cope with what-
ever eventualities arise and to continue to deliver predictable results
to stakeholders. However, as several of the chapters show, this can be
counter-productive.
The existence of continual change in the external (and internal)
environment also implies that control systems will also be constantly
changing. But given the time-lags inherent in updating such systems, it
is likely that the overall control system may be always catching up with
the changes that surround it. Indeed, it may be sensible to think of it not
as a coherent system but rather a combination of loosely coupled parts.
There are associated tools, some old and enduring and others more
innovative that always need to be placed in their contexts characterized
by both by organizational location and by time and space, and increas-
ingly need to be fluid and malleable.1 One significant change brought
about by these demands for change is the (global) proliferation of rank-
ings and league tables in the private, public and not-for-profit sectors.
The internal workings of organizations have also become more visible,
and managers are being held more accountable, whilst at the same time
delivery of these promises is becoming more difficult.
In this changed environment, the role of control systems is also
changing. From being internally focussed and financially oriented, they
have become increasingly externally driven and use a range of non-
financial information (see Chapter 7). But the accepted connotations
of control may also have to change. Control can no longer be seen
as a guarantee that predicted outcomes will occur. Rather, control is a
process which may be helpful in guiding an organization through the
stormy seas of its environment, and assisting constant adaptation they
may even encompass the change of overall goals as some of the original
goals become unrealistic.
Uncertainty in late modernity
Dealing with uncertainty and risk is seen as one of the key aspects
of late modernity. Late modernity is the description given to todays
highly developed global societies (Giddens, 1990) and is characterized
in various ways ranging from an information society, a post-indus-
trial society, a network society to a risk society (Power et al., 2009).
Uncertainty is central to management control, as all organizations exist
in an environment characterized by significant amounts of uncertainty
from a variety of different sources. For example, UK universities are
clearly operating in a more uncertain funding environment than in the
past. Questions that arise include: are there more factual uncertainties
or are we more anxious? Also, do uncertainties create new uncertainties
once they are managed? And, what are the roles of management control
in these processes?
As Soin and Collier (2013) observe: uncertainty is not new it is a
central feature of any organizational setting. What is new, however, is
that uncertainty is emerging from many different sources both internal
and external. The need to consider both internal and external audiences
(mostly customers, regulators and stakeholders) appears to be the major
change that has occurred. Traditionally, most management control prac-
tice has been inwardly directed but issues like regulation, sustainability,
ethics, governance and risk management are derived from external pres-
sures with accountability being part of that movement.2 Developing these
ideas of external accountability, Miller and Power (2013) further high-
light the adjudicatory nature of (management) accounting (and control)
in response to the changing environment stating that: Accounting has
multiplied in response to individual demands to know more and measure
performance to evaluate agents (p. 581). In many ways, the same can
be said of management control. Bourne (in this volume) argues that
the levels of uncertainty have increased and that the development of
performance management frameworks is an attempt to cope with these
changes.
The majority of research approaches taken in studying uncertainty in
the management control literature (which are rather limited in scope)
are at the rational, objective end of the spectrum. Although these can
be useful a more subjective approach (see the trend in this book from
the Widener survey approach, through Bourne; Harris; Warren, Saulpic
& Zarlowski; Soin, Huber & Wheatley; Linsley & Linsley; and Lowe &
De Loo) to both research and practice may be helpful. For example, it
may be that the processes through which uncertainty is identified and
managed may be as important as the actions themselves.
Middle-Range Theory (MRT) appears to have a lot to offer in this
context. Whilst acknowledging the necessity of starting from some
existing framework to structure thought and belief, MRT is also reflex-
ibly open to modification of these initial views through the gathering
of empirical data. It might be helpful to reflect on the type of theory
that approaches such as MRT produce. It may be much more akin to
the Saulpic and Zarlowski approach of affecting real world behaviour by
education and exposure to ideas, rather than in prescription for universal
action. At the very least, there is a contingent view that prescriptions
need to be related to circumstances. More radically, understanding
might only be possible when immersed in specific circumstances, and
grand theories prove to be unhelpful. Management knowledge (and
maybe social knowledge more generally) may require a combination of
theoretical frameworks and specific data that cannot be generalized in
any more cogent manner.
Regulation and governance
Regulation, as a mode of control, raises some interesting issues around

uncertainty. For example, throughout the 1980s and 1990s, the UK had
a strong deregulatory incentive. Driven by strong neo-liberal principles,
social policy was restructured along the lines of a political economy that
put efficiency and economic rationality at its forefront. The focus was
on the seeming over-regulation of the public services, on the inflex-
ibility and inefficiency that followed and on the costs of regulation.
Deregulation, in many respects, created uncertainty by replacing polit-
ical uncertainties with the uncertainties of the market place.
Issues relating to regulation and uncertainty are addressed by a number

of contributions in this volume most of which draw on current business
practice. In Chapter 10, Tessier highlights issues around how controls are
introduced in relation to new external regulations that emerge within
an industry. She also highlights how companies manage uncertainty
regarding these new requirements by implementing imperfect controls
and improving them when uncertainty is reduced. In Chapter 12, Soin
et al. look at the effects of regulation in the UK higher education sector
by connecting risk management and management control through the
lens of accountability. They show how new management control tools
like risk registers have developed as a response to the external demands of
public accountability brought about by the higher education regulator.
In Chapter 13, Warren further explores this theme through a consid-
eration of the management controls associated with uncertainty as it
emerges from the prospect of current and future regulation (p. 203) and
sustainability in the electricity industry. As Ayres and Braithwaite (1992)
put it, we live in a state of regulatory flux, where dramatic regulatory,
deregulatory, and re-regulatory shifts are occurring simultaneously
(p. 7). We suggest that the contributions presented here highlight the
uncertainties that emerge as a consequence of this and the implications
it has for management control practices in organizational settings.
Corporate governance and risk management emerge as themes that
extend traditional management control practice to become a mecha-
nism to deal with organizational uncertainty. As Soin and Collier (2013)
highlight, although managers have always faced uncertainty, the range
of uncertainties that are being attempted to be managed has increased
through the proliferation of risk management. For example, new cate-
gories of risk have been recognized, reputational and operational risks
amongst others. This theme is picked up in Chapters 12 and 16, where
the authors argue that managing these risks has implications for manage-
ment control activities. Linking in to the discussion on regulation as a
mode of control, Black (2005) argues that regulation is no longer centred
on the state, but diffused and dispersed throughout society. The state has
become increasingly committed to an indirect supervisory role calling
for a re-organization of the collective and individual components that
make up organizational life. This re-organization needs a sound system
of internal control whereby organizations are turned inside out as a
direct response to public demands for control (Power, 2007).
All these elements have implications for management control practice,
which are addressed in various ways through the monograph. Spekl
and Kruis show that much of the work currently being undertaken in
management control also includes risk management and corporate

governance issues. Anderson and Dekker highlight the use of various
control mechanisms to measure transaction risk between supply chain
partners. Harris focuses risk in strategic decision-making in organiza-
tions arguing for a more intuitive approach to understanding risks and
their control. Finally, Soin et al. highlight that risk management and
management control have been brought increasingly close together
through issues around the idea of public accountability.
These contributions show that risk management has become a
significant feature of organizational and management control systems.
Companies now have more operational freedom because the regula-
tory emphasis has shifted from monitoring the content of management
decisions to certifying the quality of managerial and control practices.
The burden of responsibility is on senior managers of regulated firms to
develop and operate effective governance structures and management
control systems and ensure staff competence.
Responses to external pressures
Organizations are also subjected to pressures (of varying intensity) to

demonstrate that they can robustly cope with whatever uncertainty
brings, and continue to deliver results to stakeholders. This can be
counter-productive and might simply represent an illusion of control
(Power, 2007, 2009) and/or be seen as fads and fashions. In Chapter 3,
Spekl and Kruis highlight the irony of US scholars leaving the field
of management control partly because of their performance evaluation
systems which are pushing researchers away from theoretically astute
field studies and surveys to narrowly focused economics-based studies
using large archival datasets in popular topic areas (p. 42).
Another aspect of this relationship between management control
and uncertainty relates to ideas around the creation of ready-made
solutions to problems as highlighted by Saulpic and Zarlowski in
Chapter 14. They highlight that as a consequence of an uncertain world
decision makers are more likely to be looking for solutions. Linked to
this are issues around the standardizing effects of management control
systems as a response to uncertainty. In Chapter 10, Tessier states that:
Implementing controls such as best practice is an attempt to reduce
uncertainty (p. 159). In contrast, Soin et al. raise the prospect that risk
management as a response to demands for accountability leads to a focus
on standardized procedures and tick box compliance. They suggest that
this can create the above-mentioned illusion of control a feeling
of security because risks are being managed in a manner that satisfies

external stakeholders. Lowe and De Loo take this idea even further by
questioning this obsession with efficiency and effectiveness in the name
of security about the future (p. 240). They argue that fears about making
mistakes in organizational settings coupled with notions of permanent
progress (p. 240) stifles and restricts organizational behaviour.
Creativity and innovation are also relevant here. Pfister raises the
issue of how far formal control procedures enable or hinder innova-
tion and what types of MCS create the optimal conditions for creativity
and innovation. He shows how MCS mediate the cultural traits of
organizations. This contrasts with Soin et al., who highlight defensive-
ness and fear as the outcome of risk controls, suggesting that too much
control might diminish creativity in UK universities. These issues go
back to Simons (1995) concerns of how can you balance creativity and
control. In addition, organizational roles and practices are constantly
evolving. In their chapter, the Linsleys explore the emergence of the
management accountant as a strategist from a cultural perspective based
on the work of Mary Douglas. They note the strength of existing social
solidarities, and explain the limited success of such a changed role for
management accountants as being incompatible with strongly hierar-
chical organizations.
Thus, the ideas around this theme take a more critical stance. Although
control through standardization and creativity are positive responses
to external pressures, it appears that there might be some unintended
consequences relating to fear, anxiety and defensiveness. It is there-
fore worth bearing in mind that dealing with uncertainty through new
management practices needs to take account of the specific contexts in
which it is attempted.
Conclusions
It is evident that the chapters in this book raise more questions than they
answer. However, they are written by some of the leading academics in
the field of management control who have each made their own signifi-
cant contributions to its development. In presenting their own work,
they were also asked to reflect upon its connection with the existence
of uncertainty in the management of todays organizations, and this
has resulted in an impressive set of ideas, which will be influential in
developing the research agenda over the next decade or more. We can
ask no more of our readers than that they study what they have to offer,
to reflect upon it and allow it to influence how they develop their own
research agendas. One thing is certain: managing in an uncertain envi-

ronment will continue to be an area of major importance in the future,
whatever that may bring.
Notes
1. We are indebted to John Burns for this insight.
2. We are indebted to Christian Huber for this insight.
References
[These do not include references that are given in the book chapters discussed.]
Ayres, I. & Braithwaite, J. (1992). Responsive Regulation: Transcending the Deregulation

Debate. New York: Oxford University Press.
Black, J. (2005). The Emergence of Risk-Based Regulation and the New Public Risk
Management in the United Kingdom. Public Law, 3, 512548.
Giddens, A. (1990). The Consequences of Modernity. Cambridge: Polity Press.
Miller, P. & Power, M. (2013). Accounting, Organizing, and Economizing:
Connecting Accounting Research and Organization Theory. The Academy of
Management Annals, 7(1), 557605.
Power, M. (2007). Organized Uncertainty: Designing a World of Risk Management.
Oxford; New York: Oxford University Press.
Power, M. (2009). The Risk Management of Nothing. Accounting, Organizations
and Society, 34(6/7), 849855.
Power, M., Scheytt, T., Soin, K. & Sahlin, K. (2009). Reputational Risk as a Logic
of Organizing in Late Modernity. Organization Studies (01708406), 30(2/3),
301324.
Simons, R. (1995). Levers of Control: How Managers Use Innovative Control Systems to
Drive Strategic Renewal. Boston (MA): Harvard Business School Press.
Soin, K. & Collier, P. (2013). Risk and Risk Management in Management
Accounting and Control. Management Accounting Research, 24(2), 8287.
2
Transfer Pricing: Insights from the
Empirical Accounting Literature
Martine Cools
This chapter provides an overview of the empirical literature on transfer

pricing, to which Clive Emmanuel has significantly contributed since
1982. Transfer prices are instruments to measure the value of the goods
or services transferred between the subunits of an organization, as such
allowing subunit results to be expressed in financial terms. Each subunit
can therefore be treated as a financial responsibility centre for the
purposes of accountability and allows relevant decision-making infor-
mation to be computed.
The empirical accounting literature on transfer pricing is broadly
characterized by three research streams. The first one focuses on the
management control issues of transfer pricing, which recognizes that
transfer pricing, through its impact on the results of the subunits, plays
a major role in internal decision-making (resource allocation, cost
determination of the goods and services involved) and performance
evaluation. The second stream consists of tax accounting studies on
international transfer pricing and income shifting: they investigate to
which degree national tax differentials lead to transfer pricing manipu-
lations in multinational enterprises (MNEs). The third and most recent
stream of empirical transfer pricing studies aims at understanding the
impact of the increasing need for transfer pricing fiscal compliance on
the design and use of the management control system within MNEs.
Whereas the first two research streams have treated the aspects of taxa-
tion and management control as isolated issues, this last research stream
acknowledges that tax rules have a significant influence on the organi-
zations management control system. Most of Emmanuels research has
taken a contingency-based approach, searching for insights into the
objectives of a companys (international) transfer pricing policy and
into the organizational and environmental determinants of its transfer
14
Transfer Pricing: Insights from the Literature 15
pricing method. Although he has also contributed to the income-

shifting stream, Emmanuels main contributions lie within the manage-
ment control and fiscal compliance stream.
This article is structured as follows: each section provides an overview
of the empirical transfer pricing literature, respectively from a manage-
ment control, tax accounting and from a fiscal compliance perspec-
tive. It concludes by highlighting what the work of Clive Emmanuel, as
one of the pioneers in this field, has meant and still means for transfer
pricing research today.
Transfer pricing from a management control perspective
The early transfer pricing literature treated
transfer pricing as a mere cost-revenue exercise, devoid of its organi-

zational and human dimensions. In contrast, many accountants
acknowledge, though within the restrictive profit goal congruence
assumption, that no single pricing method can satisfy all the infor-
mation needs of the decentralized company. (Emmanuel & Mehafdi,
1994: 140)
Hirshleifer (1964) was the first researcher to stress that transfer prices
are the unavoidable by-product of decentralization, as they allow
for accountability of subunit results in the context of the allocated
resources by enabling the computation of accounting profit. Along the
same line, Watson & Baumler (1975) described transfer prices as instru-
ments enabling organizations to differentiate and organize themselves
into different autonomous subunits, while at the same time allowing
them to integrate the actions of the subunits in a coordinated way and
to provide a more suitable system of performance evaluation. In other
words, these authors pointed at the underlying organizational factors
involved in transfer pricing issues, thereby recognizing that uncertainty
in these processes complicated transfer pricing related decision-making.
Eccles (1985) undertook an empirical study that confirmed the impor-
tance of organizational context and the role of strategy and administra-
tive processes as the principal determinants of transfer pricing practices.
The main concern of his interviewees was to choose a transfer pricing
mechanism that induced goal congruence and simultaneously provided
useful and fair measures for performance evaluation. They felt that the
transfer pricing policies and organizational characteristics should be
consistent with strategy; in other words that the transfer pricing policy
16 Martine Cools
should lead to strategic alignment. In addition, they stressed that both

fairness and control can be achieved if appropriate processes are used.
The management control literature on transfer pricing described two
important decisions to be taken: 1) which price is set to transfer goods
and services internally in an organization (the pricing decision), and
2) where do the goods come from, in other words which subunit will
deliver the goods to which other subunit, and do the subunits have
the freedom to choose whether to buy products and services within the
group or source them from an external company (the make-or-buy deci-
sion) (Eccles, 1983, 1985; Cools et al., 2008). In addition, as transfer
prices determine subunit results, they might influence subunit manager
decision-making in a way that is not in the best interest of the organiza-
tion as a whole. This means that transfer pricing plays an important role
in the motivation of subunit managers and the consequent degree of
goal congruence (Eccles, 1983, 1985; Emmanuel & Mehafdi, 1994). Eccles
(1985) developed a more normative framework to stimulate managers
to manage transfer prices effectively, called the Managers Analytical
Plane. This plane focuses on two dimensions of strategy vertical inte-
gration and diversification and has two objectives: first, to describe
and position a companys current strategy, and second, to emphasize
that changes in strategy create pressures for changes in transfer pricing
policy. In other words, changes in strategy lead to strategic alignment.
These early organizational studies opened the way towards the devel-
opment of agency theory, transaction cost economics and contingency
approaches towards transfer pricing, in each of which the importance
of transfer pricing to increase goal congruence and to work out a suit-
able system of performance measurement and evaluation were central
issues. The agency literature on transfer pricing has stressed the poten-
tial misalignment of interests between the group and the subunits.
One of the suggested solutions involved incorporating performance
measures related to organization-wide results (Spicer, 1988; Chen et al.,
2014). Another suggestion was to use negotiated transfer prices, which
could foster greater divisional autonomy for performance evaluation,
and enhance the integration between subunit and organization-wide
objectives. However, these advantages may be outweighed by time-
consuming bargaining practices, influenced by untruthful revelation
of cost and revenue information and opportunistic behaviour by one
dominant subunit. Moreover, negotiating transfer prices often causes
conflict among subunits, may distort the subunits financial reports and
consequently requires executives time (Ravenscroft et al., 1993; Watson
and Baumler, 1975). Various studies on negotiated transfer prices can
be situated in the psychology-oriented experimental literature, which

examines issues like the impact on fairness (Eccles, 1983).1
Again focusing on the organization as a whole, Spicer (1988) set up a
positive organizational theory of the transfer pricing process. Essentially,
he referred to differences in diversification strategy, organizational design
and the dimensions of intra-firm transactions to explain the choice of
transfer pricing methods. Survey research was used to further investigate
the choice of the transfer pricing method (Borkowski, 1990). In contrast
to this approach, Emmanuel and Mehafdi (1994) developed an explana-
tory contingency framework that incorporated the international transfer
pricing system as a set of both qualitative and quantitative variables.
The authors aimed at predicting the transfer pricing process, thereby
stressing the dynamic interactions and the need for modifications in
the light of the particular case under investigation (Boyns et al., 1999). A
wide set of contingency variables was taken into account, such as value
chain, strategy, organization structure, divisional autonomy considera-
tions, dimensions of internal trade and the nature of performance evalu-
ation and reward systems.
Boyns et al. (1999) built on Eccles (1983), Spicer (1988) and Emmanuel
& Mehafdi (1994) to study the events and actions taken at an iron and
coal company by the end of the 19th century. This study highlighted a
number of interesting lessons learnt from the early organizational litera-
ture. First, it is one of the few qualitative studies the topic is still so
sensitive that opportunities to study transfer pricing in practice remain
rare. Second, they captured subunit practices, which provides new
insights as opposed to the focus on company-wide practice found in the
survey studies on transfer pricing and practioners based studies. Third,
they indicated that the choice of transfer pricing systems is a dynamic,
rather than a static process. They stressed that longitudinal studies
on transfer pricing change are a worthwhile undertaking. Boyns et al.
(1999) concluded by showing that researchers need to follow up the
evolution of a business and examine changes in the balance of power
between various groups in order to be able to understand the choice of
transfer pricing processes.
In sum, the management control literature on transfer pricing teaches
us that transfer pricing decisions are related to pricing and sourcing
decisions. In addition, transfer pricing involves organizational issues,
such as the composition of the value chain, company-wide and subunit
strategy, organizational structure, divisional autonomy, the nature of
internal trade and human dimensions, as it shapes performance evalu-
ation and reward systems and in this way influences human behaviour
18 Martine Cools
and feelings of fairness. Transfer pricing involves such a wide range of

issues that many relevant research topics remain. For example, Chen
et al. (2014) recently focused the attention on the need to study the level
of subunit autonomy in transfer pricing decisions.
Transfer pricing from a tax accounting perspective
Cross-border transfer pricing in MNEs (or international transfer pricing)

has received considerable attention in the literature.
There is a long held belief that international transfer pricing is used

by ... MNEs ... to minimize global tax liability. On the one hand, this
is a rational economic response to market imperfections created by
national governments. An alternative view decries such actions as
anti-competitive and an abuse of power. (Emmanuel, 1999: 252)
In the Foreign Direct Investment literature, transfer prices were described

as instruments to take advantage of imperfections in the global market
(Dunning, 1980; Rugman, 1981; Eden, 1998). This literature stresses
that MNEs have to cope with numerous constraints, such as profit and
loss relationships, production and technological constraints, labour and
material sourcing costs, market and demand constraints, quotas and
cash flow restrictions, investments, technological transfers and social
welfare restrictions and regulatory constraints. The reaction of the MNEs
to this complexity can vary. Some companies will take advantage of this
complex web of objectives and constraints through strategic decisions
and direct or indirect management of transfer pricing to achieve owner-
ship. Others will muddle through at the mercy of binding constraints,
while even others will try to adapt the constraints through the legisla-
tion or by negotiating (Leitch & Barrett, 1992).
Various surveys were undertaken to identify the factors determining
transfer pricing choices of MNEs. These studies identified the objectives
of an MNEs transfer pricing policy and the organizational and envi-
ronmental determinants (including the tax regulations) of its transfer
pricing method (Borkowski, 1992, 1997; Cravens & Shearon, 1996;
Cravens, 1997; Emmanuel & Mehafdi, 1994; Lin et al., 1993; Tang, 1979,
1992). MNE transfer pricing objectives include maximizing overall
profit, managing the companys worldwide cash flow, marketing and
operational objectives, minimization of taxes, adapting to changes in
socio-political factors and behavioural objectives. From these factors,
overall profit maximizing, marketing and operational objectives and
behavioural objectives turned out to be relevant determinants of the

location and sourcing decisions within MNEs. Chan & Lo (2004) used
field interviews with managers of large foreign-controlled companies in
China to investigate how managements perception of the importance of
environmental variables influences their choice of international transfer
pricing methods. This was one of the first studies investigating transfer
pricing in a developing country. They found that a market-based method
would dominate in cases where management aims at keeping a good
relationship with the host government, whereas cost-based methods
are more often used when management is alert for foreign exchange
controls in transfer pricing decisions.
While there is tax law literature discussing national tax regimes, tax
compliance requirements and the optimal transfer pricing method from
a fiscal point of view (Douvier, 2005; Swenson, 2001), tax accounting
studies investigated the degree to which national tax rate differentials
lead to transfer pricing manipulation and income shifting (Grubert &
Mutti, 1991; Klassen et al., 1993). Since the moment national tax author-
ities increased their attention to transfer pricing policies within MNEs,
income-shifting studies gained in importance. Although the results in
terms of transfer pricing manipulations are inconclusive, governments
worldwide remain critical and have augmented their vigilance: they
made transfer pricing regulations more severe and augmented admin-
istrative resources to audit in this area. More and more tax authorities
are interrogating MNEs on their transfer pricing policies, not at least
the Internal Revenue Service in the USA and Her Majestys Revenue and
Customs (HMRC) in the UK. After the UKs Public Accounts Committee
(PAC) reviewed the HMRCs accounts, it started to interrogate successful
companies such as Amazon and Google on their transfer pricing policy.
MNEs that were believed to pay too little taxes were challenged and pros-
ecuted in order to prevent abuse of transfer pricing, royalty payments,
intellectual property pricing and interest payments (PAC, 2012; Jost
et al., 2014; Bergin, 2012).
A number of US studies discussed the consequences of the Tax Reform
Act of 1986, which reduced the highest marginal tax rate in the US from
46 per cent to 34 per cent. The results of these empirical studies were
inconclusive (Harris, 1993; Jacob, 1996; Conover & Nichols, 2000). As
well as the studies around the 1986 Tax Reform Act, a number of other
studies focused on income shifting, again with inconclusive results.
Grubert and Mutti (1991) investigated three interrelated aspects of
US MNE activity: the ability to shift profits from high-tax countries
to low-tax countries, the impact of host country taxes and tariffs on
20 Martine Cools
the distribution of real capital and the influence of these policies on

international trade patterns of the US and host countries. The authors
concluded that income shifting is indeed found.
On the contrary, Collins et al. (1997) did not confirm the income-
shifting hypothesis. They examined foreign-controlled firms that paid little
tax over long time horizons, but did not find that these low tax burdens
could be attributed to income manipulation. Instead, they observed
unspecified systematic differences between foreign-controlled and other
US firms. Kinney and Lawrence (2000) compared the tax-paying behav-
iour of US firms that were substantially influenced by foreign-domiciled
companies with other US firms. They found that companies with signifi-
cant foreign ownership paid less tax than other US firms, but they could
not conclude that the reduced tax burden could be attributed to income
manipulation. Swenson (2001), on the other hand, provided empirical
results that were consistent with the transfer pricing incentives created by
taxes and tariffs. She focused on the variations in the customs value of US
imports from Canada, France, Germany, Japan and the UK. Other studies
analysed cross-jurisdictional income shifting between the continents, like
Eldenburg et al. (1996) for Canada and Australia and Borkowski (1997) for
Japanese versus US MNEs. Gupta and Mills (2002) focused on the differ-
ences between the state income tax regimes within the US. They found
that firms state effective tax rates first decreased and later increased as a
function of the number of states in which they filed returns.
In 1998, Oyelere and Emmanuel investigated the situation in the
UK: they compared UK-based foreign-controlled companies with
UK-controlled companies. They reported that foreign-controlled compa-
nies had lower values on performance measures (measured as return
on total assets or return on total sales) than UK-controlled companies,
but higher dividend payout ratios. Consequently, they found evidence
for significant income shifting by foreign-controlled companies as
compared to UK-controlled companies. In 2004, Langli & Saudagaran
undertook a similar study on the Norwegian situation analysing to what
extent the pattern found in the US also existed for corporations located
in Norway. They found that foreign-controlled companies in Norway
had a taxable income to sales ratio that was significantly lower than
comparable Norwegian-controlled companies. In addition, they showed
that the negative taxable income differential for foreign-controlled
companies, which they partly attributed to income shifting based on
the extant literature, was not limited to large companies.
In sum, the tax accounting literature on transfer pricing focuses on
cross-border transfer pricing policies. It provides insights in MNEs
transfer pricing objectives like profit maximizing and operational deci-

sions, mainly in developed countries but increasingly also in developing
countries. In addition, income-shifting practices related to transfer
pricing manipulations were investigated. Although the results were
inconclusive, tax authorities worldwide are working out detailed transfer
pricing regulations and are becoming more aggressive in publicly ques-
tioning MNEs on their transfer pricing practices.
Transfer pricing from a tax compliance perspective
If there is one thought we wish to convey through this review it is that

tax compliance in terms of transfer pricing has far reaching conse-
quences for existing theory, practice and, not least, for the design of
the management control system. (Cools & Emmanuel, 2007: 573)
Cools and Emmanuel (2007) described how the fiscal regulators continue
to tighten their transfer pricing tax regulations, with the aim to prevent
abuse in the form of tax avoidance by MNEs. The arms length principle,
requiring a continuous comparison between the transfer price and the
price that would have been reached under normal market conditions,
is the main principle for judging the appropriateness and fairness of
transfer pricing in international tax law. National tax authorities have
become more flexible in terms of the acceptable pricing methods, as
long as the MNEs comply with the extensive documentation require-
ments (Cools & Emmanuel, 2007). At the same time, the arms length
principle has always been challenged, as proved by the recent support
of a Common Consolidated Corporate Tax Base (CCCTB) by the
European Commission. The CCCTB refers to one set of rules for compa-
nies operating in the EU, meaning that companies can file a single
consolidated tax return for their European activity, and that their
consolidated profit before tax would be shared out over the member
states by using a simple formula (taking into account sales, employees
and assets). The member states would then be able to tax the profits of
the companies within their state at the tax rate they determine unilater-
ally (European Commission, 2011). Also, the recent Base Erosion Profit
Shifting action plan (BEPS) (OECD, 2013) is an interesting development
at the country level. It proposes a global template that MNEs need to
fill out for providing the necessary information on their global alloca-
tion of the income, economic activity and taxes paid among countries.
The aim of the OECD was to provide a set of rules regarding transfer
22 Martine Cools
pricing documentation, which would increase the transparency for the

tax administration, while at the same time trying to keep compliance
cost for the companies at a reasonable level (OECD, 2014).
Cools and Emmanuel (2007) concluded that it is difficult to understand
the management control system within MNEs unless fiscal regulations
are recognized as an endogenous variable. Jost et al. (2014) confirm that
the stronger compliance perspective on transfer pricing does not only
play for the tax authorities, but also for tax practitioners, public adminis-
trations and management accountants. In order to gain in-depth insights
in this matter, qualitative studies provide a valuable option. Because
transfer pricing remains a sensitive topic of study, the number of quali-
tative studies is still limited. In contrast to the analytic literature, incor-
porating tax compliance as a fact, Cools et al. (2008) explicitly examined
the process of gaining tax compliance in one successful MNE using the
same sets of transfer pricing books for tax compliance and management
control. They investigated how the management controls for tangible
goods were set up and used in one transfer pricing tax compliant MNE.
They observed how the management control system design was char-
acterized by increased centralization, a decrease in participative budg-
eting and an increase in the use of non-financial performance measures
as a result of the implementation of a transfer pricing tax compliance
strategy. In terms of the use of the management control system, Cools
et al. (2008) observed that the gains from tax compliant transfer pricing
(i.e., using the same values for managerial and tax purposes) have to
be balanced with the disadvantages of losing managerial flexibility and
motivation. Cools et al. (2008) concluded that when researchers seek
to understand management control system design and use in complex,
modern-day MNEs, they need to understand to what degree corporate
management focuses on tax compliance. The political visibility (Watts
& Zimmerman, 1986) of the MNE under study made it a potential target
for upcoming transfer pricing audits, especially in periods of growth in
the global market.
Cools and Slagmulder (2009) investigated the same case, highlighting
the impact of tax compliance on responsibility accounting. They found
that the elimination of negotiated transfer prices could lead to psycho-
logically disagreeable and sometimes even economically harmful situ-
ations. They also found that the administrative simplification of the
determination of the profit margins could lead to suboptimal business
decisions. In addition, tax compliance had such a significant influence
on subunit design that all types of responsibility centres (more specifi-
cally the revenue and cost centres) were gradually converted into real
profit centres. Further investigating the impact of transfer pricing tax

compliance, Rossing & Rohde (2010) studied intra-company cross-border
services and more specifically the changes to the overhead cost alloca-
tion system design. They observed that the MNE under study adjusted its
(overhead) cost allocation systems after implementing a transfer pricing
tax compliance strategy. Rossing & Rohde (2010) responded to the calls
for research on intra-company cross-border transfers of services, as made
by Elliott & Emmanuel (1998, 2000).
Cools et al. (2008), Cools & Slagmulder (2009), Rossing & Rohde (2010)
suggested that MNEs change their compliance strategy in response to the
risk of being audited: managers seem to recognize that transfer pricing
decisions are inherently associated with considerable risks, which in turn
affects their transfer pricing strategies. Rossing (2013) undertook a case
study to examine whether and how a functional tax strategy impacts
the management control system in an MNE facing transfer pricing tax
risks. Again, the study concluded that the management control system
of this MNE was contingent upon the MNEs response to its tax envi-
ronment. The author further illustrated the role of inter-organizational
network collaboration across MNE transfer pricing tax experts, which
were building on each others tax knowledge. The paper showed how
this collaboration improved the formal interactive control system and
reduced tax uncertainty. In another recent study, Jost et al. (2014) used
data from the Ernst & Young 20072008 Transfer Pricing survey to inves-
tigate the degree to which MNEs perceive the importance of transfer
pricing risk. They asked for the person with the ultimate responsibility
for transfer pricing in their MNE to provide a personal assessment of
transfer pricing risk. Their findings link transfer pricing risk awareness
to general tax and transfer pricing specific strategies, the types and char-
acteristics of intercompany transactions MNEs are involved in, their
individual transfer pricing compliance efforts and resources dedicated
to transfer pricing matters.
The research stream on the impact of tax compliance on manage-
ment control design and use is still underexplored. One of the issues
is the choice for using a single set of transfer pricing books rather than
multiple sets of books. In their analytical work, Baldenius et al. (2004)
referred to the issue of whether organizations separate their managerial
transfer prices from those used for tax purposes. The authors referred
to documented practices that despite the statutory conformity require-
ment, most MNEs seem to use only one set of books, both for simplicity
and in order to avoid the possibility that multiple transfer prices become
evidence in any disputes with the tax authorities (Baldenius et al.,
24 Martine Cools
2004: 592). This assumption is commonly made in analytic articles

(Halpirin & Srinidhi, 1991; Sansing, 1999; Smith, 2002a) ,which is in
line with consultants usual advice to implement one set of books to
demonstrate to the tax authorities that transfer pricing is justified by
internal, rather than purely tax-driven motives (Ernst & Young, 2001,
2003; Durst, 2002).
However, various analytical studies (Baldenius et al., 2004; Smith,
2002b) modelled two distinct transfer prices, one to serve incentive
purposes and the other to serve tax purposes, and there is some evidence
of this practice in MNEs (Borkowski, 1996). It is still not clear what
determines the choice between one or multiple sets of books, and what
MNEs actually understand by these practices. This issue would provide
an interesting issue for further research. In addition, the impact on tax
compliance and consequently on management control design and use
under recent developments like BEPS at the OECD and CCCTB at the
European Commission are worth investigating. Overall, transfer pricing
is increasingly treated as a risk management topic (Rossing, 2013; Jost
et al., 2014). This research stream definitely deserves to receive more
attention, as the transfer pricing regulations keep on changing at a rapid
pace worldwide, meaning that the nature of transfer pricing is becoming
increasingly complex (Jost et al., 2014).
In sum, the empirical transfer pricing literature is recently characterized
by a third stream of studies, highlighting that environmental pressures
can have a significant impact on management control system design
and use. The risk of being audited on their transfer pricing practices has
become so likely for MNEs, that they document their practices for both
tangible and intangible transfer, and make sure that their corporate tax
department keeps an overview. Although the literature provides insights
based on a number of qualitative studies, there is ample room for future
research on how transfer pricing practices are actually managed in a tax
compliant company.
Conclusion
Despite all attention it has received over recent years, transfer pricing
remains a relevant research topic. Many domestic as well as multinational
enterprises run into transfer pricing difficulties sooner or later in their
existence. Moreover, the higher degree of globalization creates integrated
business opportunities for MNEs through cross-border transfers, whereas
corporate income tax systems remain nationally based. Further, national
governments react to this trend by formulating tighter regulations to
reduce the opportunities to manipulate transfer prices and reduce taxes.

And last but not least, international conflict between national tax author-
ities to protect and enhance their revenue base puts MNEs under pressure
to satisfy different tax authorities at the same time.
Clive Emmanuel was among the pioneers of the empirical transfer
pricing literature. His work gives proof of an interesting change in the
interest in the research topic: starting from being interested in the
management control versus the income-shifting aspects of transfer
pricing, Emmanuel drew our attention to changing developments in
transfer pricing practice. Fiscal compliance became so important that its
impact on management control practices calls for further investigation
(Cools & Emmanuel, 2007; Bergin, 2012). His main points of attention
to bring these studies to a good end remain of high value for researchers
today. His first point was that if researchers want to understand transfer
pricing and decide to undertake an empirical transfer pricing study,
they have to make sure they understand what they are talking about. In
more concrete terms, as transfer pricing affects practices at the subunit
management control level, Emmanuel stressed the relevance of focusing
the study at the subunit level (see Boyns et al., 1999; Cools et al., 2008).
His second point was to select one particular transaction in order to be
able to concretely grasp the situation (Boyns et al., 1999; Cools et al.,
2008; Rossing & Rohde, 2010). Emmanuels third point was to be open
for the dynamics of the situation, and not to assume that transfer pricing
is a static issue. In other words, Clive Emmanuel highlighted in his work
that, in contrast to earlier contingency studies, transfer pricing investi-
gations can benefit from a process view that acknowledges the dynamics
of the situation (in terms of evolution of business or power struggles in
Boyns et al., 1999, or in terms of the dynamic character of the influence
of tax compliance on the MCS in Cools et al., 2008).
Taking all contingency factors into account, the original Emmanuel
& Mehafdi (1994) framework remains valid and calls for further testing
and validation. It is clear that Emmanuels enthusiasm for the topic will
stimulate various researchers to dig further into this complex issue:
If we have conveyed the significance tax authorities and MNEs are

giving to international transfer pricing tax policy, that is satisfactory;
if we have whetted the appetite for future research in this area, that
is very pleasing; if we have planted the view that the management
control system of the MNE cannot be examined unless transfer pricing
compliance is an endogenous, contingency variable, that is very satis-
fying. (Clive Emmanuel in Cools & Emmanuel, 2007, p. 584)
26 Martine Cools
Note
1. Important contributions are Ackelsberg and Yukl (1979), Emmanuel and Gee
(1982), Chalos and Haka (1990), Ravenscroft et al. (1993), Luft and Libby
(1997), Anctil and Dutta (1999), Ghosh (1994, 2000), Kachelmeier and Towry
(2002).
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3
Management Control Research: A
Review of Current Developments
Roland Spekl and Anne-Marie Kruis
Introduction
In this chapter, we provide an overview of current developments in

management control research, looking both at method choices and the-
matic patterns. Traditionally, overview papers are based on what has
been published over a specific period of time in a selection of lead-
ing journals. Our approach is slightly different. Rather than looking
at what has been published, we want to see what people are currently
working on, and to pick up on themes and trends that appear to define
the contemporary research agenda of the field. As a point of departure,
we choose the papers from the 2013 conference of the Management
Control Association (MCA), held at Nyenrode Business University. The
MCA conference has established itself as one of the main venues for
management control researchers, and is known for its open-minded-
ness regarding methodological positions and method choices. To get
a richer perspective on the contemporary research agenda, we add a
selection of papers that have been published in the period 20082012
and that appear to have a strong impact on ongoing research work. To
identify these papers, we rely on Google Scholar for citation scores.1 The
interesting thing about these scores is that they are not restricted to
references in selected scholarly journals (as for instance Tompsons ISI
Web of Knowledge scores), but encompass all sources available on the
internet including unpublished working papers, conference proceed-
ings and seminar presentations. These metrics thus provide a current
and egalitarian account of what people are working from (that is, the
sources they quote) which, in turn, provides the basis for inferences
about what they are working on (that is, their broad area of interest).
Finally, we include papers from MAR and AOS published in 20122013.2
30
MCS Research: Current Developments 31
These should give some counter balance to our initial selection of con-
ference papers. After all, some of the conference papers may turn out
to be academic dead ends. Including papers that have recently been
published in two main journals in the field dilutes the influence of such
dead ends in the sample, and helps to focus on the more productive
themes and trends in the collective research agenda.
Our findings indicate that management control is a lively area of
research, characterized by heterogeneity in theories, methods and
topics, but with a need to reconsider the balance between explora-
tion and exploitation. We also observe that the field has become very
European, with nearly exclusive European authorship of contemporary
high-impact papers almost all of which are published in European
journals. Because problems of management control are not intrinsically
European, this dominance is reason for concern.
This chapter first demarcates the scope of the review and discusses
the selected papers. It then presents our findings and concludes with
some comments on the state of the field.
Delineating the field
To give some focus to this review, we need a set of criteria to decide which
studies to include. The obvious route would be to start from a defini-
tion of the field of management control. There is, however, still debate
as to how to define the field, even after decades of management control
research. At a very general level, most would agree that the field is con-
cerned with understanding the processes and mechanisms that are used
within organizations to influence the behaviour of their members so as
to contribute to organizational performance. But if one requires more
precision, opinions start to diverge. Malmi and Brown (2008) suggest a
rather restrictive definition, concentrating on the systems managers use
to direct employee attitudes and behaviour and excluding decision-sup-
port systems. They also exclude controls that are not directly oriented
towards employees, such as inventory controls and quality controls.
Others advocate a much broader approach. Otley (1999) discusses how
the term management control has become associated almost exclusively
with accounting-based information systems, and how it has become
disconnected from strategic planning and operational management. He
argues that this focus is too narrow, and proposes a more encompass-
ing perspective focussing broadly on the management of performance,
rather than just its measurement. Performance management systems
are the evolving formal and informal mechanisms, processes, systems,
32 Roland Spekl and Anne-Marie Kruis
and networks used by organizations for conveying the key objectives

and goals elicited by management, for assisting the strategic process
and ongoing management through analysis, planning, measurement,
control, rewarding, and broadly managing performance, and for sup-
porting and facilitating organizational learning and change (Ferreira
and Otley, 2009: 264). For the purposes of this chapter, we want to cast
our net quite widely, and we will work from the Ferreira and Otley defi-
nition. However, when applying this definition, we come across three
streams of literature that appear to be related to management control
but that do not fit in neatly and that need some additional discussion.
These are the literatures on risk management, internal control and cor-
porate governance. We will consider these first.
The study of risk management has moved beyond the specialized
fields of health and safety, insurance, investment management and
treasury, and has begun to address more inclusive issues of how control
structures help organizations to deal with risks and opportunities in
the pursuit of organizational objectives (Soin and Collier, 2013). This
evolving focus has a clear overlap with the field of management con-
trol, and many research questions addressed within the risk manage-
ment literature can easily be reframed as management control issues.
For example, in her study of the rise of enterprise risk management
in two large banks, Mikes (2009) explicitly draws on the literature on
the roles and uses of management control systems. The reverse is also
true. Ding et al. (2013) examine partner selection and contract design
choices as instruments to manage relational and performance risk in
inter-firm relationships; issues that have been considered to be part of
management control at least since Otleys (1994) observation that the
legal boundaries of the firm have become less relevant in demarcat-
ing the field. Because of this increasing connectedness, we include the
literature on risk management in our review, as long as the papers dis-
play at least some interest in human behaviour and organizational goal
achievement in the analysis.
There has been a recent surge in the literature on internal control. The
term internal control is typically understood to refer to the processes by
which the organization seeks to provide reasonable assurance regarding
the effectiveness and efficiency of operations, the reliability of report-
ing and compliance with relevant laws and regulations (COSO, 1992; see
also COSO, 2013, for a recent update). Given this definition, one would
expect this upcoming literature to have a lot in common with manage-
ment control. This, however, is not the case. The literature on internal
control is strongly related to the SarbanesOxley Act of 2002, which
requires managers and their auditors to report on the effectiveness of

the firms structure of internal controls. These disclosure requirements
are restricted to control over financial reporting, and do not include
operations or compliance. The typical focus of this literature, therefore,
is either on factors that may cause weaknesses in reporting controls (for
example Doyle et al., 2007), on the determinants of decisions regard-
ing disclosure of these weaknesses (for example Rice and Weber, 2012),
or on the market responses to information about these weaknesses (for
example Hammersley et al., 2008). Because this literature is silent on
the broader relationship between control and organizational perform-
ance, we exclude this stream of research from our overview.
Accounting journals often publish papers addressing issues of corpo-
rate governance. The field of corporate governance shares with man-
agement control an interest in supervision, incentives, monitoring and
managerial decision-making, but at a different level of analysis: whereas
management control studies hierarchical and hybrid control relation-
ships within and between organizations, corporate governance is about
the relationship between shareholders, the board of directors and the
CEO (Brickley and Zimmerman, 2010; Shleifer and Vishny, 1997).
This different level of analysis leads us to exclude these papers from
our review. We also exclude papers on executive compensation. These
papers typically address agency problems between shareholders and the
CEO rather than within-firm management behaviour and, therefore,
belong to the field of corporate governance rather than management
control. In addition, a significant part of the executive remuneration lit-
erature does not focus on (dimensions of) organizational performance,
but on specific outcome variables in the sphere of financial reporting
such as accounting irregularities and earnings management (for exam-
ple Armstrong et al., 2010).
Sample
The 2013 MCA conference featured 45 papers in total. To this group of

papers, we add the papers published in 2012 and 2013 in MAR and AOS,
provided that they belong to our domain as defined in the previous sec-
tion. This leads us to include 44 papers from MAR (all research articles plus
guest editorials) and 20 papers from AOS. Finally, we add the 25 papers
from 20082012 that have the highest impact on current research accord-
ing to Google Scholar. The total sample, thus, comprises 133 papers.
Table 3.1 reproduces Google Scholars ranking of the 20 most influ-
ential journals in the field of accounting and taxation. This ranking is
Table 3.1 Most influential journals in Accounting & Taxation (according to

Google Scholar)
Citations of
H-index top paper
1 The Accounting Review (TAR) 54 596

2 Journal of Accounting and Economics (JAE) 53 432
3 Journal of Accounting Research (JAR) 50 820
4 Accounting, Organizations and Society (AOS) 47 391
5 Contemporary Accounting Research (CAR) 40 257
6 Accounting, Auditing & Accountability Journal (AAAJ) 32 165
7 Review of Accounting Studies (RAS) 30 248
8 Management Accounting Research (MAR) 30 242
9 Journal of Accounting and Public Policy (JAPP) 29 139
10 Journal of Business Finance & Accounting (JBFA) 27 166
11 Auditing: A Journal of Practice & Theory (AJPT) 26 112
12 Accounting Horizons (AH) 26 167
13 European Accounting Review (EAR) 25 160
14 Critical Perspectives on Accounting (CPA) 25 65
15 National Tax Journal (NTJ) 22 59
16 Accounting and Business Research (ABR) 22 107
17 International Tax and Public Finance (ITPF) 21 246
18 Accounting & Finance (AF) 20 115
19 The British Accounting Review (BAR) 20 130
20 Journal of Accounting, Auditing & Finance (JAAF) 19 112
Note: information retrieved from Google Scholar Metrics in December 2013. Reported
h-indices and number of citations reflect the situation as per July 2013. Included papers are
published in the years 20082012.
based on the h-index as per July 2013 for papers published in 2008
2012, and measures citation intensity. TAR for instance has an h-index
of 54, which means that of all papers published in this journal in the
five-year reference period, 54 have been cited 54 times or more as per
July 2013. With this score, TAR gets the highest ranking in the Google
list. The most influential individual paper, however, has been published
in JAR and is a study by Barth et al. (2008) on international accounting
standards and accounting quality. This paper has been cited 820 times.
From the 20 most influential journals, we select the papers that belong
to the domain of management control as defined earlier in this chapter,
and rank these using the number of citations they receive. Table 3.2
presents the results from this procedure (the top 25).
Table 3.2 Top 25 papers in Management Control from the 20 most influential
journals
Title Author(s) Journal Year Citations
1 Institutional rationality and Lounsbury AOS 2008 259

practice variation: New
directions in the institutional
analysis of practice
2 Management control systems Malmi & MAR 2008 242
as a package: Opportunities, Brown
challenges and research
directions
3 The design and use of Ferreira & MAR 2009 188
performance management Otley
systems: An extended
framework for analysis
4 Public sector to public services: Broadbent & AAAJ 2008 161
20 years of contextual Guthrie
accounting research
5 The effect of comprehensive Hall AOS 2008 146
performance measurement
systems on role clarity,
psychological empowerment
and managerial performance
6 A review and discussion of Caglio & Ditillo AOS 2008 130
management control in inter-
firm relationships: Achievements
and future directions
7 Emerging themes in management Berry, Coad, BAR 2009 130
control: A review of recent Harris, Otley
literature & Stringer
8 Accounting, hybrids and the Miller, AOS 2008 115
management of risk Kurunmki &
OLeary
9 An exploratory investigation Cadez & AOS 2008 111
of an integrated contingency Guilding
model of strategic management
accounting
10 The risk management of nothing Power AOS 2009 108
11 In search of management Malmi & EAR 2009 108
accounting theory Granlund
12 Risk management and calculative Mikes MAR 2009 104
cultures
13 Developing performance- Wouters & AOS 2008 96
measurement systems as enabling Wilderom
formalization: A longitudinal
field study of a logistics
department
Table 3.2 Continued
Title Author(s) Journal Year Citations
14 Information system integration, Chapman & AOS 2009 96

enabling control and Kihn
performance
15 The impact of firm characteristics Abdel-Kader & BAR 2008 94
on management accounting Luther
practices: A UK-based empirical
analysis
16 Actor-networks and the diffusion Alcouffe, MAR 2008 83
of management accounting Berland &
innovations: A comparative Levant
study
17 Accounting for control and Vosselman AOS 2009 77
trust building in interfirm & Meer-
transactional relationships Kooistra
18 The relations between Langfield- MAR 2008 76
transactional characteristics, Smith
trust and risk in the start-up
phase of a collaborative alliance
19 Partner selection and Dekker AOS 2008 76
governance design in interfirm
relationships
20 Manufacturing shareholder value: Ezzamel, AOS 2008 74
The role of accounting in Willmott &
organizational transformation Worthington
21 Reasons for management control Davila, Foster AOS 2009 73
systems adoption: Insights & Li
from product development
systems choice by early-stage
entrepreneurial companies
22 Straddling between paradigms: A Kakkuri- AOS 2008 71
naturalistic philosophical case Knuuttila,
study on interpretive research Lukka &
in management accounting Kuorikoski
23 Does the balanced scorecard add De Geuser, EAR 2009 69
value? empirical evidence on its Mooraj &
effect on performance Oyon
24 Performance management Broadbent & MAR 2009 68
systems: A conceptual model Laughlin
25 Performance management Verbeeten AAAJ 2008 67
practices in public sector
organizations: Impact on
performance
Note: information retrieved from Google Scholar Metrics in December 2013. Reported number
of citations reflects the situation as per July 2013. Included papers are published in the years
20082012.
It is interesting to note that none of the top 25 papers comes from any
of the leading Northern American journals (that is, TAR, JAE, JAR and
CAR).3 This suggests that the reputation of these journals is not built on
their impact on the field of management control, but rather on their
contribution to the other sub-fields of accounting, particularly finan-
cial accounting and auditing. Apparently, AOS (13 papers in the top
25) and MAR (6 papers) are better able to select the high-impact papers
on management control. Other journals contributing to the top 25 are
AAAJ, BAR and EAR (2 papers each).4 We also note that the authors of
the top 25 papers are almost exclusively European. We will come back
to this observation in the concluding section.
Findings
We examine the papers in our sample to assess method choices and

to identify general thematic patterns in the field.5 Table 3.3, panel A
reports on research methods. Method choices and paper sources are
associated (2 =17.548; df=4, p<0.01). Particularly, we observe that the
top 25 papers are relatively often non-empirical, indicating that con-
ceptual, methodological and overview papers are picked up relatively
intensely in the field: while they account for 24 per cent of the sample,
they make up almost half of the top 25. Within the group of empirical
Table 3.3 Method choices
MCA Top 25 MAR/AOS Total
Panel A: Full sample

Qualitative (case 27 (60%) 4 (16%) 29 (46%) 60 (45%)
studies)
Quantitative (survey, 14 (31%)* 9 (36%)* 18 (29%)* 41 (31%)*
experiment, ... )
Non-empirical 4 (9%) 12 (48%) 16 (25%) 32 (24%)
TOTAL 45 (100%) 25 (100%) 63 (100%) 133 (100%)
Panel B: Empirical papers only

Qualitative (case 27 (66%) 4 (31%) 29 (62%) 60 (59%)
studies)
Quantitative (survey, 14 (34%)* 9 (69%)* 18 (38%) 41 (41%)*
experiment, ... )
TOTAL 41 (100%) 13 (100%) 47 (100%) 101 (100%)
*Includes one paper (two in the last column) that uses mixed or combined methods.
studies (Table 3.3, panel B), there appears to be a dominance of quali-

tative approaches, with 59 per cent of all papers applying case study
methods. However, there is again a relationship between methods and
sources (2 =5.230; df=2, p<0.10): the empirical papers from the top 25
tend to be quantitative (69%) rather than qualitative. Apparently, the
field as a whole leans towards qualitative methods, but builds from
quantitative studies. A potential explanation for this intriguing find-
ing could be that although many qualitative papers aspire to generate
insights that are meaningful beyond the specific case, their findings
tend to be presented in a highly contextualized and particularized way
that cannot easily be transposed to other settings or be fitted in with
interpretative schemes of other researchers. In contrast, results from
studies in the quantitative tradition are perhaps easier to incorporate in
other studies because of their more aggregated and generic, unspecific
nature.
Table 3.4 presents an overview of the major themes in the MCA con-
ference papers and the top 25. Papers from our third source (recent MAR
and AOS articles) have been excluded because of the potentially distortive
effect of special issues. In 2012 and 2013, MAR published three special
issues in total, accounting for 22 (50%) of the 44 articles that appeared
in this journal in that period of time. The subjects of the special issues
reflect editors preferences but not necessarily the research interests of
the broader academic community, and their inclusion may overestimate
the importance of these topics as part of the collective research agenda.
We do seem to observe such tension for instance in the area of sustaina-
ble development, management and accounting. MAR dedicated a special
issue to this topic, but only 2 of the 45 MCA conference papers address
similar issues, and the theme is absent from the top 25 entirely. We defer
a fuller discussion of this observation to the concluding section.
Table 3.4 Major themes
MCA Top 25 Total
Inter-organizational relationships 7* (16%) 5 (20%) 12* (17%)

Adoption and diffusion; evolution 7 (16%) 4 (16%) 11 (16%)
of practices
Roles and uses of PMS 6* (13%) 4 (16%) 10* (14%)
Other themes 26 (58%) 12 (48%) 38 (54%)
TOTAL 45 (100%) 25 (100%) 70 (100%)
*Includes one paper that is counted in two categories.

A first observation is that the field of management control is quite

diverse, with 54 per cent of the papers resisting classification in one
of the major themes. The other 46 per cent, however, clusters in only
3 groups, suggesting considerable programmatic coherence within the
community after all. We take the paradoxical simultaneity of diversity
and joint focus as an indication of the fields vitality: it suggests that
the field converges on a common core, but also enjoys a large periphery
where innovation occurs, novel approaches emerge and new applica-
tions are found.
The largest of the major research streams studies management control
in inter-organizational relationships. This theme first appeared in the
literature in the late 1990s, and has spawned a vast body of work since
including a widely cited review article by Gaglio and Ditillo (2008) and
a new overview paper by Anderson and Dekker (in this volume). To
avoid duplication, we refer the reader to this chapter for a discussion of
this theme.
The second main theme is broadly described by us as adoption and
diffusion; evolution of practices. Papers subsumed under this head-
ing share an interest in understanding why and when certain manage-
ment control practices occur, and how they come about. However, this
strand of literature is very heterogeneous, which is nicely illustrated by
the 4 papers from the top 25 that belong to this theme. Davila et al.
(2009) for instance study the adoption of product development systems
in entrepreneurial firms, addressing internal factors (such as learning,
managers background) as well as external motives (for example legiti-
mization) as potential explanatory variables. Abdel-Kader and Luther
(2008) call on an extensive contingency framework that includes both
firm characteristics and environmental variables to explain differential
emphasis on various management accounting practices in the UK food
and beverage industry. Alcouffe et al. (2008), however, employ a very
different perspective, which is hard to reconcile with the determinis-
tic (or at least probabilistic) and rationalistic approach of both Davila
et al. (2008) and Abdel-Kader and Luther (2008). Where the latter stud-
ies seek to explain the presence, absence or more generally, differences
in importance of accounting control instruments and systems from an
essentially functionalist point of view, Alcouffe et al. (2008) explicitly
examine the diffusion processes through which accounting techniques
are shaped and constructed. In so doing, they rely on actor-network the-
ory (ANT). ANT holds that adoption and diffusion are best seen as the
(dynamic) result of an intricate series of interactions between human
and non-human actors, in which instruments and techniques become
infused with meanings derived from transient interests and changing

power bases of various actors in the process. With this emphasis on
individual interests, ANT builds from factors that operate at the micro-
level. Another prominent approach in this line of research, however, is
institutional theory.6 Institutional theory finds its explanatory appa-
ratus at the macro-level, that is, at the level of the social structures
and the socio-cultural context. Institutional theory is the subject of
the fourth paper within the adoption and diffusion theme. This paper
ranks first in the top 25, and takes issue with the anachronistic and
caricatured version of neo-institutionalism as is has typically been
applied in accounting research (Lounsbury, 2008: 350). According to
Lounsbury, researchers in the institutional tradition need to move away
from the narrow and simplistic view of isomorphism and mimicry, and
should embrace new conceptions of institutional rationality, allowing
for multiple, competing logics, and acknowledging actor-level intent in
the study of organizational decision-making and practices. With this
plea, Lounsbury seeks to build a bridge between the micro-orientation
of ANT-like approaches7 and the structural view of the institutionalists.
Also, albeit less explicitly, Lounsbury connects the rational choice per-
spective of the likes of Davila et al. (2008) and Abdel-Kader and Luther
(2008) to the social and institutional embeddedness of process-oriented
theories. Such synthesizing efforts are more than welcome, for they may
secure at least some accumulation in the body of knowledge within this
stream of research.
The third main strand of research examines the various roles and
uses of performance measurement systems. This is a classical theme in
the literature, dating back at least to Hopwoods (1972) identification
of the budget-constrained, profit conscious and non-accounting styles
of performance evaluation, and Demski & Felthams (1976) distinction
between decision-facilitating and decision-influencing roles of perform-
ance measurement. The theme regained momentum following Simons
(1995) notions of diagnostic and interactive use of control systems, and
again with the introduction of the enablingcoercive dichotomy (Adler
& Borys, 1996) in the accounting literature (Ahrens & Chapman, 2004).
Central to this stream of research is the idea that performance measure-
ment systems can be used in different ways and for different purposes,
and that the behavioural and organizational effects of these systems are
contingent upon how they are being used. The long lineage of this line
of research is sufficient indication of its value to the field of manage-
ment control. There is, however, growing unease as to the recurrent pro-
liferation of new concepts and taxonomies to describe and classify the
uses and roles. At one level, there is a concern with the ambiguity that
is present in some of the new concepts. Bisbe et al. (2007) for instance
note that Simons (1995) concept of interactive control is rather diffuse
(cf. also Ferreira & Otley, 2009 and Tessier & Otley, 2012), and that it
has been operationalized quite differently across studies. Their study
demonstrates that apparently, management control researchers some-
times use the same term to refer to different things. However, there also
appears to be a tendency to introduce new terms to refer to the same
(or at least closely related) phenomena. For instance, to describe the
nature of control (that is, how control is exercised or established), we
can choose from a variety of taxonomies, including the enablingcoer-
cive8 uses as per Adler & Borys (1996), the negativepositive divide from
Simons (1995), and the transactional versus relational uses suggested
by Broadbent & Laughlin (2009). If one needs a classification scheme
to differentiate between the purposes of performance measurement
systems, the choice is similarly rich and includes the diagnostic and
interactive uses referred to earlier, but also Henris (2006) monitoring,
attention focusing, strategic decision-making and legitimization roles,
for example. This rich choice brings conceptual nuance to the field, but
also leads to fragmentation. Therefore, we must address the question
whether we really need all these new taxonomies. Spekl & Verbeeten
(2014) demonstrate that many purpose-oriented classifications show
considerable overlap, and that a synthesis is possible. Tessier & Otley
(2012) make a similar point regarding the taxonomies of the nature of
control. This suggests that a constructive balance can be found between
conceptual nuance on the one hand, and systematic accumulation on
the other, and that the field of management control may well be served
by somewhat more self-control on the part of researchers when consid-
ering new taxonomies.
Conclusion
In this chapter, we provided an overview of current developments in

management control research, based on MCA conference papers, recent
journal publications and frequently quoted journal sources from the
last five years. From this overview, management control emerges as a
vibrant field, characterized not only by considerable diversity in sub-
jects, theories and methods, but also by substantial coherence through
a shared and persistent orientation on a limited number of key themes.
Particularly, almost half (46%) of the MCA and top 25 papers can be
classified in one of the three main thematic clusters we identified, that
is, control in inter-organizational relationships, adoption and diffu-

sion/evolution of management accounting and control practices, and
the roles and uses of performance measurement systems. Within these
themes, however, coherence does not seem to be high on the agenda.
Rather than seeking to add to a knowledge base that is truly cumulative
in nature, researchers appear to look for originality in their work even
if this originality is more semantic than real. We believe that although
paradigmatic diversity is vital for the field to progress, there also is a
need for theoretical stability, coordinated replication and systematic
accumulation. These are not sufficiently part of the research tradition
in management control, and it may be time for the field to find a new
balance between exploration and exploitation.
Another and more worrying observation is that researchers from
the US are virtually absent from the top 25. That is, of the 49 scholars
that have contributed to the 25 most influential papers,9 only four are
affiliated with a US-based school. Of these four researchers, one has
a European background (MSc and PhD from the UK), and the other
three have European co-authors. These numbers suggest that US schol-
ars have left the field almost entirely, and that the academic study of
management control has become a predominantly European affair10
even though many real-life problems of control are intrinsically univer-
sal. Ironically, the reason for this exodus is located in the management
control structure of US business schools: performance evaluation sys-
tems in these schools push researchers away from theoretically astute
field studies and surveys to narrowly focused economics-based studies
using large archival datasets in popular topic areas (Merchant, 2010).
Consequently, US accounting scholars that care for their careers are
likely to end up in financial accounting or in executive compensation;
an area that we have excluded from the current overview. We can only
hope that this trend will soon be reversed.
Finally, we note some divergence between the themes of special issues
and the current research agenda as it emerges from the conference
papers and the most frequently cited papers. In the period we exam-
ine, MAR published three special issues. One of these addresses a rather
mature subject (strategic management accounting), but the other two
explore more recent developments in business and organizations, that
is, the connections between sustainability and management account-
ing (vol. 24/4), and risk management (vol. 24/2). Leading journals such
as MAR not only reflect current research programmes but also play a
role in defining them, and even though these new themes have not
really surfaced in our sample of conference papers yet,11 they may very
well figure prominently on the collective research agenda within the

next few years. Especially risk management is likely to attract addi-
tional research attention in the near future. Risk management is already
present in the top 25 with 3 papers, suggesting that quite a few research-
ers have begun working on that topic. Such work is most welcome
(Kaplan, 2011). Although risk management has gained genuine signifi-
cance in practice, research has only just begun to scratch the surface of
risk management design choices, and how they support organizations
in dealing with risks and opportunities as they occur in the pursuit of
organizational goals. Examples include Arena et al. (2010), Mikes (2009)
and Paape & Spekl (2012), but much more research is needed in this
important new area of academic endeavour.
Notes
1. See Rosenstreich and Wooliscroft (2009) for an assessment of Google Scholar
in evaluating accounting research.
2. Journal acronyms are defined in Table 3.1.
3. The highest ranked management control paper from these four journals is
Robinson et al. (2010), published in TAR (55 quotes).
4. Some reputable journals appear to be missing from the list entirely, such
as the Journal of Management Accounting Research ( JMAR) or Behavioral
Research in Accounting (BRIA). JMAR publishes only one issue per year, and
one could surmise that this causes its absence from the list. This, how-
ever, is not the case. The h-index of a journal is based on that journals
most cited papers, and the theoretical maximum is equal to the total
number of papers published in that journal in the reference period. For
JMAR, this number is 72. The real explanation is that most JMAR papers
just do not get quoted a lot. The most frequently cited paper from 2008
to 2012 in JMAR is Brown et al. (2009), which is referenced 40 times. But,
most JMAR papers receive less than ten citations. A similar observation
holds for BRIA. Its highest-ranked paper from 2008 to 2012 is Lau and
Moser (2008), with 32 quotes.
5. We analysed the papers independently of each other and then compared
our findings for inter-rater agreement. This agreement turned out to be
almost complete, and the few differences were easily resolved.
6. Various papers from the MCA conference apply (versions of) institutional
theory, for example Hiebl et al. (2013) and Wanderley et al. (2013).
7. An approach that is different from ANT, but similar in its micro-orientation
and its allowance for non-human agency is for instance the socio-material
framework applied by Brard et al. (2013).
8. Alternatively referred to as controlling (Mundy, 2010) or constraining
(Tessier & Otley, 2012) uses.
9. Three authors have contributed to two top 25 papers.
10. Five contributors are from Australia, of which four have joined forces with
again European co-authors. The largest group of authors work at UK-based
institutions (17), followed by the Dutch, Finnish and French (6 scholars

each).
11. Both new themes are represented by two papers from the MCA conference.
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4
From Make-or-Buy to
Coordinating Collaboration:
Management Control in Strategic
Alliances
Shannon Anderson and Henri Dekker
Coase (1937) first explained firm boundaries as a solution to minimizing

the costs of accessing markets what Williamson (1975) termed transac-
tion costs. Over time, innovations in management control and changes
to legal structures have reduced the costs of monitoring, raised the costs
of behaving opportunistically and created ways for partners to credibly
commit to future actions. At the same time, the development of valuable
and inimitable resources by entrepreneurial firms are a basis for collab-
oration between partners with complementary resource endowments
(Penrose, 1959). Together these forces have transformed the dichotomous
choice of make versus buy into a selection among a variety of hybrid
modes of organization; for example, strategic alliances, joint ventures
and supply chain partnerships. Hybrid structures blend characteristics of
arms-length market transactions with modes of governance and control
that are more common to large decentralized firms. The thesis of this
chapter is that innovation in management controls has been central to
the emergence, diversity and stability of hybrid organizational forms.
Introduction
In contemplating the purpose of the firm, Nobel Prize winner, Ronald

Coase (1937) asked why prices and markets are the best mechanisms
for directing resources in some instances, while a manager is better in
others. He reasoned that the explanation that best fits the real-world
evidence is that ... there is a cost of using the price mechanism (p. 21)
in market transactions. Thus, the existence and boundaries of the firm
are explained as the result of managers acting to minimize costs. If we
47
48 Shannon Anderson and Henri Dekker
looked no further, we might conclude that Coase envisioned a limited,

though nontrivial role for management accountants to elaborate the
costs of using markets as compared with the costs of organizing produc-
tion within the firm. Indeed, Coase describes the roles of management as
forecasting demand, making new contracts (for instance to secure inputs
to production), and ... rearranging the factors of production under its
control (p. 30). However, in 1938 he critiqued cost accounting systems
as ill-equipped to support these management functions, in part because
many transaction costs are not measured or recorded by accountants
(Coase, 1973). His complaints accord well with more modern criticisms
(Miller & Vollman, 1985; Cooper & Kaplan, 1987; Johnson & Kaplan,
1987) and with research about accounting innovations intended to
make cost data more relevant for decisions (Anderson, 2007), including
decisions related to firm boundaries (Anderson & Dekker, 2009a,b).
Although many of the costs that Coase identified as essential to under-
standing markets and firms are not found in firms cost accounting, in
this paper we demonstrate that their influence on the design of manage-
ment controls has, nonetheless, been significant.
Building on Coases work, another Nobel Prize winner, Oliver
Williamson (1975, 1985), elaborated the nature of transaction costs and
their relation to firm boundaries. He linked transaction characteristics
(such as asset specificity and uncertainty) and limits to human deci-
sion-making (bounded rationality) to increased costs of using markets.
In particular, he argued that transaction characteristics that evince an
inability to write, execute or enforce complete contracts and that presage
opportunistic hazards and coordination failures define the comparative
cost efficiency of vertical integration (termed hierarchy) as compared
to markets. Importantly, he also identified transaction costs that apply
to transactions completed within the firm. Specifically, the tendencies
of internal operations to become inefficient and of managers to hoard
resources (that is, slack-building) are linked to the loss of high-pow-
ered profit incentives (Alchian & Demsetz, 1972). Anthony (1965)
wrote extensively about management controls that decentralized firms
use to mitigate these problems. Comparing alternative modes of organ-
izing transactions between firms, Williamson concludes that hierarchy is
preferred to markets when the transaction costs associated with incom-
plete contracts become large in relation to the inefficiencies associated
with the loss of high-powered incentives.1
Whereas Coase explained expanding firm boundaries as a transaction
costminimizing outcome, Penrose (1959) theorized that firms grow to
exploit scarce, inimitable resources. Clearly, scarce, inimitable resources
create barriers to competition that give rise to abnormal returns, or

profit. However, the question of why capturing these returns often
leads to firm growth is answered by Coase and Williamson; specifically,
because if legal systems are ill-equipped to protect the firms ownership
rights, resources are more efficiently protected and exploited within the
boundaries of the firm. Thus, Coases explanations for firm boundaries
emerging from cost minimization are augmented by Penroses observa-
tion that strategic resources that confer market power often necessitate
internal development.
The predictions about firm boundaries that follow from transac-
tion cost economics (TCE) are broadly explored in the economics and
management strategy literatures. Importantly, early empirical studies
often treated transaction costs as immutable, homogeneous across
firms, and exogenously determined, and framed firms cost-minimizing
responses as a choice between markets or hierarchy. Later studies
expanded this question to the choice among markets, alliances and hier-
archies, with alliances being related to intermediate levels of transaction
costs (Geyskens et al., 2006). The assumption of immutable transaction
costs is, however, at odds with Coases writings. He anticipated time-
varying transaction costs altering firms make-buy decisions over time:
... dynamic factors are also of considerable importance, and an inves-

tigation of the effect changes have on the cost of organizing within
the firm and on the marketing costs [his term for the costs of accessing
markets] generally will enable one to explain why firms get larger and
smaller. (p. 30, remark in italics added)
The assumptions of homogenous, exogenous transaction costs have

also been challenged. For example, Dye (1985) and Tirole (1999) note
that theorists typically assume a homogeneous functional form for
the costs of contracting (such as a fixed cost of contracting and vari-
able costs per contingency) with little empirical evidence to support
this choice. They posit that firms with differing expertise and efficien-
cies in contracting may in fact face differing costs of accessing markets
(that is, endogenously determined transaction costs). This characteriza-
tion is consistent with returns to management accruing to superior
coordination of firm activities (Coase 1937, pp. 19, 30) and accords with
evidence that firms differ in their ability to manage strategic alliances
(Lorenzoni & Lipparini, 1999).
In sum, empirical tests of TCE that follow the tradition of treating
the firm as a black box production function that operates in perfectly
competitive markets frequently collide with the realities of inter-firm

transacting. In the 1990s the paradoxical phenomena of inter-firm
relationships (variously labelled as: strategic alliances, joint ventures,
networks, consortia and supply chain partnerships) gained widespread
attention. As Anderson and Sedatole (2003) describe, strategy experts
posited initially that these configurations were fragile experiments
that would either succeed and progress to merger, or would fail and
disappear. International alliances were often described as marriages
of convenience that were used to skirt government regulations and
facilitate international partners access to domestic customers, with no
substantive collaboration. However, predictions of the demise of hybrids
were not borne out; a stable middle ground between arms-length,
market transactions and large, vertically integrated firms, emerged. In
this chapter, we argue that innovations in management control have
made possible enduring modes of collaboration that capitalize on the
high-powered incentives of the market while overcoming opportunistic
hazards and coordination failures anticipated by TCE. We argue that
Coases question, Why is price the best coordination mechanism in
some instances, while the manager is best in others? must be expanded
to include: and why are inter-firm modes of organizing, with attendant
management controls, best in other instances?
The objective of this review is to summarize important contributions
in the management accounting research literature on how management
controls have been used to mitigate transaction hazards and to facili-
tate coordination. Our thesis is that inter-firm management control is
central to the returns to hybrid organizational forms hypothesized by
Coase (1937), Williamson (1975) and Penrose (1959). We provide a selec-
tive, rather than a comprehensive literature review to support this thesis.
Studies of inter-firm management control typically take as given that
transacting firms have chosen to employ a hybrid organizational form,
and we maintain this assumption, referring the reader to the economics
and management literatures for studies of the choice of organizational
form. We further limit our review to empirical studies, aiming to highlight
the central themes that have animated the research inquiry (see Anderson
and Dekker 2014 for a more extensive review of empirical studies).
The chapter is organized in four sections. In Section 2, we take as our
point of departure the literature that examines how inter-firm contracts
are used to control opportunistic hazards and to facilitate coordination
in inter-firm transactions. Researchers in business strategy have also
worked in this area; however, because contract terms often incorpo-
rate management controls aimed at aligning incentives or coordinating
partner actions, management accountants have contributed unique

insights to this question. In Section 3, we move beyond the formal
contract to consider other mechanisms of control that are employed to
mitigate transaction costs and sustain hybrid organizational forms. Just
as detailed contract specifications shed light on the emergence of hybrid
transactions that previously may have seemed unsustainable, considera-
tion of a broader array of formal management controls sheds light on
how firms use a portfolio of controls to align partner incentives and
promote efficient coordination. We conclude in Section 4.
Inter-firm contract design
Incomplete contracts create the window of opportunity for hybrid

organizational forms to emerge as the optimal way to balance trans-
action costs. In some cases, incompleteness follows from the impossi-
bility of defining some feature of the transaction (or equivalently, the
infinite cost of doing so). In other cases, incompleteness obtains as a
cost-minimizing choice between the certain costs of contracting and
the expected costs of exposing the firm to opportunistic behaviour of
its trading partners or of coordination failures. Regardless of origins,
the interstitial spaces created by incompleteness are rarely left blank.
Rather, following Merchant & Van der Stedes (2007) elaboration of
Ouchis (1979) control framework, when final outcomes cannot be spec-
ified, firms resort to second-best solutions of specifying intermediate
outcomes, partner actions and behaviours. These alternative contract
terms typically reflect management control processes devised to align
incentives and to facilitate coordination between the transacting firms.
In this section, we review the literature on inter-firm contract design
related to management control practices.2
Inter-firm contracting and risk types

Inter-firm contracts provide the formal and legal agreements between
exchange partners that govern their relationship (Anderson & Dekker,
2005), and are seen as frameworks in which cooperation between part-
ners proceeds (Gulati, 1995). Management accounting studies consider
contracts to be a critical component of the management control struc-
ture used to manage and control inter-firm relations. Contracts include
clauses that align and safeguard parties interests, that motivate them
to act in the interest of the relationship and that facilitate coordination
and adaptation. These clauses include the specification of inter-firm
management controls (for instance, performance targets and measures,
rewards, penalties, decision rights and actions and behaviours to be taken

or avoided) that are used during the execution of transactions. Studies
have employed transaction cost theory to analyze inter-firm contracts,
following the logic that once firms have chosen an alliance (instead
of make-or-buy) as the appropriate governance mode, the exchange
hazards that underlie this choice will also explain the contracting and
control choices within the chosen governance mode (Gulati and Singh,
1998).3
In theorizing the need for inter-firm contracts, studies have differen-
tiated between two general types of risks: relational risk and perform-
ance risk (cf. Das and Teng, 2001). Relational risk results from a lack
of cooperation between partners that arises when firms are unable to
align their self-interest for mutual gain, exposing them to potential
opportunism. Performance risk in contrast relates to alliance failure
despite full cooperation, and is associated with coordinating actions to
complete complex, interdependent tasks in uncertain environments.
Thus, performance risk follows from non-opportunistic origins and thus
may still be significant when relational risk is deemed to be low. Whereas
relational risk essentially describes the issue of how value is distributed
between (or: appropriated by) alliance partners, performance risk deals
with the problem how much value is created in the first place.
Anderson et al. (2014a) use survey and field study methods to explore
the presence of different risk types in strategic alliances, and find both
relational risk and performance risk to be present in significant degrees.
They also find, however, that performance risks related to value crea-
tion (which is key to the resource-based view on alliances) often present
greater managerial concerns than relational risks relating to value appro-
priation that is the basic concern of transaction cost theory. Anderson
et al. (2014) further find that when collaboration centres on gaining
access to a partners valuable strategic resources, managerial concerns
shift from relational risk to performance risk. The next section reviews
how these risk types relate to firms contracting choices.
Functions and dimensions of complex inter-firm contracts

Prior management accounting studies of inter-firm contracting have
focused on both the content and functions of contracts to mitigate and
manage these risks. In particular, studies have sought to understand
how inter-firm exchange hazards are associated with more elaborate
and complex contracts to govern the exchange, and more specifically
with different contract dimensions and specific contract clauses or
agreements intended to stimulate desired behaviour (for instance, fixed
or variable price agreements, and price adjustment method). Empirical

studies find that more risky inter-firm exchanges are associated with
more complex contracts that include a greater number of terms and
clauses, and contain more detailed agreements to mitigate and monitor
transaction risks (Anderson & Dekker, 2005; Ding et al., 2013). On the
one hand, more complex contracts allow for greater enforcement of
agreements to mitigate relational risk, which is supported in particular
by agreements that incent partners to act in the interest of the collabo-
ration and that allow for safeguarding of firm interests. On the other
hand, complex contracts also allow for greater coordination and adapta-
tion between partners to reduce performance risk, by specifying a divi-
sion of labour, supporting communication routines and by providing
guidelines to integrate partners activities, thereby simplifying decision-
making and preventing disputes on how to best accomplish tasks.
Studies also recognize that complex contracts incorporate multiple
contract dimensions that serve the above purposes. Anderson & Dekker
(2005) examine the dimensionality of contract extensiveness for infor-
mation technology (IT) transactions by analyzing firms use of an elabo-
rate set of contractual contingencies. Based on this set of contingencies,
they identify four contract design dimensions that are typically used
in combination to manage exchange risks: the assignment of rights and
responsibility, product and price agreements, after sales service provisions
and legal recourse agreements. These four dimensions exhibit similarities
with control frameworks that have been developed to study intra-firm
control, such as Jensen & Mecklings (1992) three legs of the stool:
allocation of decision rights and responsibilities, performance measure-
ment and rewards and sanctions. The study finds that different sources of
transaction costs give rise to placing more or less emphasis on different
contract dimensions, and that except for product and price agreements
(which may be boilerplate across many contracts), increased use of the
dimensions involves greater up-front contracting costs. The results thus
point to significant costbenefit tradeoffs in contract design.
Another characterization of the dimensionality of complex contracts
is examined by Ding et al. (2013) who, based on Luo and Tan (2003),
decompose contract complexity into the dimensions of issue inclusive-
ness (that is, the extent to which the contract includes important terms,
clauses and issues), clause specificity (that is, the degree and detail of spec-
ification and codification of these clauses and terms, such as detailed
specification of allocation of rights and responsibilities, conflict reso-
lution and termination conditions) and contingency adaptation (that is,
the extent to which unanticipated contingencies are accounted for and
relevant guidelines to handle these contingencies are provided). Firms

are found to use more inclusive and detailed contracts when the inter-
firm relations in which they engage are characterized by greater task
interdependence and broader scope, whereas contingency adaptability
agreements are used more when environmental uncertainty is greater.
Dekker et al. (2014) examine contract complexity for strategic
outsourcing relations in Japanese firms home and host countries by
looking at both the functions (enforcement, coordination, adaptation)
and detail of contractual agreements. The study replicates prior findings
that with increased exchange hazards, the complexity of outsourcing
contracts increases in order to manage the greater risks of outsourcing.
Although the study does not find contract complexity to differ between
home and host country outsourcing relations with similar characteristics,
it does find that the cost of developing complex contracts is greater for
host country relations. This finding converges with beliefs that cultural
differences can make contract negotiations more cumbersome and
lengthy as a result of different understandings, expectations and schemas
in negotiations. In addition, drafting a contract in a host country may
also take more effort to ensure that it complies with local regulations.
A broader view on inter-firm contract design

In addition to contract complexity and its underlying dimensions, studies
have examined other contract design choices, including their duration,
termination, renewal (or extendibility) and flexibility. Greater exchange
hazards that follow from asset specific investments are predicted on the
one hand, to result in longer-term contractual commitments (Joskow,
1987), but, on the other hand, to stimulate use of contract renewal
clauses (Dekker et al., 2014). For example, firms may contract for a fixed
term with the option of extension or renewal, if performance targets
are met. By providing the option to terminate the relationship at the
moment of expiry and thus offering the prospect of continued business
through renewal, exchange partners are motivated to act in the best
interest of the relationship and to obtain high performance (Cooper &
Slagmulder, 2004; Schloetzer, 2012). In contrast, contract termination
clauses specify conditions under which partners are allowed to termi-
nate the relationship before the contract expires (Schepker et al., 2014).
These clauses often include provisions for conflict resolution (such as
decision rules, third-party arbitrage, legal recourse) and specify owner-
ship of assets that were developed during the relationship.
Costello (2013) finds that asymmetric information between buyers
and suppliers leads to use of contracts with shorter duration, but also
that when longer-term contracts facilitate the exchange of relationship

specific assets, parties substitute short-term contracts with financial cove-
nants in order to reduce opportunistic hazards. When direct monitoring
is costly and the products exchanged are highly specific, covenant restric-
tions are more prevalent. In a similar vein, Dekker et al. (2014) find that
longer-duration contracts are used for governing strategic outsourcing
relationships when exchange partners face greater asset specificity and
environmental uncertainty. Contract duration shortens however when
conditions generate information asymmetry (that is, greater monitoring
problems and in host country relationships). The authors further find
that contract duration and use of renewal clauses are complementary
decisions to the design of complex contracts, supporting the view that
these choices all are conditional on risk and made interdependently.
Contract flexibility describes the extent to which the contract is left
open for adaptation and interpretation during the course of the rela-
tionship (Sako, 1992). Greater flexibility is predicted to be used when
the exchange relationship faces greater uncertainty that over time will
require adaptation (Krishnan et al., 2011), and, under uncertain condi-
tions, may also help avoid costly revisions and renegotiation of fixed
contract terms (Masten & Saussier, 2002). Contract flexibility is often
associated with the creation of collaborative agreements, which
essentially specify firms shared expectations. Krishnan et al. (2011)
find that the use of collaborative agreements increases with task and
demand uncertainty, which conditions cause contracting problems and
limit firms ability to use more comprehensive and complex contracts.
Dekker et al. (2014) similarly find contract flexibility for strategic
outsourcing relations to increase with environmental uncertainty and
task complexity that complicate contracting, but also that flexibility is
less for cross-border outsourcing relationships that face a greater likeli-
hood of misunderstandings and conflict. For these relationships, clear
and explicit agreements that leave less leeway for diverging interpreta-
tions are used instead.
Incomplete contracts and inter-firm management controls

Because complex contracts typically are incomplete, management
accounting research has focussed not only on how contracts provide a
window on the management controls used in inter-firm transactions,
but also on how managers use other forms of management control
to complement incomplete contracts and minimize transaction costs.
Indeed, there is evidence that more complex inter-firm contracts are
associated with greater use of management controls to manage inter-
firm exchange. Dekker and Van den Abbeele (2010), for instance, find
that when firms use more extensive contracts for risky IT transactions,
this is associated with greater use of outcome and behaviour controls
during transaction execution. Similarly, Dekker et al. (2013) find that
more elaborate contractual contingency planning agreements between
supply chain partners is associated with use of various control mech-
anisms for managing transaction risk, including performance target
setting, operational performance reviews, information sharing, supplier
support and joint problem solving arrangements. In the next section,
we turn to these alternative modes of management control that may or
may not be specified in contracts, but which have also been found to
have a contingent relationship with transaction costs.
Beyond contracts: the role of management controls in

sustaining inter-firm relations
Risk, control archetypes and inter-firm control choices

Management control choices in inter-firm relationships include deci-
sions about the structures, mechanisms and practices that exchange
partners use to gain control of cooperative activities while building
a sustainable, stable relationship. It is particularly in this area where
management accounting research has provided evidence of innovations
in management control that have made possible enduring modes of
inter-firm collaboration that are responsive to transaction risks. Empirical
studies of inter-firm control have generally concentrated on explaining
firms choice of control archetypes and their design and use of specific
management control mechanisms (Caglio & Ditillo, 2008). Studies of
control archetypes develop taxonomies of control patterns that are used
by collaborating firms facing different exchange conditions. Van der
Meer-Kooistra & Vosselman (2000) and Langfield-Smith & Smith (2003),
for instance, differentiate between market-based, bureaucracy-based and
trust-based patterns of controls in outsourcing relations. These patterns
combine distinct mechanisms of control and suit different transaction
conditions. Similarly, Kamminga & Van der Meer-Kooistra (2007) iden-
tify distinct patterns of joint venture control (that is, a content-based
pattern, a consultation-based pattern and a context-based pattern) that
are used under different exchange conditions.
Another stream of management accounting research focuses on how
firms use some subset of controls to solve a specific control problem,
with the benefit of enhancing the stability of collaboration. Examples
of control subsets that are commonly studied include partner selection
practices, performance measurement and incentive systems and formal

operating policies and procedures. These studies typically classify
management control mechanisms based on the nature of control
(Dekker, 2004; Dekker et al., 2013; Emsley & Kidon, 2007; Groot &
Merchant, 2000; Kamminga & Van der Meer-Kooistra, 2007; Mahama,
2006; Neumann, 2010; Van der Meer-Kooistra & Vosselman, 2000), the
objects and purposes of control (Dekker, 2004, 2008) and the tightness
of control use (Faems et al., 2008; Groot & Merchant, 2000). Generally,
this literature relies on the prediction that when firms face particular
exchange risks, this will not only have implications for their choice of
governance mode and design of complex and incomplete contracts, but
also for the management control mechanisms and practices employed
to manage the relationship by mitigating opportunistic behaviours and
facilitating the joint creation of value. Indeed, given the decision to
collaborate, ex ante processes for partner selection and decisions about
contract design and ex post ways of making the exchange relationship
operational are interrelated and jointly define the management control
of the relationship.4
Similar to studies on inter-firm contract design, studies on inter-
firm management control choices distinguish the purposes of control
(Anderson et al., 2014a; Caglio & Ditillo, 2008; Das & Teng, 2001;
Dekker, 2004, 2008; Nicolaou et al., 2011, Tomkins, 2001). Following
transaction cost theory, inter-firm management controls are seen as a
means to address potential opportunism that generates relational risk.
In particular, management control mechanisms mitigate relational
risks though motivating partners and by measuring, monitoring and
rewarding/punishing behaviours and outcomes. Seen through the lens
of the resource-based view of the firm, inter-firm controls are also argued
to facilitate effective coordination and adaptation between exchange
partners, in order to attain desired collaborative outcomes and mitigate
performance risks. Direction is provided by setting goals and specifying
actions to be taken and coordination is facilitated by the exchange of
information on planned and realized actions and results.
Formal controls in inter-firm relationships

Regarding the types of management controls employed to manage the
performance and behaviour of exchange partners, empirical accounting
studies have focused particularly on firms use of formal mechanisms in
the form of outcome and behaviour controls (Cker, 2008; Dekker, 2004;
Dekker & Van den Abbeele, 2010; Emsley & Kidon, 2007; Langfield-Smith,
2008; Mahama, 2006; Neumann, 2010). Outcome controls specify and
measure results to be achieved by alliance partners without interfering

in the way that they are obtained. Examples include performance meas-
ures and targets for alliance achievements, and rewards and penalties to
motivate partners to act in the best interest of the relationship. Behaviour
controls instead specify and measure (un)desirable behaviours by the
partner to achieve goals, without necessarily focusing on the extent of
goal achievement. These may include joint planning, rules and regula-
tions, procedures and audits of behaviour. Jointly, these formal control
mechanisms support relationship stability through the alignment of
incentives, safeguarding of interests and coordination and alignment of
actions through planning, guiding, monitoring, evaluating, discussing,
adjusting and rewarding partners performance and behaviours.
Empirical studies provide evidence that the use of these control mech-
anisms increases with inter-firm risk, and that they are often used in
conjunction to manage risk. Field studies (Cker, 2008; Dekker, 2004;
Langfield-Smith & Smith, 2003; Langfield-Smith, 2008; Neumann,
2010; Van der Meer-Kooistra & Vosselman, 2000) provide descriptive,
exploratory and explanatory evidence on the types and roles of outcome
and behaviour controls to manage and mitigate risk, and how these
mechanisms complement the incomplete contracts that form the basis
of exchange relations. Survey studies provide larger sample statistical
evidence on these associations. Dekker & Van den Abbeele (2010), for
instance, find that firms externally sourcing significant IT products and
services use not only more complex contracts when these transactions
entail greater risk, but also make greater use of outcome and behaviour
controls during the transaction. They find evidence of complementa-
rity between these control mechanisms, that is, they form interrelated
responses to transaction risk. Dekker et al. (2013) use survey data to
examine how Japanese manufacturers use control practices to manage
collaborative relations in the supply chain, and find exchange risks to
relate to greater use of these practices, in particular performance target
setting, operational performance reviews, information sharing, supplier
support and joint problem solving. The study also finds evidence of
complementarity among these control choices, such that they form
interrelated choices in the management of risk.
Whereas empirical studies have placed much emphasis on the formal
mechanisms of control, most incorporate into the analysis how their use
is associated with the presence of informal controls. Accounting studies
have particularly focused on the role of two types: (1) partner selec-
tion that firms use to identify, assess and select exchange partners, and
(2) trust between exchange partners.
Partner selection for inter-firm relations

The selection and choice of exchange partner for inter-firm cooperation
is a primary form of informal control and is related critically to the notion
of exchange hazards and transaction costs. The selection of an adequate
partner is considered an effective way to mitigate alliance risk, and has
a strong bearing on the potential resource contributions by prospective
partners that delineate the opportunities for value creation. Empirical
studies indeed have found exchange hazards to relate to partner selec-
tion in terms of the design of alliance partner selection and management
processes (Anderson et al., 2014a; Langfield-Smith, 2008), selection effort
(Dekker, 2008; Dekker & Van den Abbeele, 2010), use of selection criteria
(Dekker & Van den Abbeele, 2010; Ding et al., 2013; Ittner et al., 1999;
Langfield-Smith & Smith, 2003), and choice of partner type (Dekker
et al., 2013). These studies describe how greater exchange hazards induce
more intensive selection procedures, broader and tighter use of selection
criteria (for instance, on quality and service levels, reliability, techno-
logical capabilities, reputation, firm size, stability) and a preference for
trusted partners regarding their goodwill and capabilities.
Anderson et al. (2014a) provide field and survey evidence on how firms
with significant alliance activity develop procedures and controls for
partner selection, such as mechanisms for the identification of prospec-
tive alliance partners, accountability of personnel for partner selection
and formal reviews of selection processes and outcomes. Interviews with
a range of boundary spanners across three case firms identify partner
selection procedures to be the most frequently mentioned alliance
control, through which firms aim to purposefully match partner charac-
teristics and capabilities to specific alliance activities. Survey data across
a broader set of firms indicate that use of such selection processes varies
primarily with alliance performance risk and that it also is associated
with greater use of interactive feedback mechanisms during the execu-
tion of alliance activities to support alliance management and learning.
Studies on partner selection further provide evidence on interrelations
with other control choices. Field studies show how partner selection is
one element of a greater set of interrelated controls used to manage risk
over the life span of the relationship. Survey evidence indicates that in
the presence of exchange hazards, more intensive and careful partner
selection is associated with greater contract complexity (Dekker, 2008;
Ding et al., 2013), and more intensive use of outcome and behaviour
controls during transaction management (Dekker & Van den Abbeele,
2010). A primary explanation for these results is that more intensive
partner selection may not only increase the confidence in the chosen
partner (which may actually reduce the need for control), but also result
in learning about the partner and resources to be exchanged, alternatives
and contingencies that may arise during the transaction. This learning
can facilitate contract and control design. Considering the outcome of
the selection process, evidence from supply chain relationships indi-
cates that the selection of partners of greater ability supports the use of
control practices to manage the relationship; in particular contractual
contingency planning, target setting, operational performance reviews,
information sharing and supplier support (Dekker et al., 2013).
Trust and inter-firm control

Trust is a central behavioural variable in studies of inter-firm contracting
and control. Studies have examined how trust that evolves over time
between exchange partners influences their contracting choices for
new transactions and how it interacts with the management control
choices made for managing these transactions. These interactions have
particular importance when considering the incomplete nature of inter-
firm contracts and controls, where trust is seen to resolve some of the
concerns caused by incompleteness.
Prior studies have generally conceptualized and tested interrelationships
between trust and formal control in two ways: as substitutes and as comple-
ments (Coletti et al., 2005; Dekker, 2004, 2008; Emsley & Kidon, 2007;
Tomkins, 2001; Velez et al., 2008; Vosselman & Van der Meer-Kooistra,
2009). The substitution argument builds on the premise that the emergence
of trust between exchange partners reduces behavioural uncertainty and
diminishes the need for formal controls to manage partner behaviour. This
notion of trust relates primarily to the perceived goodwill of an exchange
partner, which in the presence of exchange hazards alleviates concerns
about opportunistic behaviours. Important in this view is that when firm
uses formal controls to a greater extent than the exchange partner considers
necessary, this would act as a signal of low trust or even distrust, which can
damage the relationship between partners (Dekker, 2004).
The complements argument in contrast relies on the premise that the
relation between trust and formal control is reinforcing. As formal controls
provide transparency and predictability of behaviour and results, this can
support the development of trust. Trust in return supports joint routines,
mutual understanding of objectives, needs and competencies and goal
congruence, which are argued to support the development of formal
controls that enable exchange partners to better manage coordination
requirements and mitigate performance risks.
Empirical studies provide support for both perspectives. Particularly,

studies provide evidence that the form of the interrelation between trust
and control is conditional on the type of trust considered (goodwill or
competence trust), the objectives of control (managing relational or
performance risk) and contextual variables such as the strategic objec-
tives/importance of the alliance and the stage of the relationship between
partners (Anderson et al., 2014a; Dekker, 2004, 2008; Tomkins, 2001,
Velez et al., 2008).5 More specifically, studies find that in the presence
of exchange hazards, goodwill trust is negatively associated with the use
of management controls to mitigate relational risks, whereas there is a
positive relation between competence trust and management controls
to manage performance risks. This indicates the presence of substitutive
relations (goodwill trust and controls for managing relational risk) and
complementary relations (competence trust and controls for managing
performance risk) between trust and control existing at the same time.
Whereas the substitutive relationship concerns how trust contributes
to the reduction of transaction costs, the complementary relation-
ship relates more strongly to the resource-based view on alliances and
suggests that competence trust enables firms to develop controls that are
supportive of greater value creation.
Anderson et al. (2014) further find that in the presence of exchange
hazards and incomplete controls, prior ties between partners (that proxy
for trust) reduce managers concerns about relational and performance
risk. When the partners resources are of limited strategic importance,
this effect is most pronounced for relational risk, whereas when stra-
tegic importance of partner resources is high, it is most pronounced
for performance risk. Again, these findings emphasize how trust may
interact with management controls in both the mitigation of transac-
tion costs through limiting relational risks, and the creation of value
through limiting performance risks. The conditionality of findings on
types of trust, controls and contextual variables also raises the question
whether there can be one type of relationship between trust and control
at all, or whether researchers and designers should be more specific in
their analysis by making explicit which types of trust and controls are
under examination, and in which setting.
Do traditional management control frameworks

fit the inter-firm setting?
Most studies of inter-firm management controls use control frameworks
that were originally developed to describe management control within
the firm. These frameworks are often applied uncritically without first
considering whether it is appropriate to transplant them to the inter-

firm setting. The substance of the control problem, aligning the interests
of firms that have a different profit function, differs materially from that
of aligning interests of business units within a firm and, as Coase and
Williamsons work illustrates, the risks that arise at the boundaries of the
firm are novel and likely to demand new control responses.6 Anderson
et al. (2014b) use exploratory field and survey methods to determine
whether management control frameworks developed to describe
internal management controls are robust enough to fit the inter-firm
context. They examine how well the field study observations fit three
widely used intra-firm management control frameworks of Simons
(1995), Merchant & Van der Stede (2007) and Jensen & Meckling (1992).
The analysis provides support for the applicability of these frameworks
to the inter-firm setting and shows how each provides unique contri-
butions for understanding alliance risk management. In particular, the
findings indicate that management controls play an important role
in mitigating relational risks, but that the case firms place a relatively
greater emphasis on managing performance risks by facilitating coordi-
nation and communication between partners. This is a role for manage-
ment control that fits more closely with the value-creating motives of
alliances instead of only transaction cost minimization, and puts to the
front the role of behaviour-based controls (as particularly emphasized
by Simons (1995), and Merchant & Van der Stede (2007)) in achieving
this objective.
In a related study, Anderson et al. (2014a) identify specific risks
faced and management controls used by collaborating firms and find
support for the proposition that performance and relational risk are
critical risk categories that occupy alliance managers minds. They
also identify compliance and regulatory risk as a third key category.7
A broad set of alliance control practices is identified that is used to
manage alliance risk. Performance risk is associated primarily with
careful partner selection and contractual outcome agreements; rela-
tional risk is associated primarily with explicit exit agreements, and
correlates with use of asset safeguards and, compliance and regula-
tory risk is associated primarily with informal (trust-based) controls.8
In sum, whereas the management control frameworks developed to
describe internal controls are general enough to fit the inter-firm
management control context, the details that relate unique risks in
transacting between firms to new modes of control present a new
understanding of how management controls stabilize hybrid organi-
zational forms.
Conclusion
Coase (1937) first explained firm boundaries as a solution to minimizing

the transaction costs of accessing markets. For some transactions, an
important source of transaction costs is the need to protect proprietary
resources that are the basis for earning superior returns and an impetus
for firm growth (Penrose, 1959). Over time, innovations in management
control and changes to legal structures have reduced the costs of moni-
toring, raised the costs of behaving opportunistically and created ways
for transaction partners to credibly commit to future actions. At the same
time, entrepreneurial firms that develop scarce, inimitable resources have
the impetus to collaborate with partners with complementary resources.
Together these forces of innovation have transformed the dichotomous
choice of make versus buy into a selection among a more nuanced
set of hybrid modes of organization. The hybrid structures blend charac-
teristics of arms-length market transactions with modes of governance
and control that are more common to large decentralized firms. With
this blending comes the challenge of enacting management controls
that limit value appropriation while stimulating value creation.
With this selective review of the accounting literature, we have attempted
to highlight the centrality of innovation in management controls to the
emergence, diversity and stability of hybrid organizational forms. Inter-
firm management controls are evident in the design of complex inter-firm
contracts. These may include the stipulation of measureable outcomes,
processes of measurement, reporting relationships and the payments and
potential contract renewal that transpire with performance or sanctions
and termination that accompany non-performance. Agreements also
typically cover behaviour controls such as allocated rights and responsi-
bilities, service provisions and options for legal recourse. Contract terms
are intended to both align partner incentives and to facilitate commu-
nication, coordination and adaptation. However, formal contracts are
only one piece of the management control picture. Management control
scholars have shown that the transaction hazards and the collaboration
opportunities that have been used to explain firm boundaries and contract
terms are also useful for understanding the larger portfolio of manage-
ment control practices that accompany hybrid modes of transacting.
Mirroring the decision-influencing and decision-facilitating roles of intra-
firm controls, inter-firm controls mitigate the relational and performance
risk that prevail in hybrid organizational forms and that are not fully
addressed by complex but incomplete contract. For managers, the variety
and nuanced application of management controls has transformed the
comparatively simple, computational decision of make-versus-buy into

the challenging task of designing inter-firm controls to render transac-
tions that are fraught with transaction hazards and at risk of coordination
failures, both profitable and sustainable for transaction partners.
Notes
Portions of this chapter first appeared in Anderson and Dekker (2014). The
authors retain copyright of these materials and they are used with permission of
the publisher.
1. Strictly speaking, Coase predicts that firms minimize the sum of production
and transaction costs. Studies that focus on testing the influence of trans-
action costs on firm boundaries typically assume that production costs are
identical between the firm and external suppliers. This assumption may
be appropriate if minimum efficient scale is low and production entails no
proprietary processes.
2. See Schepker et al. (2014) for a review of the management literature on inter-
firm contracting.
3. In testing relations between exchange hazards and inter-firm governance and
control, studies generally rely explicitly or implicitly on one of two hypoth-
eses: (1) the discriminating alignment hypothesis that states that firms
select the most efficient structure or controls that align with the exchange
conditions they face, and (2) the misalignment hypothesis that states that
firms will suffer negative performance consequences when making subop-
timal choices.
4. Whereas we focus on the interrelation among transaction costs, incomplete
contracts and management controls, other studies have also considered
how inter-firm management controls affect cooperation and socialization
(Mahama, 2006), and how they can form exit barriers (Phua et al., 2011).
5. In a dynamic setting studies have argued that the relation between trust and
control initially is complementary up to the point that sufficient trust is
developed that they become substitutes (Tomkins, 2001; Velez et al., 2008).
This dynamic argument is primarily concerned about the relation between
goodwill trust and controls to mitigate relational risks. Velez et al. (2008) find
that instead of substitution per se, firms also choose to expand the relation-
ship itself, resulting in increased risk, and trust and control increasing even
further.
6. This could for instance be because inter-firm relationships involve multiple
firms with no overlapping profit functions, there is no single central decision-
making authority and resolving disputes may involve third-party arbitrators
or the court of law.
7. Compliance and regulatory risk in the alliance setting is the risk that a
partner will expose the firm to third-party sanctions by failing to comply
with customer requirements, firm policies or government laws and regula-
tions. This risk is not related to coordination of activities (performance risk),
or a partners attempt to capture an unfair share of alliance rents (relational
risk), and instead relates to choices made by the partner to comply (or not)
with rules and regulations, or to act (or not) in a fiscally responsible manner
(Anderson & Dekker, 2014).
8. The study further finds that financial reviews are used primarily in joint
ventures.
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5
Researching the Human Side of
Management Control: Using
Survey-Based Methods
Sally Widener
Introduction
One of the more important internal factors determining the perform-

ance of (business) organizations is the human behaviour that originates
within them. Using archival data, Hansen & Wernerfelt (1989) find that
twice as much of the variance in firm performance is due to factors
related to human behaviour than is due to economic factors. More
recently, the importance of human behaviour has arguably increased
due to the heightened levels of uncertainty firms currently face. Firms
faced with uncertainty from growth opportunities due to technological
innovations and the development of emerging markets saw opportuni-
ties for global expansion and earnings growth. However, lately, uncer-
tainty has been fuelled by pressures in the capital markets and a sense
of consumer pessimism. As firms struggle to maintain their earnings,
human behaviour becomes increasingly important. Statements such as
Every crisis is a human crisis (Braverman, 2003, p. 141) and It is often
the (mis)handling of crises, not the crisis itself, that can have the most
consequences (James and Wooten, 2005, p. 141) illustrate the impor-
tance of human behaviour to firm performance (see also Otley, 1994).
It is imperative that firms align human behaviour within the organiza-
tion to maximize its positive effect on performance and to achieve their
organizational objectives. One important tool used to facilitate this task
is the management control system (MCS), which consists of mechanisms
and practices top managers use to maintain or alter patterns in organi-
zational activities (Simons, 1995, p. 5). As employees are the focus of
MCSs, it is important to gain insights and understanding into the conse-
quences MCSs have on human behaviour. In this chapter, I will focus
on two important behavioural outcomes: creativity and learning. These
69
70 Sally Widener
areas are important as they both are exacerbated in times of uncertainty

and both are intertwined with MCSs.
Surveys are often the best means researchers have available with which
to collect data on the perceptions and beliefs of company participants.
As such, they provide a powerful tool with which insights on the rela-
tionships between MCSs and human behaviour can be developed (Van
der Stede et al., 2005). Thus, the primary contribution of this chapter is
a discussion of examples and opportunities for management accounting
researchers who wish to make a contribution to the field of manage-
ment accounting at the intersection of management control and human
behaviour using survey methods.1
The chapter is organized as follows. Next, I provide an overview of
relevant literature. Following that, I provide a more detailed discussion
of how researchers have used survey methods to make contributions in
two specific areas: creativity and organizational learning. Then, I reflect
on the questions that have yet to be answered and discuss how survey
methods can be used to make a contribution. Finally, I conclude with
summary remarks and personal observations on the future of the use of
survey methods to make a contribution at the intersection of manage-
ment control and human behaviour.
The survey method
Various research methods have been used to provide evidence on the

antecedents and consequences of MCSs, as well as on their design
and use. Experimental research aimed at understanding interactions
between MCSs and human behaviour has provided important insights.
However, some questions may be better addressed using other methods.
The survey method is a powerful tool to answer certain questions, and
can complement the use of experiments (and other methods such as
field studies) in developing insights on human behaviour.2
I focus on the use of the survey method for several reasons. Researchers
can use surveys to obtain data on employees perceptions, attitudes and
behaviours that may not be available in other ways. Similar to field work,
the survey method often has high external validity as it gathers data in
a rich field setting from actual practitioners and can include contex-
tual variables. A survey allows for researchers to gather a sample large
enough to engage in quantitative analyses, which enhances the strength
of the resultant evidence. Surveys can accurately document the norm,
identify extreme outcomes, and delineate associations between variables
in a sample (Gable, 1994, p. 114). It should be noted, though, that if
Using Surveys to Research the Human Side of MCS 71
inferences are made of cause-and-effect, researchers must rely on strong

theory (Van der Stede et al., 2005). Furthermore, in order to provide such
evidence, it is important that surveys be developed and administered
in a rigorous way (Van der Stede et al., 2005).3 I also focus on the use
of surveys for personal reasons. Dating back to my dissertation, which
focussed on gaining a better understanding of what the use of strategic
human capital means to an organizations MCS (Widener, 2004), I have
used the survey method extensively. Although I have successfully used
other methods (archival data sets, quantitative field studies and qualita-
tive case studies) I have enjoyed being able to ask and answer research
questions that I find stimulating, interesting and personally satisfying
through the use of survey data.
To get an idea of how surveys have contributed to the literature on
human behaviour and management control I decided to undertake a
review of the past 15 years. Note that my intention is not to do a thor-
ough literature search; moreover, my review was quite subjective and is
not corroborated by any independent source. The intent of my review
was simply to get a feeling for what had been done in this area.
Along with two student assistants, I reviewed eight journals (The
Accounting Review, Journal of Accounting Research, Journal of Accounting and
Economics, Accounting, Organizations and Society, Contemporary Accounting
Research, Behavioral Research in Accounting, Management Accounting
Research and Journal of Management Accounting Research) for the 15-year
period 19982012. The research assistants first identified, organized and
described all articles with the term survey. From there, I narrowed the
list of articles to 40 by selecting only those that, from the description (and
abstract), appeared to examine (1) management control topics (defined
broadly) and (2) human behaviour. I was surprised to find that less
than three articles per year were published that (in my opinion) used a
survey to examine questions at the intersection of human behaviour and
management control. The majority of articles were found in Accounting,
Organizations and Society, Management Accounting Research, Journal of
Management Accounting Research and Behavioral Research in Accounting. I
also found that the topics were clustered around examinations of partici-
pation (e.g., Venkatesh et al., 2012; Kruis & Widener, 2014), commitment
(Chong & Chong, 2002), justice/fairness (e.g., Burney et al., 2009; Lau
& Moser, 2008), trust (e.g., Nicolaou et al., 2011) and role stressors (e.g.,
Burney & Widener, 2007; Mass & Mateja, 2009). Over time the quantita-
tive models used appeared to gain in sophistication as the use of media-
tors and moderators increased. One view of these findings might lead
to questioning whether researchers do not find survey-based questions
72 Sally Widener
examining the intersection of management control and human behav-

iour interesting. Or one could wonder whether researchers are conducting
these types of studies but their quality precludes publication in the journals
reviewed. A more positive and optimistic outlook, though, is to conclude
that we have barely scratched the surface of potentially interesting areas
of examination and there is ample opportunity to make future contribu-
tions to the literature.
I will next discuss examples of how surveys can be used to make a
contribution to the literature in the areas of learning and creativity.
Examples of survey-based research at the intersection of

management control and human behaviour
Before proceeding with a discussion of two examples of survey-based

research at the intersection of management control and human behav-
iour, a caveat is in order. Although I use a variety of examples, I rely
heavily on my own research because of the familiarity I have with it.
While there are many fine examples of survey research that I have not
included, it must be remembered that my intent is not to provide a
literature review of all survey-based research.
Management control and creativity

Creativity is the production of novel ideas. It is considered to be necessary
to the survival of organizations as it allows them to adapt to changing
markets and uncertain environments. As firms compete in increasingly
turbulent and uncertain environments employee creativity provides the
foundation for continued firm success (Shalley et al., 2004). Zhou and
George (2003, p. 548) discuss the importance of creativity to an organi-
zation and state:
Work has become more knowledge-based and less rigidly defined

and specified. Organizations are facing intense domestic and global
competition in a highly turbulent and uncertain environment. To
survive, adapt, and gain competitive advantage, organizations need
to fully take advantage of their employees innate creative potential,
because employees creative ideas can be used as building blocks for
organizational innovation, change, and competitiveness.
Similarly, the accounting literature argues that MCSs are necessary for
firm success, especially when facing high levels of uncertainty. Although
the literature is a bit conflicted on what type of MCS is best suited for
managers in uncertain times (Chenhall, 2003) there is considerable

agreement that firms need additional information in order to cope
with uncertainty (Galbraith, 1973; Chenhall, 2003). As the literature
holds that both creativity and control are essential for firm success, an
important and interesting question is, how can they co-exist? Zhou and
George, 2003, 546) illustrate the importance of examining this question
when they state On the one hand, organizations are highly dependent
upon control systems, standardized practices, and routines to ensure
smooth and efficient operations. Yet these systems have the unintended
consequence of shutting down the innate creative propensities of organ-
izational members.
A series of experimental accounting studies investigate contract design,
creative output and self-selection. Kachelmeier et al. (2008) conclude
that employees incentivized with creativity measures produce a higher
percentage of output characterized as creative; however, the level of
output is no higher than with other incentive contracts. Kachelmeier
and Williamson (2010) find that contracts that reward creativity induce
selection by employees who believe they are creative. These employees
produce more creative output at the beginning of the contract; however,
over time employees paid only for quality become higher producers of
creativity. Chen et al. (2012) investigate group incentives and collabora-
tive creativity and conclude that certain types of group incentives work
better than others in motivating creative behaviour.
There is also related accounting literature more focussed on product
innovation and new product development (see e.g., Davila, 2000;
Cardinal, 2001; Ditillo, 2004).4 Using a combination of field and survey
data, Davilla et al. (2009, p. 338) document that on one hand MCSs
provides the clarity that creativity is argued to require, but on the
other hand they find that management teams avoid formal MCSs
because they kill creativity.
Otley (1994) suggests that performance measurement may dampen
creativity if firms focus too much on meeting performance targets.
Simons (1995) also notes that often researchers become focussed solely
on the monitoring function as firms are highly concerned with their
achievement towards predictable goal achievement. However, he argues
that firms do not rely on singular control systems, but rather they rely
on a package of controls. It is through the package of controls that firms
are able to motivate and facilitate employee creativity while at the same
time pursue predictable goal achievement.
Spekl et al. (2014) build on Simons (1995) and examine whether a
package of controls facilitates employee creativity. They measure the
74 Sally Widener
intensity of use of the levers of control (LoC) package of controls, and

show that the LoC package positively influences both employee empow-
erment and creativity. Using a survey method allowed the authors to
create a relatively large database of 233 responses from business unit
managers, which facilitated the provision of quantitative evidence on
the research question. The authors were able to measure constructs not
readily available through archival sources, such as the intensity of use
of the LoC package, and they were able to answer the research question
through an examination set in real-world companies, thus enhancing
the external validity of the project.
Management control and learning

The accounting literature, using survey methods (e.g., Chenhall, 2005) as
well as field research (e.g., Kloot, 1997), has examined the association
between learning and MCSs; however, there is much that remains to be
learned. Simons (1995) argues that control positively influences learning
whereas Kloot (1997) argues that control may undermine learning. Survey
studies have provided conflicting and inconclusive evidence. Chenhall
(2005) found a positive relation between the operational and customer uses
of performance measurement systems (PMS) with learning, but a negative
relation between the supplier use of PMS and learning. Henri (2006) found
that the interactive use of PMS was positively associated with learning
whereas the diagnostic use was negatively associated with learning. By
contrast, Widener (2007) concluded that the diagnostic use of the PMS was
positively associated with learning whereas the interactive use of PMS was
not significantly associated with learning. Various explanations may explain
these conflicting findings, including sample characteristics and modelling
choices, but the discrepancy indicates there is much still to learn.
McDonough and Leifer (1983) hold that firms must employ simulta-
neous structures, or possess organizational ambidexterity (Raisch and
Birkinshaw, 2008), in order to cope with increasing levels of internal
and/or external uncertainty. Raisch and Birkinshaw (2008) argue that
it applies to learning as well: scholars have long believed that a well-
balanced combination of two types of learning is essential for long-term
organizational success in order to cope with uncertainty.
Using survey data, Lee and Widener (2014) draw on the concepts from
the organizational ambidexterity literature to examine whether different
types of MCSs are related differently to different forms of learning. Out
of approximately 1400 attendees at the 2010 SAP Business Objects Users
Conference they collected data from 366 respondents of whom 241
used the same two SAP systems. The authors control for the various uses
of both systems and find that more intensive use of the PMS system
is positively associated with generative learning whereas more inten-
sive use of the budgeting system is positively associated with adaptive
learning. Performance effects are translated through generative learning
to learning and growth performance and finally to internal business
process performance. Using survey data to construct a structural equa-
tion model allows Lee and Widener (2014) to conclude that different
types of MCSs differently affect different types of learning.
Future opportunities
In the last section, I discussed research findings at the intersection of

management control and human behaviour in two particular areas:
creativity and learning. In this section, I continue these themes by
discussing potential opportunities for future research.
Creativity and supportive context

One recent theme in the creativity literature is the impact of context and
mood on creativity (e.g., Shalley et al., 2004). George and Zhou (2007)
examine how a supportive context interacts with employees mood
to affect creativity. George and Zhou (2007) created a database of 161
supervisoremployee dyads through a survey in one division of a large
company. Their research shows that a supportive context (i.e., when the
supervisor uses developmental feedback, conveys interactional justice or
appears trustworthy) interacts with employees mood (both positive and
negative) to affect creativity. These contexts have a natural link to the
management control literature and raise the question of when MCS can
provide a context supportive of creativity. For example, Adler & Chen
(2011) theorize that an important aspect of MCS design on creativity
is whether it is used in an enabling or coercive manner (Adler & Borys,
1996). Future research could benefit from examining aspects of MCS
design, such as whether it is used in an enabling or coercive manner,
to determine which aspects provide a supportive context. The survey
method has been used successfully to both measure and assess creativity
(e.g., George and Zhou, 2007) as well as to assess aspects of MCS design
such as enabling vs. coercive (e.g., Chapman & Kihn, 2009) and thus
could provide quantitative insights with high external validity.
Research on how MCSs and creativity are associated could also benefit
from analysis at levels other than the individual (Shalley et al., 2004).
Tsai et al. (2011) extend the George & Zhou (2007) paper by examining
the interaction of trust (e.g., supportive context) and a positive tone
76 Sally Widener
in teams. Chen et al. (2012), in an experiment, conclude that a group

tournament pay system fosters team creativity. One insight gleaned
from a review of the current literature discussed earlier was the lack of
survey-based research at the level of the team. Future research could
benefit from the use of surveys to collect data at the level of the team
and provide insights on which aspects of MCS can create a supportive
context for stimulating team creativity.
One last dimension of supportive context that I would like to address
is leadership style. Using survey data from 189 respondents, Haq et al.
(2010) find that leaders who are supportive and encouraging (i.e., trans-
formational leaders) influence employee creativity. Future research
could benefit from unpacking the relation between the LoC package,
leadership style and creativity. Understanding whether the LoC package
itself changes to fit with different leadership styles (i.e., transactional
versus transformational) and thus is able to positively influence crea-
tivity in the presence of either leadership style, or whether the relation
between the LoC package and creativity only holds in the presence of
transformational leaders, would benefit our theoretical understanding
of the association between control and creativity.
Creativity and incentives

It is commonly thought that rewards are negatively related to creativity
as they serve to suppress the intrinsic motivation that drives creativity.
However, Zhou & George (2003) conclude that the empirical evidence is
inconclusive (see also Shalley et al., 2004). In the accounting literature,
experimental studies have shown that measuring and rewarding crea-
tivity does not enhance individual creative output (e.g., Kachelmeier
et al., 2008); however, as discussed earlier Chen et al. (2012) find that
certain types of team-based incentives are related to enhanced levels of
team creativity. Spekl et al. (2014) use survey data to show that the LoC
package facilitates creativity; however, the setting is in the Netherlands,
which has relatively low use of incentives (Jansen et al., 2009). A fruitful
future line of survey-based research could directly measure the extent
the LoC package is linked to incentives and examine whether the rela-
tion between the LoC package and creativity is moderated by incentive
intensity or type of incentive used (Chen et al., 2012).
Learning as a process
Organizational learning is a process that occurs at three levels of an
organization (Crossan et al., 1999). Learning begins with individuals
who bring to bear their intuition on a certain situation or set of data.
They then interpret that information and try to come to some sort of
conclusion or insight. At the level of the group, individuals join together
to integrate the different perspectives. Learning is then institutionalized
at the level of the organization.
The notion of organizational learning as a process that occurs at multiple
levels in the organization lends itself to many interesting and important
research questions. We still know little about the interface of manage-
ment control and learning at each specific level or point in the process.
Could there be some MCSs that inhibit one or more of these steps in the
process? Which MCS enhances an organizations ability to institution-
alize what has been learned? Integrating these questions with the Malmi
& Brown (2008) typologies of control or with the Merchant & Van der
Stede (2007) control framework could reveal interesting implications. For
example, perhaps it is routinizing the process that results in the institu-
tionalizing of learning. Thus, behavioural control in the form of standard
operating practices could be critical as in the Merchant & Van der Stede
(2007) framework. On the other hand, Malmi & Brown (2008) suggest
a typology of five control types, one of which is administrative control.
Perhaps the use of administrative control is necessary to institutionalize
learning. Thinking through their entire typology, perhaps planning and
cybernetic controls influence interpretation, reward and culture control
influence integration (e.g., free rider, team incentives) and administra-
tive and culture control influence institutionalization. Studies that try to
combine and sort out the uses of systems with all five types of control
systems and the four processes of learning could provide great insight.
One way to address these questions is to design a survey that will
support multilevel studies on a number of topics related to learning and
management control. Multilevel analyses have not been frequently used
in accounting literature, although they are used quite extensively in other
business disciplines (e.g., management).5 The survey method is ideal as (1)
it can be constructed and administered to individuals, teams and organi-
zations that all operate in an environment where learning is important
and (2) it can be designed so as to collect the variables of interest.
Future research could also examine a specific stage of the learning
process in order to provide insights with depth as opposed to breadth.
Srivastava et al. (2006) provide an illustration of how researchers can
examine team processes. They performed a study on 102 teams in hotel
properties and concluded that empowerment leads to knowledge sharing
and efficacy in teams. In their study, knowledge sharing has character-
istics similar to that of the integration process of learning that occurs
at the team level. In the management control literature Simons (1995)
78 Sally Widener
theorizes that the LoC package leads to empowerment and learning (see
also Spekl et al., 2014 for empirical evidence). Integrating these findings
with Srivastava et al. (2006) might allow insights to be generated about
whether the LoC package is associated with the integration process, and
further, whether that association can be explained via knowledge sharing.
A survey could be designed to measure the relevant constructs and struc-
tural equation models could provide evidence on the mediating relation-
ship. Not only will insights be gained at the intersection of management
control and learning, but also using survey methods and appropriate
analysis techniques will provide insights on why the relation exists.
Conclusions
The importance of human behaviour on firm performance, especially

in times of uncertainty, is well accepted. Survey researchers have the
potential to make a significant contribution to the field of management
accounting (Van der Stede et al., 2005) and to the literature at the inter-
section of management control and human behaviour. Van der Stede
et al. (2005) point out that surveys can provide data worthy of being
used as evidence in court; the key is that they must be well executed.
Survey research can provide large sample evidence, quantify constructs
for which archival data do not exist and can tap into respondents
beliefs and perceptions on various topics (Van der Stede et al., 2005).
The purpose of this chapter is to share my reflections on how survey-
based research has contributed to our understanding of the effects of
management control on human behaviour as well as discuss potential
opportunities for future research using survey methods.
I was surprised to find that in eight leading journals over a 15-year
period, less than three articles per year were published that used survey
methods to address questions about human behaviour and (more
broadly) management accounting. I choose to interpret this finding in a
positive light; that there remains a tremendous opportunity for survey-
based research to contribute to the literature. Certainly, there is a place
for survey research when well executed. Although I do not advocate
it for all studies, I have found it to be rewarding and enjoy being able
to address a plethora of questions using the survey method. Indeed I
subscribe to the view that our field thrives when multiple methods are
brought to bear on a topic with certain methods being more appropriate
for certain questions (see e.g., Otley, 1999).
This chapter uses as illustrations two important behavioural topics:
learning and creativity that are especially important to firms when facing
high uncertainty. Through my examples, I hope I have demonstrated

how survey-based research can provide insights on the human side of
management control and have provided food for thought regarding
useful directions for future research. My hope is that this discussion
may spark interest in taking on one of these topics. Certainly, though,
these are not the only two areas that are of interest to the human side
of management control. Indeed a review of the current literature shows
streams of literature that exist in the areas of participation, commit-
ment, justice/fairness and role stressors that researchers can tap into and
make contributions.
In closing, I would like to offer two key conclusions. First, future
research can better exploit the benefits of survey research methods to
further understand the human side of management control. This is
an important area as human behaviour drives performance, and survey
methods can allow researchers to provide large-scale evidence on topics
that are not easily measured using other methods. Second, there are
many opportunities available for survey-based research to make a contri-
bution to the literature. I hope that my reflections contained in this
chapter will help stimulate future research.
Notes
The author gratefully appreciates comments from participants at the 2013 MCA
conference and from the editors, David Otley and Kim Soin.
1. This chapter will make more explicit and provide more depth on the reflections
contained in a plenary address I gave at the 9th International Management
Control Research Conference.
2. I also advocate the use of mixed methods in research studies (e.g., Gable,
1994).
3. Note that survey research must be done well for it to be powerful (e.g., see
Van der Stede et al., 2005). The purpose of this chapter is not to discuss how
to do good survey research; however, there are a number of authoritative
articles that do so (see e.g., Dillman et al., 2008).
4. It is important to note that creativity and innovation are not synonyms.
Innovation is about the implementation of the creative ideas (Chang &
Birkett, 2004).
5. For example see Kidwell, R.E. et al. (1997) and Wang et al. (2011).
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6
Management Control under
Uncertainty: Thinking about
Uncertainty
David Otley
Introduction
Much of the discussion of the design and operation of management

control systems takes place under the (often implicit) assumption that
the future can be known with a high degree of certainty. Even where
uncertainty is explicitly recognized, it takes the shape of a benign form
of external uncertainty where the future, although not completely
predictable, is seen as occurring in a well-specified space. Indeed, such
uncertainty tends to be treated as a contingent variable, which may
modify the form of well-understood relationships between control vari-
ables, but is otherwise quite well contained. However, the real world
is subject to much greater uncertainty, with events occurring that are
often totally unexpected and which have a major impact and unfore-
seen consequences. This chapter will therefore explore the nature of
uncertainty, how it may be conceptualized and examine some of the
consequences for management control systems.
What is uncertainty?
Uncertainty is basically a lack of ability to predict what the future will

hold, for good or ill. As well as an inability to predict the future events
which may occur, it also involves an inability to forecast the likely conse-
quences of such events. So rather than being a quality of the external
world, uncertainty is related to each and every individual. It is the indi-
vidual who is uncertain rather than uncertainty being a property of the
external world. For example, it may be that the world is totally deter-
mined and the future, in principle, totally predictable. But if I do not
83
84 David Otley
understand how the world works and have insufficient information to

model it, I can still be totally uncertain as to what will happen next.
Uncertainty is therefore not an objective phenomenon but rather an
attribute of a person attempting to understand the world and how it
operates.
Uncertainty therefore relates to a lack of predictive ability by individ-
uals or groups who have inadequate predictive models to forecast future
events and their consequences (Otley and Berry, 1980). This may often
be relatively insignificant and ideas of equifinality indicate that desired
future states can be approached along a variety of paths. Here any short-
term errors can be corrected by small adjustments as actual outcomes
become known. But in some cases, the opposite is true. An unexpected
event can totally change the future course of history. A battle between
two well-matched forces can be determined by very small chance events,
but the outcome can be (hypothesized to be) very different depending
upon the actual outcome. Business organizations competing against
each other are therefore often a source of uncertainty rather than a
means of reducing it. The financial crisis of 2008 appears to have been
largely unanticipated, yet has blighted the worlds economy for what
seems likely to be a decade or more.
Given that uncertainty is related to each persons predictive models, it
follows that I may be uncertain when other people are not. If they have
better predictive models, or better information about relevant predictor
variables, then they may be able to foresee the course of future events
far more clearly than I can. So being uncertain means a lack of ability to
predict reasonably accurately what the future might hold and how that
will impact future events. So we all face different types and degrees of
uncertainty depending upon our own mental models of how the world
works. It also follows that even though I may be completely certain
about the course of future events, I might be incorrectly confident and
subject to big surprises!
In this way, uncertainty is analogous to a rainbow. A rainbow appears
to be a clearly perceived object, with different observers apparently
perceiving exactly the same phenomenon. But it is actually perceived
differently by every observer and is subject to their own position. Thus
when they move, the rainbow moves too. One persons perception of
where the rainbow ends is different from anothers, and none of them
can find the end if they go in search of it! Similarly, uncertainty is always
related to an individual, even when it may be perceived as an objective
phenomenon that all observers will view in the same way.
Risk and uncertainty
It is common in the statistical literature to distinguish between risk

and uncertainty. Risk occurs when the complete range of future possi-
bilities can be envisaged and probabilities attach to the likelihood that
each may occur. However, although much analysis is conducted on the
basis of such assumptions, such situations are rare outside of artificially
closed systems with determined outcomes. Situations such as a lottery
or a casino are examples of situations where such techniques of risk
analysis can be applied, but even these externalities occasionally throw
in unexpected events (the casino burns down or goes bankrupt, and fails
to deliver your expected winnings).
Such analyses are most usually performed using the assumption that
relevant variables follow a distribution that is Gaussian (or so-called
Normal). Although very convenient mathematically, it is based on
assumptions that often do not apply in reality. In order to estimate
probabilities a long history of similar events requires analysis, and
the generating process that causes such outcomes is assumed to be
stable over time. This distribution is also symmetric, with similar tails
stretching out identically in both directions; that is, upside and down-
side errors are assumed to be identical. The shape of the distribution
also shows a rapidly decreasing likelihood of occurrence the further
one moves away from its central point, whereas in practice distribu-
tions have so-called fat tails with extreme outcomes having greater
probabilities than it assumes. This can be of great practical importance,
with some of the models used to represent complex financial instru-
ments under-estimating the likelihood of extreme and highly adverse
outcomes. Finally, it is not just the probability of an outcome that is
of importance, but also the consequence of the outcome that matters.
Indeed, some financial traders have made a good living by making
a series of (relatively) small bets which usually deliver small losses,
compensated by occasional wins of an extremely large amount (Taleb,
2007).
It follows that conventional risk analysis, based on estimating the
probabilities of a range of predictable outcomes has limited applicability
in practice. We need to consider how uncertainty can be assessed and
managed in circumstances where we do not have a long past history to
guide us, where the underlying processes may be subject to continual
change and where the consequences of unlikely yet possible events may
be extreme (for good or ill).
86 David Otley
Predictive models
I will use the term predictive model to include all the methods we use
to predict future outcomes, whether these occur solely in the brain of an
individual, or are formally specified typically using computer models.
Thinking first of human predictive ability, there is now a considerable
body of (mainly psychological) literature that shows that human beings
are not very good at prediction, even of relatively simple tasks and
outcomes. It demonstrates that we have biases that are usually uncon-
scious that lead us to overestimate the occurrence of common outcomes
and to underestimate the likelihood of less common outcomes. We
also have difficulties in envisaging the full range of future possibilities,
and so fail to attribute likelihoods to them. In particular, we are often
overconfident and assume that the worst cannot happen even when we
acknowledge its possible existence. The conclusion is that human beings
are not as good at forecasting the future as they believe they are. So good
control systems need to make allowance for this state of affairs.
If human beings are poor at forecasting, then so are computer models.
Although computer-based forecasting models have become extremely
complex and sophisticated over the past two or three decades, they
seem to have run into potentially insurmountable problems. Although
increasing sophisticated models are better at representing the past trajec-
tory of events with a high degree of accuracy, this attribute does not
seem to lead to greater success in predicting the future. This can only
be explained by the observation that the drivers of future events are
not exactly the same as they were in the past, so an improved encap-
sulation of history does not seem to lead to better prediction of the
future. Indeed, it might be argued that what the more complex models
are doing is capturing the noise (which will not repeat in exactly the
same way) rather than the underlying processes involved.
Forecasting is therefore something we are not very good at, regardless
of how we set about the task. We often do not know what we dont know
(Donald Rumsfelds famous unknown unknowns). And even when
we are aware of some possible adverse possibilities, we are often poor
at assessing their likelihood of occurrence and their possible impact.
Indeed, much of the literature concentrates on predicting the likelihood
rather than its impact. This can lead to misplaced confidence when a
low likelihood event has immense consequences.
Formal risk management processes seem to run into the same diffi-
culties. The often quoted remark that it is the process of risk manage-
ment rather than the formal outcomes that is important, indicates a
recognition of the above issues. At least the attempt to think about

possible scenarios can open our minds to a wider range of possibilities
than we might have believed existed or were important. But we must
remain aware that we are still likely to be understating the possibilities
that the future might hold for us.
Reactions to uncertainty
The most common human reaction to uncertainty is to ignore it. This

may occur either because the person is unaware of the possible events
that may occur, or by a deliberate decision to ignore the possibility of
such events and trust to luck. However, in such scenarios some people
will turn out to have been unlucky. In many societies governments
insist that certain situations are not ignored, for example by insisting on
third-party car insurance so that other affected individuals are not disad-
vantaged by the inaction of one actor. In other cases, social security may
be provided to help the unlucky from becoming too disadvantaged
and a further burden on society. Finally, an interesting variation across
countries is their governments attitudes to healthcare, which ranges
from comprehensive state provided care (as in Scandinavian countries
and, to some extent, the UK) to the US where individuals are expected
to take out their own private insurance (although Medicare provides
a lower safety net). The debate over Obamacare provides evidence of
the wide range of attitudes to such state involvement. This mirrors the
debate in the UK over welfare payments where recipients of benefits are
stereotyped on a scale ranging from unfortunate to lazy.
At the next level, people may attempt to avoid situations in which
they are exposed to (excessive) risk and uncertainty. Taking care to avoid
known risks occurs constantly in everyday situations (e.g. looking before
crossing the road; staying away from known problem areas in a big city;
not cycling on busy roads; keeping your money in deposit accounts
protected by government guarantee, rather than in more speculative
investments). But the downside risk to taking excessive care may be
that you do not encounter new experiences and interesting opportuni-
ties. There is always a balance to be struck.
A common approach to certain types of uncertainty is to insure against
it. This is particularly appropriate where the uncertainty may be unknow-
able at the individual level (will I suffer from a life-threatening illness?)
yet be relatively predictable at the level of a population (x% of people
contract this illness in a one-year period). So health insurance may be a
product of considerable value to an individual whilst being a predictably
88 David Otley
profitable product for insurance companies who can diversify their risk.
Note, however, that many policies of this nature (e.g. travel insurance)
take care to exclude extreme events where a probability distribution is
not known (e.g. terrorist activity, nuclear contamination, etc.).
Even an individual may be able to reduce their exposure to uncertainty
by diversification. So, whereas investment in the shares of an individual
company may have an unacceptably high degree of risk/uncertainty
associated with it, a diversified portfolio covering many such companies
may be able to deliver a comparable return at lower risk. However, such
diversification does not protect against events that affect all companies.
The recent financial crisis caused substantial drops in equity share prices
in most companies on a global basis. In our increasingly inter-connected
world, there are a growing number of risks that are not mitigated by
diversification.
A final strategy can be to attempt to benefit from unexpected uncer-
tainties. To think about this requires consideration of both the likeli-
hood of an event and also its impact or consequences. An event may
have a small likelihood of occurrence, but the consequences if it occurs
can be substantial. In the recent financial crisis, some types of extreme
risk appeared to have been mis-priced allowing speculators to take
hedging positions that allowed them to benefit from low probability
adverse events.
Given that many of the above uncertain events have been difficult
to foresee, it is likely that some people may have been unexpectedly
lucky as well as others who have been unlucky. One practical
response to such outcomes is to take advantage of any luck which may
come your way, without falling into the trap of believing the outcome
was the result of you own superior skill or judgement. As Shakespeare
put it: There is a tide in the affairs of men which, taken at the flood,
leads on to fortune; omitted, the voyage of their life is bound in sorrows
and in miseries.
Management control under uncertainty
Given the wide range of circumstances that can be categorized as uncer-

tain, can we draw any conclusions about how organizations can attempt
to control their affairs to benefit from such events whilst avoiding their
worst consequences? At one end of the spectrum we can envisage organ-
izations that operate in environments characterized either by low levels
of uncertainty, or by uncertainties that can be diversified. Companies
that concentrate on the basic necessities of life, such as food and utilities,
have generally been seen as low risk (although the increased globalization
of food supply can be seen as a process which has increased risk). Many
such companies have chosen to try to increase their returns by increasing
their exposure to risk by such mechanisms as high financial leverage. In
these circumstances, planning becomes a central tool where the predict-
able consequences of selected actions are analysed in considerable detail
over a lengthy period of time. In my own lifetime I have seen corpo-
rate plans covering a period of ten years (or even longer), although this
reduced to five years, and more recently most commonly to three years,
indicating a different perspective on the uncertainty that is perceived.
Indeed, even a three-year plan was described to me as having years
two and three written in pencil, indicating that it was more a one-year
rolling plan with a three-year horizon. The most common control tool,
even today, is budgeting which attempts to predict financial outcomes
over a one-year period. Even here, the Beyond Budgeting movement
has argued that such budgets give a false sense of security and inhibit
flexibility.
At the other end of the spectrum, we have situations where any
attempt to forecast the future is seen as problematic and as producing
more problems than it solves. An example would be the fashion industry,
where attempts to forecast what will be fashionable next season are
fraught with problems. At the top end, designers attempt to control
the market by deciding what will be fashionable, and selecting next
seasons colour palette, for example. But lower down, the mass market
tends to adopt an agile strategy that involves waiting and seeing. This
is possible only if the items which turn out to be in demand can be
designed, manufactured and distributed in a very short space of time,
typically ten days to six weeks. A by-product of this strategy in the UK
has been an increasing return to local manufacture to reduce lead times
in delivery. So the key attribute of such strategies is agility, a rapid reac-
tion to actual events which are observed, rather than any attempt to
predict them.
It seems obvious that both ends of such a spectrum are extreme. What
most organizations have to do is to place different aspects of their opera-
tions at an appropriate point on such a planningagility spectrum. Some
activities may need long-term planning, such as those which require
long-term capital investment, although this can be partially mitigated
by specifying flexible assets (e.g. some types of robotic machinery) that
can be utilized in a variety of ways. But other activities may continue
to be resistant to prediction. Who could have forecast the impact of the
internet on shopping habits, leading to the slow decline of the high
90 David Otley
street, but a relative increase in the requirement to deliver the goods and
services ordered in such a manner?
Finally, there is the area of risk management, a term which has
become increasingly popular in recent years. At one extreme, this seems
to require consideration of the possible risks faced by an organization,
but in practice appears confined to relatively predictable possibilities.
But at least this may stimulate some form of contingency planning of
a what will we do if ... ? nature. It is sometimes claimed that it is not
the outcome of risk management that is its key virtue, but rather the
process of thinking about it. Perhaps it is a process which can be used to
counter the human characteristic if ignoring or under-estimating future
uncertainties.
Handling uncertainty
An approach to dealing with uncertainty has been put forward by

Makridakis et al. (2009), although this is perhaps focussed more at the
risky end of the spectrum than in the realm of unknown unknowns.
However, it provides one of the few guides to decision-making and
action under uncertainty. They suggest a routine for assessing uncer-
tainty which has three steps all beginning with the letter A (p. 190).
1. Accept that you are operating in an uncertain world.

2. Assess the level of uncertainty you are facing using all available
inputs, models and data, even if you are dealing with an event that
seems as regular as clockwork.
3. Augment the range of uncertainty just estimated.
The first step is essentially aimed at ensuring that uncertainty is not

ignored, even when we know it exists, but may not know how to deal
with it. The second step consists of assembling and evaluating available
information which may give insight into the processes involved, even if
taken from a different situation. The third step argues that any estimate
of risk or uncertainty based on past evidence almost certainly under-
estimates the future risk, and suggests that estimates are augmented
by a factor of around two times, except in the most stable of circum-
stances. They also suggest we try to distinguish between uncertainties
we can manage and maybe reduce, and those where the occurrence of
an event is something we can do little about and we should concentrate
on taking steps to mitigate the consequences if the event comes to pass
(i.e. ranging from insurance to contingency planning).
A further step which can usefully be added to this list is to adapt: to

try to learn from our own experience and the experiences of others.
Not only may this provide a method for improving our own predictive
models (i.e. reducing uncertainty) but also a way of sensitizing ourselves
to the possibility of rare events which may nevertheless have large
consequences. We may not be able to control the future, but there are
things we can do to mitigate some of its adverse consequences.
Managerial performance evaluation
As we have seen, the presence of uncertainty can require significant

adaptation to both the design and use of management control systems.
This has received scant attention in the literature, and it is beyond the
scope of this chapter to try to detail the adaptations required, apart from
noting that it is probably in the way systems are used that will provide
the greatest benefits, certainly in the short term. The key feature of
uncertainty is that it is difficult, or indeed impossible, to quantify. The
biggest challenge is to help adapt managerial behaviour to take better
account of its existence.
Nowhere is this more apparent than in the processes of evaluating
managerial performance, because unexpected events can result in
performance that is significantly better or worse than might have been
expected in advance. In other words, delivered managerial performance
can be a consequence of managerial effort, ability skill and judgement
but, in the presence of uncertainty may be primarily attributable to
luck. This effect has always been present in the attempt to distinguish
between managerial and unit economic performance, but becomes acute
in the presence of significant uncertainty.
Let me illustrate this by an extreme example, set in the context of an
industry subject to significant unexpected events that affect perform-
ance, namely fund management. By considering this, admittedly
extreme example, it may be possible to deduce practices which can be
used in less extreme circumstances. The rhetoric of the fund manage-
ment industry suggests that skilled fund managers can out-perform an
appropriate benchmark (e.g. average market performance for a general
fund), and that despite the disclaimers in the small print, track record is
an important factor that should be taken into account when selecting
a fund manager for your investment. However, the evidence does not
seem to bear out this claim. The average fund (and/or fund manager)
does not out-perform its benchmark by more than a very small margin.
Once management fees are taken into account the average outcome is
92 David Otley
no better than a random selection of shares that might yield (or perhaps
more sensibly, a tracker fund following the whole market or appro-
priate sector). However, this observed average effect does not rule out
the possibility that some managers may out-perform the market for an
extended period of time. [Interestingly, this effect may not be balanced
by an equal number of managers who under-perform as it is unlikely
these under-performers will remain in their jobs!].
Consider a starting position with 1024 fund managers (less than
currently exist in the UK), and assume that their performance is purely
a random effect driven by luck and chance rather than skill and judge-
ment. After a year one might expect half of them (512 managers) to have
out-performed the market, balance by another 512 who under-performed.
After two years, some 256 managers will have an above average two-year
track record. After five years, there will be 32 star managers who have an
enviable five-year record of out-performance and who will be only too
keen to advertise this outstanding track record. They will look all the
better for the fact that many of their former colleagues and competitors
may no longer be active in fund management and have sought their
fortunes in other occupations!
How then should we evaluate the performance of fund managers,
given that there will always be a significant number who have
achieved their success by luck alone? Clearly, track records need to
be regarded with care, as they may reflect more luck than judgement.
Nevertheless, the lack of a track record may be more worrying, despite
the fact that many of the under-performers may have suffered just
from bad luck. So reported results cannot give us the insight we need
into the qualities of the managers concerned; we need to examine the
processes by which they made the judgements to buy (or sell) shares
in their portfolios. But this is also an evaluation that has significant
difficulties in this industry. There is no approach that is guaranteed
to give superior results, for if there were, it would rapidly become the
normal approach in the market and inevitably fail to deliver in the
longer term.
It is notable that many fund managers set out the rudiments of their
favoured approach in their marketing literature. And I am happy to
acknowledge that they are probably being honest in their belief that the
approach they adopt has likely benefits. They are particularly likely to
believe this if they have enjoyed several periods of above average results!
But different approaches are suitable for different market conditions,
and it often seems to be the case that a previously successful approach
founders when circumstances change.
There seems to be an analogy here between this example and the

traits of successful managers in many major corporations that have
been analysed in the literature. The overwhelming conclusion is that
successful managers possess a number of traits (e.g. ability, hard work,
etc.) to which they and others attribute their success. But it is also
noticeable that the managers who were identified as successful in one
decade have generally become less successful as time passes on. It is also
worthy of note that many of the traits possessed by successful managers
also appear to be possessed by large numbers of other, less successful,
managers. Thus, the traits may be necessary conditions for success, but
by no means determine it. The successful managers may just have been
lucky, particularly at an early stage in their careers.
The same analysis may be applied to academics whose success may
be strongly correlated with their research performance. Again, given a
set of bright, well-qualified individuals, who are those who are likely to
be successful? Again, I would argue that luck plays a substantial role.
Even in the relatively mundane activity of getting your work published
in good journals luck appears to play a significant part. For example,
a particular piece of research may have an unexpected conclusion that
gives it a certain novelty value. The paper will be sent to a likely journal,
where it is assigned (somewhat arbitrarily) to a number of referees to
evaluate. These referees may react in different ways, depending on their
own background and preferences, and also perhaps on their mood on a
particular evening when they decide to review this paper. As in a good
journal, the supply of very competent papers generally considerably
exceeds those that can be published, whether a particular paper gets
accepted on not may well be largely determined by chance. Once an
academic has had a few papers accepted in top journals, they tend to
become regarded as top academics and it may become easier for them
to get subsequent work accepted. At the very least, this pattern of early
success may well bolster their confidence (particularly in comparison
with their less lucky peers) and encourage them to produce a continuing
stream of good work that is submitted to these journals, some of which
is published by them. So those early career researchers who get lucky
early in their career are more likely to continue to be successful later!
This issue is accentuated by the increasing tendency for performance
to be assessed on the basis of pre-set quantitative targets, and rewards
(including financial rewards such as bonuses and promotions, and also
status achieved by a position in a set of rankings) to be largely determined
by successful target achievement. Given the fact that circumstances
change between the time when targets are set and their achievement
94 David Otley
is measured, it is possible that some highly performing managers fail to

meet these targets despite their skill and hard work. Conversely, some
other managers may meet their targets through either facing less adverse
conditions, or through luck. Add to this the tendency of many managers
to manipulate their reported performance so that targets are apparently
met, although in fact this has been done by methods that would not
be seen as desirable if this fact was known. Target achievement is there-
fore not a good measure of managerial performance under conditions of
significant uncertainty.
In these circumstances, the management control literature would
suggest that performance should be assessed either by behaviour controls
(that is, by specifying the actions that should be taken, or the processes
by which performance should be achieved) or by social controls. For
middle to senior managerial jobs, specification of required behaviours
is generally seen as both difficult and undesirable. The essence of mana-
gerial work is seen as leaving the choice of methods to the managers
themselves, as superiors do not have the necessary knowledge and infor-
mation to detail this in advance. If they did, then the task concerned
could be delegated to less well-paid workers.
So we are left with the rather vague category of informal and social
controls. These have not been well specified in the literature, but would
appear to involve regular informal monitoring and regular discus-
sions between senior and more junior managers concerning the issues
surrounding the delivery of required results and the actions that are
being considered to achieve these outcomes. It is a major research issue
to empirically observe how these discussions take place in practice, and
the outcomes associated with different practices. At present, what little
we know concentrates on the undesirable consequences of rigid prac-
tices based solely on the monitoring of outcomes.
Conclusions
This chapter has been based on the assumption that uncertainty is

much more prevalent in many managerial situations than the literature
gives credit to. It also exists even when it is not fully recognized by
the managers concerned. Further, managers who have been successful
mainly by lucky accident have a tendency to attribute their results to
their own superior ability, knowledge or practices. These circumstances
collude to ensure that the existence of uncertainty tends to be under-
stated and the development of better practices to manage where it exists
are not paid the attention they deserve.
But uncertainty should not be conceptualized as an external, observ-

able phenomenon; rather it is a property of an individual, although
groups of individuals may share an equal lack of knowledge and predic-
tive ability. Crucially, uncertainty may be reduced by improvement in
available predictive models (i.e. better knowledge and understanding
of the situation involved). Nevertheless, there is always likely to be an
irreducible core of uncertainty, in that the future will never be totally
predictable. We therefore need to develop better ways of describing
(and even quantifying) likely sources of uncertainty and their possible
impacts even although such approaches are never likely to be totally
successful. However, the process of thinking about the uncertainties
inherent in a given situation may give insights into areas of activity
which may be better avoided, or contingency plans developed to cope
with the consequences of their occurrence.
Risk management processes represent one attempt to try to codify the
impact of many different types of uncertainty on major business activi-
ties. These processes can be useful in themselves, yet the very formaliza-
tion of such activities, and their reduction into a box ticking approach,
can significantly reduce their value. It is a duty of senior management
to ensure that they are fully involved in the risk management activity.
However, the application of the technologies of risk management does
not inevitably lead to better outcomes and may merely consolidate
risk. Indeed, an organization may become less responsive and agile if
it diverts too much effort and attention continually reviewing speci-
fied risks according to a bureaucratic programme. The need is to focus
managerial attention on the certainty of uncertainty in a way that leads
to intelligent responses.
By contrast, many organizational control activities take place as if
uncertainty barely exists. Budgeting is a prime example, where point
estimates of future outcomes are used to produce financial plans.
Occasionally some scenario planning is undertaken to try to foresee the
possible consequences of deviations from these budget assumptions,
or attempts to put probability estimates on the likelihood of certain
outcomes, but these are relatively rare practices. In particular, they tend
to involve relatively predictable uncertainties whilst still ignoring other
major possibilities that are more difficult to envisage. There is an urgent
need to try to develop more coherent practices in the field as the world
continues to evolve towards a global system that is both highly inter-
connected and subject to major uncertainties with potentially massive
consequences. How can we reduce the impact of future largely unpre-
dictable yet (cumulatively) likely events?
96 David Otley
References
Makridakis, S., Hogart, R. & Gaba, A (2009). Dance with Chance: Making Luck Work
for You. Oxford: Oneworld Publications.
Otley, D. & Berry, A. (1980). Control, Organisation and Accounting. Accounting
Organisations and Society, 1980, 231244.
Taleb, N. N. (2007). Fooled by Randomness. London: Penguin.
7
Managing through Uncertainty
Mike Bourne
Management control systems were developed to enable the management

of organizations, including under conditions of uncertainty. However,
in recent times, the level of uncertainty has increased and traditional
management control approaches are struggling to cope with the speed
of change and the increasing uncertainty in the business environment.
In this chapter, I will start by discussing the history of management
control and its enabling role in the creation of modern corporations.
I will then argue how the development of performance management
frameworks over the last 25 years is a continuation of this process
whereby companies are endeavouring to cope with changes in the envi-
ronment. Multi-dimensional performance measurement frameworks
need to be designed, implemented and used. However, this takes time
and has a cost. I will argue that as volatility and uncertainty increase,
managers need new approaches to management control to keep pace
with this change. This chapter will therefore describe two recent and
very different approaches developed from practice to deal with situa-
tions of high uncertainty. They are provided to give illustrative insights
into the way management control is developing to deal with an evolving
environment rather than to give a comprehensive view of appropriate
management control practices.
The origins of management control
In this section, I will discuss the early history of the development of

financial, cost, management accounting and control systems used to
manage performance from their beginnings in the late 1200s to the
middle of the last century. The intention is to illustrate how devel-
opments in control enabled the development of corporations, from
97
98 Mike Bourne
early double entry book keeping to recent times. In the late thirteenth
century, double entry book keeping became necessary as a means of
managing complex trading arrangements. For example, Johnson (1981,
p. 512) cites the Medici accounts as an excellent example of how a pre-
industrial organization could maintain a good account of external trans-
actions and stock without recourse to higher-level techniques, such as
cost accounting.
This situation persisted until the birth of the modern factory in the
early nineteenth century. Prior to the industrial revolution, merchant
entrepreneurs used a domestic system for manufacturing goods such as
textiles. This involved the merchant buying raw materials in the open
market and coordinating their conversion into manufactured items
through consigning the goods to independent households (Johnson,
1981). At this time, all the transactions were market based with arti-
sans working to market determined piece rates for the job. So in reality,
nothing had changed in accounting terms since the time of the Medicis.
Double entry book keeping was perfectly adequate.
Johnson (1981) argues that development in accounting practice came
in the United States with two major structural changes in the manage-
ment of production. Firstly, piece-work payment systems were replaced
by wages and, secondly, factories developed from single to multiple
operations. The transition from piece-work payments to a wage payment
meant that managers in the early textile mills could no longer know
what the product cost without records of output and wages paid. There
was also an additional problem. Without a piece-work rate, they (the
workers) had no automatic incentive to pursue the same goal when
being paid wages (Johnson, 1981, p. 514) so employees performance
had to be measured and monitored for control purposes.
Moving from single to multi-operation production also makes an
understanding of costs much more important. The development of
integrated mills in the USA necessitated management cost accounting
systems. In the UK, Johnson (1981) argues, single process mills relied
on efficient market institutions to coordinate different production
processes which eliminated the economic advantage of administrative
control and cost accounting systems. Thus, we see the emergence of
early cost accounting systems for internal control around 1850 in an
integrated New England textile mill (Johnson, 1972). These were used to
facilitate control of productivity, measure the impact of internal changes
and manage raw materials.
The next major development in management accounting coincides
with companies trying to progress from managing a single (although
Managing through Uncertainty 99
multi-operation) production plant to the management of multiple

plants as occurred at E. I. du Pont de Nemours Powder Company
(Johnson, 1975). In this new multi-site manufacturing environment, we
see the need to coordinate activities, which were previously mediated
through the market. Top management also needed to relinquish day-
to-day control of the business to allow them time to plan for the future.
Johnson (1975) argues that the cost of integrating and coordinating
internal activities is the main factor limiting the size of a unitary form
organisation (204).
The solution developed at du Pont between 1903 and 1912 was very
similar in character to a modern standard management accounting solu-
tion. The only real difference was in the allocation of overhead (the allo-
cation only being made to finished goods and not to work in progress).
Standards were set for production and cost reporting which allowed
comparisons of performance between different sites. Systems were also
in place to motivate the sales force to pursue profitable sales, monitor
changes in demand, coordinate sales, production and purchasing and
forecast cash flow. A further innovative approach was the introduc-
tion of Return on Capital Employed as a key ratio for measuring the
success of past investments and as a basis for guiding future investment
decisions.
Although Hofstede (1968) claimed that the first industrial use of budg-
etary control was in the US during the 1920s and that this use was clearly
derived from budgetary techniques in government (McKinsey, 1922),
the du Pont example clearly predates this. Chandler (1962) argues that
when companies such as du Pont, Sears, Roebuck and General Motors
diversified after the First World War, they discovered that sophisticated
management accounting systems were fundamental to the coordination
of multi-divisional organizations. Johnson (1978) argues that Durants
attempt to consolidate autonomous car and automotive part manufac-
turers into one giant firm, General Motors, failed because In short, he
did not have the administrative system that could direct the activities of
each operating unit towards common goals (492).
However, the system implemented by his immediate successor, Pierre
du Pont, and Donaldson Brown (another former du Pont executive) did
allow top management to coordinate performance. Financial policy,
sales reporting and flexible budgeting indicated promptly when devia-
tion from plan required divisional mangers to take action and allowed
top management to allocate resources and executive compensation.
Whatever the original source, the use of budgets spread. A study
showed that by 1941, 50 per cent of well-established US companies were
100 Mike Bourne
using budgetary control in one form or another and by 1958, budgets

appeared to be used for overall control of company performance by 404
out of 424 (just over 95%) participating in the study (Sord & Welsch,
1962).
In fact in the six intervening decades between 1925 and the publi-
cation in 1987 of Relevance Lost: The Rise and Fall of Management
Accounting, Johnson & Kaplan (1987) argue that no progress was made
in the development of management accounting:
By 1925, American industrial firms had developed virtually every

management accounting procedure known today. (p. 125)
This brief review of (management) accounting history suggests that there

are connections between the needs of entrepreneurs and their needs for
cost and management control systems. In fact, Johnson (1981, p. 139)
himself argues that
Accounting historians, however, seldom explore the organizational

conditions underlying the emergence and role of accounting.
Johnson (1981) dismisses the concept developed by many accounting

historians (Littletin, 1933; Garner, 1954; Chatfield, 1971) that modern
production costing arose because it fulfilled an inherent need to inte-
grate cost accounting into double entry financial accounting. Instead,
he argues that entrepreneurs responding to market forces were forced
to search for alternative forms of trading and organization. These
organizations had to be managed and controlled and consequently the
development of modern firms and accounting control techniques are
inextricably entwined. These new organizational forms could not be
managed without the new techniques developed and the techniques
had no relevance outside the new structures.
The main thrust of Johnsons (1981) argument is that the devel-
opment of new organizational forms and management accounting
control systems were governed by the laws of economics. The early
entrepreneurs who created the multi-process mills, integrated firms
and multi-divisional organizations could only succeed if the marginal
costs of integrating and coordination compared favourably with the
marginal costs of mediating the same transactions through the market
place (Johnson, 1975, p. 204). The logical conclusion of this argument
is that the development of management control and performance
measurement systems is driven by changes in the environment and it
will be argued here that more recent developments in accounting and

performance measurement can also be traced to changes in the business
environment.
The management control crisis of the late 20th century
Traditional performance measures have been characterized as being

financially based, internally focussed, backward looking and more
concerned with local departmental performance than with the
overall health or performance of the business (Johnson & Kaplan,
1987; Keegan et al., 1989; Neely et al., 1995; Olve et al., 1999). Their
focus on short-term results at the expense of longer-term competi-
tiveness and business survival has been well documented (Banks &
Wheelwright, 1979; Hayes & Abernathy, 1980; Kaplan, 1984, 1986;
Johnson & Kaplan, 1987). But here I wish to focus on the control
limitations.
Johnson & Kaplan (1987) stated Management accounting informa-
tion, driven by the procedures and cycles of the organisations financial
reporting system is too late, too aggregated and too distorted to be rele-
vant for managers planning and controlling decisions. Later, Johnson
(1992) argued Relevance was not lost by using improper accounting
information to manage. It was lost by improperly using accounting
information to control business operations.
Compared with the last two decades of the 20th century, the busi-
ness environment in the 1920s was relatively stable. Some of the major
changes in the business environment since then include:
the re-balance of power from producer to consumer as the realiza-

tion dawned that industry is a customer-satisfying process, not a
goods-producing process (Levitt, 1975, p. 174);
global competition and the reduction of trade barriers (Johnson &
Kaplan, 1987);
the rise of consumerism in the 1960s (Dalrymple & Parsons, 1976,
p. 14) from Ralph Naders unsafe at any speed (1965) to Shells Brent
Spar debacle (where environmentalists and consumers put moral and
economic pressure on the company, Rice & Owen, 1999);
the rate of technological advances, in particular in computing and
communications (Peters, 1997);
the speed of change in certain markets (Weisbord, 1988) and the
consequences for the speed of change in the supply chain;
the shift from capitalism to the knowledge society (de Geus, 1997).
102 Mike Bourne
Taking Johnsons (1981) argument to the next stage, one would expect
each of these environmental changes to have an impact on the develop-
ment of management control and performance measurement systems.
For example:
the loss of producer power and the reduction of trade barriers

opening markets to global competition make the external market
more competitive and volatile. This changed environment requires
performance measurement systems to be more externally focussed;
the rise of consumerism since the 1960s, the shift from a capital to a
knowledge based society and the increased rate of change in supply
chains raises the profile of three important stakeholders in the busi-
ness, society, employees and suppliers. One would expect this change
in balance to require performance measurement systems to become
broader in scope including the requirements of a wider range of
stakeholders;
the development of new technologies and operating practices has
undermined the fundamental basis of costing based on direct labour
hours. One would expect to see more emphasis on non-financial
performance measures and alternative costing systems.
During this period, in practice we did see developments matching these

shortcomings. For example, the development of
multi-dimensional performance measurement frameworks with

greater emphasis on the external environment (Keegan et al., 1989;
Fitzgerald et al., 1991; Kaplan & Norton, 1992)
stakeholder based measurement frameworks such as the Performance
Prism (Neely et al., 2002)
activity based costing approaches (Cooper & Kaplan, 1991) and the
beyond budgeting movement (Hope & Fraser, 2003).
Current approaches to management

control and uncertainty
So far in this chapter, I have described how management control devel-

oped to deal with an evolving business environment. The development
of management accounting techniques over the later part of the 19th
and early 20th centuries enabled the development of more complex
organizational structures in relatively stable environments. But by the
1980s, these approaches were struggling to cope with a more dynamic
business environment. In the last section, I described the more recent

development of multi-dimensional performance measurement frame-
works created in response to this greater change and uncertainty, with
the emphasis moving from lagging financial measures to more forward-
looking and responsive non-financial measures. In this section, I want
to focus on current approaches. Although there is continuing interest in
performance measurement and management for management control
purposes amongst practitioners, in the academic literature we find
mixed results when we investigate whether this approach has a positive
impact on performance (Franco-Santos et al., 2012). In their literature
review, Franco-Santos et al. (2012) identified two significant and related
factors that contribute to their findings.
Firstly, a number of authors highlighted the costs involved in perform-
ance measurement and management control (Ahn, 2001; Butler et al.,
1997; Papalexandris et al., 2004). Designing, implementing, using and
keeping a performance measurement or management control system
up to date is a resource intensive process. The costs of doing this, be
that expenditure on external consultants and software or the use of
management time within the organization, has to be outweighed by
the benefits accruing to the organization. In my experience, there are
many organizations that develop management control approaches that
are not effective and it is highly likely that such organizations incur the
costs without the benefits.
Secondly, many authors emphasize that the way the performance
measurement and management control approach is implemented is
critical for success (Otley, 1999; Neely, 2005; Franco-Santos & Bourne,
2005). That is to say, having a performance measurement framework is
less important than the process by which it is implemented. This links
to the first point as the design and implementation comes at a cost.
The argument in the practitioner literature is that the process of
developing the performance measurement or management control
system is critical as it engages line management in the refinement of
strategy and builds their commitment to the implementation of the
performance measures (Neely et al., 1996, 2002; Bourne & Bourne,
2000, 2007, 2011). This is typically done through a series of work-
shops in which the management team discuss and debate the key
objectives, measures, targets and improvement initiative (Bourne &
Bourne, 2011; Melnyk et al., 2014) creating a Mental Model (Eccles &
Pyburn, 1992) or Success Map (Neely et al., 2002, Bourne & Bourne,
2007) that captures and communicates what the organization is trying
to achieve.
104 Mike Bourne
Unfortunately, such an exercise needs to be undertaken or reviewed

regularly (Neely et al., 2000; Bourne et al., 2000) as the organiza-
tion evolves and the business environment changes. In their paper,
Bourne et al. (2000) argued that to keep the measurement system
functioning and aligned with the strategy, management teams need
to regularly review their targets, their sets of measures as well as using
the feedback from the measurement system to challenge the strategy.
These are all activities that take time and therefore have a cost to the
organization.
As the environment becomes increasingly more volatile and uncer-
tain (Harrington et al., 2011, Melnyk et al., 2014), we have to ques-
tion whether such approaches are appropriate in all circumstances? Are
there alternative approaches to management control that enable us to
pilot the organization without constraining time and costs? In the next
section, I have chosen two very recent and very different examples of
developments in management control. They are provided to illustrate
how control is evolving rather than to give a comprehensive picture of
the field.
Management control under uncertainty
Management control is important for the management of an organiza-

tion and the implementation of strategy. Management control enables
managers of organizations to recognize changes in their environment
and adapt, so there is an increasing need for the measurement and
control systems to become more dynamic. Maintaining this dyna-
mism in an uncertain environment is becoming increasingly difficult as
organizations need to react faster than traditional control systems can
be updated. In this section, I will describe two approaches to dealing
with uncertainty developed from practice. The first approach emerged
from a Delphi study focussing specifically on this issue (Melnyk et al.,
2014). The framework developed is designed to help managers think
through the structure of their performance measurement and control
systems so that the structure fits the environment in which they
operate. The second approach is the application of feed forward control
in New Product Development (NPD), specifically the development of
the product portfolio to be offered to the market. This approach uses
a number of techniques that help the management team think about
the future and improve their control over the process. I will start by
discussing the Delphi study.
Dynamic control systems

In 2012, a team of researchers from Cambridge, Cranfield, Michigan State
and Strathclyde Universities and SINTEF assembled a group of senior
and highly experienced practitioners to reconsider the way performance
measurement and management control is undertaken in organizations.
Many of the participants were from fast moving industry sectors and
were concerned about the lack of flexibility and responsiveness in many
of the control systems they encountered. The problem was fleshed out
during the process and stated as follows (Melnyk et al., 2014).
The belief is that the business environment in which we are trying to

run our businesses is changing. The speed of change in technology
and increasing levels of connectivity are combining with shifts in
economic patterns of activity to make markets extremely unpredict-
able and more complex to manage. For businesses to survive, they
need to quickly identify new threats and opportunities, make deci-
sions about their response and implement these decisions quickly.
This environment favours organisations that are smaller and are
managed by their owners.
The issue for larger corporations is how to guide managers in their
decision-making. The corporation wants decisions to be taken in the
best interests of the longer-term future of the company taking into
account the potential gains and risks involved. This will involve the
balancing of short-term performance against the building of capability
for the future as well as the risk and benefits. In the past, managers
have been assessed based on their performance against measures and
targets, but we are no longer certain that we can adequately define
the measures and targets, especially in a volatile environment, to
assess managers without constraining the speed of decision making
and action that we now need to be successful. Finally, there is an
increasing need to enable local decision making within the broader
framework of the rest of the organisation. This requires measurement
to be used more as an information and learning tool than as a control
mechanism.
At the centre of the debate was the issue of keeping the management
control system up to date. Traditionally, as described earlier, a change
in the environment normally triggers a change in the strategy which
then leads onto a change in the performance measures that underpin
the management control system. But organizations werent doing this,
106 Mike Bourne
which led the team to ask why? One of the conclusions was that such
an approach is too cumbersome and takes too much management time
and effort to implement. The solution proposed to this problem was the
Performance Alignment matrix.
The Performance Alignment Matrix is a simple two-by-two matrix
comprising two dimensions: outcomes and solutions (see Figure 7.1). Its
purpose is to help guide senior decision-makers in designing a manage-
ment control system that has the flexibility but aligns operations with
strategy. The argument made is that the control approach needs to fit
the environment in which the organization operates and the level of
uncertainty the organization faces. I will briefly describe the approach
here.
In the matrix, the outcome dimension captures the intended goals the
organization is trying to achieve. These goals can be stated in specific
terms or more general terms. This is to reflect the difference between situ-
ations where the organization can state its intended longer-term goals
precisely and situations where there is a broad understanding of what is
required. In the paper (Melnyk et al., 2014) the difference between these
two dimensions was illustrated by the example:
Specific Outcomes
I need five new products launched by the end of the year.
I need armed security to protect my supplies.
General Outcomes
I want to do radical innovation.
I want my supplies secured.
If we now turn to the other dimension, this captured the solutions

adopted by the organization. Solutions are defined as the way the
organization goes about delivering the outcome and, like outcomes, the
solutions dimension can be stated in either specific or general terms.
Defining solutions specifically or in general terms enables or constrains
those in the organization in what they do.
Each of the four quadrants was described asf follows (Melnyk et al.,
2104).
Measurement-driven management: Measurement driven manage-
ment is the most specific form of measurement. It is measurement in
its purest form. This is measurement that is after the fact. This approach
makes sense when the method is fixed and the outcome determined.
Here the main concern is that of matching actual performance with
the target set and whether you achieved the objectives or not. This
Outcome
General Specific
Assessment-driven Outcome-driven
General management soluons
Solutions
Specific Solution-driven Measurement-driven

outcomes management
Figure 7.1 The Performance Alignment Matrix (Melnyk et al., 2014)
is most attractive and most appropriate when dealing with a stable

environment.
Outcome-driven solutions: With this approach, the outcome is
clearly specified, yet the solution is only outlined in general terms. Here
the strategy adopted to reach the organizational goal is not critical as
long as the desired outcome is achieved. That is, we are not interested in
how the people achieve the specific goals, as long as the general goals
are achieved. Consequently, we specify the outcome and let others in
the organization determine the solution.
Assessment-driven management: Here, the outcome is broadly
described (e.g., we want radical innovation in our industry) and manage-
ment is open to any solution and outcome as long as it is consistent
with the broad goal. Consequently you cant measure against a tightly
defined goal; you can only assess progress. To assess the solution you
will need to focus on whether the organization has the necessary capa-
bilities in place (right people, right processes, systems, sufficient slack
resources, adequate communication, appropriate level of incentives
and opportunities for accidental innovation). To assess the outcome,
you will have to assess whether the projects and tasks aimed at satis-
fying the broad outcomes are being carried out, whether the tasks are
on track and whether they are delivering results in line with the broadly
defined goals. You do not want to measure outcome or solution specifi-
cally because, if you do, then you run the risk of shaping the outcome
in ways not desired.
Solution-driven outcomes: This quadrant captures what happens
when the measurement drives the outcome. This is the situation where
108 Mike Bourne
the organization doesnt have clear strategic direction or goals. This

creates a vacuum, which some managers fill by creating specific solutions.
These are often measures of activity with no clear links to outcomes. By
specifying quantitatively what is needed, people are directed towards
specific solutions. But this creates the situation where managers stop
exploring alternative solutions or, because they have some measures,
they forget the need for setting higher-level goals. It is dangerous for an
organization to have specific measures of activity which are not directed
to a clear goal as the activity creates a momentum of its own without a
purpose. However, there are situations where this is necessary as people
need direction in their work whilst strategy is being formulated or
refined. Hence, we have coloured this quadrant yellow to highlight the
dangers if this situation continues for an extended period.
The suggestion made in the paper (Melnyk et al., 2014) was that
management need to consider the implications of each quadrant when
designing their control system. In the paper it was argued that different
parts, functions and levels in the organization should operate differently
depending on how well defined the problem and solution can be stated,
but it is also clear that the matrix is designed to help managers control
their business under different levels of uncertainty. If you know what
you want to achieve and how you are going to achieve it, uncertainty
is low and the control system can be clearly defined. However, if your
outcomes or solutions can only be stated in general terms, the uncer-
tainty increases and the management control system needs to be config-
ured accordingly.
So we have considered the issue of control from the point of view
of senior management trying to guide activity at multiple levels in an
organization under change and uncertainty. In the next section, we will
discuss an approach taken by a management team trying to develop a
new product portfolio in a fast moving industry. These managers face the
need to maintain some degree of strategic alignment whilst attempting
to be both innovative and frugal.
Control system sophistication

Developing a product portfolio for the fashion industry requires innova-
tion and control. The customer is looking for new and exciting products,
but they cost money to design and develop, so excessive innovation can
be wasteful and costly. When this is combined with industry-specific
challenges, such as the dynamic, volatile and unpredictable nature of
demand; short product lifecycles; high levels of product variety and
frequent product range changes; and complex, extended global supply
Increasing FAC
sophistication
STAGE-GATE NPD GOVERNANCE
Sophistication FEEDFORWARD ANTICIPATORY CONTROL:
level SOPHISTICATION LEVELS
7 Product Category level review of the FAC metric target
+
6 Product Category level review of targets

+
5 Scenario Planning / Forecast review: Product level forecast
+
4 Product Category level FAC metric: reporting actuals and setting targets
+
3 Product level forecasting through the NPD process + Strategic Fit check
+
2 Product Category level forecasting (anticipated outcome) and Target Setting
+
1 Actuals reporting (feedback measures)
No Measurement
Figure 7.2 Feedforward anticipatory control: sophistication levels

Source: Baker & Bourne 2014.
chains requiring quick responsiveness to trends (Bruce & Daly, 2004),

control is essential. Managing with the uncertainty in this situation is
important so that the team can create an effective product portfolio.
The approach developed by Baker & Bourne (2014) comes as much
from reading the literature on control systems as it does from practice. The
framework presented in Figure 7.2 was developed from the control systems
literature and logic then refined in use. The framework describes increasing
levels of sophistication that can be applied to the management of the stage
gate process in the NPD (New Product Development) portfolio develop-
ment. I will next briefly describe the different levels of sophistication.
At the lowest level, level 0, no measurement is used in the decision-

making.
At the level above this (level 1), the brand management team respon-
sible for the portfolio use feedback from the last season sales to inform
their current decision-making.
At level 2, the team start to anticipate the performance of the brand
by forecasting what they believe they will achieve by product cate-
gory. Product categories are easily identifiable groups of products and
this task helps the team think about the targets they are trying to
achieve and plan the range.
At level 3, the focus on forecasting intensifies. At level 3, fore-
casts are conducted at the product level (the next level down from
product category) and the team start to do these forecasts repeatedly
110 Mike Bourne
throughout the process. The team also start to assess the strategic fit
of the range being developed with the brand strategy.
At level 4, the sophistication develops to look at key ratios. The ratio
described in the paper is the FAC (Feedforward Anticipatory Control)
metric, in this case the cash margin per product. Forecasting cash
margin per product enables the team to think about the size of the
range and to balance the need for innovation with over and wasteful
development.
At level 5, the team introduce different scenarios to help them think
about the risks they are taking and the confidence in their forecasts
Finally at levels 6 and 7 the team start to reflect on the targets that
have been set and on the target value of the FAC metric itself.
In practice, this approach has proved remarkably useful for the manage-
ment teams developing the portfolios. Not only are the teams more
confident in their forecasts and selection decisions but results show
that the higher the level of sophistication used, the better the resulting
financial results (Baker & Bourne, 2014).
Summary and conclusion
If I reflect on the development of controls discussed in this chapter, we

can see a move from the use of outcome measures of financial perform-
ance to a wider set of indicators that reflect the whole activity of the
organization. These measures are increasingly being used for guidance
rather than control as being quick to identify changes in the environ-
ment and respond becomes more important. The process of using these
measures is also changing and control is now probably best managed
through the performance planning and review meetings where these
measures get discussed and debated rather than by scrutinizing financial
or performance reports. Decisions need to be taken in the moment, not
in response to a measure, and we will need to understand more fully
what this means for control. How are we are going to allow managers to
respond quickly and flexibly whilst still keeping some track of what they
are doing and where they are taking the organization? I have given two
very different examples of approaches that have been developed with
practitioners for doing this, but increasing change and uncertainty will
continue to make this an interesting and developing field.
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8
Uncertainty as a Determinant of
Performance Measurement and
Compensation Systems: A Review
of the Literature
Margaret Abernethy and Julia Mundy
Introduction
The objective of this chapter is to synthesize empirical research studying

the design and use of performance measurement and compensation
systems (PMCS) in complex settings, specifically when decision-makers
face uncertainty. We analyse recent papers in the accounting literature
that investigate the influence of uncertainty on PMCS and organize our
findings around two questions: (1) What is the influence of uncertainty
on specific elements of PMCS design or use? and (2) What aspects of
PMCS design or use are associated with specific types of uncertainty?
A difficult problem for many organizations is the challenge of
managing in an increasingly complex and turbulent environment.
Thompson (1967, p. 159) identified uncertainty as the fundamental
problem for complex organizations and ... coping with uncertainty as
the essence of the administrative process. However, we still do not have
a good understanding of the sources of uncertainty, how individuals
respond to uncertainty and how organizations can design systems and
processes to support managers operating in uncertain environments (see
Otley, Chapter 6 in this volume).
Our focus on PMCS acknowledges the importance of these systems
in aligning individual and organizational goals. Accounting researchers
have devoted considerable effort to identifying the determinants of
PMCS as well as the conditions that influence their effectiveness. One
of the challenges in designing PMCS in uncertain decision contexts is
that performance measures often do not adequately capture the efforts
of managers. For example, a manager might be responsible for a division
114
Uncertainty and Designing Compensation Systems 115
where the strategic priority is to be first to the market with new prod-
ucts. There is no adequate measure that can assess managerial effort
in achieving this priority; furthermore, desired outcomes have a long
time horizon. The wrong measures can lead to misdirected effort and,
worse, fraudulent behaviour that is costly for the firm and the individ-
uals within it. Such behaviour also influences the efficient functioning
of the market and hence has wider implications for societys well-being.
The consequences of Enron, Worldcom and, more recently, the global
banking crisis offer a pertinent illustration of the economic and social
consequences of poorly designed PMCS.
Our review incorporates research that examines how both contex-
tual and individual level variables influence PMCS, and conceptualize
uncertainty broadly to capture a variety of contextual factors. Otleys
definition in Chapter 6 (p. 83) is useful as he refers to uncertainty as a
lack of ability to predict what the future will hold, for good or ill ... and
involves an inability to forecast the likely consequences of such events.
This definition is consistent with early work of Galbraith (1977) and
Thompson (1967) who argued that uncertainty arises due to incomplete
information about processes required in transforming work into desired
outcomes and/or where there is ambiguity about what those desired
outcomes might be. In chapter 6, Otley sharpens this definition by recog-
nizing that uncertainty is not a fixed property of the external world (i.e.,
external to the individual) but rather a property of individuals or groups
of individuals. In other words, one individual can interpret a particular
organization context quite differently from another and will respond
accordingly. That is not to say that particular contexts wont make it
more or less challenging to predict the future but that the ability of indi-
viduals to manage under conditions of uncertainty will differ.
We examine those empirical studies concerned with the challenge
of designing PMCS in organizations faced with uncertainty. Our objec-
tive is to evaluate the current state of knowledge about the influence of
uncertainty on PMCS, and to try to make sense of what we have learned
about PMCS in complex settings. Two filters are used to narrow the scope
of our review. First, we aim to extend the Merchant et al. (2003) review
of incentive compensation systems by including only papers published
between 2003 and 2013.1 Second, we differentiate our review from that
of Franco-Santos et al. (2012), who reviewed the consequences of PMCS,
by including only those empirical studies that examine uncertainty as a
determinant of PMCS. Our focus on PMCS as the dependent variable is
also mindful of the concerns expressed in the literature with models that
include performance as the dependent variable.2 All studies that fit our
116 Margaret Abernethy and Julia Mundy
parameters regardless of their theoretical approaches or research method

are included. Our focus on uncertainty is a response to Otleys call in
Chapter 6 (p. 95)for researchers to develop better ways of describing
(and even quantifying) likely sources of uncertainty and their possible
impacts on behaviour, in particular how it relates to the design and
use of PMCS. This chapter is structured as follows. We first identify the
parameters that enable us to narrow the scope of papers reviewed. We
then select those papers that treat PMCS as a dependent variable, and
provide the results of our analysis. Our concluding section provides a
summary of our analysis and suggests some ideas for future research.
Parameters for inclusion in the review
Research published between 2003 and 2013 in the following accounting

journals is included: Accounting Organizations and Society, Contemporary
Accounting Research, Journal of Accounting and Economics, Journal
of Accounting Research, Journal of Management Accounting Research,
Management Accounting Research and The Accounting Review.3 We are
interested in organization-wide PMCS and include empirical studies
at the individual, department, business unit and firm level of anal-
ysis. Studies that examine different types of performance measures
and reward systems are included. We define reward systems widely to
include pecuniary, non-pecuniary (for example, praise, promotion, non-
cash awards), or a mixture of both (for example, promotion to a higher
salary scale). Most of the studies examine performance measurement
choices in incentive contracts rather than the nature of the contract
itself (for example, percentage of equity options in the contract). This is
not surprising given it is the choice of performance measure that is most
relevant to accounting researchers.
Our first step was to identify studies that examine uncertainty directly
(i.e., task uncertainty, environmental uncertainty) and where it is
clear in the theoretical arguments that the researchers believe that the
phenomena of interest (e.g., information asymmetry, strategy) creates
uncertainty for decision-makers when evaluating managerial perform-
ance and/or designing PMCS.4 Due to the numerous definitions of
constructs, we worked systematically through the journals, reading the
titles and abstracts of each article in order to eliminate those that were
not relevant, before examining the remaining articles in greater detail
(Euske et al., 2011).
Based on these broad parameters we identified 91 papers focussing on
uncertainty and PMCS; this was narrowed down to 30 papers that treat
uncertainty as a determinant of PMCS. This chapter includes details of

these 30 studies.
Theoretical perspectives
This section provides a brief overview of the theoretical approaches that

inform the studies included in this chapter, and indicate how uncer-
tainty is conceptualized in each. Appendix A provides the full details for
each paper and Table 8.1 categorizes each paper according to the type of
uncertainty and dimension of PMCS studied.5
Standard classical economic theory aims to examine changes in

human behaviour as a direct response to changes in economic
stimuli; namely rewards. Performance measurement and incentive
contracts are viewed in this literature as a means to achieve greater
goal congruence between agents and principals. Information asym-
metry often underpins uncertainty in these studies; it increases when
tasks are complex as principals have incomplete knowledge about
the work performed and thus cannot monitor if agents are directing
their efforts optimally. Managers must therefore incentivize agents
to encourage them to direct their efforts to desired actions. There are
other sources of uncertainty such as interdependencies among the
tasks performed by agents, such that the principal cannot be certain
of the unique contribution made by each agent. Uncertainty also
derives from factors such as strategy, risk and competition.
Psychology focuses on how factors such as perceptions, beliefs, cogni-
tive biases and feelings influence individual attitudes and decisions.
Studies drawing on these theories treat uncertainty as an outcome
of inherent human traits. Uncertainty is present when individuals
lack the requisite information, knowledge or skills to undertake
a task. Complex decision settings create uncertainty for managers;
they simply cannot efficiently process the information required for
effective decision-making due to cognitive limitations. In addition,
they bring to the decision-making process their own preferences and
personal traits. Together, these affect an individuals ability to eval-
uate the performance of subordinates. Many of these studies examine
the outcome of PMCS and thus few are represented in our review.6
Behavioural economics is a theoretical approach that investigates
the cognitive and emotional factors that influence economic deci-
sion-making. Its foundations are based in economics but the models
developed draw on insights from psychology and social psychology.
Uncertainty is derived from both economic and psychological foun-

dations (e.g., information asymmetry, cognitive biases, etc.).
Organizational theory, which traditionally drew on sociology, was orig-
inally concerned with examining competing theories of organization
design. Much of what we call contingency research in the accounting
literature was based initially on organization theory. Uncertainty in this
category of papers derives from economic and other environmental
factors, as well as from firm-specific considerations such as innovation,
interdependencies, competition, strategy and risk.
Based on the full set of 91 studies, we identify 14 different forms of

uncertainty.7,8 These categories of uncertainty are used to classify the
different forms of uncertainty captured in the set of papers reviewed in
this chapter. Table 8.1 includes only those eight categories of uncertainty
Table 8.1 Uncertainty as a determinant of performance measurement and

compensation systems9
PMCS Design and Use (DV)
A B C D
Choice of
performance
measure/ Subjectivity/
Type of Uncertainty incentive Discretion Use/ Other
(IV) contract in use importance dimensions
Contextual
Environmental HassabElnaby Cavalluzzo
uncertainty et al. (2005) & Ittner
OConnor et al. (2004)
(2006)
Competition Evans III et al. Hansen & Van
(2010) der Stede
Hansen & Van der (2004)
Stede (2004)
OConnor et al.
(2006)
Strategy Dekker et al Hansen & Van Dekker et al
(2013) der Stede (2013)
Hansen & Van der (2004) van Veen-
Stede (2004) Lillis & van Dirks (2010)
HassabElnaby Veen-Dirks
et al. (2005) (2008)
Malina & Selto
(2004)
Ittner, Lambert &
Larcker (2003)
Table 8.1 Continued
PMCS Design and Use (DV)
A B C D
Choice of
performance
measure/ Subjectivity/
Type of Uncertainty incentive Discretion Use/ Other
(IV) contract in use importance dimensions
Risk Evans III et al. Bol et al. (2010)

(2010)
Evans III et al.
(2006)
Pizzini (2010)
Interdependencies Abernethy et al. Gibbs et al. Abernethy van Veen-
(2004) (2004) et al. (2010) Dirks (2010)
Bouwens & van Hansen & Van
Lent (2007) der Stede
Gerdin (2005) (2004)
Hansen (2010)
Hansen & Van der
Stede (2004)
Pizzini (2010)
Task complexity Evans III et al.
(2010)
Evans III et al.
(2006)
Noise in performance Grabner & Moers Ittner et al. Bol & Moers
measures (2013) (2007) (2010)
Ittner, Larcker &
Meyer (2003)
Krishnan et al.
(2005)
Woods (2012)
Information Abernethy et al. Abernethy
Asymmetry (2004) et al. (2010)
Individual level traits
Cognitive biases Bol (2011) Cavalluzzo
Bol & Smith & Ittner
(2011) (2004)
Choi et al. (2012)
Ding & Beaulieu
(2011)
Vera-Muoz et al.
(2007)
that appear in our group of 30 papers. As can be seen from Appendix

A, economics or behavioural economics comprise the most commonly
used theoretical perspectives. Together, Appendix A and Table 8.1 indi-
cate that studies in these two categories have also investigated the largest
number of different forms of uncertainty. Interdependencies are associ-
ated mostly with studies using an economics or organizational theory
approach. Strategy is most commonly identified with an organization
theory approach. Most types of uncertainty are associated with at least
two different theoretical perspectives.
Appendix A also indicates that archival and survey data are the major
research methods used to examine uncertainty as a determinant of
PMCS. There are relatively few experiments or field studies that fit the
criteria for inclusion in this review.
Analysis
This section presents the results of our analysis. Table 8.1 includes all
studies classified by type of uncertainty and the PMCS dimension.
Where a study includes more than one type of uncertainty or examines
more than one dimension of PMCS it is included in the relevant cell.
Given the multiple ways in which PMCS have been defined and opera-
tionalized, we take some licence in classifying the PMCS of interest in
each empirical study.
Dimensions of PMCS and uncertainty

We first examine how uncertainty influences each dimension of the
PMCS. Column A in Table 8.1 includes those studies that empirically
examine the choice of performance measures and incentive contracts.
Column B focuses on the way in which performance measures are used
(e.g. subjectively). Column C includes those studies that examine the
extent to which performance measures are used to evaluate perform-
ance or the intensity of the use.10 And Column D includes dimensions
of PMCS that cannot easily fit into our other columns. Each column is
discussed in turn.
Choice of performance measure and/or incentive contract (Column A)

Various typologies are used in the literature to describe perform-
ance measure choices. Some studies distinguish between financial/
non-financial measures; aggregated/disaggregated measures; objec-
tive/subjective measures. In some cases, disaggregated measures are
separated into financial and non-financial (for example, Bouwens
& Lent, 2007). Empirical findings indicate that competition,

strategy, task characteristics and interdependencies are associated
with the weight placed on non-financial, disaggregated or subjec-
tive performance measures, objective and/or the type of incentive
contract (Bouwens & van Lent, 2007; Dekker et al., 2013; Evans
III et al., 2010; Hansen, 2010; HassabElnaby et al., 2005; Malina &
Selto, 2004; OConnor et al., 2006). Together, these studies provide
evidence that non-financial, subjective and/or disaggregated meas-
ures can mitigate the effects of uncertainty. These measures are
viewed as informative because they provide incremental informa-
tion over and above what is provided by financial measures. There
are some ambiguities in the findings. For example, Abernethy et al.
(2004) demonstrate that the weight placed on summary meas-
ures is both increased and decreased depending on the nature of
interdependencies.
Three studies examine the influence of uncertainty on the design of
the incentive contract itself, that is, where the design does not relate
to the choice of measure. Ittner et al. (2003a) find that firms oper-
ating in new economy industries, in which strategies are unproven
and therefore more uncertain, are more likely to rely on equity grants
than cash compensation. Pizzini (2010) finds that, when faced with
higher risks, group-based physician practices are more likely to rely
on group-based incentives. In a similar setting, Evans III et al. (2006)
show how greater risk reduces the likelihood that specialist physicians
will be subject to (noisy) cost measures.
Subjective use of PMCS (Column B) Uncertainty increases the use of
subjectivity in PMCS. Interdependencies between departments lead to
greater use of subjectivity in incentives, either as a means to encourage
and reward cooperation between departments or to offer employees
insurance against the noise in performance measures created by the
actions of other departments (Gibbs et al., 2004). Subjectivity is also
used in different ways to mitigate the effects of uncertainty in target
setting and evaluation processes. Ex ante, evaluators are more likely to
make subjective assessments in their choice of measures (Choi et al.,
2012), or to reduce targets when managers face higher risk (Bol &
Smith, 2011; Woods, 2012,) or to compensate for lack of information
(Grabner & Moers, 2013; Vera-Munoz et al., 2007). Ex post, they adjust
output measures for reasons including cognitive bias, incomplete
information or to compensate managers for uncontrollable outcomes
(Bol, 2011; Bol et al., 2010; Ding & Beaulieu, 2011; Ittner et al., 2003b;
Krishnan et al., 2005).
Intensity or importance of PMCS (Column C) Several studies examine the

relation between uncertainty and the factors that influence the impor-
tance of PMCS and/or the intensity of use. Ittner et al. (2007) demon-
strate that increased noise in performance measures is more likely to
lead to less emphasis on performance-based pay because it reduces the
informativeness of the measures. In contrast, firms adopting mixed
strategies simultaneously are more likely to increase their reliance on
incentives as a way of dealing with multiple objectives (Dekker et al.,
2013). The van Veen-Dirks (2010) study demonstrates the influence
of strategy, technology and interdependence on the importance of
financial and non-financial measures for performance evaluation vis a
vis rewarding performance. Hansen and Van der Stede (2004) provide
evidence that competitive environments reduce the role of budget
information for performance evaluation as well as limiting the useful-
ness of rolling budgets due to higher uncertainty and greater levels of
uncontrollable risk.
Other dimensions of PMCS (Column D) Cavalluzzo and Ittner (2004)
investigate the factors that hinder the development of performance
measures. Underpinning some of those factors are measurement
difficulties due to the nature of the work or tasks performed; these
measurement difficulties are similar to the noise construct consid-
ered in principal/agent models of PMCS design. Bol and Moers (2010)
examine how performance-based compensation systems become
diffused and link this to the notion of risk sharing. Their results
indicate that firms will adopt performance-based system early when
incentive benefits increase and risk sharing costs decrease. Dekker
et al. (2013) demonstrate that when firms pursue multiple strate-
gies they will increase the number of performance measures in order
to more fully capture the outcomes of these mixed strategies. They
also find that the dispersion of weights on performance measures
in incentive contracts increases under a mixed strategy approach.
Van Veen-Dirks (2010) finds some evidence that the use of PMCS for
rewarding or evaluating manager depends on interdependencies and
type of strategy pursued.
PMCS design and use under different types of uncertainty

In the previous section, we examined the influence of uncertainty
on specific elements of PMCS design or use. In the remainder of
this section, we use the information in Table 8.1 to identify those
aspects of PMCS design or use that are associated with specific types
of uncertainty.
Environmental uncertainty is a generic term for the exogenous events

that affect the firms ability to identify if outcomes are a result of a
managers actions or environmental factors. Some measures appear
to be more effective at capturing managerial performance than
others although the empirical findings are somewhat ambiguous. For
example, industry-specific factors influence the use of non-financial
performance measures (NFPM) (HassabElnaby et al., 2005), although
industry regulation leads to increased development of PMS but is not
associated with greater accountability or use of performance data
(Cavalluzzo & Ittner, 2004). Political constraints are associated with a
reduced reliance on objective measures but an unexpected increase in
the use of incentives (OConnor et al., 2006). Contrary to theoretical
expectations, there is no association between environmental uncer-
tainty, as captured by export sales, and the use of objective PMs or
incentives (OConnor et al., 2006).
Competition increases the levels of uncontrollable risk that a firm faces
and therefore weakens the relation between effort and managerial
performance. It is associated with a reliance on both financial and
NFPM (Evans III et al., 2010) as these provide more information on
the contribution of managers. It also leads to a reduced reliance on
budgets for performance evaluation (Hansen & Van der Stede, 2004).
OConnor et al. (2006) use a Chinese sample of SOE firms to study
whether increasing competition due to liberalization forces influences
the use of objective performance measures. They find, however, that
political forces negatively mediate this relation.
Strategy is a critical determinant of PMCS design and use. Different stra-
tegic priorities influence the ability of a firm to predict desired outcomes
and the means of achieving these. Similarly, the time horizons of
achieving strategic priorities can vary. These factors influence the
ability to measure managerial effort and/or outcomes. Researchers find
that the complexity of strategic choices is positively related to greater
diversity in the performance measurement information used to eval-
uate and reward managers (Dekker et al., 2013; Lillis & van Veen-Dirks,
2008), to the extent of performance-related pay (Dekker et al., 2013),
to the relative importance placed on types of performance measure
attributes (Malina & Selto, 2004), to the increased weight placed on
non-financial measures (HassabElnaby et al., 2005), to the reliance on
financial measures for variable rewards (van Veen-Dirks, 2010) and to
the types of incentives on offer (Ittner et al., 2003a). Contrary to expec-
tations, the specific type of strategy appears to be important; volume
flexibility has greater salience than either product- or market-focussed
strategic choices in the design and use of PMCS (Lillis & van Veen-
Dirks, 2008).
Risk increases the extent to which outcomes are controllable by managers
and thus influences the choice of measures and incentive contracts.
Firms facing higher risks are less likely to use measures that could
cause sub-optimal decision-making by managers (Evans III et al., 2006;
2010) but more likely to rely on group-based incentives that share the
costs of risk (Pizzini, 2010). High levels of risk can also be mitigated by
allowing evaluators to adjust targets downwards so that managers are
compensated for uncontrollable events (Bol et al., 2010).
Interdependencies reduce the informativeness of performance meas-
ures by obscuring the contribution made by different individuals or
groups. Research findings indicate that interdependencies can either
increase or decrease the choice and use of PMCS. There is evidence
that as interdependencies increase performance measurement tends
to incorporate a greater use of NFPM and/or disaggregated measures
(Gerdin, 2005; Hansen, 2010; van Veen-Dirks, 2010; Bouwens &
van Lent, 2007). However, the use of divisional summary measures
(i.e. ROI, RI) declines when the focal units actions affect other divi-
sions and increases if the reverse is the case (Abernethy et al., 2004).
Interdependencies also increase the reliance on group-based incen-
tives (Pizzini, 2010) and the use of subjective bonuses (Gibbs et al.,
2004).
Task complexity affects not only the understanding of means/ends rela-
tions but also creates a common problem faced by firms as managers
are expected to perform multiple tasks, some of which are measur-
able and others which are not (Roberts, 2010). Performance measures
become noisy and their use is often problematic for evaluating and
rewarding managerial performance. In line with theoretical expecta-
tions, the evidence indicates that task complexity is negatively associ-
ated with both the use of quality measures and the use of capitation
(fixed-fee) contracts due to the increased noise in performance meas-
ures (Evans III et al., 2006; 2010).
Noise in performance measures reduces their informativeness by obfus-
cating the relation between the outcome and the measure used to
evaluate it. Noise has a direct impact on the subjective use of PMCS.
For example, evaluators are more likely to rely on subjective measures
when objective measures do not provide sufficient information or
as a means to deal with unexpected performance (Grabner & Moers,
2013; Woods, 2012). However, noise in PMs can also cause managers
to make errors of judgement or to behave dysfunctionally (Krishnan
et al., 2005; Ittner et al., 2003b; Woods, 2012). Noise in performance

measures also influences firms decisions to adopt and rely on PMCS.
Some studies find that a performance-based system is more likely to
be adopted and used when measures are informative, that is, when it
enables an evaluator to isolate the outcomes that are the result of an
agents performance (Bol & Moers, 2010; Ittner et al., 2007), but other
evidence indicates that managers do not always adopt less noisy meas-
ures (Ittner et al., 2003b).
Information asymmetry occurs when subordinates possess information
that is not easily accessible by their managers. Accurate performance
measurement is therefore hindered by a lack of information about
either effort or outcomes. It is typically included as a control vari-
able (see Abernethy et al., 2010). In one of the few papers exam-
ining the direct effects of information asymmetry, Abernethy et al.
(2004) hypothesized that it would decrease the reliance on divisional
performance measures. However, after controlling for decentrali-
zation, information asymmetry was not significantly related to the
choice of measure.
Cognitive biases cause managers to ignore or misinterpret the informa-
tion provided by performance measures and can thus lead them to
make sub-optimal decisions. For example, managers biases can lead to
compression and leniency in performance ratings (Bol, 2011), upwards
adjustments to ratings in adverse conditions, but not corresponding
downwards adjustments in favourable conditions (Bol & Smith, 2010),
inappropriate surrogations for measures (Choi et al., 2012), and diffi-
culties in selecting and interpreting performance metrics (Cavalluzzo
& Ittner, 2004; Vera-Munoz et al., 2007). However, cognitive biases
can be mitigated by the use of financial incentives when managers are
required to undertake simple evaluations (Ding & Beaulieu, 2011).
Discussion and concluding comments
The objective of this chapter was to synthesize empirical research stud-

ying the design and use of PMCS in complex settings, specifically when
decision-makers face uncertainty. We analysed 30 papers in the PMCS
literature that investigate the influence of uncertainty on PMCS, and draw
several conclusions from our analysis. Based on our set of selected jour-
nals we identified 91 papers that focussed on uncertainty and PMCS but
only 30 papers investigating uncertainty as a determinant of PMCS. This
is perhaps surprising given the interest from both researchers and practi-
tioners on the optimal design and use of PMCS in a variety of contexts.
We note also the dominance of archival and survey methods in the selec-
tion of papers studied here. The full set of papers (i.e., 91) included many
experimental studies but only a limited number of case and field studies.
Many experimental studies focus on outcomes of PMCS, which enhance
our understanding of the consequences of PMCS, whereas case studies
are particularly useful in providing greater contextualization of PMCS.
Overall, the findings provide complementary evidence about the design
and use of PMCS under specific types of uncertainty. Although findings
are largely consistent across a variety of research settings and countries,
some studies point to differences that warrant further investigation. It
appears that different forms of uncertainty are more salient within some
industries and countries than within others. However, there is consistent
evidence that uncertainty is a significant determinant in the design and
use of PMCS.11 We find that uncertainty leads to increased adoption
and development of PMCS (e.g. development of more diverse measures,
introduction of non-financial measures), although its effects on the use
of PMCS are less predictable. For example, our analysis shows how some
forms of uncertainty have been found to lead to an increase in the diver-
sity and type of performance measures used while others have the opposite
effect. Similarly, noise in performance measures is associated with a greater
use of NFPM, whereas choices related to strategy and interdependencies
can lead to different effects. Uncertainty can also impinge on managers
ability to choose the right measures or to make evaluations based on the
available information. Despite the challenges involved in the design and
use of PMCS the evidence suggests that the choice of measure and way
in which those measures are used can mitigate some of the unintended
consequences when firms face increasing levels of uncertainty.
We identify very few papers that investigate simultaneously the effects
of different forms of uncertainty on PMCS. However, when viewed
together, some of the findings potentially give rise to incompatible
choices. This indicates the importance of understanding how different
forms of uncertainty might interact to influence PMCS in different
ways. For example, if competitive environments are not conducive to
the use of budgets in performance evaluations, then it is not clear how
firms pursing a cost leadership strategy can balance this against a focus
on tight cost control. Task complexity is associated with a reduced reli-
ance on quality measures, but this might conflict with the greater use
of NFPM in competitive environments. Firms with a high level of inter-
dependencies between departments must balance the relative merits of
aggregated and disaggregated measures, while simultaneously consid-
ering the increased use of NFPM in such situations.
Strategy is another area where firms may be required to make trade-

offs. Complex strategic choices necessitate careful consideration of
those elements of PMCS that are most likely to enable managers to deal
with multiple and potentially conflicting priorities. Strategy is often
described as the critical determinant of all organization design choices;
if this choice in turn influences the operating context of the firm what
trade-offs might we expect in the choice of PMCS? And what are the
decisions surrounding such choices? We find no studies that investigate
the relative importance of different forms of uncertainty in relation to
PMCS; for example, is there a hierarchical order for the factors influ-
encing PMCS? These gaps indicate opportunities for further research.
It is reasonable to assume that firms operating in complex and chal-
lenging environments are forced to make trade-offs in their decisions
about PMCS, but we know little about the nature of the choices they
face, nor how they manage them. Some of these choices relate to other
organization design choices; for example choices relating to the delega-
tion of decision rights or the use of selection and promotion.
Although we do not in this chapter include consideration of alterna-
tives to PMCS for controlling behaviour, recent research (e.g., Campbell,
2012) provides a number of opportunities to examine how uncertainty
influences the firms choice to invest in selection processes rather than
PMCS. There are also no studies of which we are aware that examine
how innate individual level characteristics might mitigate the rational
design choices a firm makes in response to uncertainty. Recent studies in
financial accounting are unpicking the black box and examining how
CEO characteristics such as integrity, overconfidence and testosterone
levels influence accounting choices (Jia et al., 2013, Dikolli et al., 2013,
Schrand & Zechman, 2012). It is possible that some of these same traits
might be significant moderators in the relation between subjectivity in
PMCS use and uncertainty or indeed other elements of PMCS.
Our analysis also indicates that there are a number of dimensions of
PMCS that have received little attention. A noticeable gap in Table 8.1 is
the dimension of subjectivity/discretion in the use of PMCS. Empirical
research has only examined the impact of risk, interdependencies and
noise. Noise in performance measures captures numerous dimensions of
a firms operating environment, but its generic nature does not enable us
to inform practice as to which dimensions are most influential. Strategy is
argued to influence other organization design choices (Milgrom & Roberts,
1995) but we know little about its impact on subjectivity in performance
evaluation or reward decisions. There are other dimensions of PMCS that
also warrant further consideration. For example, how does uncertainty
influence the type of information used to set performance targets? When

firms face an increasingly complex environment, do they use more
external and forward-looking information in setting performance targets?
Similarly, there is very little research on how PMCS change in the context
of uncertainty. Do firms undergoing crises (e.g. global financial crisis)
change their emphasis on PMCS or change the type of measures used to
evaluate managers; do they try to control behaviour through tighter use
of these systems in times of crisis in order to manage uncertainty? And are
there other dimensions of uncertainty not captured in our analysis, for
example, volatility in market conditions or stages of growth?
The studies that we review also use different levels of analysis; most
archival work draws on firm level data, whereas surveys typically use
data from middle-level managers. Given the nature of experimental
designs, the focus in these studies is at the individual level although
inferences are generally drawn to the managerial level. Thus, we do not
know if the type of PMCS at the top level percolates down to the oper-
ating level and whether design choices are made centrally or delegated
to the different levels of management. Does uncertainty influence these
decisions or is there simply a contagion effect? The wide-spread use of
more sophisticated statistical modelling tools enables us to look at data
obtained from multiple levels within a firm.
Organizations face many decisions in their design and use of PMCS.
These decisions are complicated and influenced by the nature of the
uncertainty that organizations face. Despite the pervasive nature of
uncertainty and its critical impact on organizational choices, our review
of the literature indicates that it remains an under-researched element
in academic debates around PMCS design and use. Our aim in writing
this chapter was to summarize what we have learned to date and to
provide a basis for the development of further research in this area. We
provide a limited but pertinent number of research ideas that require
further thought. Although organizations continue to make fundamental
choices in their design and use of PMCS, our findings indicate that there
remains much that we do not yet fully understand about the impact of
uncertainty on the design and use of PMCS. There is much scope for
researchers to advance our understanding of this important topic.
Notes
1. We acknowledge the financial support provided by the Department of
Accounting, University of Melbourne and also the most valuable research
assistance provided by Estha Gondowijoyo. We also thank the editors for
their insightful comments.We attempt to be as thorough as possible in iden-

tifying studies that meet our criteria for inclusion. We apologize to those
authors whose papers we may have inadvertently overlooked.
2. See Ittner & Larcker (2001) for a discussion of the empirical problems that
can arise.
3. We include these journals as they include what are considered to be the top
five core accounting journals and the two leading journals in management
accounting.
4. For completeness, we also included papers where uncertainty may not be the
focal construct of interest but is treated in some form as a control variable
(e.g., volatility, growth, risk) as there are other studies that use these same
variables as the test variable.
5. While we used at least two researchers to classify the papers, it is possible
that the theoretical perspective is mis-specified, particularly when multiple
theories are part of the theoretical arguments.
6 There is a growing body of research drawing on social psychology, which
enables researchers to adapt the traditional principal/agent model. These
studies would meet the parameters for selection in this chapter but are
currently in working paper format. Social psychology is also used in the
broader PMCS literature to examine the effects of social norms, identity or
culture on individual or group-level performance (i.e. as outcomes of PMCS
rather than as determinants).
7. The different forms of uncertainty are environmental uncertainty, competi-
tion, strategy, risk, interdependencies, task complexity, noise in performance
measures, information asymmetry, cognitive biases, growth, innovation,
creativity, psychological traits and socio-psychological preferences.
8. Although it is possible to create broader classifications of uncertainty, we
primarily use the constructs as defined by the researchers. It would have
been possible, for example, to consider creativity as introducing noise in
the performance measure because of the inherent subjectivity in a creativity
measure.
9. Several studies include more than one dimension of uncertainty either as a
test variable or as a control variable. Similarly, a number of studies include
more than one dimension of PMCS design and use. Where this occurs, they
are included in more than one cell in the table.
10. We make a distinction between studies that examine extent or importance
of use from those focussed on the different types or choices of performance
measures. Studies in Column C focus on the extent or importance of use
of the performance measurement system. For example, Hansen & Van der
Stede (2004) focus on the relative importance of budgeting information for
performance evaluation rather than the choice of measures.
11. We, as academics, are fully aware of the problems associated with PMCS
design. Teaching and research are tasks where we have little under-
standing of the transformation process and the measures used to capture
our performance in both teaching and research are incomplete (i.e. do
student satisfaction ratings taken at the end of semester scores capture
learning? Or does a publication in a top tier journal in the current year
measure the impact of ones research?). Both activities have long-term
horizons.
Appendix A: Summary table of the studies included in the review
Research
Author Year Journal Theoretical base Method
Abernethy, Bouwens, & van Lent 2010 MAR organizational survey

theory
Abernethy, Bouwens & van Lent 2004 TAR economics survey
Bol 2011 TAR multi-theory archival
Bol, Keune, Matsumura & Shin 2010 TAR behavioural archival
economics
Bol & Moers 2010 AOS multi-theory survey
Bol & Smith 2011 TAR behavioural experiment
economics
Bouwens & van Lent 2007 JAR economics multi-method
Cavalluzzo & Ittner 2004 AOS multi-theory archival
Choi, Hecht & Tayler 2012 TAR psychology experiment
Dekker, Groot, & Schoute 2013 JMAR organizational survey
theory
Ding & Beaulieu 2011 JAR behavioural experiment
economics
Evans III, Kim & Nagarajan 2006 TAR economics archival
Evans III, Kim, Nagarajan, & Patro 2010 JMAR economics survey
Gerdin 2005 AOS organizational survey
theory
Gibbs, Merchant, Van der Stede & 2004 TAR behavioural survey
Vargus economics
Grabner & Moers 2013 JAR economics archival
Hansen 2010 MAR economics field study
Hansen & Van der Stede 2004 MAR organizational survey
theory
HassabElnaby, Said, & Wier 2005 JMAR economics archival
Ittner, Larcker, & Pizzini 2007 JAE economics survey
Ittner, Lambert & Larcker 2003 JAE economics archival
Ittner, Larcker, Meyer 2003 TAR multi-theory multi-method
Krishnan, Luft, & Shields 2005 TAR multi-theory experiment
Lillis & van Veen-Dirks 2008 JMAR organizational survey
theory
Malina and Selto 2004 MAR organizational field study
theory
OConnor, Deng & Luo 2006 AOS multi-theory survey
Pizzini 2010 TAR behavioural archival
economics
van Veen-Dirks 2010 AOS multi-theory survey
Vera-Muoz, Shackell & Buehner 2007 CAR psychology experiment
Woods 2012 AOS multi-theory multi-method
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9
Controlling Creativity and
Innovation: Paradox or Necessity?
Jan Pfister
Innovation is seen as a central driver of economic growth and sustain-

ability both in the corporate and the public worlds. Managing innova-
tion is challenging as there is much uncertainty involved in forecasting
the organizational future if no innovation occurs or some specific inno-
vations are pursued. In this regard, research on management control
systems (MCSs) shows some disagreement about how far formal control
procedures enable or hinder innovation. It is argued that formal control
and bureaucracies constrain employees autonomy including their capa-
bility to be creative. On the contrary, more recent research recognizes
the usefulness of formalized MCS for decision-making along the innova-
tion process, appreciating the necessity of controlling innovation.
In light of this controversy, this chapter aims to explore some of the
challenges and possibilities for MCS in the quest of controlling creativity
and innovation. The contribution of the chapter is to contextually illus-
trate that innovation entails various performances that fit differently
to particular contexts, thereby encouraging further research to theoreti-
cally and empirically explore the wide range of roles that MCSs have in
enabling creativity and innovation. In so doing, the chapter compares
an innovation-driven technology corporation with a highly regulated
financial services provider. Both these large multinational firms set
innovation as a high priority in adapting to the uncertainties of their
emerging business environments. Nonetheless, the way they approach
it differs fundamentally, indicating the wide range of MCS design and
operation that can occur in different innovation contexts.
The chapter is structured as follows. The next section briefly describes
some aspects of creativity and innovation as performative states. Then,
the role of MCS is discussed from both a narrow and a broad perspec-
tive. The subsequent section exemplifies how the two cases approach
134
Controlling Creativity and Innovation 135
innovation from a control perspective, in particular how they identify,

co-create with or integrate innovative start-ups. Drawing on this data,
these contrasting examples are discussed and some open questions for
future research are set out.
Creativity and innovation as performative states
There are many definitions and viewpoints about creativity and inno-
vation. Referring to Fagerberg (2005) creativity is here understood as
the ability to imagine and source visionary new ideas and inventions,
and innovation as the first attempt to implement those incremental or
radical novelties in practice. Creativity and innovation are both asso-
ciated with how humans work together, how the work environment
inspires new ideas and how it shapes the ability to execute those ideas
(Adler & Chan, 2011; Amabile et al., 1996). Although creativity has rele-
vance along the whole innovation process, it is said to be particularly
crucial at the beginning of the idea creation stage (Davila et al., 2009b).
From a control perspective, the distinction between creativity and
innovation is important because the ability to imagine, visualize or
identify new ideas roots partially in different individual and organiza-
tional requirements than the execution of those ideas in practice (e.g.,
Davila & Ditillo, 2013). In this regard, social psychological research has
shown that creativity is associated with environmental conditions that
enhance intrinsic motivation. Creativity relates to personality traits such
as freedom, discretion, independence and self-determination (Barron &
Harrington, 1981). Furthermore, organizational environments where
employees autonomy on task strategies is reduced (to the extent that
it hampers experimentation) affect intrinsic motivation and creativity
negatively (Amabile, 1983).
With regard to innovation, the traditional R&D view has been that
it should be protected within the organization. However, during the
last decade the view that companies should systematically open up
the innovation cycle has received increasing attention in practice and
research. Organizations use external ideas as well as internal ideas,
and internal and external paths to market, in order to advance their
technology (Chesbrough, 2003). For example, so-called inbound proc-
esses refer to the integration of suppliers, customers and other external
knowledge sources (e.g. buy or license patents). These activities require
an innovation network, the ability to source outside knowledge, and the
financial strength to acquire knowledge carriers (Piller & Walcher, 2006).
In contrast, outbound processes are concerned about benefitting from
136 Jan Pfister
internal ideas by selling or revealing them to the market such as selling

intellectual property or multiplying technology. The coupled processes
combine in- and outbound processes in ecosystems and encompass
co-creation with partners via alliances, cooperation and joint ventures
(Faems et al., 2010).
Taken together, companies require environmental conditions that
enhance intrinsic motivation and facilitate employees endeavours to
contribute creatively. Furthermore, innovation has become increasingly
interdependent across company boundaries where creative ideas are
sourced from outside or where specific components in the execution are
co-created with external partners.
Control as a condition within which creative and

innovative performance occurs
Interpreting MCSs in their broadest sense, they encompass all organi-

zational arrangements that direct employees towards organizational
objectives and shape the organizational work environment accordingly.
Such a broad view is considered in performance measurement frame-
works that integrate formal systems on vision, strategy, objectives and
measurement with the cultural aspects that reflect the context and are
inherent in the design and use of such MCSs (Ferreira & Otley, 2009;
Merchant, 1985; Otley, 1999). In this vein Malmi and Brown (2008) refer
to the notion of the control package to acknowledge that several formal
and informal MCSs often work loosely together without management
being necessarily fully aware of their combined effect.
While the holistic view of control is important for creativity and inno-
vation (Granlund & Taipaleenmki, 2005; Scheytt & Soin, 2005), a more
controversial debate has been about how far formal MCSs such as the
design and use of performance indicators are recognized as facilitators
in the innovation process. Formal MCSs have long been seen as stifling
innovation, mainly caused by a narrow view of accounting information,
recognizing its use only for diagnosing deviations from plans (Anthony,
1965). A statement from Ouchis (1979, p. 844) seminal paper on organi-
zational control mechanisms reflects this early viewpoint:
... suppose that we are running a research laboratory at a multibil-

lion dollar corporation. We have no ability to define the rules of
behaviour which, if followed, will lead to the desired scientific break-
throughs which will, in turn, lead to marketable new products for
the company. ... Effectively, we are unable to use either behaviour
or output measurement, thus leaving us with no rational form of

control.
Ouchis argument suggests that the only suitable form of control in

uncertain areas, such as R&D, is what he labels clan control a form
of organizational control that builds on value congruence and high
commitment among employees, requiring low degrees of formality. As
the process of innovation is inherently uncertain and ambiguous, it
seems impossible to constrain employees in their actions or prescribe
outcomes. Rather, employees should be intrinsically motivated and, by
being so motivated, strive to explore different paths, thereby achieving
innovations for organizational long-term success. Careful selection
of employees, continuous training, reinforcing communications and
celebrations to internalize the values are at the heart of a clan. Several
empirical studies support this perspective and demonstrate that in R&D
environments, as compared to more conventional firm environments,
the relevance of budgets decreases (Rockness & Shields, 1984) and
regular, personal and intensive contact is much more important than
formal systems (Abernethy & Lillis, 1995, p. 244).
Nonetheless, this restrictive interpretation of formal MCSs in rela-
tion to innovation has been overhauled. One reason is the increased
recognition of non-financial performance indicators (e.g. number of
patents, number of new product introductions, customer satisfaction) in
practice. Although such indicators have been used before, through the
development and publicity of the Balanced Scorecard (Kaplan & Norton,
1992) and similar tools in the 1990s, organizations started to combine
financial and non-financial indicators more systematically, generating
leading and lagging information for decision-making to enable the
variation, selection, retention and diffusion of innovation initiatives
(Davila, 2000; Davila et al., 2009b; Davila & Wouters, 2004; Hertenstein
& Platt, 2000; Kaplan, 2009).
For example, the more flexible use of accounting information has been
reflected in Simons levers of control framework (Simons, 1990, 1995):
Although in the normal course of business, managers are likely to use the
systems diagnostically, if they face situations of strategic uncertainty such
as decisions about innovation, a more interactive use of the specific system
is appropriate. Similarly, Adler and Borys (1996) notions of enabling and
coercive bureaucracies have contributed to this strand of research, raising
the issue how positively or negatively employees perceive specific control
mechanisms in the fulfilment of organizational tasks such as innovation
(Ahrens & Chapman, 2004; Tessier & Otley, 2012).
138 Jan Pfister
Clearly, the broadening of the spectrum of indicators as well as the

shift in appreciating accounting information not only as a control
device but also as a valuable information source for decision-making
paved the way for a more central role of formal MCSs in uncertain and
knowledge intense areas (Bisbe & Otley, 2004; Davila et al., 2009b;
Ditillo, 2004; Jorgensen & Messner, 2010). More recent research shows
that as size increases, entrepreneurial firms rely more on formal systems
in new product development (Davila, 2005; Davila et al., 2009a) and
adoption of systems relates also to legitimization with external parties
(Davila et al., 2009a).
Since performance indicators can only provide incomplete informa-
tion, managers often look for complementary sources to inform their
decision-making such as informal channels (Preston, 1986), strategic
priorities (Jorgensen & Messner, 2010) and meetings (Ahrens & Chapman,
2004). Accounting information is used rather pragmatically as one of
many information sources rather than as main representation for deci-
sion making. As such, managers can be somewhat relaxed (Jordan &
Messner, 2012) about the representational quality of indicators, inferring
to the complementary use of formal MCS with simple gut feel.
In the following section we will discuss case examples of how two
large multinational companies inject new innovations into their organi-
zations. Both companies adapted their control structure and processes
to approach their specific challenge on innovation.
Context, innovation and control: Two case examples
The two case examples are IBM and Standard Chartered. They have in
common that both are large multinational companies with a concern to
stay at the forefront of the technological developments in their respec-
tive industries. By doing so they have a particular interest in screening
the markets for suitable ideas and start-ups that could help transform,
advance and grow their business.
The cases were developed via semi-structured interviews with the
key managers responsible for the specific innovation areas in the two
companies. These interviews were recorded, transcribed and analysed
with NVivo. In addition, publicly available information complemented
the case writing.
IBM Global University Programs

The International Business Machines Corporation (commonly referred
to as IBM) is a large US-headquartered, multinational technology and
consulting corporation with more than 400,000 employees. It manu-

factures and markets computer hardware and software, and offers
infrastructure, hosting and consulting services. The core vision of the
company is to build a Smarter Planet on which it has been working with
companies, cities and communities around the world.
Parts of the execution of this vision are the Intelligent Operations
Centers for Smarter Cities that the company has been establishing and
maintaining in more than 2,000 cities. These centres enhance coor-
dination of resources and provide streamlined responses to issues on
traffic, water and power. They provide a large ecosystem which can scale
up innovative sensors, systems and big data. James Spohrer1, a Silicon
Valley pioneer and Director of the Global University Programs at IBM,
exemplifies one aspect of these centres based on weather forecasts:
We use our blue thunder super computer to do the weather model-

ling simulations down to a very very fine level so we know where the
drains are going to back up, where to send the maintenance people,
where theres threats of avalanche and landslide and all of that stuff
and if theres likely to be crisis we can send the right specialist to the
right hospitals and its all managed through this Intelligent Operation
Center. And any company or any university that develops a company
or a capability that can fit into this then we can scale it globally and
rapidly.
On average IBM acquires a 100 million dollar revenue company every

month. IBM selects its acquisitions according to whether they view the
potential to double the revenue of the acquisitions within one or two
years. Universities play a significant role within this strategy. About two
thirds of the companies that IBM acquires come out of university-based
entrepreneurial ecosystems, providing IBM the connection to a wide
range of industries such as retail, medical and education.
The IBM University Program concentrates on early stage start-ups.
Oftentimes these companies are innovative but do not have the equip-
ment and infrastructure to grow. Partnering with IBM and its platform
offers them the opportunity to scale up. The University Program there-
fore aims to increase the quantity and quality of the start-ups coming
out of universities and align them with the IBM ecosystem. Spohrer
continues:
So the best way to predict the future is to inspire the next generation
to build it better, the future already exists at universities its just not
140 Jan Pfister
well distributed, so we at IBM remember that thing [that] the univer-

sity is at the center of the city and the state, were like yeah and were
trying to create platforms for scaling up the innovation, the entre-
preneurial innovation coming out of the universities to make those,
you know, those bright university kids richer faster. And like I said we
would rather hire a failed entrepreneur, because most of them will
fail, but we would rather hire a failed entrepreneur than somebody
directly out of university.
Spohrer leads a team of about 500 people worldwide that manages a data-
base and network of 5,000 universities. The Program is facilitated through
several initiatives. For example, within their Global Entrepreneurship
Program, IBM makes software freely available to start-ups that generate
up to one million revenues and are less than five years in business. They
also organize so-called Smart Camps around the world. If a start-up is
selected to participate in that they can obtain additional funding for free
advertising and venture capital and also might get integrated into IBMs
customer accounts.
Interestingly from a control perspective, IBM applies rigid and detailed
formalized processes to select these start-ups. These evaluations include
internal and external indicators, the research skills of the university
as well as the universitys connection to IBM, for example in terms of
providing employees or being a customer of IBM itself. As Spohrer points
out, at the core of this control process is a sophisticated algorithm that
has been developed based on large data and experience:
Well the hidden part is what are these 28 variables and the exact
nature of the algorithms, we keep that very close to our chest, but we
let people know this is the way, you know, this is what were doing
so help us, you know, because thisll help you. If you have a start-up,
if youre a university and you can produce start-ups and align with
us this is what were trying to do, were trying to basically help your
entrepreneurs coming out of your university get stinking rich. And
when theyre rich, theyll give back to the university and youll have
a brand new reputation so whats not to like about this model, its
just, its basically service science, service is the application of knowl-
edge for mutual benefit.
IBM introduced the term service science which entails the applica-
tion of rigorous scientific methods to the study of business and soci-
etal systems, thereby designing and implementing complex tasks that
provide value for others. This control philosophy roots in the assump-
tion that one can develop the optimal set of equations and algorithms
upon which innovation can be formally steered. IBMs CFO clarified at
public speeches that these 28 variables are at the centre of their decision-
making and if applied correctly can create a sustainable winwin situ-
ation for all parties involved. Although some of the variables might be
more important than others, the formula is continuously tested in terms
of the behaviours and processes that improve the performance along
those variables. Hence, IBM has developed highly formalized procedures
to select, adapt and integrate external innovations into their business
and has designed these control processes as fit to their business envi-
ronment. This is an approach that stands in contrast to the next case
example of Standard Chartered.
Standard Chartered Studios office in San Francisco

Standard Chartered is a large UK-headquartered banking and financial
services company with more than 80,000 employees, generating most
of its profits in Asia, Africa and the Middle East. The CEO Peter Sands
views technological developments as a cornerstone of the banking and
financial services business as he anticipates several changes in the way
these services will be conducted in the near future.2 Since innovation is
high on the banks agenda, the bank identified a need to improve their
networks in Silicon Valley where many of the technological develop-
ments are established.
To respond to and engage with different emerging technologies,
the bank established the Standard Chartered Studios office in San
Francisco in 2010. While the original initiative was to support mobile
applications for banking, over time, the bank realized a broader task
set for SC Studios around the following two purposes. First, SC Studios
provides insights for the banks management about current innova-
tions and emerging technologies in the region. Second, SC Studios
proactively seeks opportunities for the bank to work with other
companies, to partner with or acquire start-ups and to provide the
bank with opportunities to engage with advanced technologies more
generally. In doing so, SC Studios interacts with a broad range of part-
ners such as venture capital groups, the start-up communities, estab-
lished companies and professional associations around Silicon Valley.
Todd Schofield3, the Managing Director of the SC Studios office, estab-
lished the group and has been in charge of the unit since its inception
in 2010, following two years of working inside the banks technology
group in Singapore:
142 Jan Pfister
Weve purposely set it up in a flexible way because our mission isnt

to grow a technology empire in the Bay Area, rather our focus is to be
very agile and very effective. Weve found we can best do this with a
small core team of very effective people. As needed we can burst our
project resourcing when there is demand, and then roll resources off
when initiatives are completed.
The SC Studios office consists of four full time employees and relies mainly
on specialist contractors. For example, they added temporary develop-
ment groups for the design of specific applications or hired consultants
and other parties on demand. SC Studios primarily works with and reports
to the Chief Information Officer (CIO) of the bank in order to provide the
required information at a relatively senior level. This information is then
used top down from the CEO-level. However, SC Studios also aims for
broad engagement outside of the IT vertical, and works with across levels
in the bank as they encounter interesting products, services, or concepts
that may be particularly useful to a business unit.
From a control perspective, SC Studios is classified as a non-banking
entity and maintains full legal/policy compliance while not needing
heavy bureaucracy and rigid standardized processes that can be typical
in other areas of the bank. SC Studios was created on the basis that the
bank is by necessity a structured and regulated institution that addition-
ally requires a pipeline of innovation insights and opportunities that
come from a wide variety of sources. Schofield explains:
SC Studios has been set up almost as a start-up within the bank.

While we ensure that we are in compliance with corporate polices, we
are given the flexibility and agile capability to engage with the Silicon
Valley ecosystem, both formally and informally. Our management
teams in turn get on-the-ground information about technologies and
trends that we are seeing, and we are able to line up a series of oppor-
tunities for the bank to adopt, integrate or invest in new technologies
that will add value to our customers and our enterprise. We want to
make sure that SC Studios is an effective group providing strong value
for the investment of the bank.
In order to maintain this kind of start-up climate, SC Studios developed

a relatively flexible process of how they work together with the CIO and
other parties in the bank:
We spend time with the business units, understanding their priori-

ties and looking at small pilots where we can help them to be more
effective. We work to be aligned with the business units to collabo-

rate on initiatives that will generate value. Were finding that this
has created a new space for exploration and experimentation that
is not around the traditional pipeline process. We can have general
discussion, see whats a good fit, and then move forward on the items
that will be the most advantageous for the bank to explore. Theres
a balance in there of how we figure it out, and things move up and
down the scale depending on the particular situation or company
that were talking with.
SC Studios uses some indicators such as the number of companies,

start-ups and other engagements they are involved with, and how many
of these initiatives filter into projects. However, compared to the previ-
ously discussed IBM example, SC Studios exemplifies a response to the
banking bureaucracy by being lightly formalized, building on much
flexibility in order to equip the bank with the required external innova-
tions and engagements from Silicon Valley and elsewhere that will bring
advantages in the long term.
Discussion
Returning to the literature at the beginning of the chapter, the two

examples (see overview in Table 9.1) reflect the competing theoretical
frames about formalization of MCS and its effects on innovation. In the
IBM example innovation is extensively managed by large scale data and
sophisticated algorithms and thereby confirms the view that MCS are
useful to support decision-making along the innovation process (e.g.,
Bisbe & Otley, 2004; Davila, Foster, & Li, 2009; Jorgensen & Messner,
2010). Although the algorithms remain a formula with all its simplifica-
tion of practice, the case reveals that gut feel in uncertain areas can be
profoundly complemented with algorithms. It also demonstrates that
IBM relies on much creativity from university-based entrepreneurial
systems. Although the Smarter Cities platform provides some constraint
to the start-ups in the sense that they need to align their business idea
to the ecosystem, in the end IBM uses its knowledge and infrastructure
to complement young entrepreneurs creativity and freedom and trans-
form their ideas into innovations. In contrast, the example of Standard
Chartered much resembles the traditional view that an overemphasis
on bureaucracy not only constrains creativity but also initiative when
employees feel the climate does not appreciate their inputs (Adler &
Borys, 1996; Ouchi, 1979). The banking environment likely leverages
144 Jan Pfister
Table 9.1 Comparison of case examples4
IBM: Management of the Global Standard Chartered: Management

Case University Programs of the SC Studios in San Francisco
Innovation How to identify and select suitable How to keep the bank at the
challenge start-ups from university ecosystems forefront of technological
around the world and integrate them innovations despite being
with IBMs Smarter Cities Intelligence remotely located from Silicon
Operations Centers Valley where many of these
trends come from
Business Formalized and well-established Formalized and well-established
environment structure; Progressive, experimental structure; Highly regulated,
and innovative business bureaucratic and relatively
IBM is an innovation company. inagile business
We pursue continuous Standard Chartereds ambition is to
transformation both in what we be the worlds best international
do and how we do it always bank. We bank the people and
remixing to higher value in our companies driving investment,
offerings and skills, in our operations trade and the creation of wealth
and management practices, and in the across Asia, Africa and the
transformational capabilities we deliver Middle East
to our clients.
MCS Use of algorithm to make decisions Use of a special and agile unit
about acquisitions of start-ups; outside the structure to flexibly
Provide start-ups an ecosystem capture the newest innovation
to scale their innovations rapidly trends and keep the bank at the
around the globe forefront of the technological
o MCS are formally integrated with developments
the innovation ecosystem of the o MCS are formally excluded
business from the highly regulated
banking bureaucracy
compliance and standard procedures and is not primarily designed to

innovate beyond incremental innovations in financial products and
services. Through establishing this special unit, the bank found a solu-
tion to direct and enable their innovations from outside the formal
structure.
Taking a broader control perspective view, the two cases illustrate that
MCSs for innovation mediate between the cultural traits of the organi-
zations and their relation to creative and innovative performance.
Through their Smarter Cities Operating Centers, IBM has developed a
strategic advantage because this ecosystem is so widely spanning around
the globe that it is difficult to imitate, not only for cost, but also in
terms of infrastructure more broadly. As the life blood of this business
model is innovation, employees are more likely interested in techno-
logical innovations themselves. The control package (Malmi & Brown,
2008) respecting the broad view of MCS (Ferreira & Otley, 2009) supports
innovation within the company, and consequently the organization is
more likely to accept and successfully apply formal control procedures
for innovation. In contrast, the type of worker attracted to the bank
is clearly different from the IBM case. By nature of the industry, this
business is rather conservative, bringing in more compliance and task-
fulfilling people that are accustomed to work with the banks proce-
dures and compliance mechanisms. Formalizing innovation within this
business would be difficult to develop as the type of employee is less
likely to be driven by technological novelties. The solution for the bank
is a comparably small investment, giving a few employees the task of
networking and feeding the global bank with information about inno-
vations. Consequently, both case examples seem to balance the context
and conditions needed for creativity and innovation to occur, but with
radically different solutions.
Conclusion
Is controlling creativity and innovation a paradox or a necessity?

Whereas the approach of Standard Chartered is primarily about ensuring
that the bank keeps up with current technological developments, IBMs
approach goes much further by building their whole business around
innovations and by forecasting how specific innovations might affect
their bottom line. Both companies have adjusted their control structures
to engage with creativity and innovation and therefore illustrate contex-
tual necessity in doing so. By contrast, controlling creativity and inno-
vation is primarily a paradox if the term control is associated with a
negative and narrow connotation. If control is seen as constraining and
leaving very limited autonomy to employees, it is incompatible with the
creation and execution of new ideas outside existing patterns. However,
control is interpreted much more broadly here. It is the managerial
influence on the natural flow of actions in order to align them towards
the purposeful goals of the organization. As such, control does not
mean to be coercively constraining, rather it can be directing, guiding,
enabling, supportive and as such leaves much room for creativity and
innovation.
This chapter illustrates that there is still much research required to
better understand the optimal MCS conditions for creativity and inno-
vation. It indicates that there is a range of creative and innovative
performances, and that it is not only about understanding the contexts
but rather the combination of the type of creative and innovative
146 Jan Pfister
performance expected, how that performance fits to the context, and

what type of MCS can best mediate between expected performance and
organizational context to achieve the aspired outcomes. In this sense,
MCS research is challenged in several ways in an interdisciplinary way.
What do the conditions of creative and innovative performance entail
in current business environments? How do specific contexts enhance
or limit these conditions? What are possible MCS solutions to enhance
creative and innovative performance in specific contexts?5
Notes
1. I would like to thank the editors and Kari Lukka for their comments on the
draft; Jim Spohrer (IBM) and Todd Schofield (Standard Chartered) for their
valuable time for the interviews and Solomon Darwin (Center for Corporate
Innovation at UC Berkeley) for support with access.
2. Quotes are based on interview with James Spohrer, IBM Almaden Research
Center, San Jose, June 2013.
3. See recent article in Financial Times by the CEO of Standard Chartered: Sands,
Peter (2013) Banking is heading towards its Spotify moment, Financial Times,
June 30.
4. Quotes are based on interview with Todd Schofield, Standard Chartered Bank,
San Francisco, July 2013.
5. Quotes in the table are from vision and strategy statements of company
websites.
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10
Managing Management Controls
Sophie Tessier
Introduction
Management controls can have different objectives. According to Tessier

& Otley (2012a), management controls can be grouped into systems of
strategic performance, operational performance, strategic boundaries,
and operational boundaries. Each of these groups of control systems are
composed of different types of controls such as social (values, culture,
symbols, etc.) and technical (procedures, rules, routines, cybernetic
controls, etc.) (Malmi & Brown, 2008; Tessier & Otley, 2012a).
In recent years, operational boundaries control systems have received
a lot of attention, mostly (and unfortunately) because of their failure
to prevent financial scandals such as Enron and Worldcom. As a result,
new laws, most notably SarbanesOxley (SOX) in North America, have
increased the financial and legal burden that is imposed on listed
organizations and the quantity of technical controls implemented in
organizations has increased to a point where some organizations are
withdrawing from the market. Generally speaking, technical controls
are often seen as alienating employees (Adler & Borys, 1996) and
Power (1997, 2004, 2005) warns against the potential effect of the risk
management of everything and the elevation of risk management to
the rank of religion (Power, 2004, p. 24). As Perrow explains (1986,
p. 5), Critics usually attack bureaucracy for two reasons it is unadap-
tive, and it stifles the humanity of employees. However, as argued by
Adler and Borys (1996), technical controls can also be useful as they
provide guidance, clarify responsibility, ease role stress and help indi-
viduals be and feel more effective. According to these authors, whether
technical controls are perceived positively or negatively by users depends
on the type of formalization (enabling or coercive). In addition, Tessier
149
150 Sophie Tessier
and Otley (2012b) argue that it is possible for organizations to manage

technical management controls in order to turn bad bureaucracy into
good bureaucracy.
This chapter provides an insight into the usefulness of technical
controls and provides some suggestions on how to reduce their less desir-
able side effects. Specifically, it discusses the notion of control quality
followed by a description of how organizations can improve the quality
of technical controls by managing the process of change. Reasons for
implementing technical controls are explored and using the life cycle
metaphor, the different phases of the life cycle of control are described.
These are 1) the implementation of new controls, which often occurs
in a context of uncertainty, 2) the subsequent improvement of these
controls, once more information is available and uncertainty is reduced,
and 3) the removal of obsolete controls. Finally, the chapter discusses the
need to consolidate control packages and how this can be achieved.
The quality of technical controls
As mentioned earlier, opinions are mixed with regard to bureaucra-

cies. Researchers views on bureaucracy are split between bureaucracy
as a means of enforcing compliance onto recalcitrant employees, and
bureaucracy as a means of improving efficiency (Adler & Borys, 1996).
Generally speaking, it is argued that a positive attitude towards formali-
zation occurs when tasks and the level of formalization are properly
aligned: routine tasks should be formalized and non-routine tasks should
be left informal. By contrast, formalized non-routine tasks will generate
dissatisfaction (Adler & Borys, 1996). However, Alder & Borys (1996)
argue that this view does not explain everything. The missing link is the
notion of quality. As Perrow (1986, p. 24) explains only some rules are
bores. The good, effective rules are rarely noticed; the bad ones stand
out. Good rules are taken for granted, whereas bad rules are resented
(Adler & Borys, 1996).
Increasingly, authors are addressing the conflicting views on bureauc-
racies through the notion of quality of control. Several authors have
implicitly or explicitly categorized controls into good and bad (Adler &
Borys, 1996; Ahrens & Chapman, 2004; Hopwood, 1972, 1973; Tessier &
Otley, 2012a). For example, Tessier & Otley (2012a) describe how some
SOX-related controls were considered useless by employees, because
they merely ensured the presence of a signature (giving the illusion of
control, without any real control), whereas other SOX-related controls
were appreciated, because the formalization imposed by SOX made
Managing Management Controls 151
employees lives easier (more efficient work through the implementa-

tion of best practices).
As Adler & Borys (1996, p. 64) argue, employees will embrace formal
work procedures that are appropriately designed and implemented.
Therefore, making and changing formal rules should be one of the main
concerns of managers (March et al., 2000) and organizations should
proactively manage their management controls as described in the next
section.
Managing technical management controls: a life cycle

approach
Technical controls do not evolve or arise in some mysterious way, nor

are they implemented without complication (March et al., 2000, p. 25).
Therefore, the implementation of a procedure is a first step, not the last
one. Technical controls follow a life cycle pattern of change. Controls
are first created and implemented (rule birth), then they are revised and
improved (rule revision) and eventually, when they become obsolete,
they may be removed (rule suspension) (March et al., 2000; Tessier &
Otley, 2012b). It is important for managers to understand processes of
change such as the life cycle of controls in order to influence it as well as
to anticipate potential problems along the way (Burns 2000, p. 568).
Why implement technical controls?
While it is obvious that some rules are needed in organizations, it

is generally felt that most organizations have far too many rules.
(Perrow, 1986, p. 20)
If organizations have too many rules, why do they need to implement

more? In general, the more rules there are in an area, the less chance
there is of a new control being implemented (i.e. low birth rate of
controls). In other words, in an organization, the population of controls
grows, but not indefinitely (March et al., 2000). However, new prob-
lems (for example: the adoption of SOX) can lead to the implemen-
tation of new technical controls. Sometimes, the implementation of a
new control is non-negotiable. This is the case when controls are imple-
mented, because of external pressure such as a new piece of legislation
or a request by regulatory agencies (March et al., 2000). At other times,
the implementation of a new control can be challenged. This is the case
if the pressure for controls comes from the inside.
152 Sophie Tessier
Specifically, there are several reasons for implementing technical

controls, the first being that they provide structure. Rules routinize
organisational activities and define authority relations, connections
among subunits, and decision-making structures (March et al., 2000,
p. 9). Complex organizations also need technical controls to standardize
the variability in personnel, customers, environment, production tech-
niques, etc. (Perrow, 1986). Finally, individuals need technical controls,
because procedures make life more predictable and thereby reduce
ambiguity and anxiety (Schein, 1992, p. 247). Whereas ambiguity can
cause tension and anxiety, formalization can help reduce role ambiguity
by making it clearer for employees what is expected of them (Jackson &
Schuler, 1985). For example, in a modern organization with a low level
of structure, managers may use the budget to cope with role ambiguity
(Marginson & Ogden, 2005).
People with high uncertainty avoidance are less comfortable with
uncertainty and ambiguity, and prefer to cope with them by relying
on rules of behaviour, structuring of activities and standardization of
procedures (Chow et al., 1999, p. 447). Hence, the implementation
of a new control sometimes comes from someone asking for a new
procedure (March et al., 2000). I witnessed in a previous study several
examples of employees implementing controls for themselves (e.g. an
employee wrote her own job description, because she did not have one)
or requesting more controls from their supervisors (e.g. branch staff
managers asking for a procedure to help them create window displays).
Chester Barnard wrote The power of choice is paralyzed in human
beings if the number of equal opportunities is large ... Limitation of
possibilities is necessary to choice (1938, p. 14; cited in Simons, 1995,
p. 40). In marketing, this is a problem called overchoice. Although
the possibility to choose makes people feel in control, too much choice
can be debilitating and lead to information overload (Botti & Iyengar,
2006). When consumers do not have well established preferences, they
might not choose at all (Botti & Iyengar, 2006). A possible solution to
circumvent overchoice is to provide a default option with the possibility
to opt out.
Applied to technical controls, organizations can provide employees
with uncertainty avoidance a default option in the form of a proce-
dure. For example, in a previous study I conducted, there was a retail
organization where branch staff could order whatever range of stock
they wanted from a full catalogue of all available items. Some employees
(especially new ones) were frozen by this overload of information (full
catalogue) and could not choose. As a result, they waited until they were
out of stock to order (clear choice, but loss of sales). To circumvent this
problem, while still providing leeway to employees, the finance director
suggested a restricted order form (default option) with the possibility of
ordering from the full catalogue (opt-out option).
Other procedures are implemented to formalize unwritten rules
(March et al., 2000). Indeed, the absence of formal rules does not mean
that there are no rules (Perrow, 1986). To illustrate this, Perrow gives
the example of an employee who takes initiatives (because there are
not supposed to be any rules) ending up being told he did something
wrong. In other words, the absence of rules can lead to a lack of direc-
tion (Merchant, 1985) resulting in employees learning by the nega-
tive (Tessier, 2009). Formalizing the unwritten rule reduces ambiguity
regarding what is acceptable and what is not.
Finally, other reasons for implementing controls include growth (which
creates coordination problems) (March et al., 2000; Tessier, 2009), new
technology (March et al., 2000) and new laws (Tessier & Otley, 2012b).
Implementing effective technical controls

Controls are often ineffective because their implementation is severely
deficient. (Dion, 2004)
Why is it that the implementation of controls is sometimes severely

deficient? One explanation is that in order to implement a technical
control, implementers need a good predictive model. A predictive model
is a means of forecasting the likely outcomes of various alternative
courses of action (Otley & Berry, 1980, p. 236). To routinize a task, a
predictive model needs to exist. If there is a lot of uncertainty (i.e. weak
predictive model), it is difficult to routinize a task.
Whereas organizational procedures objectify know-how (Adler
& Borys, 1996), organizations also search for solutions to unexpected
problems which current routines fail to deal with (March et al., 2000).
In these cases, there are no predictive models, there is no know-how.
For example, an interviewee explained in Tessier & Otley (2012b, p. 786)
that implementing SOX-related controls was difficult at first:
We could have been smarter, but we couldve only been smarter if we

had understood where we had to get to. And I dont think at the begin-
ning [ ... ] we didnt know where we were going to be eventually.
So, what can be done to improve the implementation process? According

to Adler & Borys (1996), good practices with regard to the design of
154 Sophie Tessier
new controls suggest that users should be involved in the design of

new controls. The implementation of a new control should be an itera-
tive process, with some testing, to allow for progressive improvement.
Tessier & Otley (2012b) describe such an implementation process in
their article. Indeed, the organization under study, which had inade-
quate stock control, wanted to improve control over loss, stolen and
damaged merchandise. Rather than imposing a control designed by the
head office, they began with a pilot programme, consulted employees,
and revised the original control before implementing it throughout the
organization. By doing so, they gathered knowledge on the best way to
design the control and tested their predictive model.
Another good practice regarding the implementation of controls
involves training users (Tessier & Otley, 2012b). According to Adler
& Borys (1996), training should not only help users understand how
the rule works, but also what are its key components and its rationale
(internal transparency) as well as how it fits into the big picture (global
transparency). Indeed, under an enabling approach (which is considered
a more favourable approach than a coercive one) the whole process is
explained to users. Contextual information is provided and users under-
stand how their tasks fit into the whole process.
Although following these best practices helps avoid many pitfalls, it
also takes time. It is not always possible to dedicate weeks or months
to the design of a control and to the training of users. Indeed, controls
are often implemented quickly because of time pressure (Tessier &
Otley, 2012b). This is especially true if the new control is required,
because of external pressure such as a new law or a new regulation, or
if the control is implemented in the context of a crisis (March et al.,
2000). When there is time pressure, implementers do not have time
to gather the appropriate amount of knowledge on how the control
should be designed. Also, there might not be any time to fully evaluate
the current situation. This creates a lot of uncertainty over the design
of the control. It also creates uncertainty regarding the use of the
control as there is not enough time to offer proper training to users. As
a result, newly implemented controls are often described as ineffective
(do not control what they should be controlling) and inefficient (not
user friendly, halting organizations, time consuming) (Tessier & Otley,
2012b).
Improving technical controls

Newly created rules are relatively vulnerable to revision and suspen-
sion. (March et al., 2000)
As explained earlier, when controls are implemented under pressure,

people do not have time to create good predictive models, test controls,
do pilots, etc. With use, knowledge regarding new controls increases.
People come to know better what is required (reduces uncertainty from
the implementers perspective) and therefore can improve controls (e.g.
automation, simplification) and offer training (reduces uncertainty
from the users perspective). As one employee explains in Tessier & Otley
(2012b, p. 803):
[The control] was not user friendly, because it was newly launched.
This year, we did a lot of improvement on it [ ... ] its really easy. So it
went from the worst tool to now where [the users] they like it very
much.
What are the main factors that contribute to control improvement?

First, organizations that proactively revise controls generate more
control improvement than those which wait for conflicts to trigger
improvement (for example, users complaining about a control). This
is so, because control improvement requires 1) identification of a
weakness/problem with existing controls, 2) knowledge on how to
improve controls and 3) a mechanism to break the inertia. Although
conflict can lead to the identification of control weaknesses, it is not
a very effective mechanism for gathering knowledge on how to fix
the problem or to break inertia. A process for purposefully improving
controls is more effective (Tessier & Otley, 2012b). For example, in
one of the organizations studied in Tessier & Otley (2012b), surveys
were conducted to ask users what they thought of new controls and if
they had any suggestions on how to improve them. This process was
done systematically when implementing new controls. Moreover, this
organization formalized training as well. To access the organizations
Intranet, users had to first read any new procedures and complete a
test.
Improving one control has a snowball effect that leads to the improve-
ment of other controls. Indeed, As March et al. (2000) explain, prior
revision of a rule increases the rate of subsequent rule revision for this
rule. Moreover, the likelihood that a rule will be revised is positively
related to whether another rule in the same area is revised during the
same time period (March et al., 2000).
The type of bureaucracy (enabling or coercive) will also have an impact
on whether controls will be improved or not. Indeed, coercive proce-
dures are difficult to change, because users do not have the knowledge
156 Sophie Tessier
or the incentive to propose and facilitate change (Adler & Borys, 1996).
On the other hand, enabling procedures, which have an inherent repair
feature and which have internal and global transparency will lead to
more improvement, because users will have both the knowledge and
the incentive to participate in the improvement process (Adler & Borys,
1996).
With time, control packages will become more stable and while the
population of rules grows, it does not grow exponentially. Indeed,
once new rules are implemented for a particular problem and once
knowledge of these new rules increases, the need for further rule
implementation and improvement decreases. In other words, the rate
of birth and rule revision decreases with the age of the rule regime.
As a result, rules become part of the scenery and are taken for granted
(March et al., 2000). However, when this happens, organizations stop
paying attention to these particular areas of their control packages.
Organizations will move their attention to new problem areas which
require new rules and will pay less attention to revising existing
ones.
When controls are not improved on a regular basis, or when organiza-
tions move their attention to other problem areas, controls can become
obsolete beyond repair and have to be removed, rather than changed.
Thus, an organizations level of tolerance to rule obsolescence will have
an impact on control improvement and the speed at which controls
become obsolete. In fact, Schulz (2003) found that the number of years
since the last revision is negatively related to rule revision, but positively
related to rule suspension.
Removing obsolete technical controls

The greatest problem with rules is that organizations and their envi-
ronment change faster than the rules. Most bad rules were once good,
designed for a situation that no longer exists. (Perrow, 1986, p. 26)
Eventually, even a good control, revised periodically, can become obso-

lete. Controls can become obsolete for several reasons. The most likely
is that the situation that required the control in the first place, such as
a legal requirement, has changed and thus rendered the control unnec-
essary (Tessier & Otley, 2012b). Another reason is that a better control
has been implemented (Tessier & Otley, 2012b). Whatever the reason,
obsolete controls need to be removed to prevent clutter.
Anthony (1965, p. 258) probably said it best when he stated that Like
a fruit tree, a management control system can become both unsightly
and unproductive unless it is pruned periodically. The analogy with

nature is very a propos as even the healthiest plant will suffer if not
pruned. However, this is easier said than done as organizations are
usually better at implementing controls than removing them (March
et al., 2000; Tessier & Otley, 2012b). In other words, the rate of rule
proliferation is greater than the rate of suspension (March et al., 2000).
One of the reasons for not removing an obsolete control is that people
can learn to live with it (Tessier & Otley, 2012b, p. 790). Another reason
is that obsolete controls can be ignored and not enforced. However, this
sends the mixed message that it is alright to ignore some controls, which
can diminish the strength of other controls such as cultural boundary
controls. Therefore, organizations need a systematic control removal
process.
In order to remove controls, one must first identify obsolete controls
and to identity an obsolete control, one must look for it. For example,
March et al. (2000) give the example of the editor of the administra-
tion guide who occasionally inspected policies to determine if some
were outdated. In Tessier & Otley (2012b), Company B used SOX as
an opportunity to identify obsolete controls, an opportunity that
was seized by several other organizations upon the implementation
of SOX (Wagner & Dittmar, 2006). Moreover, Company B proactively
assessed the effectiveness of controls through a formal annual plan.
Controls were compared with laws, rules and guidelines to make sure
they were adequate (may lead to improvement) and required (may lead
to removal).
Although removing obsolete controls will help rationalize control
packages (i.e. make it more efficient by removing superfluous controls
(Soanes & Stevenson, 2004, p. 1193)), organizations also need to consol-
idate their control packages (i.e. combine into a single unit (Soanes &
Stevenson, 2004, p. 305)).
Consolidating control packages

Weve got so many controls, weve got duplicate controls, weve got
things that are overcompensating [ ... ] How do we streamline these
controls so that it doesnt become such an over burdening task to do
anything? (Tessier & Otley, 2012b, p. 803)
If an organization has too many rules, it might be because it has not

engaged in an effort to consolidate its control packages. In Tessier &
Otley (2012b), Company B expressed the need to consolidate their
control packages, because there was a lot of redundancy between the
158 Sophie Tessier
different compliance groups (corporate governance, risk management,

internal auditing, external auditing, SOX). As an interviewee explains:
What people have been doing is trying to dam the hole in the dyke,
keep on putting something in there just to make sure we comply and
what we havent done is say well what we should do is take all of
that and put one piece of concrete in place. (Tessier & Otley, 2012b,
p. 787)
Therefore, even if individual areas of control are monitored for obsolete

controls, different control processes can create redundancy. Redundant
controls can only be identified when taking a global view (Tessier,
2009).
Obviously, another way of keeping the number of rules to the minimum
required is to systematically challenge their implementation in the first
place. Tessier & Otley (2012b) describe an organization where such care
was taken before adding any control, mainly because the chairman
disliked controls. Justification for the new control had to be provided and
only once the chairman had been convinced that the control was neces-
sary would he authorize its implementation. Challenging new controls
in such a way could help avoid the implementation of the same control
in different processes (e.g. internal control and risk management).
Concluding remarks
This chapter suggests that a systematic process for reviewing and moni-
toring control packages should be introduced into an organization to
ensure that there are no controls missing, that the ones in place are
as effective and efficient as they can be, and that obsolete or dupli-
cate controls are removed. This new activity or task could be called
controls management or as Anthony (1965, p. 258) called it Control of
the Management Control System. This requires different levels of moni-
toring: control level (monitor a specific control), process level (monitor
controls in a specific process), organization level (monitor controls in
different processes to identify redundant controls: corporate govern-
ance, risk management, internal auditing, external auditing and SOX
management) (Tessier, 2009).
In Chapter 6, Otley mentions that a common reaction to uncertainty
is to ignore it. To an extent, the control of management control activity
is based on an acknowledgement of uncertainty. Underlying the proac-
tive search for missing controls is the realization that uncertainty as
to what the future holds will lead to new needs for control in the future,
needs that cannot be foreseen in the present. Similarly, searching for
obsolete controls implies that the environment has changed in unex-
pected ways that renders some controls obsolete. Furthermore, imple-
menting best practice to help employees with weak predictive models is
acknowledging that uncertainty lies within individuals, as explained by
Otley, and that sharing knowledge and experience, in the form of best
practice, will improve the predictive models of others.
The control of management control activity is also a way of coping with
uncertainty. Implementing controls such as best practice is an attempt
to reduce uncertainty regarding the accomplishment of certain tasks.
Moreover, implementing new controls is often done even though imple-
menters are uncertain about what is required. The proactive manage-
ment of controls implies that controls are implemented regardless of
uncertainty with the intention of adjusting and improving controls
once uncertainty has been eliminated (or at least reduced) knowing that
experience with less than perfect controls is contributing to this reduc-
tion in uncertainty. Hence, it allows organizations to implement less
than perfect controls (that will subsequently be improved), rather than
waiting for uncertainty to disappear on its own.
The complexity of organizations operations, and the level of regu-
lation from industry-specific regulatory bodies, and from the finan-
cial market in addition to the individuals need for structure and role
clarity suggest that the use of technical controls is not going to lessen in
the years to come. Rather than being trapped in a vicious circle of rule
proliferation, where new rules are implemented to unify and systema-
tize existing rules (March et al., 2000), organizations would benefit from
investing the time and the resources to actively manage their manage-
ment control systems to take full advantage of their benefits and lessen
their disadvantages.
Note
This chapter is loosely based on Tessier & Otley (2012b).
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11
Feel the Risk: Strategic Investment
Decisions in an Uncertain World
Elaine Harris
Introduction
This chapter focuses on risk in strategic decision-making in organiza-

tions and draws together a variety of theoretical perspectives, especially
from the field of psychology. It explores the notion of feeling the risk,
which may be unfamiliar to both scholars in management control and
practitioners.
It is clear that no single theory is adequate to describe or inform
how strategic decisions are made in uncertain conditions, but there are
several that offer partial explanations or at least contribute towards our
understanding of how managers can deal with the uncertain environ-
ment and assess the likely risks in strategic decision-making in organiza-
tions. The literature suggests how relevant theories might be aggregated
to make sense of decision-making in an organizational context and
considers the implications for further research in this important area of
management control.
For this purpose, a strategic investment decision (SID) is defined as an
allocation of the firms capital to a specific business activity or project
in pursuance of the organizations goals. In corporate strategy terms this
involves selecting a strategic option, in financial management it may be
termed capital budgeting or capital investment appraisal. It may involve
raising new capital or loans to finance the project and to be termed
strategic will play a significant role in delivering the corporate goals.
A strategic decision may be differentiated from operational decision-
making, by the latter being more routine, involving a smaller invest-
ment of funds and usually a shorter payback period.
Strategic decision-making (SDM) or project appraisals generally require
an evaluation of the likely outcomes, both positive and negative, in terms
162
Feel the Risk 163
of the financial and non-financial consequences that are predicted to

flow from an initial commitment of capital (Harris et al., 2009). Although
the future cannot be accurately predicted, decisions must be made with
limited information in conditions of uncertainty. Some outcomes can
be foreseen with some certainty, especially where we have knowledge
and experience of making similar decisions in the past these we call
risks, which may be calculated in some sense. Others may be less fore-
seeable, so stay within the realm of uncertainty.
The next section of this chapter explores the issue of risk and uncer-
tainty in strategic decision-making through a review of relevant litera-
ture. This is divided into three main sections, starting with the normative
prescriptions of economics and finance theory that may be thought
of as rational analysis. The next section focuses specifically upon the
psychology of risk that accounts for human behaviour and managerial
judgement, the use of intuitive approaches (feeling the risk) in contrast
to what might be termed rational approaches. Finally in this section,
we consider the field based studies that offer insights into the organiza-
tional context of decision-making and how the process of project risk
appraisal has been observed in practice.
The last section suggests how the theories from these fields can be
combined and applied to guide SDM and how a balance between the
rational and intuitive approaches might be achieved. The main argu-
ment is summarized and implications for how further research might be
designed are considered.
Literature review
Economics and finance

For most business enterprises operating in a capitalist society there is a
profit motive, though a wider range of aims are now more commonly
recognized. In this section, the literature is based on a simple profit
motive and a rational decision-maker who is assumed to have sufficient
information to calculate the value of a proposition and measure risk
based on probabilities. This is unlikely to apply in todays global busi-
ness environment, but in many large organizations it appears to have
significantly influenced capital budgeting guides and the capital budg-
eting procedures followed.
The basic tools of discounted cash flow, well explained by Bromwich
(1976), draw on a stream of theory about the political economy domi-
nated by the concept of maximizing shareholder wealth. Although
164 Elaine Harris
some of the principles might still be relevant, this stream of theory

assumes a level of predictability often absent in todays uncertain world
(Handy, 1998). Bernstein (1996) presented early contributions to risk
theorizing, including Bernoullis (1738) utility theory which dominated
economics for decades, explaining how our present-day concerns about
risk have developed. A few of the key milestones and authors from the
20th century are noted here to give the reader a sense of what we will
call risk as analysis.
Keynes (1921) highlighted the limitations of calculating the prob-
ability of an uncertain future event by reference to the frequency of
similar events in the past for the purpose of business decision-making,
warning that the estimation of probability in such decisions was highly
dependent on judgement. It seems this message has been largely
unheeded. Von Neumann and Morgenstern (1944) developed game
theory, depicting decision-takers as economically rational and clearly
able to choose between certain and uncertain options by calculating
expected outcomes using probabilities and measures of risk preference.
This is often regarded as a neat theory, but it clearly ignores Keynes
(1921) treatise on probability. Simon (1945) wrote a critique of Von
Neumann and Morgensterns game theory, which also goes largely
ignored by economists.
Continuing in this vein, Markowitz (1952) portfolio theory showed
that an investor could spread or reduce the risk by investing in negatively
correlated assets.1 This may have conceptual relevance in modern-day
decision-making, without necessarily having to apply the actual algorithm.
Similarly, Black and Scholes (1973) option pricing theory2 was based on
stock market observations and became influential in financial economics,
but has little relevance to corporate decision-making beyond the concep-
tual level, outside a few specialist industries like gas exploration. It has
no relevance in fast-moving decision environments where the window of
opportunity closes too quickly for such a delay to be an option.
It may be argued that these economic theories did little to help avoid
some very high-profile corporate failures leading to economic recession
and a call for better risk management of large corporate entities. This gave
rise to the first internal control framework with guidance on risk assess-
ment (COSO, 1992), which introduced the concept of value at risk
and fits very much within the economics paradigm. Much regulation
that has flowed from this within the corporate governance movement
(including COSO, 2004) views risk management from a quasi-scientific
or closed rational system perspective, well critiqued by Williamson
(2007). So far, the (hi)story of risk is not a happy one.
Feel the Risk 165
The psychology of risk and decision-making

Kahneman and Tverskys (1979) prospect theory challenged the accepted
wisdom in economics by showing how people overestimate some proba-
bilities and underestimate others, depending on the size of the expected
gain or loss. This is best demonstrated by the sale of lottery tickets,
where the chance of a big win (however slim) can persuade people to
buy a ticket whereas a smaller prize with a greater probability of winning
might not do so. Then they are persuaded to continue buying tickets,
imagining their chances of a win will increase over time. Whilst this
theory may be categorized as behavioural finance, it still fits within the
positivist philosophy of reducing decision-making to a mathematical
model, so focussing on a single behaviour and ignoring many other
human or contextual factors.
Simon (1947, 1957 & 1976) portrays economic man as rational (left-
brain), social man as non-rational and emotive (right-brain) and
administrative man as pragmatic (consensus). He conceived the notion
of bounded rationality (attempts to take rational decisions being
limited by an individuals knowledge and experience). Again this
important work has largely been ignored by risk researchers who have
focussed upon memory, models, systems and regulatory frameworks.
Simon (1957) discussed the simplifying heuristics people use (as an
alternative to the rational model) and noted the need for a greater
understanding of the psychology of decision-making, the stream of
work considered in this section. Bazerman (1985) explored how indi-
viduals exercise judgement and added to Simons notion of bounded
rationality one of bounded ethicality (2006) where our feelings
and ethics influence our judgement in ways that we may not even be
aware of. This can be compared with the affect heuristic recognized
by Fineman & Sturdy (1999), Finucane et al. (2000) and Slovic et al.
(2002).
Slovic (2000) inspired by Shakespeare as well as by Simon, Kahneman
and Tversky, added trust, emotion and sex to the heady mix of psycho-
logical factors affecting societal risk-taking. Together with Gilovich and
Griffin, Kahneman (2002) updated the collection of work he, Tversky
and Slovic had compiled on the heuristics that individuals draw upon
when making decisions. Heuristics and the role of intuition are presented
as forms of bias, implying that they lead to errors of judgement and
suboptimal decision-making. They concede, in passing, that heuristics
can lead to accurate judgements, but more often they present them as
systematic errors.
166 Elaine Harris
Building on earlier work on the affect heuristic, Loewenstein et al.

(2001) were the first to coin the phrase risk as feelings (Figure 11.1).
They proposed a new perspective where emotion is not only acknowl-
edged to play a role in decision-making but they placed it at the begin-
ning (anticipatory emotion e.g. fear, anxiety and dread), in the middle
(gut feelings experienced at the moment of making the decision) and at
the end (emotional outcomes).
This work was acknowledged by Slovic et al. (2005: S35) who
contrasted risk as feelings as individuals fast, instinctive and intui-
tive reactions to danger with risk as analysis which brings logic,
reason, and scientific deliberation to bear on risk management. Whilst
their research was in the non-business field of healthcare and specifi-
cally the decisions concerning cancer patients, the paper highlighted
the duality of human information processing and its contribution to the
notion of feeling the risk as well as computing the bottom line. This
duality or dual-process explanation of mindful judgement has become
known as system 1 (intuitive) and system 2 (analytical) in decision-
making (Weber & Johnson, 2009). Sunstein (2001) investigated the dual
processes in a political setting and suggested that cost benefit analysis
(system 2) could be used to keep emotions (system 1) in check in group
decision-making.
To assume that risk as feeling is a negative behaviour fails to credit
decision-makers with a well-developed knowledge of their industry and
business that informs their expert intuition. It also overlooks the human
cognitive ability to process information rapidly in the sub-conscious,
Anticipated outcomes
(including anticipated Cognitive
emotions) evaluation
Subjective
probabilities Behaviour Outcomes
(incl. emotions)
Feelings
Other factors
e.g., vividness,
immediacy,
background mood
Figure 11.1 Risk-as-feelings perspective

Source: Lowenstein et al. (2001: 270).
Feel the Risk 167
without realizing the detail of that analysis. So whilst some decision bias
may arise from over-confidence (Griffin & Tversky, 2002) when experi-
enced managers begin to trust their own judgement too much (a form
of management hubris), this does not invalidate the potential usefulness
of human judgement in SIDs.
Remarkably, Kahneman & Klein (2009) joined forces to argue that the
two apparently opposing paradigms of heuristics as bias (HB, work
by Kahneman and his associates) and naturalistic decision-making
(NDM, work by Klein and Simon) are actually compatible after all.
Eureka! Their main differences stem from the fact that HB research
is largely conducted in laboratory settings and is predisposed to
algorithms, whereas NDM is conducted in the field and adopts an
admiring stance towards experts. The admiration for expert judgement
stemmed from early research that observed successful chess players. It
might be argued that the same rigour has seldom been applied in SID
research. Kahneman and Klein argue that whilst their predispositions
and emphasis differ, they acknowledge the potential for both system 1
and 2 decision-making in practice, with the caveat that professional
intuition is sometimes marvellous and sometimes flawed.
Dane and Pratt (2007) explored the effectiveness of intuition in mana-
gerial decision-making, proposing a model that incorporates both the
domain knowledge and task characteristics, which supports the
view taken by Harris (2009) that understanding the managerial cogni-
tion of the risks attached to a particular type of project in a particular
industry (through cognitive mapping) can help managers to mobilize
their expert intuition in SDM. Advocates of Simons approach suggest
that his bounded rationality can usefully be applied to examine the
cognitive processes of experts to improve our understanding of human
decision-making (Campitelli & Gobet, 2010). Much psychology litera-
ture deals with personal decision-making of individuals rather than
collective decisions in an organizational context, although the concept
of social intelligence is acknowledged (Hertwig & Herzog, 2009).
The Social and organizational context of decision-making

Another relevant stream of literature deals with social and cultural atti-
tudes and the risk appetite of decision-makers. Douglas & Wildavskys
(1983) model categorized corporate attitudes based on the two dimen-
sions, the degree of equality (personal freedom to choose) and the degree
of individualism/collectivism. Adams (1995) identified rationalities that
fitted these four quadrants as fatalists (low equality individuals resigned
to accepting risks), hierarchists (low equality and highly collective),
168 Elaine Harris
individualists (high equality acting as individual entrepreneurs) or egali-

tarians (high equality acting in a collegiate way).
Using this model, Collier et al. (2007) undertook a survey and case
analysis of management accountants risk management practice. They
found only 7 per cent were fatalists (risk sceptics), 36 per cent were hier-
archists, 14 per cent individualists (entrepreneurs) and the majority, 43
per cent, were egalitarians (risk aware). It is generally accepted that entre-
preneurs are willing to take relatively high risks (risk seekers) and that
many bureaucratic (hierarchical) organizations produce more risk averse
(risk avoidance) behaviours. Hillson & Murray-Webster (2007) placed the
fatalists (risk tolerant) and egalitarians (risk aware/risk neutral) together
in the centre between these two extremes. Not all interviewees were
aware of their own risk stance prior to participating in this research.
It can be difficult for them to articulate their position in qualitative
studies, hence the more common use of survey instruments.
An investigation in the 1990s originally designed as case study
research, developed into action research (Harris, 1999) as a result of
participants finding it difficult to articulate why they thought of one
particular project, in their experience, as riskier than another. Once
the tacit nature of risk knowledge was taken into account, the study
adopted a repertory grid technique to elicit participants understanding
of risk. This data was then used to formulate cognitive maps to visu-
alize a shared understanding of the risk profile of projects familiar to all
members of management groups. The theory underlying this research
was George Kellys (1955) personal construct theory (PCT). Kelly (whose
work has arguably been neglected by mainstream psychologists, even
those researching in NDM) credited all humans with the ability to be
a scientist as we all ask questions, gather and analyse data and draw
conclusions about our world.
The essence of PCT is that we make sense of our world by comparing
each new event or experience with what we have experienced before,
using bipolar constructs or concepts, with labels for the extremes, which
are then used as signposts in the memory. So if we wish to make sense of
how we feel today, we may draw upon a concept of happiness, recalling
past moments when we have been happy at the positive extreme or sad
at the negative extreme. We might hold this memory in a hierarchy of
constructs that explain our happiness, which might include whether the
sun was shining, which could be sensed by brightness (dull or bright),
temperature (warm or cool), who we interacted with and the quality of
social discourse (interesting or boring), our feelings for who we were
with (love or hate) and what we achieved (the attainment of a goal or a
Feel the Risk 169
set-back or hurdle). Each person might assess their happiness differently

depending on their past. If we share experiences, by growing up in the
same family or working in the same organization or industry, we are
likely to share some common constructs (commonality). We may not
always agree or assess things in exactly the same way, but have sufficient
empathy for others that we can understand their feelings and appreciate
their views (sociality). Harris & Woolley (2009) used PCT to investigate
the uncertainty of innovation and business start-up cases in South Africa.
Cognitive maps were drawn up and refined to reflect participants views
of the uncertainties they faced in SDM. Part of the novelty of this work
(Harris, 1999; Harris & Woolley, 2009) was the use of group interviews
in SDM research.
Harris et al. (2009) undertook a survey and case analysis, based on
the psychological dimensions of decision-making, namely the heuristics
(often termed bias by the rationalists), framing and consensus (a more
naturalistic construct). This confirmed the extent to which these mental
reference points (availability, anchoring and adjustment heuristics), use
of benchmarks, representativeness or rules of thumb, recency, meaning
data that are easier to recall, (part of framing), together with the way
propositions are presented and debated in organizations (in reaching
consensus) were reported as influencing SDM in a cross-section of
organizations. One of the key findings was the involvement of multiple
managers in the SDM process.
Emmanuel et al. (2010) conducted a systematic review of past case
studies on capital investment decisions, viewing the cases through the
lens of a set of psychological constructs, to gauge how the process of
reaching managerial judgement in SDM was influenced by these risk as
feelings factors. Both from the analysis of past cases and the analysis of
three new cases, these factors appeared to affect the SID process at almost
every stage. The key concepts of heuristics, framing and consensus were
mapped onto the stages in the SID process for three cases. However,
in some companies, managers were encouraged to share these feelings
in an open and collaborative style of management, and in others they
were constrained either by formal systems or by an autocratic busi-
ness leader. It was found that the level of formality in the SDM process
could limit, enable or necessitate the intuitive application of managerial
judgement.
For the moment, we can summarize the above as supporting the view
that assessing risk in SDM is more of an art than a science and may involve
more emotional thought processes than rational analysis, without detri-
ment to the outcomes. It is suggested that risk management might not
170 Elaine Harris
have become so poorly thought of as it seems to have done if it did not

purport to be a science. The involvement of multiple managers in SDM
also emphasizes the social nature of the SDM process.
Adams (1995) criticized the risk management movement for actu-
ally adding to risk, showing that risk mitigation gives decision-makers
more confidence to undertake a more risky strategy. Power (2004) made
similar criticisms in The Risk Management of Everything, based on
Giddens (1998) Risk Society (see also Chapters 12 and 16 in this
volume). This dissatisfaction with the rational technicist approach to
risk is echoed by Froud (2003). She criticises attempts to use quantified
decision making techniques that incorporate risk into cost benefit or net
present value calculations (569) in the context of PFI decisions.
It seems these authors were all expressing their frustration with the
marketisation of risk management and the potential for systematic
risk management processes to appear overly scientific, especially when
mathematical approaches dominated, thus creating an illusion of
control that suited both the companies and the regulators. It is inter-
esting to compare this notion with Kahnemans notion of the illu-
sion of validity referring to the overconfidence as he saw it of clinical
judgement (Kahneman & Klein, 2009: 517). However, as Froud (2003:
572) notes, the post-modernist concepts of sociologists such as Giddens
do not offer a workable alternative to the assessment of risk and uncer-
tainty in SDM, which leads her to call for a more radical approach and
the acknowledgement that the uncertain future is partly shaped by
decisions and actions made in earlier periods (575).
The influence of contextual factors in SDM has been investigated by
Alkaraan and Northcott (2013) using a survey of UK manufacturing
companies. They report that the higher decision uncertainty the more
focus there is on procedural rationality in SDM as opposed to strategy
formulation and political behaviour. This not only seems counter-intuitive,
but may also result mainly from the framing of survey questions and
surrogate measures used and from the survey methodology itself. Whilst
it seems likely that financial managers will report more use of what they
see as rigorous rational procedures during periods of high uncertainty,
it may not be responsible for the actual decision taken. Rather it most
probably stems from a heightened awareness of the risk of being exposed
(e.g. by press coverage) when projects fail and having to account for risk
processes under corporate governance rules. Reporting use of rational
approaches is what they think is expected of them, but do the finan-
cial managers responding to such surveys really know or believe what
influences them and their colleagues in SDM when tacit knowledge and
Feel the Risk 171
cognitive processes are so inaccessible? Methods based on social interac-

tion with practitioners using techniques such as cognitive mapping and
group interviews are more likely to reveal the influence of contextual
factors and the role played by intuition.
Balancing the analytical and intuitive

decision-making styles
The evidence from the literature can be interpreted in a number of ways.

Whilst the economic rationalists continue to search for enhanced quan-
titative theories and to present the use of instinct or intuition as bad
behaviour on the part of decision-makers, others are more accepting of
human tendencies to employ their intuitive feelings about alternative
propositions and harness their years of business experience as emotional
intelligence. However, to argue for intuitive (system 1) thinking alone to
determine important business decisions would be foolish.
Banks have been accused of copycat behaviour in their decision-making,
accepting sub-prime lending risk just because other banks were doing
so. One could question where the moderating effect of any costbenefit
analysis disappeared to in this case (Sunstein, 2001, 2005). Research into
the banking sector is not the focus of this chapter, but there are lessons
to be learned from the banking crisis where the level of equality argu-
ably became too high and the control ineffective in organizations that
may have allowed its decision-makers to adopt too high a risk appetite
simply because they could see competitors getting away with it for a
while. Did they feel the risk?
Power and control in society obviously play a key part in shaping risk
attitudes (Thompson et al., 1990) and the less confidence people feel in
the systems of control for example in financial markets, the more fatal-
istic and risk sceptical they become. This could be potentially damaging
when economies need to boost growth by taking calculated risks for
example in product innovation and business development decisions.
This situation can lead the way for governments and others seeking to
exercise control over society to use psychology to influence decisions
in what could be considered an unethical way. The power of sending
subliminal messages through advertising has long been recognized in
the field of marketing, as has the mimetic adoption of market positions
(Greve, 1998).
Balancing the rational (analytical) and the intuitive (risk as feelings)
aspects in decision-making therefore could benefit from the advan-
tages and compensate for the limitations of both. There have been a
172 Elaine Harris
number of authors advocating what they call dual processing in deci-

sion-making (see for example Epstein, 1994; Stanovich & West, 2000).
However, Campitelli & Gobet (2010) also identify the problem that the
cognitive process of framing (e.g. applying effort to thinking about the
decision environment) can over-ride the effortless intuitive process of
heuristics. Anderson (2000) concluded that decisions were likely to be
more effective if more intuitive judgement were applied to problems
than economic calculus, which seems appropriate in conditions of high
uncertainty. In SDM there is a lack of guidance as to how best to deal
with this problem in order to integrate cognitive and rational processes,
which may be due to the apparent lack of an accepted framework that
captures more than economic output.
At this point, we turn to recent advances in performance measurement
and an increasing recognition of the concept of a triple bottom line
(3BL). This recognizes that it is not sufficient or satisfactory for enter-
prises to simply make a profit, but that they should do so sustainably,
responsibly and transparently. For these aims to be achieved through
the effective allocation of resources to projects and activities in SDM,
the wider group of stakeholders such as employees, customers, local
communities and the world at large need to be taken into account. We
have had techniques to measure results beyond the financial outputs for
some time, such as Kaplan & Nortons (1992) balanced scorecard (BSC),
with four perspectives of performance, financial, customer, internal
(business processes) and learning/innovation (long-term sustainability).
BSC may go under an alternative name, for example a steering wheel
as in the case of Tesco PLC (Woods, 2011: 57) which essentially replaces
the learning/innovation perspective with two other stakeholder perspec-
tives (people and community) in line with 3BL thinking.
The BSC may have grown in popularity amongst companies, as many
case studies and surveys reveal, but until recently it has been poorly
theorized. Busco & Quattrone (2014) present the BSC as a rhetorical
machine in a theoretical framework with four dimensions. They see it as
a visual performance space, as a method of ordering and innovation, a means
of interrogation and mediation and as a motivating ritual. The case study
they report shows evidence of each of these four roles in the day-to-day
measurement of performance in a company, resulting in management
action. However, no such approach is generally applied when strategic
investment decisions are made. So why is a BSC approach not utilized
in SDM? Perhaps in Busco and Quattrones case it is being used for long-
er-term decision-making, but is it made explicit in the business cases
presented to the board? Their paper suggests that any business proposal
Feel the Risk 173
would need to be argued in terms of the strategic imperatives, which in

turn flow from the BSC analysis. They comment that (51)
BSC is able to accommodate different users interests within its unitary

working practice by being a means of interrogation and mediation, i.e. an
instrument that constructs knowledge by allowing users to continuously
question notions of strategic imperatives, objectives and KPIs.
It is argued here that this must surely influence managers heuristics and
help to develop a shared cognition of business motives and the environ-
ment such that expert intuition will take the BSC as a reference point. If
this is the case, it is argued that the BSC could and should be recognized
as an appropriate form of framing for strategic decisions. It seems odd
that few companies seem to have taken BSC principles on board in SDM
despite guidance from the original authors (Kaplan & Norton, 2004) in
their work on strategy mapping. While Woods (2011, p. 162) advocates
integrating risk and performance measurement, there is little guidance
for practitioners about how to integrate risk and BSC into SDM.
The so-called paradox of risk is that often there is more detailed risk
analysis at the operational level and not enough at the strategic level.
Whilst there is a place for quantitative methods, when we have reliable
enough data to make it meaningful, strategic level managers could do
well to feel the risk and harness their expert intuition (benefitting
from the NDM research) as well as using multiple performance measures
to evaluate propositions.
Conclusions and further research
The main conclusions from the literature are that appraising SIDs
requires more than the single aim of profit maximization to be consid-
ered, that risk and other non-financial factors are not easily measured
but need to be assessed, that managerial judgement is based on concepts
from psychology, but decision-making involves multiple managers and
most relevant behavioural theories relate to the individual. It is also
difficult to discover how managers feel the risk and match (or not)
their risk appetite with that of their organization, especially through
survey research methods, where respondents may over-emphasize
rational approaches.
The main argument of this chapter is that as traditional capital budg-
eting techniques are inadequate for SID-making in todays increasingly
uncertain world, more flexible frameworks such as BSC and cognitive
174 Elaine Harris
mapping tools could usefully be developed that empower managers to

not only feel the risk in an emotional intelligence sense, but share
that intuitive feel with others in a visual performance space as an aid
to balanced decision-making.
It seems likely that despite Kahneman & Kleins (2009) failure to
disagree, psychologists will continue to work in either the positivist
paradigm of HB or the non-positivist paradigm of NDM. In the same
way, a significant number of business researchers are likely to continue
following the positivist paradigm of neo-classical economics. However,
a review of research in management control, including SDM (Berry
et al., 2009) concluded that more field studies would help to keep our
theorizing firmly grounded in organizational reality, as a collaborative
activity with practitioners, more in the style of action research. The
authors also called for researchers to adopt an open-mindedness to draw
upon a wide range of theoretical approaches to move this essentially
inter-disciplinary subject forward, which is echoed here.
There is arguably a need for more psychologists to venture away from
their clinical context into the business world to test out the transfer-
ability of their theories to SDM, by conducting research in organiza-
tions. Few Business School researchers have a sufficient understanding
of psychology and few psychologists an adequate grounding in business
for them to cross the discipline boundaries on their own. It seems that
one way to integrate the learning from these two fields is for inter-disci-
plinary research teams to form around the shared principles of natural-
istic enquiry (Lincoln & Guba, 1985; Miles & Huberman, 1994).
The knowledge gaps in SDM under uncertainty that they could
usefully study in organizational settings might include comparisons
between the psychology of SDM in small entrepreneurial enterprises,
large multinational companies and state owned entities. The influence
of national and cultural contexts on SDM, e.g. comparisons between
SDM in developed and developing countries, between relatively stable
economies and economies in crisis has strong qualitative research
potential.
The use of performance measurement systems, e.g. BSC in SDM as
action research (assuming no company that has formally adopted this
approach yet can be found). Sustainability and ethics (3BL) in SDM
is another potentially fruitful avenue, as is the role of social media in
SDM, including the potential for crowd-sourcing. Power and internal
organizational politics and SDM, e.g. marginalization of dissenters
could also reveal how decision-makers share their feelings about risk
and uncertainty.
Feel the Risk 175
Researchers working in the NDM paradigm may be in the minority

in psychology departments, just as managerial cognition researchers
are in the academy of management, but there is surely an opportunity
for research networks and special interest groups like the Management
Control Association to foster better links across these disciplines to work
jointly on taking SDM research forward.
Notes
1. The mathematics of portfolio theory are not covered here, see Bromwich
(1976): 295301.
2. Option pricing theory examines the benefits of holding an option to invest,
so delaying a decision to invest until a later date when there is less uncertainty
surrounding the likely outcome.
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12
Uncertainty: Risk Management in
Universities
Kim Soin, Christian Huber and Sharon Wheatley
Introduction
Uncertainty is a prevalent feature of any organizational setting and

managers have always faced uncertainty. This uncertainty pre-dates
Knights (1921) early work on the nature of uncertainty and March &
Shapiras (1987) seminal work on the role of uncertainty in decision-
making in organizations. Power (2007) argues that when uncertainty
is organized, it becomes a risk to be managed. However, the discourse
of risk and the way it is managed is not always a feature of the wider
management control framework in organizations. And, although the
relationship between risk management and management control has
been acknowledged both explicitly (Bhimani, 2009; Mikes, 2009, 2011;
Soin & Collier, 2013; Woods, 2009) and implicitly (Huber & Scheytt,
2013) in recent literature, the connections (or perhaps the connector(s))
are far from clear. In this chapter, we explore the connection between
risk management and management control and argue that both concepts
have experienced changes in recent years that have united them under
the umbrella of a discourse around accountability.
Taking Anthonys (1965) definition of management control, where
management control is defined as the process by which managers
assure that resources are obtained and used effectively and efficiently
in the accomplishment of the organizations objectives (p. 17), we can
see that traditional risk management did not really feature in manage-
ment control. Risk management dates back to the work of Frank Knight
in the 1920s that was mainly applied in banks and insurance companies
as a way of limiting potential losses in highly specialized and quantified
financial markets (McGoun, 1995). However, even if these highly abstract
tools were used to determine the efficient and effective use of resources,
178
Risk Management in UK Universities 179
such a task was largely exclusive to finance departments. Management

control staff had little concern for these forms of risk management.
Moving on from Anthonys (1965) work, both management control
and risk management practice had started to change. Berry et al. (1995)
define management control as the process of guiding organisations
into viable patterns of activity in a changing environment (p. 4).
The inclusion of a broader and more dynamic environment indicates
that management control is no longer the preserve of managers and
those that were being managed. External demands by markets, regula-
tors and stakeholders entered the frame. These external demands have
shifted the role and remit of management control practices to one that
now includes the creation of accountability. This has coincided with a
broader shift towards a mixing of external and internal reporting and
ideas about corporate governance (Power, 2007).
Sauder & Espeland (2009: 64) argue that accountability has become an
expansive and elastic term for transparency, improving decision making,
containing bias, and enhancing productivity. This development has led
to various forms of standardisation and the development of strategies to
achieve accountability, one of which is risk assessment and management.
Miller & Power (2013: 583) highlight the expanding role of accounting,
identifying what they call the adjudicatory role of accounting where
accounting has moved beyond the more traditional costing practices to
the creation of accounts of performance for example through risk
registers and the like. In this way, creating accountability has become an
additional core task for management control activities. Risk management
has experienced a similar development. In this respect Powers (2007,
2009, 2013) work is instructive. He shows how risk management has
evolved in scope and focus with new risk categories such as operational
risks or reputational risks entering the picture. This is part of a movement
from highly complex and technical tools to a fairly generic repertoire of
risk maps and risk registers, which can easily be applied in any organi-
zational context by any management expert including staff concerned
with management control. Power identifies the Cadbury report (and the
rise of corporate governance), the Turnbull report (ICAEW, 1999) and the
COSO framework (COSO, 2004) as crucial points in the dramaturgy of
this development. The call for accountability has led risk management to
also become more focussed on satisfying external reporting requirements
through new tools and conceptualizations.
Risk management and management control have moved closer
to each other in the past 20 years or so. United by the pressure of
a powerful discourse of accountability, risk management has become
180 Kim Soin, Christian Huber and Sharon Wheatley
inherently connected to management control. In a sense, risk manage-

ments job is to cover the back for management control: It can be
argued that management control practice has always been a producer of
assurance and that new discourses of accountability simply put pres-
sure on management control to produce this assurance more explicitly.
This in turn links risk management more tightly to traditional defini-
tions of management control. Whatever the reasoning, the connection
between risk management and management control is getting closer
but still little is known about how this is done in practice.
In order to understand the connection and the ongoing intertwine-
ment of risk management and management control, it is important to
understand how risk management is expanding its scope and changing
to accommodate ideas of accountability. Whereas scholars such as Power
or McGoun (1995) have focussed on the historical development of risk
management, we focus the rest of this chapter on the conceptual and
functional development of risk management. Drawing on the example of
regulation in the UK higher education sector, we illustrate the new scope
of risk management and the new tools that accompany this expanded
scope. In doing so, we show how risk management is connected to
management control through notions of accountability. We begin the
chapter by examining the regulatory context in which risk management
has spread in higher education institutions. We then discuss findings from
a web-based search of UK universities risk management policies and an
in-depth case study in a UK university. We then conclude by discussing
these empirical illustrations against the background of the increasing
intertwinement of management control and risk management.
HEFCEs risk management
Higher education institutions (HEIs) in the UK are governed by the

Higher Education Council for England (HEFCE). This powerful regulator
is exerting mounting pressure on HEIs in the UK to increase their effi-
ciency and effectiveness in meeting societal goals. One consequence of
this development has been the prescription for HEIs to account for their
risks. For this purpose, HEFCE has designed guidance on risk manage-
ment for universities (Huber, 2009). The background against which
HEFCE has crafted its policy is the private sectors approach to risk
management, and in particular its principles. In 1991, the Committee
of Sponsoring Organizations (COSO, 2004) in the US developed one of
the first systematic conceptual frameworks and standards for internal
control. This framework/guidance was then re-drafted under the concept
of enterprise risk management (ERM) to reflect the shift from internal

audit to enterprise risk management. In 2004, COSO updated its earlier
guidance on internal control and reframed it as a standard for enter-
prise-wide risk management. The Turnbull report (ICAEW, 1999) was the
UKs shorter version of the COSO risk-based approach to internal control
and has become a blue print for risk management across a range of public
sector institutions including universities. This echoing of private sector
styles of management is part of a wider trend that has transformed the
governance and management of the public sector in the UK. During the
1980s, the management and organization of the public services in Britain
came under sustained pressure for change, in part due to a relentless neo-
liberalist belief in the performance enhancing properties of private sector
styles of management and a corresponding view of the inefficient and
bureaucratic nature of the public services. This is commonly referred to
as the influence of New Public Management (NPM) on public adminis-
tration. The basis of NPM lay in the injection of private sector expertise
and rationality into the public sector, seeking to remove the differences
between public and private sector administration and to introduce new
patterns of accountability in the public services1,2.
HEFCE seeks to promote accountability for the use of public funds
and uses funding mechanisms as a way of ensuring good governance in
the higher education sector. In 2001, HEFCE required all higher educa-
tion institutions to adopt a risk-based approach to internal control.
Namely, a risk management system that can identify, analyse and control
all types of risk and is subject to review on a regular basis. In their 2013
accounts direction (HEFCE, 2013), HEFCE reiterated the need for HEIs
to maintain a sound system of internal control and to ensure that key
principles of effective risk management have been applied. HEIs need to
demonstrate that these controls cover all risks, with a focus on the most
important risks, to produce a balanced portfolio of risk exposure. The
process should be based on a clearly articulated policy, requiring regular
monitoring and review, which gives rise to action where appropriate.
Risks need to be managed by an identified individual and involve the
demonstrable commitment of governors, academics and officers. In
addition, risk management should be integrated into normal business
processes and aligned to strategic objectives.
For HEFCE, risk is defined as:
The threat or possibility that an action or event will adversely or

beneficially affect an organisations ability to achieve its objectives.
(HEFCE, 2008: 4)
Put simply, risk management is a process that aims to improve the

chances that objectives are achieved, that damaging things are less likely
to happen and that beneficial outcomes are more likely to be achieved.
Risk management is not about avoiding all risk, but about under-
standing what risks we are exposed to and working out how to manage
them. Examples of risks identified by HEFCE include things like finan-
cial, estates, strategic, health and safety, students, reputation, staffing,
research and overseas operations. The guidelines suggest an integrated
approach to risk, with the intention of enabling organizations to be
more efficient and better able to grasp opportunities. In terms of good
practice, HEFCE (200511: 5) states that:
Good risk management practice is about having a holistic approach,

driven by a desire to balance stability and innovation.
Further practical guidance on how HEIs can enhance and embed their
risk management processes is to reconcile the top-down and bottom-up
elements of a risk management process. Figure 12.1 illustrates the risk
management activities HEFCE would expect to see in an institution
following current good practice.
Top-Down Integrated Board / Executive Reporting

Strategic Risk (monthly/quarterly) Watch List of risky
Assessment business initiatives
Key
KeyRisk
Risk &
& Mitigation
Mitigation
(annual) Reporting Key overall risks &
Reporting
adequacy of mitigation
Risk embedded in
Centre
Strategic Planning
Current & Future Risk Profile Feedback &
High-level
(monthly / quarterly) Actions
SWOT/STEP
& Strategic Risk Integration Action
Integration of
of Strategic
Strategic &
& Action
Operation-wide Planning
Register Operation-wideReviews
Reviews Planning
Board Level of risk, mitigation effectiveness, Coordinated

Assessment of impact on overall risk profile mitigation plan &
understanding of action tracking
risk appetite
Bottom-Up Collated operational risk reporting

Operations, Projects
Operation-wide with mitigating actions (monthly / quarterly)

Risk Assessment
& Functions
Collation of
Operational Risk Reviews
Operations
Operations Programme & Project Functional Support
Risk
RiskReview
Review Risk Review Risk Review
Operations risk Programme & project Functional risk

reporting risk reporting reporting
with mitigating with mitigating with mitigating
actions (quarterly) actions (monthly) actions (quarterly)
Figure 12.1 Elements of an institution-wide risk management framework

(HEFCE, 200511)3
HEFCEs approach to risk management is one which is built on private

sector ideas and is imposed on universities as a form of enforced self-
regulation (Ayres & Braithwaite, 1992). That is, universities can differ
from HEFCEs templates but must somehow prove to the regulator that
they act accountably with respect to the risk and uncertainties they face.
Following Power et al. (2009) we interpret this shift towards account-
ability as part of the emergence of a new, broader form of risk manage-
ment. To further understand these changes and discuss their connections
to management control, we will now present the findings of web-based
research in UK HEIs and a case study of the management control system
of a UK university.
Taming uncertainty: Risk management and

management control in UK universities
Power et al. (2009) argue that universities constitute a prime example

of types of organizations under new pressure to conform to values of
accountability and transparency in the form of risk management. In this
section, we aim to show how risk management enters HEIs and how the
logic of accountability as expressed in the HEFCE guidance, acts as a
driver for the creation of management control tools, which in turn, act
as a driver for the expansion of risk management. There are two aspects
here: Firstly, through a web-based search of publicly available informa-
tion on HEI websites, we show that many universities are producing
generic replications of HEFCE sample policies and standardized risk
management practices. Secondly, we look at a case study of risk manage-
ment practice in a UK university to show how risk management pene-
trates the strategic and management control levels of the organization.
Our web-based research was carried out to investigate the risk manage-
ment approach of HEIs in England as revealed by publicly available
information on their websites. This approach allows us to gain an
overview of the adoption of risk management as part of management
control across a wide sample. From an accountability perspective, this
exercise is in itself quite revealing, as it shows how universities partici-
pate in this accountability discourse. The sample population was drawn
from the 118 HEIs listed on the 2013 National Student Survey. From this
population, a sample of 24 organizations (20.3%) was selected at even
intervals across the list. The aim of the sample was to include a broad
cross section of HEIs. Each selected university website was searched for
risk policy, risk register and risk map. When available, strategic
planning documents were also reviewed to ascertain if, and how, risk
management was integrated into normal business processes and aligned

to strategic objectives. The private provider BPP University College was
also sampled. Although there was no website information available on
their risk management practice, an organizational insider (one of the
authors) revealed that there is a risk register, which is regularly reviewed
by a management committee (not the audit committee). This illustrates
that the web information can only reveal which organizations choose
to publicize their risk management activities (in this case 50% of them),
and the absence of information does not necessarily indicate that there
is no risk policy or register.
Table 12.1 summarizes the findings:
Table 12.1 Evidence from our web-based research
Audit
Risk HEFCE Risk committee
Policy format/cited Register responsible Risk Map
50% of 10 of these 58% made 38% clearly No evidence

the sample policies were reference to a stated the of risk maps
referred to a available on the risk register audit being used
risk policy website (83%). committee was
Of these, 8 (80%) responsible
referred to HEFCE for risk review.
or used the Executive
template provided Committee,
by them Council
and Heads
of Schools
were other
alternatives
These findings cast some interesting light on current risk manage-

ment practices in HEIs. HEFCE guidance clearly influences the applica-
tion of risk management practice. A total of 73 per cent of the policies
referred to HEFCE or utilized the template(s) provided by them, making
appropriate amendments to tailor the content to their organization.
For example, the HEFCE sample risk management policy template
(HEFCE, undated) suggests a role for the Audit Committee in managing
the annual review of risks; 38 per cent of HEIs in our sample followed
this element of the guidance. Risk registers were evident in 58 per cent
of the organizations, and were available to university staff in 13 per
cent of the cases. The review of the risk register was specifically referred
to as annual, termly, quarterly or more broadly as regular the term

used in the HEFCE guide to good practice (200511). However, no risk
registers are available to the public through websites and there was no
evidence of the use of risk maps. Two of the institutions revealed the
use of external consultants (for example, KPMG) to provide training for
staff on risk management, aligning with HEFCEs preference for utilizing
private sector good practice to set the standard for HEI practices. One
organization that does not publish risk documents on the website
(Coventry University) illustrated identification of risks through the
use of a PEST (Political, Economic, Social, Technological) analysis and
a Stakeholder analysis (which uses Key Process Indicators to monitor
identified actions), illustrating a different approach to the management
of risk than that suggested by HEFCE.4
To summarize, although it was difficult to access details of risks
identified by organizations, our web-based research reveals common
approaches to the management of risk in particular, the use of
a risk policy and risk register. Our findings show that most universi-
ties are producing generic replications of HEFCE sample policies and
thus creating standardized versions of the management control tools
created in response to HEFCEs demands for accountability through
risk management practice. Again, in faithful representations of HEFCE
guidance, organizational structures have been put in place to ensure the
regular review of risk registers, mostly managed by the Audit Committee.
Overall these findings support our contention that external demands for
accountability are forcing risk management deeper into universities and
that this is impacting on management control thinking in particular
the construction of techniques to support this logic of accountability.
In the following, we present the second part of our empirical enquiry.
Here we report on the findings of a case study undertaken in a UK
university. This part of our study aims to complement the overview data
presented earlier, providing insights into both the adoption of proce-
dures and the adaption of organizations in relation to the connection
between management control and risk management. The data is based on
a number of interviews undertaken at senior management level to look
at the implementation of a risk management system in a UK university.
Nine interviews were conducted with Heads of Schools and eleven inter-
views were conducted with heads of administrative departments (Public
Relations (PR), Human Resources, Estates, Health and Safety, Finance,
Information Systems (IS), Training, Academic Registry, Knowledge
Transfer and Facilities Management). Internally published documents
and (publicly available) web data about the university provided further
information. Relating to our web-based research, this university was one

of the institutions that faithfully translated HEFCEs guidance.
Following the aforementioned HEFCE (2001, 200511) guidance that
emphasized institutional accountability, efforts were made to create
an institution-wide risk management framework (cf. Figure 12.1) or
an Enterprise-wide Risk Management (ERM) system as it is commonly
known. Drawing on Anthonys (1965) levels of control (strategic,
management and operational), ERM systems are located at the strategic
level (Vice-Chancellors Group (VCG)) of organizational control. These
controls are largely enacted at the lower levels of management (Heads
of Schools and senior administrators) and operational (lecturers and so
on) control. In particular, at the strategic and management levels, risk
management is effectively part of management control.
At the strategic control level, a number of formal procedures to
demonstrate accountability were introduced and new management
control tools were created. This involved developing a risk manage-
ment policy, creating a corporate risk register and establishing control
assessment procedures such as records management. Risk management
was also incorporated into the planning, decision-making and business
planning processes within the university. After the updated guidance in
2005, activities were expanded to develop an implementation plan and
to explore and assess organizational risks with the emphasis on controls.
The internal audit function became risk champions that promoted
risk management. Thinking shifted towards risk appetite how to
identify and define it, mitigate and control it. The prioritization of risk
reporting, embedding and integrating risk management procedures into
existing organizational practices for example with business planning
also occurred.
Formalized risk management reporting practices and controls and
increased reporting at senior levels were introduced. Schools and depart-
ments were required to produce risk registers and Heads of Schools and
the heads of non-academic areas were required to report to the VCG
on a six-monthly basis about the management of risk within their
area of responsibility. The two Deputy Vice-Chancellors with respon-
sibility for the overall management of schools, as well as the heads
of non-academic areas, were required to report on their risk manage-
ment arrangements to the Audit Committee, and the management of
risk was included as an annual agenda item for University Council as
part of the business planning process. Ongoing VCG reviews of the
corporate risk register were also introduced. In 2005, a risk manage-
ment project team was established to see how risk was being managed
across the whole university and to identify ways to embed the risk
management system. In conjunction with internal audit, they devel-
oped ways to share risk management knowledge for example, via
training sessions.
Lower down the organization at the management level, where much
of this control activity was enacted, there were more diverse views on
risk. Competing aims, lack of engagement with, and ownership of the
system as well as a reluctance to engage in the process were all evident in
academic attitudes towards risk management. For academics, this mana-
gerial/bureaucratic style of control (Macintosh, 1994), was a complete
anathema that challenged the traditional (management control) values
of autonomy, creativity and collegiality (Ezzamel, 1994; Macintosh,
1994; ter Bogt & Scapens, 2012). Risk management was perceived as
an administrative task rather than an academic one. Some academic
managers (for example, Heads of Schools) were unwilling or unhappy
to be interviewed on the topic, saying they knew nothing about it.
Many brought administrators to the interviews because they were seen
as more able to answer questions about risk management. This fear
of the risk management system led to a myopia about the active control
systems that were already in place to alleviate risk. Things that covered
traditional academic territory like controlling academic risks around
students: issues such as progression, recruitment patterns and the
viability of new courses. These issues covered traditional academic terri-
tory and systems were already in place to assess, document and control
risk in these areas.
The formal risk register was not identified as part of any risk manage-
ment controls by any of the interviewees and the role and purpose
of the centralized risk register was unclear throughout the research.
Although, in theory, it can be a means to improve risk management
within an organization by forcing senior managers to be accountable
for the identification, assessment and control of risks they manage,
it is clear that senior managers in academic departments did not feel
comfortable with such forms of practice. Added to this, there was a lack
of clarity about how transparent and open the risk register is meant to
be and who has access to the document. Accountability in particular
was a thorny issue: formal responsibility for the preparation of local
risk registers was assigned to Heads of School. Yet, in the 2005 risk
register, all the people identified as being responsible for risk manage-
ment were administrative staff (even where it was clearly an academic
management issue). Consequently, accountabilities for the process were
unclear. The following example archive keeping demonstrates that
identifying clear and defined accountability for risk is not a straightfor-

ward matter:
The administrative part of the University may identify a risk archive

keeping for instance. This will have been driven by legal considera-
tions and concerns about liability real to the administrative part of the
University but one for which academics feel that they are not directly
responsible. A system for managing the risk is developed and policy
written and agreed by the University. The method of implementa-
tion is to email Heads of School drawing their attention to the policy.
They in turn pass the responsibility down to individual academic
members of staff. The management of risk is dependent upon indi-
vidual staff members opening the email, reading the email, opening
the attached policy and making sense of the fact that they have been
designated as having responsibility for this risk. The academic parts
of the University tend not to develop systems to deal with such risks
and actively manage them. Their collegiate culture will mean that all
are broadly and collectively responsible ... this often means that no
one takes responsibility. However Heads of School are still account-
able (Internal Report).
Individuals also talked about transferring responsibility for risks and

avoiding culpability for risks. However, in areas like estates and research
contracts and finance where risk was a long-standing management issue,
it was accepted as part of day-to-day work. In the following section, we
discuss the implications of these findings for the connection between
management control and risk management.
Discussion and conclusion
Until a decade ago, management controllers could be forgiven for viewing

risk management as merely a tool for finance that focussed on things
like value at risk or portfolio management in large banks. However, the
empirical illustrations presented in this chapter show that risk manage-
ment has become a substantially different set of practices, and is part of
a response to pressure from outside the organization to be accountable
and has become intertwined with traditional management control tasks.
We now analyse these developments, drawing on our empirical material
as illustrations of themes discussed in the prior literature.
In the university example presented here, we show that traditional
risk management has changed to accommodate a different set of
practices with artefacts like risk registers becoming a central part of the
risk management policy. Although self-regulation enables organizations
to decide on the internal processes to achieve external targets and aims
(Ayres & Braithwaite, 1992; Culpitt, 1999), standardized responses are
frequently utilized, as our web-based search of university websites shows.
Risk registers and risk policies are the most common tools for managing
uncertainty in universities. Risk registers have become widespread in
many different types of organizations (Jordan et al., 2013). One reason
for the popularity of these tools could be that they are fairly generic,
which makes them applicable to a number of contexts by a number of
people. Another reason could be that they are easy to interpret, which
helps them to create accountability, as a number of stakeholders (such
as HEFCE in the higher education sector) can interpret the data and thus
call for such a form of representation. As Power et al. (2009) summa-
rize: the circulation of generic risk management standards and princi-
ples creates isomorphic pressures on organizations to conform to these
models and to apply them: a good organization is one which manages
risk in accordance with established frameworks (p. 169).
If Powers (2007) thesis that powerful discourses of accountability
and transparency are affecting many current management practices is
correct, then risk management can be seen as a response to calls for
accountability par excellence. The example of universities, again, can
shed some light on this development. HEFCE is a government agency
and deeply embedded in public discourses of spending tax-payers
money for the benefit of society. In this function, HEFCE is accountable
to the government and the nebulous figure of the tax payer. More impor-
tantly, HEFCE is also the propagator of accountability and imposes the
need and the technologies of accountability on universities. Enforced
self-regulation is a form of regulation which is especially prone to the
logic of accountability, as organizations must prove that they do not
abuse their freedom. This logic of governance is turning the organiza-
tions inside out, as Power (2007) argues. Organizations must use forms
of governance and management control to prove to stakeholders that
they behave accountably. The only way to do so is to lay bare the inside
workings of the organizations including the management of risk.
Where do these efforts to achieve accountability leave the prac-
tice of management control? We suggest that risk management is not
replacing traditional forms of management control but complementing
them. In our empirical example, this intertwinement occurred at the
senior management level. Risk management tools were used in addition
to more traditional forms of reporting and incorporated into existing
management structures. Conceptually, the inclusion of risk manage-

ment in management control activities symbolizes the addition of a
new dimension: whereas management control is aimed at ensuring that
organizations achieve what they set out to do, risk management is about
avoiding actions which actually put such achievements at risk. Put opti-
mistically, this can provide a new balance in management control by
which an additional perspective is gained (Tessier & Otley, 2012; see
also Tessier in this volume). Whether such a benefit materializes will be
an empirical question dependent on technical integration, senior level
commitment and corporate culture (Arena et al., 2010; Mikes, 2011). In
terms of theory, it is likely that such an extended scope enables manage-
ment control to better conform to discourses of accountability and
thereby gain legitimacy.
We end with a word of caution. What are the implications for
management control with this increasing focus on accountability
and uncertainty? At the operational level, our respondents reported
some alienation to what was seen as growing managerialism (Mueller
& Carter, 2007) and a focus on accountability, significantly detached
from their daily work life and traditional identities. Risk and account-
ability can lead to a focus on procedures and maintaining a faade
of behaving as desired by outside stakeholders. Redefining manage-
ment control to incorporate uncertainty for the sake of accountability
could then result in decoupling, defensiveness and fear. On the other
hand, this could be an opportunity for management control to re-in-
vent itself as a useful tool for managing uncertainty for the benefit of
organizations.
Notes
1. For a comprehensive discussion of the origins and influences of NPM on
public administration see Gruening (2001), Hood (1991, 1998), Pollitt
(2004).
2. In the higher education sector, reports such as the Jarratt Report (1985)
can be seen as manifestations of external attempts to change the internal
governance of institutions and the influence of managerialist values on the
sector.
3. HEFCE copyright material is reproduced with the permission of
Higher Education Funding Council for England (HEFCE) and may be
accessed in its original form here: http://webarchive.nationalarchives.
gov.uk/20100202100434/http://hefce.ac.uk/pubs/hefce/2005/05_11/
4. Although it is worth noting that SWOT (a similar type of analysis) is an
essential component of the HEFCE risk management template (see Figure 1,
page 7 and page 29 of HEFCE, 200511).
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13
Management Control, Regulation
and Investment Uncertainty in the
UK Electricity Generation Market
Liz Warren
Introduction
Thus far, this book has directed significant attention towards issues
of uncertainty, management control and controls; however, to under-
stand their true complexity, these matters benefit from further exami-
nation in the context of real business practices. This chapter will draw
on issues discussed elsewhere in this book and explore their relevance
within the UK electricity generation industry. Issues, such as the human
reaction to uncertainty, as discussed in Chapter 6, and how it can be
addressed by reducing exposure to it and attempting to benefit from it
will be addressed in this chapter. Chapter 10 introduced issues relating
to how controls are often introduced when new external regulations
emerge within the industry, and this is discussed further by exploring
how companies can reject new controls by choosing not to comply
and/or by holding back investment. Chapter 11, meanwhile, calls for
more research into the practice of strategic decision-making in its socio-
political, organizational context and how this influences how managers
assess the likely risks to a project before approving them; this chapter
will examine how in the electricity generation industry it was not risks
per se that led to the holding back of approval but rather uncertainties,
leading to a push for consultation on a new public policy.
This chapter will consider all of the issues highlighted earlier, by
providing a contextual industry analysis, focussing on uncertainty
arising from current and potential future regulations. It will explore
how uncertainty critically limited investment in the UK electricity
generation market, by examining how energy companies make multi-
million pound capital investment decisions in a climate of significant
regulatory uncertainty. By examining the increasing environmental
193
194 Liz Warren
regulations in this industry and how energy companies have tried to

use predictive models to aid their decision-making process the chapter
will analyse how new control systems were used to identify weaknesses
in both current and future regulations, to avoid uncertainty and also to
benefit from it. The latter part of the chapter will show how real options
theory was implemented, in many cases by holding back on investment
until greater certainty was provided; creating an investment hiatus.
Investment decisions provide complex and, in many cases, highly
uncertain control issues, as argued by Emmanuel et al. (2010); thus any
meaningful understanding requires full appreciation of the organiza-
tional context. Therefore, this chapter will question the management
controls associated with regulatory uncertainty within the UK electricity
generation industry by providing a contextual analysis of this industry
rather than an in-depth theoretical observation of the control systems.
Background to the UK electricity generation market
Since privatization in 1990, there have been revolutionary changes

within the UK electricity generation industry. The process of privatiza-
tion was immensely complicated, as it was the largest privatization plan
the Conservative Government had been involved in, and the indus-
trys combined net assets were in excess of 42 billion (Surry, 1996;
Chesshire, 1997). It was anticipated that the closure of the national-
ized industry would provide a more economically aware and financially
viable competitive market. Although the government had encouraged
competition within the industry via the Electricity Act 1983, this had
failed, because independent companies had been unable to provide
financially viable investment plans that could compete with the Central
Electricity Generation Board (CEGB), which used a 5 per cent real rate
of return to justify investments (Chesshire, 1997). Private companies
required a rate of return that was greater than 5 per cent, therefore,
no justification could be provided to award the contracts to anyone
other than the CEGB. It was hoped that privatization would introduce
more control to the industry and force the implementation of common
business practices, as found in other privatized industries. The use of
management control processes, such as investment appraisal and busi-
ness planning were anticipated to move from being only politically
symbolic gestures to those with a significant impact on efficiency. At
the time, based on capital budgeting modelling, it was thought that the
government could stand back from the industry and allow the market to
trigger the required levels of investment (Miller, 1991).
Regulation of UK Electricity Generation 195
At the time privatization happened, three major electricity genera-

tors dominated the electricity industry: National Power,1 Powergen2
and Nuclear Electric3 (Dnes et al., 1989). In the first 11 years following
privatization, the industry witnessed an influx of international compa-
nies, and by 2001, the market structure of the electricity industry had
changed dramatically. There were in excess of 40 generators operating in
the UK, a power pool replacement known as the New Electricity Trading
Agreement (NETA) and full retail competition.
Following the introduction of NETA, market pressure became very
intense, because the industry had a full open market with too much
capacity. Electricity prices dropped and the market became saturated,
resulting in a reduction in competition with many competitors leaving
the market. By 2011/12, although according to national statistics the
number of major power producers was 28, the truth was that 6 large elec-
tricity generation companies owned 71.3 per cent of the UKs generation
capacity (Seris, 2012). In addition to the changes in economic market
structure, one of the biggest drivers of change within the industry
was the introduction of environmental regulations, such as the Large
Combustion Plant Directive (LCPD) and the European Union Emissions
Trading System (EU ETS). The current position of the UK electricity
generation market provides a contextual background that it is profit-
able yet unstable; this is an ideal background against which to analyse
management control, regulation and investment uncertainty.
Investment, regulation and sustainability
Investment in the electricity generation industry is encouraged by

speculation around low security of supply,4 which ultimately pushes
up the price of electricity; however, an increase in pricing must also be
concurrent with strong policy. Without a policy to secure supply, and
in the absence of regulation, those companies considering investment
face uncertainty. The consequence of an increase in prices is that the
short run price is observed as being above marginal costs; this provides
an additional contribution to cover the cost of capital (Redpoint & ES,
2007). Control systems involved when generating business plans for new
investments consider the point at which the cost of capital is achieved.
However, although this seems standard it needs to be noted that invest-
ments within this market cannot be completed quickly, as internal
decision-making processes must be undertaken to analyse whether an
investment is financially viable. Viability is determined through the
control process for business plans generated using techniques that are
196 Liz Warren
from a box of tools commonly known as investment appraisal. A long

process is essential to cover those risks and uncertainties associated with
investments, as the life of a plant can be in excess of 25 years, with
an average cost of 600 million for 1000MW (Warren & Seal, 2014). A
power station with a generating capacity of 1000MW is able to provide
sufficient electricity for approximately 1 million people. To ensure the
supply is greater than demand the UK needs an estimated 95 billion
pounds worth of investment, with this increasing to 200 billion in
the longer term. It is the duration of this time period and the need for
substantial capital that contributes to the uncertainty of such projects
how is it possible for anyone to predict the factors that will impact on
a project over such a time frame? Moreover, the combined process of
planning and applying for permits (permission from the government to
build) can take between four and seven years (Warren, 2013).
Although the process of investment itself includes lengthy permit
application and internal scrutiny, the industry itself, however, is not
self-controlled, in that it is heavily regulated by both the Environment
Agency and OFGEM. The Environment Agency oversees the implementa-
tion of environmental regulations in conjunction with the Department
for the Environment, Food and Rural Affairs (DEFRA), whilst OFGEM
focuses on competition and the protection of the consumer. Therefore,
the industry is surrounded by issues of profitability that affect share-
holders, as well as concern regarding regulation and issues of sustain-
ability driven by the UK economy, which requires continuation of an
electricity supply. Issues of regulation, investment and sustainability
have created a paradox because these aspects do not blend well; in fact,
in some instances they are contradictory.
As can be seen in Figure 13.1, there are three aspects to under-
standing the decision-making process in this industry with contradic-
tions among investment, regulation and sustainability, which emerged
from changes made when the industry was privatized. Prior to privatiza-
tion the industry was legally obligated to provide sufficient electricity
to meet the UKs needs; however, the process of privatization removed
this responsibility because it was anticipated that the use of capital
investment techniques would generate sufficient interest in investment
when and where demand was needed, through price increases. The UK
government argued that investment would be market led when it was
required.
However, the introduction of new environmental regulations during
the past 13 years has affected the appeal of the UK market, becoming one
of the biggest problems facing the industry in terms of sustainability. To
Investments: investment
appraisal
Institutional process
Regulation: e.g. LCPD,

ROCs and EU ETS Sustainability: can we
keep the lights on?
Social-economic context
Political context
Figure 13.1 Investment factors in the UK electricity generation market
De-rated capacity margins

12%
10%
De-rated capacity margin (%)
National Grids Gone Green 2013

Scenario
8%
Reference Scenario 2013
6% Reference Scenario 2012
Low Supply Sensitivity

4%
High Demand Sensitivity

2%
0%
2013/14 2014/15 2015/16 2016/17 2017/18 2018/19
Year
Figure 13.2 De-rated capacity margins

Source: OFGEM, 2013
gain an understanding of these problems it is important to understand

what sustainability is. In this chapter, it relates to the sustainability of
the generation industry, the economy of the UK and the social requirements
for the provision of basic resources, in this case electricity. Sustainability
does not only refer to environmental concerns, it also considers the
ability to continue generating the required electricity.
As can be seen in Figure 13.2, there is a security of supply concern
during 2015/16 within the UK, with the capacity margin reaching very
low levels.
At the crux of sustainability issues within this industry are renew-
ables. The UK government has committed to a 15 per cent target of
renewables by 2020 (Pollitt & Haney, 2013) and to achieve this, a 35 per
198 Liz Warren
cent5 reduction in CO2 emissions is needed by the year 2020 (DECC,

2012). The industry has been provided with incentives, in the form of
Renewable Obligation Certificates (ROCs), to encourage investment in
wind technology; investment projects such as offshore wind rely on
support instruments from local government to make them financially
attractive (Prassler & Schaechtele, 2012).
Although the renewables6 target is encouraging in terms of achiev-
ability, it needs to be remembered that the remaining 85 per cent of the
market also requires new investment. Those energy companies investing
in renewables must also invest in other more reliable sources, as the wind
does not always blow. The current UK energy market works mainly on
the basis of future contracts, therefore the cost of not generating to meet
contracted electricity quantities can result in significant financial penal-
ties because the contracted company has to enter the spot market in
order to complete the contract, which generally has very volatile prices.
Utilizing unreliable assets to generate electricity means the required
capacity for generation is significantly higher than was required in the
past. This in itself is causing concern for investors, because many can
expect to have stranded assets on their balance sheets if they are to
cover the uncertainty of wind technology. Transparent policy and regu-
lation in relation to renewable investment can reduce uncertainty; espe-
cially with the UK becoming one of the principal offshore wind markets
in Europe (Mani & Dhingra, 2013). Although renewable regulations and
policy have created a significant market for investment in the UK, the
renewable regulation itself is argued to have created an overall uncom-
petitive energy market (Helm, 2014), because other fuels are struggling
to compete, which explains why sustainability and regulation issues
are relevant when examining the role played by management control
systems and techniques.
As previously mentioned, sustainability not only considers the environ-
mental targets within a social system but also long-term capability to meet
the needs of future generations with new investments being required to
provide electricity for future generations. The recent White Paper (DECC,
2011) acknowledges that, due to the scale of the investment required in
the UK electricity generation industry, and the failures in the existing
market, the signals for private investment are inadequate to prompt suffi-
cient investment. The current government has not only been left with
energy policies that do not address the problem of the industry energy
portfolio, but it also remains heavily reliant on fossil fuels.
The reason that investment in new assets is problematic under liber-
alization is that pressures on pricing occur when new investments are
made; in the UK most of this pressure comes from subsidies that the
renewables are receiving. The gap between price and risk is a significant
issue, because the model private investors use to make decisions relies
on returns and risks being compatible if investment is to take place.
Shareholders demand good returns on their investments. It is there-
fore not surprising that the UK is now in a position where a significant
proportion of the assets generated are either naturally coming to the end
of their useful life (many are nuclear plants), or are closing because the
owners costbenefit analysis does not deliver profitable results (many of
the large coal plants). Investing in the necessary equipment to comply
with new environmental EU legislation creates, in many cases, unprof-
itable projects. Within the UK, in addition to EU regulation filtering
through, there has also been an added complication; that is, there was
no meaningful energy policy. The generators had no idea, aside from
renewables, what technology or fuel type would be favoured in the
future. As the big six companies, in the UK generation industry, are
mainly international companies, their capital allocation for new invest-
ment must be considered from an international perspective. Therefore,
if the cost of capital and risk is lower in another country compared to
the UK, then that is where they will make an investment, given that
returns are higher. There is no loyalty to the UK.
The impact of regulation in creating

uncertainty in investment
So far, this chapter has provided a brief reflection of the complexity

within the industry relative to investment, regulation and sustainability.
The addition of new environmental regulations emerging from the
European Union (EU) stressed a need for a stable energy policy to avoid
future problems with sustainability. The industry is currently in a state
of flux and the balance detailing how regulations are used within this
industry is a hot topic.
Since the introduction of NETA in 2001, environmental regulations
have expanded with the emergence of EU directives on the environ-
ment. The UK government signed up to these directives, despite its
hands off approach towards investment in the industry. Rather than
analysing investment in reference to the bigger picture the government
intervened only by offering incentives to satisfy environmental targets.
For example, they offered financial incentives to invest in wind tech-
nology and more recently, nuclear power, explaining why Helm (2014)
argues that the market has now become uncompetitive.
200 Liz Warren
Investment in this industry was expected to become market led

following privatization; however, direct manipulation, through the use
of ROCs, has unbalanced the market in respect of achieving a sensible
fuel portfolio. With the industry now influenced by financial incentives
preferring wind power, further uncertainty is emerging, with a threat to
the long-term security of supply by the industry. Long-term investment
will require significant capital and security from the government, set
out as policy. Currently the requisite policies are not in place to create
confidence in the market or to encourage other countries to transfer
capital to the UK.
As mentioned, the consequences of the expanding environmental
regulatory framework have been detrimental to sustainability in the UK.
Within the current structures, investment appraisal modelling suggests
investment is unsupportable, as there are currently too many unknown
variables (Warren, 2013). The rationale and purpose of regulation has
been misguided, as has the government assumption that it can use the
environment as a marketing tool, to present the government as good
citizens and win votes. Ultimately, this has backfired, because the
policy of strong environmental emissions targets has resulted in sustain-
ability concerns resulting from hugely expensive investment require-
ments. The current economic climate and the rising cost of materials
such as oil, coal and gas, does not support a green planet ideology,
and the realization that strong environmental emissions will result in
increased bills has resulted in increasing public debate on the genera-
tion industry.
The increasing debate over the industry, in the UKs press, has been an
intentional consequence of generators applying a real options argument
to hold off from investing in the UK. The generators have used the
control process involved in generating business plans, including the use
of capital budgeting techniques, to provide evidence that the current
market structure and lack of policy was unsustainable. The projects
that have been selected for investment purposes have in fact involved
trusting the market because predictive models were highly unreliable.
The regulators and governments assumed that market control mecha-
nisms to prevent over investment would by default encourage invest-
ment when required; however, instead, increased uncertainty evolved
from the current regulations and lack of public policy demonstrating the
insufficiency of these control mechanisms. By creating a public debate,
the issue of the government not having a meaningful energy policy led
to a consultation process.
Real options to mitigate the uncertainty resulting

from future regulation
The politicians and regulators conceptualization of market led invest-

ment contained a substantial flaw when compared with the logic of
modern investment appraisal; it ignored the concept of real options.
Real options theory makes it possible to analyse investment oppor-
tunities, where, if risks and uncertainties are too great, the value of
postponing investment can out-weigh the return gained following an
immediate investment. As Guthrie (2012:1) explains Modern invest-
ment theory recognises that firms often have flexibility regarding when
and how they invest, and it has sought to incorporate that flexibility
into decision making by using real options analysis. It is the genera-
tors flexibility that maximizes their ability to influence the future of the
generation industry.
As argued by White et al. (2013), when the energy industry applied
investment appraisal for future projects they had to add a large risk
margin, because expected future policy can impact on profitability;
this explains why the UK is currently finding it difficult to attract
capital. Uncertainty does not emerge only from future potential regu-
lations but also from changes to existing regulation and policy. Across
Europe, there have been many examples of governments changing
their level of support and incentives to various types of fuels, which
have led to projects costing millions of pounds becoming unsustain-
able. One example of a project significantly affected by a change in
public policy is that discussed in White et al. (2013); it details the
Norwegian governments announcement of a major change to its
bioenergy policy. One project had begun just a few weeks before the
policy announcement, and those who had provided capital lost the
majority of their investment.
The argument put forward is not that the generators will do nothing;
they can and are making applications to construct and invest in new
plants, but they can also then choose to retain their permits and not
spend until future policy is decided. As mentioned previously, the cost of
meeting section 36 is on average 3M, which is significantly less than the
previously mentioned capital cost for a complete project, 600 million
for 1000 MW (Warren & Seal, 2014). Guthrie (2012:1) argues that, (A)n
important source of real option value derives from the firms flexibility
regarding the timing of investment, since this allows them to wait and
see how the future uncertain economic conditions evolve, for example,
before committing to large irreversible investments.
202 Liz Warren
New Power - Gas (CCGTs)

4%
25%
71%
Approved Suspended Under Construction
Figure 13.3 Chart revealing real options theory with Combined Cycle Gas
Turbine investment applications
Source: Plats new power and respective developers. Cited in E&Y (2013).
In this industry the value comes from taking a wait and see approach
towards future regulations, as can be seen in Figure 13.3. Figure 13.3
demonstrates the real options theory being used in practice with only 4 per
cent of approved investments actually being constructed; the others have
either been suspended or the applications are being held back. Examining
their capital expenditure budgets the generators had to consider how
much they wanted to spend given the amount of uncertainties. The
generators recognize that future regulations could improve the economic
conditions for long-term investments. Thus, Guthrie (2012) states that
real options analysis is of critical importance in industries where high
capital investments are required, such as the UK generation industry. It is
argued that real options modelling can assist multinational organizations
to downsize their risk exposure (Driouchi & Bennett, 2011).
How the industry has used real options to

instigate a debate on future regulation
The direct result of the application of real options to the industry was
the governments White Paper in 2011. The government was forced
to accept that the issue of sustainability urgently required addressing,
through the creation of new policies and market structures to encourage
a balanced portfolio. No one knows whether the consultation process
outlined in the paper will be successful, but there is certainty that regu-
latory intervention is required to encourage investment; as no govern-
ment can afford the consequences if blackouts occur.
The White Paper (DECC, 2011) initiated the Energy Market Reform
(EMR), and focussed on decarbonization and renewable issues by
providing fixed prices in the form of Contracts for Difference (CfD),
carbon price support (CPS), capacity market (CM) and Emission
Performance Standards (EPS); however, there remain many associated
problems and uncertainties that arose from the proposals and will be
of concern for many years to come. Pollitt and Haney (2013) argue that
although the government is promoting the EMR as a total re-design of
the market they also suggest that is it simply an attempt to balance the
market by combining available subsidies. Although combining subsidies
would possibly generate an intermediate solution for the government, in
terms of its low carbon policy it will do little to resolve macroeconomic
problems and thus will continue to provoke uncertainty among inves-
tors (Pollitt & Haney, 2013). Sarasini (2013) adds to Pollitt and Haneys
(2013) concern, arguing that existing climate energy policies are full of
uncertainty when examining medium- to long-term frameworks.
As discussed in Chapter 6 some activities within organizations (and
this can include markets) are resistant to prediction; this can create
problems for management control systems. The chapter has demon-
strated that changes in regulations can result in prediction problems in
investment appraisal scenarios that produce uncertainty. It is not that
the issue of uncertainty is new, as argued by Soin and Collier (2013:
85), managers have always faced uncertainty it is a central feature
of any organizational setting; it is that uncertainty is emerging from
many different sources. However, this chapter has specifically exam-
ined uncertainty as it emerges from the prospect of current and future
regulation.
Regulation within the industry has added an interesting character to
the exploration of uncertainty, because it is simultaneously a vehicle
that the government can use to push its own political agenda, i.e. on
the environment, and plays a significant role in investment decisions
made by generators. In short, the introduction of new regulations often
creates a need for new management controls to monitor the item being
governed through the new regulation; these are non-negotiable (March
et al., 2000; Tessier & Otley, 2012). However, an interesting aspect of the
UK electricity generating industry is that the generators have refused to
accept the status quo and use management control features to create a
crisis, an investment hiatus and to encourage change.
204 Liz Warren
Conclusion
Capital budgeting plays a significant role in articulating the way in which

accounting can instigate change in wider social practices. Chapter 10
argued that new controls are difficult to implement in the absence of an
effective predictive model, arguing that high uncertainty can result in
weak predictive models. There is no doubt that from a technical control
perspective this can be true; however, this chapter has demonstrated
how weak predictive models can be used as negotiation tools to argue
in favour of new rules and procedures, in the form of regulations, in a
climate with a high degree of uncertainty.
This chapter has also demonstrated how generators within the elec-
tricity generation industry demanded the reconstruction and revision
of the market structure relative to investment. The use of capital budg-
eting techniques allowed generators to exploit the notion of the double
contingency of interaction. This reflects the mutual responsiveness
of the interactions between parties. Each party or actor, in effect, has
reciprocal opportunities to sanction the acts of others. The government
can only use the process of regulation to create sustainable generation
if the generators accept the terms of that regulation by exercising the
option to invest internationally. The acceptability of regulations and
their consequences were determined using capital budgeting modelling.
This did not enable the government to stand back from industry as was
originally intended (Miller, 1991); in fact capital budgeting provided an
opportunity to expose the contradictory nature of the regulations in
place and to shift the balance of power in favour of the generators. The
generators were able to control the process of generation, and utilize the
norms of shareholders demands for investment to provide economi-
cally sound returns. The meaning of a sound return was obtained
through the capital budgeting techniques by generating profit.
Although the general press suggested a lack of investment was easy
to resolve, by simply building more power stations, this view displays
a lack of recognition of the complexity of the current situation. Yes, it
is true that building more power stations would resolve the problem;
however, behind the capital budgeting analysis of these investments
there are a number of complex political problems. This research reveals
the tremendous complexities involved in making investments.
The political negotiations involved in devising new policy created
barriers to investment. In addition, these barriers included ideological
factors, which related to the UKs desire to achieve significant environ-
mental protection at a level that does not account for the UKs current
financial problems. The lack of government direction seems to be the

source of the problem and the capital budgeting modelling has exposed
it. Current uncertainty has provided more leverage to the strategy
of investment appraisal and has become more than just a passive
technique.
Although some may argue that the generators were able to alter the
balance of power by holding back on investment, thereby preventing
the development of a sustainable industry, this does not give a complete
picture. Sustainability not only relates to emissions, it is also about the
ability to have an industry that can continue to meet the basic needs
of civilization into the future. Yes, the population of the world needs
green generation, but it also needs a long-term strategy that provides
long-term investment to provide populations with basic needs such as
electricity. Ignoring long-term investment is not only naive but is also
dangerous for the whole economy.
Notes
1. Separated into two companies, Innogy (2000), now known as RWE (2002)
and International Power (2000).
2. Owned by EON since 2002.
3. Until 1996, this companys ownership was maintained by the government,
and known as British Energy. Then EON acquired it in 2009, rebranding it in
2011 as EDF Energy Nuclear Generation Limited.
4. Security of supply is the industry term for the ratio of supply against demand
the aim is to have more supply than demand.
5. A 35% reduction based upon 1990 emissions values.
6. Although it is recognized that nuclear is a clean technology, under current
legislation (in most parts of the world) it is not considered a renewable.
Renewables include solar, wind, hydro etc. ... (IEA, 2014).
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14
Management Control Research and
the Management of Uncertainty:
Rethinking Knowledge in
Management
Olivier Saulpic and Philippe Zarlowski
The role of managers in organizations has long been construed as that

of decision-making under conditions of limited rationality and uncer-
tainty (Simon & March, 1958; Cyert & March, 1963). For instance, deci-
sion-makers can only access a limited set of alternative solutions to the
problem at hand, or might discover their preferences between competing
alternatives through the decision-making process itself. The uncertainty
about both the future conditions of the environment and the possible
outcomes of ambiguous decisions would reinforce the consequences of
limited rationality. In an organizational context of uncertainty and ambi-
guity, management control researchers have underlined how manage-
ment control systems might play an enabling role for managers through
enhanced monitoring and learning about organizational performance
(Burchell et al., 1980; Ferreira & Otley, 2009). The divide between prac-
tice and research, or the lack of relevance of research for practice, has
been documented and commented on by several prominent researchers
in our field of management control (see for instance, Baldvinsdottir
et al., 2010; Hopwood 2007, 2008, 2009; Otley, 2001; Scapens, 2008;
van Helden & Northcott, 2010) or in the field of management studies
(e.g. Miller et al., 2009; Van de Ven & Johnson, 2006). However, little
has been said about how management control research might facilitate
the management of uncertainty in organizational contexts and enhance
the enabling properties of management control systems.
Interestingly, one key instance of the relationship between research
and practice, namely teaching, has not been examined in the literature
despite most management control researchers being employed by higher
education institutions. Academics undertake research but also cater for
the training needs of students on management degrees, and practitioners
207
208 Olivier Saulpic and Phillipe Zarlowski
enrolled in executive education programmes. In our contribution to this

volume, we examine the question of the relationships among research,
teaching and management control practice. By so doing, our objective is
to propose possible ways of improving the contribution of management
control research to managers in a context of uncertainty.
Previous methodological and epistemological analyses of manage-
ment and management control research (e.g. Corley & Gioia, 2011;
Kakkuri-Knuuttila et al., 2008; Malmi & Granlund, 2009; Van de Ven
& Johnson, 2006; Young & Oakes, 2009) have assessed both the type
and form of the development of management control knowledge.
Drawing notably on pragmatist perspectives or the consideration of
the usefulness or impact of research output, it has been argued that
the contribution of management control research should be looked at
in its problem-framing rather than problem-solving properties (Young
& Oakes, 2009). Indeed, pragmatists have put forward the concept
of inquiry by which an ambiguous, indeterminate problematic situ-
ation is gradually framed into a meaningful, intelligible problem
(Dewey, 1938; Lorino, 2014). The process of elaborating the problem
is dialogic, collective and situated in the organizational context.
Through the process of inquiry, both the problem and its solution are
co-constructed. Therefore, the solution is not considered as the last
step of a decision-making process in which the problem would already
have been identified.
Based on an analysis of textbooks and their orientation, we contrast
the type of knowledge that they convey and the contributions that can
be expected from the three main research traditions or paradigms in
management accounting and control (Lukka, 2010). We then suggest
possible implications of our propositions for both teaching and
researchers relationships to practice and practitioners. In particular,
we argue that there might be a misalignment between the knowledge
produced by research and that communicated to practitioners through
teaching. Research leads to knowledge which is helpful to managers
because of its problem-framing capacities and teaching is devoted to
the dissemination of problem-solving knowledge. We thus propose
that, while improving the communication of our research results to
practitioners remains an important issue for academia (Van Helden &
Northcott, 2010), it also seems necessary to educate managers and other
non-academic research stakeholders (e.g., policy makers) about the type
of knowledge that research can actually produce in the fields of manage-
ment control and management. In the last section of our paper, based on
the French context for higher education institutions in management, we
Rethinking Knowledge in MCS Research 209
develop our recommendations for teaching and research in this context,

before concluding our paper.
Teaching, knowledge and the divide between

practice and research
The relative lack of interest by researchers to practitioner concerns and

their under-developed, disconnected or complicated relationships with
practitioners has already been highlighted (Hopwood, 2008; Merchant,
2008; Rynes et al., 2001).
Teaching is one of the privileged sites of the interactions between
academics and actual and prospective practitioners (i.e. students). A text-
book is usually a major pedagogical assistance in this interaction and
probably the one that is more readily accessible to the external observer.
The literature that analyses textbooks or course content is scarce. The
few accounts that exist indicate that textbooks and course syllabi tend
to overemphasize normative propositions (Bor, 2000; Bourguignon,
2009; Fabre & Bessire, 2006) and rarely rely on research results (Bor,
2000). Another concern is that many topics covered in management
control textbooks actually remain under-researched. For instance, Fabre
& Bessire (2006) underlined the paucity of research papers providing
analysis or descriptions of the design process of management control
techniques and systems. According to them, most papers focus on the
effects on management control systems although it is their design that is
the central feature in numerous management control courses.
That management control textbooks1 are not research-based raises
questions about the validity or reliability of their content. The motiva-
tion for the lack of research-based propositions and analyses in many
management control textbooks is unclear. It might be that little or no
research is available on the topic they cover. An alternate explanation
could be that research contributions do exist, but textbooks authors fail
to actually draw on them.
Another question is whether the type of knowledge covered in manage-
ment control textbooks is actually suited to the needs of students and
managers. Uncertainty resides in the demand of product and services that
organizations provide to customers, citizens and other parties. Managers
in organizations are also faced with growing uncertainty in their envi-
ronment as they themselves and their organizations are embedded in
complex and ambiguous accountability systems (Davenport & Leitch,
2005; Jarzabkowski et al., 2010). Do textbooks help managers to develop
their ability to analyse operational, economic as well as accountability
processes, to critically review the strengths and limitations of the existing

management control systems, to model and manage the activity they
are responsible for, to make sense of internal and stakeholders expecta-
tions regarding the performance of their organization? Uncertainty and
ambiguity call for management control systems to adapt to the context
in which they are implemented. Do management control textbooks
help managers to conceptualize and contextualize management control
systems and practices?
On the contrary, textbooks as a genre usually propose and develop
solutions and best practices that are supposed to be efficient and effec-
tive. They tend to be developed with a pretense to universality and can
be understood as ready-to-use techniques and solutions. For instance,
the Balanced Scorecard (BSC) is often described as a technique. However,
it is not always clear how the BSC can or should be used in a given end
and how the design of the BSC should change accordingly. It might even
be the case that the frameworks to analyse the technique and its uses
are not available yet. For instance, in the review of 30 years of research
on evaluative styles or Reliance on Accounting Performance Measures
(RAPM) and their impact, Otley & Fakiolas (2000) still underlined
the need for future studies to be sensitive to discovering the frame-
works used for performance management in the target organizations
(p. 509). However, we can infer from ergonomics perspectives applied
to the study of techniques (Rabardel, 1995; Clot, 1997) that a theory of
the technique, i.e. relating the technique to specific ends and uses is a
necessary condition for its appropriation by its users (Orlikowski, 1992).
With this theory, users can divert and modify the technique, adapt it to
the situation at hand while still aiming at the same end (Giraud et al.,
2011: Chap. 6).
Classifications of research perspectives (Chua, 1986) or paradigms
(Lukka, 2010) usually categorize research traditions based on the contri-
bution to knowledge they are aiming at, and the underlying episte-
mology. Functionalist or mainstream management control researchers
aim at understanding what is efficient and effective and why e.g., under
which conditions systems and techniques would provide the expected
outcomes. Interpretive research aims at developing frameworks that
would help individuals to make sense of the specific situations in which
they are embedded. Critical research relies on the assumption that
society is shaped by power struggles creating structures of domination
and alienation. Unveiling the social world and disseminating knowl-
edge therefore liberates and empowers individuals in organizations and
society.
It can be argued that these three research paradigms or perspectives

actually contribute to the development of knowledge in terms of prob-
lem-framing, instead of problem-solving. Developing frameworks likely
to enrich our perspectives on accounting and management control
arguably is the purpose of interpretive research. The same could also
hold for critical researchers even though their projects also encompass
the unveiling of conflicts and domination struggles, at the level of both
organizations and society. Finally, contributions developed in the func-
tionalist paradigm can also be assessed in terms of problem-framing.
Although functionalist researchers explicitly aim at improving the
efficiency of organizations, it is difficult to argue that they can provide
ready-to-implement answers to specific management control situa-
tions. This line of argumentation has already been developed by Cyert
& March (1953) around the project of microeconomics compared to
the behavioural theory of the firm they proposed. A relation between
statistically proven concepts at the macro-level of samples or groups of
organizations is highly unlikely to provide a robust explanation of their
dynamics and inter-relations at the micro-level of any given organiza-
tion. Indeed, in such statistical models, it is impossible to control the
specific condition of each organizations context. For instance, even
though we might draw on knowledge about the link between budgetary
slack and the performance of the organization, decisions about how
to regulate the amount of budgetary slack to a given end can only be
resolved by managers based on their contextualized knowledge of the
situation. Questions about slack management and regulation are deeply
embedded in complex and context-specific systems and processes.
However, models developed in the functionalist research remain
useful for reasoning in empirical situations, even though causal rela-
tionships between constructs might not hold for robust empirical data
analyses and the validity of these constructs might also be question-
able. For instance, when identifying variables that might moderate or
mediate budgetary slack, or which variables are related to the short-term
orientation in the decision-making process might not provide ready-
to-implement solutions to managers in a specific situation. However, it
might help them with the provision of a structured framework on which
they can rely to develop their reasoning about what they can expect of
the budgetary process, and the different ways by which these expecta-
tions are likely to be fulfilled. For example, the model developed in Van
der Stede (2000) identifies past performance and strategy as having an
influence on the style of control, slack and eventually, potential short
termism. Therefore, when considering slack and its likely consequences,
managers should not only debate whether slack is positive or negative.

Rather, they should reflect that it could be useful to adapt the level
of slack to the firms strategy, or to adapt their style of control to past
results. However, the model developed in Van der Stedes paper would
not provide any specific solution to determining the relevant level of
slack or the relevant style of control in a given organizational situation.
Simons levers of control framework is another example of the prob-
lem-framing usefulness of functionalist contributions as the framework
can provide managers with usable representations to reflect on their
organizations control systems. The same holds, for instance, for the
congruence and controllability principles as we have experienced in the
exchanges we had with the CEO of a public teaching hospital in which
we were carrying out a research project. The CEO was implementing
P&L accounts at the department level in his hospital, and discussing the
responsibility accounting principles with him actually helped him to
develop a richer understanding of some of the stakes he was facing. In
particular, he realized the potential problems of defining and setting up
of objectives for responsibility centres managers in a low controllability
context as was the case in this situation. The hospital CEO and manage-
ment team therefore explored alternative ways to use P&L accounts as
pedagogical tools towards the construction of representations of the
hospital activity combining both medical and economic performance
logics.
These examples illustrate that whatever the research perspective or
paradigm and the researchers stance, the concepts, analytical frames
and theories developed can be useful in operational situations by
helping actors to frame their problems. It seems to us, however, that
it remains difficult to present and communicate these frameworks as
constructs that would help managers and practitioners to reflect on
their context and practices. The presentation of these frameworks is
often biased towards the proposition of solutions to management and
management control problems. There might therefore be a misalign-
ment between the type of knowledge produced by research that would
be helpful to managers in terms of problem-framing on the one hand,
and the problem-solving type of knowledge, which would be communi-
cated to practitioners through teaching, on the other hand.
Beyond this misalignment or gap, another question resides in the
ability of academics as a community of researchers to commit them-
selves to either enriching existing conceptual grids or developing
conceptualizations for techniques that are promoted as innovative by
their sponsors. For instance, Simons levers of control framework is very
often described and explained in management control textbooks and

courses. However, the question of this frameworks usefulness to analyse
empirical situations has not been central for researchers and academics.
Neither have they tried and clarified and developed the framework in
this respect. Although Simons framework has been used in management
control research papers (e.g. Arjalis & Mundy, 2013), such attempts are
rare as researchers are confronted with the difficulty of operation-
alizing the framework. This is because of the lack of precision in the
definition of the different levers of control that remains unresolved. As
for innovative management control techniques, few works have been
aimed at describing and analysing new techniques such as ABC/ABM,
the BSC or VBM within a clear and generic analytical framework. It is
also interesting to note that some of the few attempts that have been
made to do so have sometimes ignited or fuelled controversies (e.g.
Ittner & Larcker, 2001; Zimmerman, 2001; Lukka & Mouritsen, 2002).
The lack of interest by academic work for technical innovation and
the constructive development of practice (Bjrnenak & Mitchell, 2002:
505) has been underlined as well as its role in creating a divide between
practitioners/consultants and academics, with the former tending to act
as propagators of the new techniques while the latter tend to play the
role of critics who remain largely unrecognized by the first group.
Some perspectives for teaching and research
In the section that follows, we draw out some implications for teaching
and research and as in the previous section use examples based on
our experience as academics to illustrate our propositions. We have to
acknowledge/recognize however, that we have gained our experience
over the years in a specific context the French elite school system
within the field of Higher Education Institutions (HEIs). Several illustra-
tions we provide and recommendations we formulate have been shaped
by our interactions with actors in this system and developed within
the institutional context in which we have been embedded. Therefore,
we briefly review some features of the French elite school system that,
in our view, are relevant to the ideas developed in this section, before
presenting and illustrating the implications that we draw for teaching/
education and research.
Research in the French elite school system

Research in the French elite school system has developed consider-
ably over the last decades but out of research traditions that were not
indigenous to these HEIs. Indeed, research activities in France used to

be mostly carried out in public universities or research institutions (as
CNRS, the National Centre for Scientific Research). Elite schools have
gradually developed a body of permanent faculty taking responsibility
for both teaching and research activities but the process has only started
relatively recently. The ability for a school to grant a doctoral degree
can be regarded as a good example of the institutions legitimacy in
terms of research within the French context. Indeed, doctoral degrees
are granted in this country by doctoral schools constituted within or
among HEIs; these doctoral schools are themselves accredited by the
French Ministry of Higher Education. It was only in 1985 that the right
to deliver a doctoral degree was granted to Polytechnique and HEC
Paris, generally recognized as the leading French engineering school
and business schools, respectively. ENA, the elite school for the training
and recruitment of the highest rank civil servants and politicians
still does not have a doctoral programme. ESSEC Business School and
ESCP Europe, which are also part of the elite business school system,
have been running doctoral programmes for several years but have only
granted doctoral degree as full-standing members of government-ac-
credited doctoral schools since 2011 and 2013 respectively.
It can be argued that the French elite engineering and public admin-
istration schools have been part of a rationallegal system of legitimacy
organized around the concepts of public service and positivism (Laufer
& Burlaud, 1980; Laufer, 2008). In such a system, science and law can be
construed as activities that tell the truth: the prominent role, position
and value of science and mathematics in engineering schools mirror
those of law in public administration schools. In contrast, management
would operate in the realm of practices. It is a competence that is devel-
oped over time through a learning-by-doing process. Students curricula
are therefore organized around teaching and training activities while
research is considered as either fundamental or not relevant. ENAs
website still indicates a mission that seems to be informed by this logic:
Created by General de Gaulle in October 1945, the founding principles
of the Ecole nationale dadministration [ENA] are to broaden access to
the highest executive levels of government service, and to provide profes-
sional training for senior civil servants.2
Laufer and Burlaud have also argued that more recently, from 1945
1960 on, a new system of legitimacy has developed around management,
management sciences and a form of quasi-positivism (Laufer & Burlaud,
1980; Laufer, 2008). In this system, management can be construed as the
scientifically established body of knowledge by which a problem can be
solved. This is also the period in which business schools in France have
established their permanent faculty. Recruitment was partly among
young academics that had been sent on research grants to the business
schools of leading research universities in the United States to earn their
PhDs, and partly as technical experts in the field of management (Takagi
& de Carlo, 2003; see also Kodeih & Greenwood, 2014). The constitu-
tion of a permanent faculty has been one of the major transformations
in the internal organization of the schools, as they became more central
institutions in the field of HEIs for the production of business, political
and administrative elites.
This brief overview of some of the features of the elite school system
in France depicts a context in which todays senior managers in private
or public sector organizations have had very little exposure to research
activities or research results, methodologies or epistemologies during
their own initial academic curriculum. When they have, it is very likely
that these research activities or results were underlain by the quasi-
positivism epistemology of decision/economics/management sciences,
which was dominant at that time in France. In both cases, the emphasis
is placed on the problem-solving capacity of management and/or
management sciences.
Teaching: Educating managers about the status of

management knowledge
As emphasized before, improving the ways in which we communicate
our research results to practitioners remains an important stake for
academia (see for instance Van Helden & Northcott, 2010). However,
in the French context, it also seems necessary to educate managers and
other non-academic research stakeholders (e.g., policy-makers) about
the type of knowledge that research can actually produce in the fields of
management control and management.
Both stakes are interconnected. Indeed, securing a more prominent
place for research in textbooks implies that we have to make more explicit
the limitations of the proposals that can be derived from research results.
In particular, we would have to recognize that research does not often
lead to establishing robust knowledge about what does work, or not, in
a specific organizational context. It is all the more important as in an
uncertain world, decision-makers are more likely to be looking for solu-
tions. They may thus be tempted to believe that there are ready-to-use
solutions to their problems, these solutions being based on experience
or on scientifically established hard facts, as recommended by the
proponents of evidence-based management (Pfeffer & Sutton, 2006).
We therefore echo the claims of evidence-based management advo-

cates that research can and should contribute to practice, and that
caution should be used when established solutions are to be imple-
mented in a specific setting (see for instance Rousseau, 2006). However,
we suggest that managers and decision-makers should look primarily for
problem-framing rather than problem-solving tools in research output,
such as the relationships between constructs. In the uncertain and fast-
changing environments managers are faced with, research results can
help them to reflect on the contexts and situations at hand and to make
sense of the difficulties they are confronted with. Analytical, conceptual
and theoretical frameworks can be useful as they provide new and alter-
nate words, categories and models through which managers can grasp
the operational, organizational and social contexts in which they are
embedded. The solution would be context-specific and co-constructed
with the problem itself between the actors involved in the manage-
ment process as their courses of action unfold.
Teaching and publishing are two activities where the emphasis could
be placed on the contribution of research results, concepts and frame-
works to the construction of meanings and situated representations for
managers. Claims have already been made to view performance as a
situated inquiry and the activity of organizing through meaning and
speech (Lorino, 2008, 2014). However, few case studies have examined
the process by which the research project and research activities them-
selves i.e., the interaction between researchers and actors in the field
have contributed to the construction of problems, solutions with their
associated meanings and actions in organizations.3
For education, examples do exist of teaching sessions in which research
plays a critical role. Although this is not unusual for master level students,
it might seem less straightforward for managers and senior managers in
executive education programmes all the more because it is less likely,
at least in France, that these managers have had to undertake research
activities themselves or have been confronted with questions relating to
the applicability of research results during their own graduate studies.
As professors, we have been party to the conception and delivery of
training sessions for chief financial officers organized as a workshop on
practices. Participants and researchers worked and reflected on situa-
tions the participants were confronted with in their day-to-day work.
The idea was to identify for each participant a difficulty he or she was
facing. The role of the researchers was to provide managers with concep-
tual frameworks drawn from the literature in management control and
organization studies and select references of a few books and research
papers that participants had to read. In so doing, the objective was to

help participants to identify the questions underlying the situation they
wanted to get hold of in other words, help them to make sense of a situ-
ation that was complex, multifaceted and changing by identifying the
problem(s) behind the problem, i.e. the possible conceptualizations of
the somewhat murky and highly contextualized practical situation that
was resisting their actions and understandings. The difficulties of such
experiments should not be underestimated: identifying possible frame-
works in the literature is one of them, as much as getting executive-level
participants to acknowledge that engaging with research would allow
them to find a better path for action. We are convinced, though, that
such experiments are useful for managers as through the process, and
beyond the situation at hand, they can develop their abilities in terms
of questioning, sense-making or inquiry (Lorino, 2008, 2014) that are
critical to them.
This holds for policy-makers as well. Because of the very responsibili-
ties that are theirs, the persons in charge of policy-level decision-making
are more remote from the concrete settings in which these policies are
to be implemented. We can expect, therefore, that becoming aware of
the limitations of the solutions put forward in the normative literature
might be even more difficult to them. We have witnessed this diffi-
culty in one of the research projects we have conducted. The project
was dealing with the implementation of new instruments and poli-
cies pertaining to New Public Management ideas in the French public
hospital context. Our analysis in the field was centred on the creation
of new responsibility centres medical divisions within hospitals and
the implementation of a new accounting system enabling the measure-
ment of the financial performance (i.e. in terms of profit or loss) of
these divisions. In this fieldwork, we realized that the implementation
of the management control system (the responsibility centre structure
and the performance measurement system) was based on the belief that
the efficiency of the system had already been established in manage-
ment knowledge for private-sector organizations. We also realized that,
conversely, analytical management control concepts, frameworks and
propositions could help managers as they were trying to make sense
of the situations they were facing and figure out what they could or
should do. For example, the distinction between measures used for the
evaluation of managers performance, and measures used in a process
of learning on the organization, its activities and their performance.
Or the principles of congruence and controllability in the structuring
of responsibility centres and responsibility accounting measures, and
the symbolic meanings attached to measuring economic performance

outcomes in a public sector organization.
We shall insist, again, that the lack of familiarity with research of
public- or private-sector managers might be to some extent specific to
the French context. Therefore, the need to familiarize actors in the field
with what management knowledge can bring them and, conversely, what
it cannot help them with, might be less developed elsewhere. Our expe-
rience and convictions remain that the experiments we have provided
illustrate interesting attempts to reconcile practice and research.
Research and the need for problem-framing

conceptualizations
As underlined in the introduction of this chapter, claims have already
been made that research should address problems that are relevant to
practitioners. The question remains of the type of research that could
be helpful in this respect. We would propose that one way to examine
this question is to reflect on the problem-framing contribution of
conceptualizations for managers and academics. As a matter of fact, it
is interesting to note that the few analytical papers that have proposed
frameworks for the analysis of management control systems (Otley,
1999; Malmi & Brown, 2008) have attracted a very large number of cita-
tions in the accounting research literature (1154 and 305 Science Direct
citation counts respectively as of 3 February 2014). An interpretation of
this success could be that research too is in need of frameworks likely to
encompass the complexity of management control systems in practical
settings.
For example, one goal for the academic community could be to develop
concepts that could help describe management control or management
accounting innovations such as ABC, in terms that do not depend on
practice. Can we provide clear definitions for an activity driver, a cost
driver? And what is the conceptual difference between cost drivers and
cost allocation bases? Is it possible to base a cost calculation system on
cost drivers? Although academic works do exist on these questions, we
shall acknowledge that debates around these issues are not central in our
academic community.
Identifying the gaps for practice in conceptual frameworks existing
in the literature is not easy. Questioning managers and decision-makers
about the challenges they are confronted with is one thing, recognizing
the underlying stakes and identifying those that cannot be accounted
for through existing conceptual frameworks might prove more diffi-
cult all the more because managers and decision-makers, as we have
mentioned, might be inclined to look for problem-solving solutions

rather than problem-framing concepts. One way to address the ques-
tion, we argue, could consist in drawing on our teaching. Reviewing the
existing concepts and frameworks we are drawing on in our courses, we
could wonder which ones are clear and structured enough and likely to
light up practices, and which ones should be developed further.
We have implemented this approach in our pedagogy for a funda-
mental course in management control for Master in Management
students, for which the learning objectives of each session have been
encapsulated in key messages. Several outcomes came out of this struc-
tured approach, notably, the need to provide more precise definitions for
the concepts that are mobilized in the course. This even holds for basic
concepts like budget and budgeting do they refer to the budgetary
process, to forecast financial statements, to future action plans? or
objectives and targets (as the term objective as it generally is used
would very often encompass both concepts). Reviewing concepts and
elaborating key messages also led us to clarify the status of the knowl-
edge they would convey: are key messages based on research results
or have they been derived discursively within the proposed manage-
ment control framework? Finally, it helped us identify themes for which
academic knowledge was still not sufficient, and led us to the proposition
of new concepts. For instance, drawing on the generally accepted idea
that dashboards should not comprise more than 15 key performance
indicators, and on anecdotal evidence we had gathered on scorecards,
their formats, contents, uses and users, we developed the two concepts
of panoramic and management dashboards as ideal types of dash-
boards that could be useful for the analysis of organizational practices
(see Saulpic et al., 2011).
Although developments like these might be useful, the question
of their validation, consolidation and enhancement still has to be
addressed. It notably calls for research projects aiming at not only devel-
oping new frameworks likely to account for the situations encountered
by researchers and actors in the field, but also ascertaining the interpre-
tative potential of existing concepts and frameworks.
Conclusion
In our paper, we have been reflecting on management control research

and the management of uncertainty by focussing on teaching, and the
relationships between researcher and practitioners. Based on a broad anal-
ysis of managing control textbooks as a genre, we have argued that they
usually promote a functionalist, solution-oriented type of knowledge

that is more grounded into normative propositions and best practices
than academic research contributions. Consistent with a pragmatist-
informed approach to knowledge, we have proposed that underlining
the problem-framing contribution of the research results produced in
different research traditions would open up a path to reconcile research
and practice through teaching. We then developed our recommenda-
tions about the need to educate managers and policy-makers about the
contextualized character of management knowledge, and the need for
more problem-framing conceptualizations in research.
Much of our argumentation has been informed by the French
context of HEIs in management we are part of. Although calls for
evolution in the relationships between management control research,
teaching, practice and practitioners should consider local economic
and social contexts and path-dependency, it would probably be incau-
tious to overlook the transnational homogenizing forces in business,
management and academia. Indeed, in many of our organizations, we
simultaneously have to cater to the needs and expectations of both
locally trained and locally active practitioners, fund providers and
governing and accreditation bodies, and international students and
organizations.
Our developments in this chapter also relate to and are conditioned by
institutions and the institutional context at another level. At the micro-
level and consistent with the pragmatist view we have adopted, it is the
uncertainty of the problematic situation that would trigger the process
of inquiry and problem-framing in which research and research results
could be instrumental. However, it has been argued that certainty and
its pendant, uncertainty, are instituted socially (see Laufer, 2008, based
on Douglas, 2001). As suggested in Douglas (2001), this would call at the
institutional level for a re-examination of certainty, knowledge and the
role of the certainty of knowledge in society.
Notes
1. In the developments that follow, we refer to management control textbooks
in general, without referring to any specifically. While we readily acknowledge
that our propositions might not hold for every textbook, we refer here to text-
books as a genre and to the type of knowledge this genre generally conveys.
As co-authors and coordinators of management textbooks ourselves (Saulpic
et al., 2011), we know that we have not avoided several of the pitfalls that we
are reflecting on in this chapter. With the propositions we develop here, we
simply intend to reflect on the contributions that we, as academics, can have
to practice and practitioners, and on the ways by which these contributions

could be enhanced.
2. http://www.ena.fr/index.php?/en/news/institution, accessed on 2 September
2013, italics added.
3. There are research traditions in management in which researchers actually partici-
pate in solving problems of organizations. The corresponding research stances are
varied: action research, interventionist research, innovation action research, etc.
According to Lewin (1997), the aim of these research traditions is usually twofold:
to transform a situation and to create knowledge by analysing the resulting
changes. In coherence with usual academic expectations, the papers inspired by
these research traditions generally focus on their contribution to knowledge crea-
tion, instead of explaining how research may have contributed to the construc-
tion of problems, solutions or meanings in the situation analysed.
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15
Cultural Theory of Risk and
the Notion of Management
Accountants as Strategists
Philip Linsley and Alexander Linsley
Introduction
It has become commonplace to claim that accountants must supple-

ment their technical accounting skills with strategic capabilities and be
active participant(s) in the decision-making process (Latshaw & Choi,
2002, p. 27). Thus, it has been argued that finance departments should
become central to the decision-making process. Further, it has been
suggested that accountants should provide strategic advice to managers
working in other parts of the organization and that a pre-requisite for
progression to finance director roles is the capacity to be a proactive
strategist (Grundy, 2007).
This claim that accountants should engage in strategic decision-making
and use strategy tools to increase shareholder value can be traced back
to the early 1980s when the term strategic management accounting
first emerged (Roslender & Hart, 2003). It is also possible to identify
an important shift in the development of strategy thinking around this
time with Whittington (1996) observing that corporate planning ceased
to be the primary focus of strategy researchers and practitioners towards
the start of the 1980s and ideas such as those related to the crafting of
emergent strategies arose (Mintzberg, 1987).
One way of thinking about these contemporaneous changes in the
scope of the remit of accountants and in strategy thinking is to draw the
two strands together through Mary Douglass cultural theory of risk. The
prime assertion of cultural theory of risk is that perceptions of what risks
are important will be dependent upon the underlying patterns of social
relations. Consequently, patterns of social relations determine how we
respond to uncertainties and dangers and, in addition, will impact on
224
Management Accountants as Strategists 225
(inter alia) perceptions of the role of the accountant and of approaches

to strategy.
The chapter argues that calls for accountants to be strategists are an
outcome of the vigorous cultural dialogues that took place during the
1970s and, ultimately, resulted in the previously dominant hierarchical
culture in the UK and USA being usurped by an individualist culture.
Very broadly, in Douglass conception, an individualist cosmology
represents a highly competitive, free-market form of society whereas a
hierarchical society possesses strong boundaries and is bureaucratic in
its nature (Douglas, 1992).
It is argued this cultural shift resulted in calls for the accounting func-
tion to move from largely fulfilling a hierarchically based stewardship
role towards supporting the individualistically based strategic goal of
enhancing shareholder wealth. Hence, it is this change in patterns of
social relations that is at the root of the demands that accountants evolve
into strategists. Importantly, the chapter also draws on cultural theory
to address an issue that, prima facie, appears anomalous in this context.
Namely, although novel strategic management accounting techniques
have been developed in recent years to support the pursuit of share-
holder value, there has been restricted take-up of strategic management
accounting initiatives post-1980.
The next section in the chapter explains key aspects of Douglass
cultural theory of risk. Section 3 then examines the hierarchicalindivid-
ualistic cultural shift in the 1970s and links this to changes in strategy
thinking. Section 4 considers how the change from a hierarchical to
an individualistic culture has given rise to the notion of management
accountants as strategists. In examining this change in the account-
ants role, the chapter explores why there has been restricted take-up of
strategic management accounting initiatives in the post-1980 individu-
alistic setting. Finally, within the conclusion some wider implications
of using Douglas as a framework for examining management account-
ants as strategists are considered.
Douglasian cultural theory of risk and

the grid-group model1
The grid-group model Douglas has established in respect of her cultural

theory of risk provides a framework which enables us to develop hypoth-
eses about, and analyse the behaviours of, four solidarities (Figure 15.1)
(see, for example, Douglas 1986, 1992, 2003).
226 Philip Linsley and Alexander Linsley
Isolate Hierarchist
Low group, high grid High group, high grid
GRID
Individualist Egalitarian
Low group, low grid High group, low grid
GROUP
Figure 15.1 Grid-group model

Source: Adapted from Douglas (1982).
The grid dimension in the model relates to the degree of regulation

that society imposes upon individuals in selecting social roles. Where
there are extensive prescriptions directing individuals behaviours this
denotes a high grid society; in low grid societies individuals self-select
social roles and can decide to cooperate with whoever they choose. The
idea of group is concerned with an individuals commitment to other
members of that society. High group denotes a society where individuals
are strongly committed to one another; however, where individuals feel
little allegiance to other members this would form a low group society.
This results in a typology of four solidarities: individualists, hierar-
chists, egalitarians and isolates. Crucially, the risks and uncertainties
each solidarity identifies as important will differ as each is endeavouring
to protect its particular pattern of social relations.
The hierarchical solidarity corresponds to a form of society where
there are sharply defined internal and external boundaries. The external
boundary separates group members from outsiders, and the internal
boundaries ensure strong role differentiation. It is a bureaucratic form of
society that defers to authority. Hence, risks that threaten the boundaries
are of the greatest concern. By contrast, actors within an individualist
society are free to connect with whoever they like. Characteristically,
the individualist solidarity is conceived of a free-market type of society
where there is a preference for self-regulation, and risk-taking is seen as

positive as it provides opportunity to profit. The primary motive under-
lying individual transactions is personal gain. A key difference regarding
risk perceptions between a hierarchical and an individualistic society is
the former is anxious about boundaries being violated whereas the latter
fears risks that jeopardize the market or that threaten wealth creation.
In the egalitarian solidarity, the external group boundary assumes
even greater importance than in the hierarchical solidarity as there are
no internal boundaries. Hence, commitment to the group is of greatest
importance and the egalitarian focus is upon any risks or uncertainties
that might threaten the group. The fourth arrangement is the isolate
solidarity. This comprises individuals who are limited in their selection
of social roles and lack a sense of community. Isolates view the world
as inherently uncertain. Consequently, they see little point in trying to
plan ahead to manage risks.
Douglas argues that all four solidarities will be observable within
any society or organization. Cultural dialogues imply a dynamic rela-
tion between the four solidarities as the supporters of each endeavour
to convince others of the advantages of their cosmology. Thus, in any
society, a particular solidarity may have greater influence but it may also
be replaced over a period of time.
A further aspect of the relationship between the solidarities which
Douglas discusses is how the hierarchical and individualistic solidarities
have a greater hold on power. Therefore, these two solidarities are at
the centre. Further, there is some reciprocity between these two domi-
nant solidarities as the individualistic solidarity needs a political base
to assure its basic security (and) ... the hierarchical (solidarity) needs an
economic base (Douglas, 1990, p. 12). By contrast, egalitarian groups
are on the border and at a distance from the centre and its power. For
this reason, it is less likely the egalitarian solidarity will have greater
influence than the individualistic solidarity or the hierarchical solidarity
in any particular society or organization.
The change from hierarchy to individualism

during the 1970s and 1980s
The shift in dominant culture during the 1970s and 1980s

Heap and Ross (1992) note how in the UK and the USA the dominance
of the hierarchical solidarity waned during the 1970s and was replaced
by the individualist solidarity during the 1980s. This change in the
dominant solidarity was brought about by events that largely happened

in the 1970s. These changes threatened the values held by supporters of
the hierarchist solidarity thus making them vulnerable to the arguments
of the other solidarities.
In the UK, economic problems present at the start of the 1970s wors-
ened as the decade progressed. The oil crisis of 1973 added further diffi-
culties to an already strained economy, and strike action by mineworkers
eventually resulted in a three-day working week in 1974 as the govern-
ment sought to safeguard coal supplies. In 1976, the then government
had to ask the International Monetary Fund for a loan and government
incomes policies eventually lead to public sector workers striking during
the winter of 197879. Similarly, the USA suffered from a declining
economy and de-industrialization during the 1970s. There was a general
sense of living standards declining and this resulted in people querying
whether the assurances inherent in the hierarchical way of life were
still being met. For example, Hendry (1999) has observed how down-
sizing programmes undertaken by companies in the 1970s adversely
affected job security and, because employees no longer felt cared for,
this made them doubt whether the company they worked for deserved
their loyalty.
Overall, this resulted in a questioning of the current order; for example,
many started to ask whether governments should reduce regulation for
businesses (Fraser, 2005; Gersemann, 2004). The outcome was that there
were highly charged political debates, particularly towards the end of the
1970s, concerning whether a culture of dependency had grown up that
should be replaced by an enterprise culture. Margaret Thatcher was voted
into power in 1979 in the UK and the changes she instigated had a close
fit with the individualist solidarity. Markets were deregulated, government
spending was reduced, state firms were privatised and individuals found
that they could not rely on the support of the welfare state to the extent
they had previously done. A similar free-market approach was adopted by
Ronald Reagan in the USA when he became president in 1981.
Strategy and the shift in culture

The changing ideas in strategy thinking across this period (pre- and
post-1980) can also be interpreted as an outcome of the move from a
hierarchical to an individualistic cosmology within companies.
The 1980s saw a shift in strategy thinking away from the corporate
planners of the 1960s and 1970s (Kay et al., 2006, p. 34). The corpo-
rate planning view of strategy adopts a rationalistic approach to stra-
tegic planning whereby an orderly series of logical stages of analysing,
planning, implementation and control occur. Senior managers may be

assisted by other experts in the analysis and planning phases, and it
is a top-down method with an in-built expectation that lower-ranking
managers will readily implement the strategic directives devised further
up the command chain.
This approach to strategy is based on a procedural rationality and
accords with a hierarchical cosmology. Deference is shown towards
the authority of senior managers in the corporate planning process so
that internal boundaries are not threatened. Kay et al. (2006) note a
problem with the rationalist school is that although it emphasizes plan-
ning, planning is not strategy (p. 31). However, in the context of
hierarchical societies it is to be expected that significant effort will be
expended in the preparation of a strategic plan as this ritual reinforces
group cohesion.
The fundamental criticism now levelled at the rationalistic approach
to strategic planning is that it omits to recognize the importance of
practical craft (Whittington et al., 2006, p. 616). This move away from
a conventional idea of strategic management is rooted in Mintzbergs
(1987) ideas about the crafting of strategy where he discusses how
strategies may not always be deliberately conceived, but rather may
emerge unexpectedly in different parts of an organization in response
to unfolding events. Thus, strategy making is no longer the preserve of
senior managers and experts, nor is it wholly rational.
How Douglass solidarities accord with this idea of strategy as process
can be seen by drawing upon Grants (2003) study identifying primary
changes in strategic planning processes during the 1980s and 1990s in
major oil companies. Grant, like Hendry (1999), notes that the impact
of the market for corporate control in the 1980s demanded senior
managers focus upon shareholder wealth and this caused substantial
changes in the approach to strategic planning.
There was a move to informal systems of planning that accentu-
ated the role of direct discussion between managers at different levels.
Strategic planning was now being undertaken by staff seconded from
line management positions and other functional areas of the business.
Accountability for strategic decision-making and, ultimately, perform-
ance was devolved to line managers. This changed the planning focus
to enhancing divisional profitability with the purpose being to ensure
that the financial performance of divisional managers could be meas-
ured against the metric of shareholder wealth.
The evolution of reoriented strategic planning systems can be
explained through Douglass individualistic typology as the hierarchy
of managers was removed and divisional managers became free to

transact as they saw fit. In a hierarchical organization, it is not deemed
acceptable to challenge others as this implies disloyalty and endangers
group solidarity, but in the individualistic firm discussions now became
more open. Expertise is no longer a determinant of status within the
firm; rather status derives from the ability to meet performance targets.
Importantly, as one might expect in an individualistic setting, goals
become financially based and the key risk is not meeting these financial
goals.
Accountants as strategists and the shift in culture
Accounting prior to the 1980 cultural shift2

Ashton et al. (1995) state that for UK and USA companies in the
1950s and 1960s the dissemination of cost information tended to be
slight ... (with) ... cost accounting systems ... only loosely integrated with
management planning and control systems (p. 2). These mechanistic
systems (cost systems, budgetary control systems, capital investment
systems) were reactive (Ashton et al., 1995, p. 2). Cost containment,
rather than cost reduction, was pursued and the focus of the firm was on
managing resources to meet production needs (Ashton et al., 1995).
Chandler (1977) describes how the structure of multi-divisional firms
consisted of a hierarchy of management and separated functional disci-
plines such as finance, purchasing and sales. Allegiances to functional
disciplines were reinforced through professional associations dedicated to
the various occupational fields (Chandler, 1977). Magdy & Luthers (2006)
discussion of the IFAC description of management accounting in this
pre-1980 period confirms the objectives of management accounting as
oriented towards the determination of product cost ... supplemented by
work on budgets and financial control of production processes (p. 6).
If a hierarchical cosmology of accounting practice is now fashioned
then a close match with the above descriptions of accounting practice
pre-1980 can be discerned. As importantly, it is also possible to under-
stand why there is a lack of strategic purpose on the part of the account-
ants within a hierarchical solidarity.
The strong grid aspect of the hierarchical cultural typology implies
departmental segregation, with the accounting department distinct
from other departments. Within the accounting department, a relatively
unambiguous organizational structure will be evident, typically with the
finance director at the apex and accounting technicians or clerks at the
base. Job titles signify the status of each member of the accounting depart-
ment, supported by job descriptions that delineate levels of authority
and set out the types of task that can be undertaken dependent upon job
title. All of this ensures there are no doubts or uncertainties about the
role of each member of the accounting department.
Similarly, pre-1980, organizations clearly distinguished manage-
ment control from strategic planning (Ittner & Larcker, 2001p. 351). If
strategizing is not denoted as an element of the accountants role then
that accountant is highly unlikely to strategize as this would arouse
suspicions and create uncertainty regarding demarcations in respect
of internal boundaries. Should an accountant presume to engage in
strategizing when it is not designated a part of their role, there will
be mechanisms for dealing with this aberrant behaviour to alleviate
the uncertainty this creates. For example, in extremis, organiza-
tions will expel troublemakers from the group through dismissal
procedures. These internal boundaries also hinder the development
of novel management accounting initiatives as they do not facilitate
cooperation between management accountants and others within the
organization.
The actors within a strong grid (hierarchical) organization would view
accounting staff as specialists possessing specific accounting-related
proficiencies as denoted by professional accounting qualifications,
which would confer respect and be important symbols of status across
the organization. This view of accountants as specialists accords with,
and upholds, the hierarchical pattern of social relations.
The design of accounting-based systems that support the strat-
egy-making process will also be affected by the prevailing culture.
Management control systems, for example, will be organized differ-
ently in hierarchical and individualistic organizations. In the former
type of organization these systems will tend towards being bureaucratic
or mechanistic. Standardized procedures for the operation of the
systems will have been drawn up by the accounting department and it
will be expected that other parts of the organization comply with these
procedures. It may appear strange that individuals will follow systems
blindly and without querying their efficacy, but this can occur when
there is a hierarchical expectation of compliance. The hierarchical
organization is seeking to maintain the status quo wherever possible
and any questioning of this creates uncertainty as it threatens the hier-
archical solidarity.
The strong group aspect of the hierarchical organization suggests the
accountant is likely to view their role as dominated by a stewardship
function for he or she will perceive their primary duty as ensuring there
is certainty in respect of survival of the group and this is best achieved
by being a guardian of the organizations capital. This implies a cautious
and prudent approach to financial matters is adopted by the accounting
staff. Therefore, the management accountants approach to risk manage-
ment is likely to be that there needs to be a very (c)areful balancing of
risks and rewards ... to keep the firm safe (Underwood & Ingram, 2010,
p. 28).
The manner in which accounting-related information is used within
management control systems will also be impacted by the strength of the
group dimension. In a hierarchical organization the manner in which,
for example, comparisons of actual and budgeted results occurs will
be driven by the need to ensure that poor performance is a collective
responsibility. The result is it becomes more tolerable for managers in
strong group organizations to be able to attribute adverse variances to
unforeseeable external factors. Therefore, it is logical in a hierarchical
setting that cost containment is practised rather than cost reduction
(Ashton et al., 1995) as it then decreases the likelihood of the need to
challenge under-performing managers or divisions. In a strong group
organization there may also be a number of goals set that have some
ambiguity. The difficulty associated with setting one clearly defined
target in this culture is that it creates the potential for group members
to be pitted against one another as this goal is pursued. Strong group
organizations wish to avoid internal rivalries and consequently set less
certain (and more moderate) goals that allow group members to gain a
sense of achievement without competition challenging the strong group
ethos. Roslender & Hart (2002) discuss how new initiatives in measure-
ment systems such as the balanced scorecard have a primary concern
with what firms are trying to become (p. 260). Hierarchical firms are not
trying to become they are trying to remain as they are. Their fervent
hope is the future will be configured as the past as this brings certitude.
Accounting practice post-1980

In 1981 Simmonds first proposed the idea of strategic management
accounting (SMA), which has at its root the premise that manage-
ment accounting and strategy be directly connected. However, a range
of studies and surveys suggest the take-up of management accounting
innovations in practice has been relatively weak. Drury & Tayles (1995)
review of the results of practice-focused surveys studying changes in
management accounting practice found only very modest changes to
have occurred. They concluded that in view of the considerable amount
of publicity that has been given over the past 10 years to the apparent
limitations of traditional cost systems and the urgent need for organi-
sations to change their management accounting systems it is puzzling
why most firms have been reluctant to change (Drury & Tayles, 1995,
p. 277). Similarly, studies such as Guilding et al.s (2000) comparison
of strategic management accounting practices in the UK, USA and New
Zealand found there is negligible use of the term strategic manage-
ment accounting in organisations and that appreciation of the term
amongst practising accountants is somewhat limited (p. 129).
Prima facie, it seems paradoxical that new management accounting
techniques and, in particular, strategic management accounting ideas
are not being used more frequently. As strategy thinking changed post-
1980 and adjusted to fit with the individualistic culture then we might
expect that management accounting would change and become more
compatible with an individualistic culture by becoming more closely
tied to strategy. This appears not to be so and, hence, explains why calls
for accountants to have a greater strategy focus still persist.
The management accountant in an individualistic organization will,
if sufficiently attentive, have perceived a shift in the basis upon which
respect is accrued pre- and post-1980. Post-1980 status is no longer based
upon having gained membership to one of the professional accounting
bodies; more important is how well the individual accountant performs
within the organization in supporting the creation of value for share-
holders (Ittner & Larcker, 2001) as the individualist fears any threat to
wealth. Technical accounting knowledge is also more open to ques-
tion and, generally, there is less trust in and respect for the accounting
profession (Linsley & Shrives, 2009). In an individualistic setting past
certainties regarding the role and place of the accountant are cast out.
The nature of the accounting role also changes, with a more informal
approach allowing for some flexibility in the operation of accounting-re-
lated systems. In this less restrictive environment, users of such systems
may via from, or sometimes bypass, set procedures or controls further
undermining the accountants status.
A softening of the internal boundaries occurs as functional speciali-
zation (through the use of cross-functional teams, as well as the elimina-
tion of traditional specializations) is removed (International Federation
of Accountants, 1998: paragraph 20). This provides the opportunity for
actors in companies to have greater amounts of autonomy and suggests
greater fluidity in roles is possible including permitting a great deal
of management accounting ... (to be) ... undertaken by the business
managers rather than by the accountants (Burns & Vaivo, 2001).
Armstrong (2002) explains that some of the most successful applica-

tions of ABC have been initiated by operational managers (p. 102). But
this creates great uncertainty and associated anxiety for the accountant
who cannot make the shift to the individualistic mode of life.
One possible explanation why the implementation of strategic
management accounting innovations has been sporadic is that limited
numbers of management accountants have completed the transition to
an individualist culture.
A great difficulty for management accountants in changing to the
individualistic culture may be that they have been steeped in the hier-
archical culture, and perhaps more so than other categories of manager.
The professional bodies of which they are members are likely to be
biased towards the hierarchical solidarity as strongholds of expertise and
professional status. As firms changed post-1980 this may have engen-
dered considerable uncertainty as it threatened the perpetuation of
their worldview. When dangers arise, hierarchists are ill-prepared to deal
with the problem from the outset, because their inherent presumption
is that the past will continue into the future. Hence, the change in the
way firms were being configured could have been a difficult matter for
accountants to acknowledge.
In due course if the danger is acknowledged, the hierarchists response
to this uncertainty or threat is to use generalized justifications for main-
taining the prior way of doing things. In this way, the continued use of
the traditional accounting methods might be defended and perceptions
of certainty restored.
If the threat still remains then, to re-confirm the external boundary,
the hierarchical community looks to itself to develop responses it
considers acceptable. For example, the community of accountants
might respond to the dangers internally via professional bodies such
as the UK Chartered Institute of Management Accountants (CIMA)
re-developing syllabi to include strategy modules, producing technical
reports on issues such as performance management and strategic enter-
prise management, and developing continuing professional develop-
ment programmes with a similarly broad scope. Whilst these initiatives
can, in part, be seen as a means for developing accountants as strategists
they also serve to renew the claim of accountants to expert status. If
the primary purpose of these actions of the accountants is for the latter
reason this would be not surprising for it can be understood as a hierar-
chical reaction to uncertainty during a period of change.
The difficulty in claiming expertise be judged useful is the previ-
ously discussed issue of the individualistic society being less impressed
by expertise and more impressed by performance. However, there is

a part of accounting where a claim to expertise is considered appro-
priate in an individualistic context. A principal risk for the individualist
is that the market does not operate efficiently. For this reason indi-
vidualists, who generally favour self-regulation, recognize there must
be some regulation to ensure integrity in the marketplace and a legal
framework must be in place that provides the confidence that contracts
can be enforced. In this respect, the individualist understands the need
for some collaboration with the hierarchist. This brings with it a need
for some accounting expertise to, inter alia, prepare financial reports,
ensure internal control mechanisms are effective, guide internal audit
processes and liaise with the external auditors. Hence, some accounting
staff are able to leverage their expert status in the individualistic setting.
For example, Zorn (2004) concludes that the rise of the Chief Financial
Officer (CFO) since the 1980s in US firms can be traced to a need for
accounting expertise to manage a specific regulatory change in earn-
ings reporting requirements (that) presented chief executives with a real
threat to earnings (p. 349). Zorn demonstrates that the CFO position
first arose out of a need for accounting expertise in respect of FASB 33,
and this was to ensure that the share price would be well managed. With
regard to accounting roles of this type then firms may want to employ
accountants with a hierarchical worldview as these roles are focussed
upon issues of assurance, control and stewardship. However, this would
not apply to management accountants whose role is not to manage
relationships with the marketplace; rather the management accountant
needs to have an individualistic worldview if they are to fully support
the business in its strategic decision-making.
Conclusion
Douglas explains why different risks are deemed important by different

solidarities by reference to patterns of social relations. Crucially each
solidarity wishes to ensure it remains in existence and, hence, it identi-
fies uncertainties and risk as important if they threaten its particular
pattern of social relations. In turn, this affects ways of organizing and
dispositions towards accounting and strategizing. If the individualistic
solidarity is compared to the hierarchical solidarity then the former
encourages risk-taking and strategy making, whilst the latter prefers a
procedural rationality.
If firms wish to employ staff, accounting or otherwise, who are active
strategists then a possibility is to ensure recruitment processes screen
for individualistic traits. Individualistic accountants are less likely to act

solely as functional specialists and will have a propensity to assist in
strategic decision-making performance to enhance shareholder value.
This is because wealth symbolizes success in this setting and risk to
wealth is uppermost in the mind of the individualist. As the individu-
alistic culture is centred upon material self-interest, group loyalty does
not hold staff together and, somehow, reward systems must substitute
for this role. Individualistically induced behaviours may also lead to
actions that threaten the very markets that individualists rely upon, as
these individualists may look to game the system or gain competitive
advantages.
The hierarchist is less concerned about threats to the market or to indi-
vidual wealth and more concerned about uncertainties and risks that
threaten internal and external boundaries. Consequently, the hierarchical
accountant is inclined to work within their job description, to establish
mechanistic control systems and to be cautious when managing risk to
ensure that the riskreward trade-off has been carefully calibrated. Thus,
they behave differently to avoid threats to the hierarchical solidarity. Of
course, acceptability of behaviour will be dependent on the worldview of
each individual, but this underlines why it is important to understand
what behaviours may likely occur in respect of a particular worldview.
Further research is needed to address complexities that have not
been considered within this chapter. Relevant questions needing atten-
tion might include How do accountants function in egalitarian firms
where the principal risk focus is upon protecting the group boundary?
Are hybrid firms possible that unite two or more solidarities and, if a
hybrid is achievable, what will the hybridized cosmology be and how
will uncertainty and risk be viewed? Can the cultural dialogues that are
a continuous feature of organizational life be used to offset excessive
behaviours associated with the dominant solidarity? Douglass cultural
theory of risk has multiple implications and further research will assist
in understanding the complexities and uncertainties associated with
different accounting practices and different strategy practices in respect
of the four solidarities.
Notes
1. Of necessity, only a very short overview of some key aspects of Douglasian
cultural theory is provided in this section.
2. The International Federation of Accountants (IFAC) (1998) considers the
development of management accounting as a four-stage process and with the
critical period of transition in the 1970s. This supports the idea of discussing
management accounting as a pre- and post-1980 activity.
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16
The Existential Perversity of
Management Accounting and
Control
Alan Lowe and Ivo De Loo
Introduction
A fear to make mistakes in organizational settings, and a general percep-

tion that organizations must endlessly become increasingly effective
and excellent seems to dominate much of our organizational commu-
nications and economic policy discussion (Pauchant, 1995).
Some authors have claimed that many of the risks identified in busi-
ness and society are associated with fear (like the fear of financial crises
or recession, pollution, etc.) (Gardner, 2008). Others suggest that such
risks can be identified and controlled through techniques like risk
management and insurance, thereby safeguarding and/or enhancing
organizational effectiveness. For instance, Beasley et al. (2005) state
that in the ... aftermath of recent corporate financial reporting scan-
dals, entity stakeholders are demanding greater oversight of key risks
facing the enterprise to ensure that stakeholder value is preserved and
enhanced (p. 522). Gordon et al. (2009) follow up on this, and suggest
that by taking a holistic perspective and ... adopting a systematic and
consistent approach (or process) to managing all of the risks confronting
an organization, ERM [Enterprise Risk Management] is presumed to
lower a firms overall risk of failure and thus increase the performance
and, in turn, the value of the organization (p. 302).
Power (2009) argues fiercely against risk management conceptions
such as these, stating that the development of, among others, ... cultural
and epistemological processes of financialization which have shaped
the increasingly reductive manner in which organizations are concep-
tualised, known, managed and regulated (p. 851) are to be blamed for
239
240 Alan Lowe and Ivo De Loo
the increasingly common view that organizations, and the environ-

ments they operate in, can be analysed and, consequently, changed,
in terms of the risk (appetite) associated with them. Power asserts that
this view tends to create erroneous feelings of security in organizations
and society, and underestimates the interconnections that exist between
many modern-day organizations, as well as between individuals (see
also Huber & Scheytt, 2013). In this paper, we claim that the extent to
which employees perceive an organization as a place where they hope to
fulfil (some of) their dreams and to invest themselves in, also seems to
be underestimated by many managers in organizations (Kramer, 1995).
Following from this, we assert that management accounting and control
procedures that are aligned with popular risk management conceptions
tend to displace the individual intrinsic motivation of employees with
feelings of fear, loneliness and disconnectedness. This is illustrated
by and manifests itself in an obsession with organizations as being or
becoming excellent, which is conventionally perceived to be for the
greater good of an organization (Aubert, 1995).
We feel that it is important to keep in mind that whatever is deemed
to be the greater good of an organization, or for that matter, the risks
and uncertainties facing an organization, and organizational prowess in
general, is based on representations which may lack permanence (Morin,
1995; see also Otley, 2014; Robson, 1992). Such representations assume
specific value systems and induce and/or stipulate specific beliefs and
practices of individuals. We suggest that the neo-classical influence on
(what is mostly considered to be) organizational effectiveness, excel-
lence, and/or prowess has led to an overvaluation of productivity and a
rather stifling and restricted view of organizational behaviour, in which
achieving security about the future, coupled with notions of permanent
progress, seem to rule (see also Morin, 1995).
Merchant and van der Stede (2007) state that ... management control
involves managers taking steps to help ensure that the employees do what
is best for the organization (p. 8).1 If indeed an emphasis on effectiveness
and excellence is present in many organizations, this is likely to be reflected
in their management accounting and control systems, and the communi-
cations and language used to talk about (the information produced by)
these systems. Such systems may create cognitive boundaries for employees
that embed and frame organizational behaviours in predominantly neo-
classical (micro)economic terms (Vosselman, 2011, 2014).
In this paper, we claim that an excessive emphasis on excellence can
itself prove threatening to organizational health and hence, we reject
a restricted economic rationalization of management accounting and
The Existential Perversity of Control 241
control. We argue that studying management accounting and control

practices from a perspective that takes into account the expressive func-
tion of work can help to shed a different light on organizational prowess.
In doing so, we argue, mainly following Aubert (1995), that absolute
stability for and the permanent survival of organizations is a myth.
What may be needed is a reconstruction of trust and personal relations
in organizations, rather than the application of different management
accounting and control procedures that intend to stimulate individual
and organizational prowess, but often act to alienate trustful relations.
We will try to sustain this argument in the following sections. After
having illustrated how management accounting and control procedures
based on rational economic values may impact the behaviour of individ-
uals, we will describe how employees may perceive the nature of (their)
work. We contend that (what will be called) the anxiety of death tends
to rule individual behaviour and thought about organizational progress
and well-being when rational economic values dominate the goings
on in an organization. We suggest that the anxiety of death is also
reflected in many popular risk management approaches, and is strength-
ened and further inculcated into organizational life as a consequence.
We aim to illustrate these aspects by means of several brief vignettes, and
put forward some ideas for a different view on organizational well-being
and more sensitive accounting and control procedures. We will end this
chapter with some suggestions for management accounting and control
research that might accommodate the view we sketch.
Management control and (the behaviour of) individuals
Perhaps as a consequence of the early neo-classical economic influence

on management accounting and control (Scapens & Arnold, 1986), there
has been a dominant view in management accounting and control studies
to examine and purge the negative tendencies of human behaviour in
organizations (Baxter & Chua, 2003, Merchant & van der Stede, 2007).
Using a largely cybernetic perspective, it is assumed that employees will
eventually accept and embrace feedback and correction and thus modify
or mitigate unwanted behaviours for the greater good of the organiza-
tion (Emmanuel et al., 1990, Merchant & van der Stede, 2007). It should
be possible to design management accounting and control systems and
measures that accomplish this when organizations and/or their environ-
ment are fairly stable (Emmanuel et al., 1990). However, Merchant & van
der Stede (2007) suggest that this may be very difficult and sometimes
impossible, as the anecdote2 in Box 16.1 serves to illustrate.3
Box 16.1 Performance management in a choir
A friend of ours has been singing in a top classical amateur choir for a couple
of years. Recently, following a less than ideal performance at an interna-
tional contest, the choirs conductor and its management decided to install a
quality management system in an attempt to raise the overall standard of the
choirs performances. The information in the jury report was used to create
this system. Choir members were sent the full report via e-mail, and were
subsequently informed (informally, in a pub) that a system would be installed.
By so doing, the choir director and its management intended to signal that
quality standards were a major concern.
One element of the system stipulated that all voices within a particular
vocal range (sopranos, altos, tenors, basses) now had to have separate prac-
tice sessions. Another element of the system, which choir members were not
informed about in advance, stipulated that each member had to be tested
periodically by singing specialized parts in front of a professional singer (from
a professional top choir). Choir members were suddenly invited for their first
(and up until now, only) test session.
Since the instalment of especially the latter element of the system, several
incidents have occurred. Relationships between a particular group of choir
members became strained after the test session, when they started to discuss
each others vocal abilities. This led to the departure of one of the members.
Also, a stricter probation period has been introduced for choir members who
pass their audition. One choir member, who had passed the audition, still had
to leave the choir, when she was told by others that her voice did not blend
well with the rest of her group.
Our friend still loves to sing very much, and could not imagine singing in
another choir, but, in certain situations, does have his own thoughts about
the relationship between what can (now) be called the choir and the people
who make up this choir.
In the situation we describe in Box 16.1, the idea of installing some

kind of management control system to improve the choirs perform-
ance levels seems perfectly acceptable, certainly if organizational reputa-
tion, survival or progress is at stake. The choir once consisted primarily
of students of a particular college of music, but now mainly comprises
amateur singers. The conductor has remained the same. He still is very
keen on choir members to behave as professionally as possible (even
though the choir now has amateur status). The quality management
system can be regarded as a manifestation of such behaviour.
However, the mere fact that there is now a system in place that period-
ically tries to assess how well choir members are singing, seems to have
influenced the functioning of the choir. Not just the behaviour of choir
members, but also what the choir is all about seems to have changed
as a consequence of the quality management system. Individuals now
have to succumb to a certain image what the choir is supposed to be

like, and choir members have to act like. Maintaining this image of
the choir is sometimes deemed more important than maintaining the
interests of the individuals who make up the choir. This has resulted in
incidents like the ones mentioned earlier.
A neo-classical perspective on management accounting and control
does not fit dynamic conceptions or representations of an organiza-
tion as described earlier. From such a perspective, an organization
would typically be seen as a singular and fairly stable entity, marked by
rather homogenous thinking and acting employees. From this stance,
a completely different picture of the organization would follow than
when it is theorized as a constellation of individuals with their own
thoughts, ideas and values that have somehow come to work together.
In the latter instance, we have a potentially dynamic perspective of the
organization where perceptions of the constellation can vary drastically
and frequently between individuals and/or over time.
We would like to offer, what is in our view, a viable take on manage-
ment accounting and control when the latter perspective is adopted.
We consider an organization and its accounting and control systems as
part of a complex social experience. Boland & Pondy (1983) claim that
when this view is adopted, it is important to understand accounting as
lived experience, by focussing on individual actors who are employed
by an organization and are faced with and immersed in (the production
of) accounting information and/or practices on a daily basis. By viewing
accounting in this way, the world that employees find themselves in
is shaped by actions and practices that aim at legitimating some activi-
ties and discouraging others (Chwastiak, 2006). Whatever is discouraged
or legitimated is likely to be infused by rational economic values, given
the origins of popular management accounting and control thought
(Scapens & Arnold, 1986; Vosselman, 2011, 2014). The discourses that
arise and/or change as a consequence of this impose constraints on the
issues that can be raised and how these can be framed, and help to link
up activities and results by making certain activities look appealing and
necessary possibly at the expense of others (Chwastiak, 2006). Covaleski
& Dirsmith (1990) assert that by so doing, ... what gets accounted for
shapes organizational members view of reality ... Accounting gives
a self-evident and apparently objective way of thinking, talking and
doing, cloaked behind a veil of blandness (p. 545). Stated differently,
accounting information helps to introduce, change and/or rationalize
certain practices in an organization, often based on rational economic
perspectives.
In order for accounting to realize such rationalizations, employees

must accept the reality that is proposed through the information stem-
ming from management accounting and control systems. In response to
this reality, employees will have to change their view of the organization
and the world it operates in (Chwastiak, 2006). It often seems that in
practice, upholding a certain image of an organization is felt to be more
important than maintaining the interests of the individuals who make
up the organization which may have a substantial impact on how the
latter feel about their work and their organization.
We will further examine the relationship between management
accounting and control systems and procedures and how employees
may perceive the nature of their work in the following section.
Management control and the nature of work
Morin (1995) believes that work serves two essential purposes for an
employee. Firstly, it has an economic/utilitarian function (focussing
on salary and job security aspects). Secondly, it also has an expressive
function (emphasizing the need to have individual autonomy and inter-
esting work). No matter how high someones salary or (bonus) incen-
tives are, if a person feels substantially fenced in by measures taken by
his/her organization (for instance, in terms of incentives granted), or
has a purely repetitive job that is of little intrinsic value, it may well be
that he/she becomes demoralized, stressed and lonely at work (see also
Pauchant, 1995). This is exactly what the (incidents in the) anecdote in
Box 16.1 seem(s) to exemplify.
We suggest that many of the representations of organizational effec-
tiveness and management accounting and control that are currently in
vogue tend to focus on the economic/utilitarian aspects of work to the
exclusion, or at least the detriment, of the expressive needs of the indi-
vidual (see also Bhimani & Bromwich, 2009, Malmi & Ikheimo, 2003).
We have another anecdote that might help to exemplify this, as can be
seen in Box 16.2.
An insightful conversation does not necessarily or immediately
generate ideas that may lead to concrete outputs. However, (input
and) output measurements are currently regarded as important yard-
sticks of organizational effectiveness and performance, even in univer-
sities (ter Bogt & Scapens, 2012). Publication standards are commonly
used to assess how faculty members are performing. That they may be
considered by their peers as valuable colleagues; have good ideas that
help to improve the work of others; be able to reflect effectively on the
Box 16.2 Informal soft skills versus output controls in organizational life
One of the authors recently visited a colleague at a different institute whom he

had not seen in a while. Even though the meeting was initially about starting
a joint research project, the conversation quickly veered on to a different and
completely unrelated topic. There followed a lengthy discussion about an
argument one of them had made in a recent paper. The argument was about a
potential danger to motivation of the conventional design and implementa-
tion of management control system measures. Speculations were done about
how contemporary management control and performance systems could tend
to attract people to organizations who might be predominantly extrinsically
motivated, or could lead to people losing their intrinsic motivation when
succumbing to the regimes that are dominant in such systems.
Both colleagues loved the exchange and felt energized by it. At the end of
the conversation, they wondered how they ought to account for this conver-
sation, as the Excel sheets they both had to complete (on a periodical basis)
about the hours spent on which type of work did not allow for free-flowing
discussions. These Excel time reporting sheets only focussed on concrete
outputs (such as preparing a project plan for research activity, or a module
outline and related teaching practices).
academic output of their colleagues ... may not matter that much in an
environment that uses hard measures of inputs and outputs. We would
argue that softer, hard to measure, skills are however very important to
make a university go round. If this is not acknowledged by managers,
Aubert (1995) contends that an organization (for instance, a university)
may well get to be governed by an anxiety of death. We will describe
what she means by this in the following section.
Anxiety of death
Techniques for driving effectiveness, an example of which are the

Excel sheets mentioned in Box 16.2, are in most cases, not new inven-
tions. In that sense, it is typical for managers when they are asked to
describe what is needed to make the organization effective, that they
will emphasize output measures, performance management, incentive
pay and other terms most closely associated with neo-classical (micro)
economic theory and rational economic values. Morin (1995) reports
that managers often list criteria such as the rate of employee and/or
inventory turnover, financial performance, quality control measures,
customer loyalty, remuneration structures and profitability as indica-
tors of organizational prowess. Nohria et al. (2003) suggest that organ-
izations typically aim to achieve superior performance vis--vis other
organizations that they perceive to be their competitors. These authors

report that their research demonstrates that successful organizations
often emphasize the following restricted set of practices: cutting waste,
detailed strategy formulation processes, flexible organizational struc-
tures and the existence of pay for performance schemes that include
annual target increases. Pauchant (1995) states that striving for perfec-
tion, excellence and word class performance have become dominant
themes for (senior) managers in their ways of doing and communication.
It seems to have become almost an obsession pervading the approach
of many of them to strategic planning and performance management.
Becker (1973) argues that as a consequence, individual employees can be
caught up in a debilitating emphasis on the organization and preserving
the organization at significant cost to their own well-being. Ultimately,
Becker suggests that this is a reflection of one of the most fundamental
desires of the individual: the fear to face up to ones own mortality.
Aubert (1995) suggests something similar when she extends Beckers
view, and posits that employees currently ... must live like a winner
to feel sure of ... [their] own existence [in an organization] (p. 165),
because [b]eing excellent is now defined as having the capacity to triumph
over others as well as over oneself, with all the precariousness involved in
such a concept (p. 156, emphasis in original).4 Aubert purports that as
a consequence, a vicious circle of permanent progress can be witnessed
in many organizations, which tends to be accompanied by an anxiety
of death that manifests itself at both the individual and organizational
levels. This anxiety may be harder to overcome at the latter level than at
the former.5 Performing excellently, preferably better and faster than
ones competitors do, therefore continues to be promoted as the only
way to go ahead and succeed in business. There seems to be an ideal-
ized perfection associated with organizations that outperform others
(Morin, 1995). However, such performance is reached in a world that
is perceived by individuals as inherently uncertain and risky (Otley,
2014). On top of this, it ought not to be forgotten that no socio-political
institution lasts forever (Kontos, 1972). Aubert (1995) states that, conse-
quently, the emphasis on moving up that can be witnessed in many
organizations, and a lack of recognition of the possibility of organiza-
tional downfall manifests itself in an anxiety of death at the organi-
zational level that ultimately hampers the effectiveness of employees
at the individual level. This may then hamper the effectiveness of the
entire organization and perhaps also of society.
People generally feel uncertain about the world they live in (Otley,
2014). Under such circumstances, employees are likely to exhibit
feelings of being disconnected from the organization and from work,

as the expectations of managers and the control systems they employ
may become increasingly intense. Aubert (1995) argues that when these
feelings are not acknowledged, and an emphasis on survival through
permanent progress rules organizational thought, there is a danger that
employees succumb to motivations based on an anxiety of death
that replace feelings of uncertainty. It is repressions of this type that
endanger a healthy attitude to work and the organization. In terms
of the structure and content of management accounting and control
systems, this may be reflected in the use of organizational measures of
performance that are linked and/or coupled with, an excessive number
of individual performance measures, thereby threatening coopera-
tion and teamwork as well as individual job satisfaction. Such serious
negative effects would often be considered by managers as unexpected
consequences that had not been intended or foreseen when installing
such systems. We regard such arguments as a convenient excuse that
managers may use to rationalize consequences that might have been
foreseen if a more nuanced model of the organization and organiza-
tional life had been adopted.
Aubert suggests that in such cases, the only way to make employees
feel connected again is to take a different starting point about organi-
zations, organizational life and the world they operate in. She puts
the view that it is necessary to allow space for employees to take more
responsibility for their professional lives, and that they are given some
choice to determine how they wish to organize their own work.
It should be kept in mind that by following this take on organi-
zational prowess and management accounting and control, we are
not decrying any attempt to promote organizational effectiveness
and stability. Our argument is for a less oppressive character to be
adopted in organizations, management accounting and control, and
performance measurement, in which we would hope creativity and
effectiveness could be benefitted. This might have a positive influ-
ence on the modern organization man, which could even translate
into the wider society. In contrast, we claim that an overzealous use
of management accounting and control systems designed to promote
organizational stability may lead to undesirable effects and can ulti-
mately cause organizational failure. In addition, we decry the lack
of importance that currently seems to be attributed to individual
employees (by their managers) to be and act like themselves, to live
out their dreams and desires in their work. We believe that popular
conceptions of organizational effectiveness and stability contribute
to this way of thinking, and contend that these conceptions are

partially infused by specific conceptions of uncertainty and risk that
we maintain serious doubts about. We will discuss these doubts in the
following section.
Risk management, control systems and the futility of the

organizational ideal
If Powers (2007) thesis that powerful discourses of accountability

and transparency are affecting many current management practices
is correct, then risk management can be seen as a response to calls for
accountability par excellence. (Soin et al., 2014, this volume, italics in
original)
Individuals, organizations and organizational environments are neither

independent nor completely programmable. This view is certainly not
new, and had already been noted, in part at least, in the early 1920s,
when Frank Knight wrote his famous treatise on uncertainty and risk
(see also Huber & Scheytt, 2013). Nevertheless, recent financial scan-
dals as well as apparently natural catastrophes such the 2013 Japanese
tsunami and Fukushima nuclear disaster, and incidents such as the BP
oil spill in the Gulf of Mexico in 2010, have tended to instil a culture
of fear in individuals, organizations and societies at large (see also
Gardner, 2008). The fear of making mistakes and of disaster(s) in general
constrains our perceptions and the decisions we take, be it in a work or
in a non-work setting. Language is used to accentuate the need to be
fearful, emphasizing the dangers and risks someone is exposed to or may
face when one is not fearful enough.6
Gardner takes a contrary position in arguing that many of the risks
associated with fear (like the fear of earthquakes, financial crises, death,
pollution, etc.) cannot be identified and kept under control. The more
popular view seems to be, however, that there needs to be little or no
fear to be faced with extreme future setbacks or disasters. Where risk
management techniques or practices are in place, it may be tempting to
ignore these risks because they already seem to be accounted for (Soin
et al., 2014). Whyte (1963) warns against the optimism that is typically
associated with such apparent predictability and stability, and asks the
reader whether he or she is willing to accept that this is the way in
which one can or should wish to view life and make a sustainable living.
The implicit suggestion is that a different take on (business and social)
affairs and (organizational) life in particular may be more fruitful (see

also Huber & Scheytt, 2013). Despite these early and extensive concerns,
Morin (1995) states that the ways in which organizations and societies
have tended to be viewed and portrayed 5060 years ago are still very
much in place today, and have in fact extended their influence further.
Similarly, in a popular book on the effects of technology on everyday life
(Morozov, 2013), it is claimed that to accept a world full of defects no
longer seems acceptable.
Gardner (2008) further problematizes the conception of a world
without defects, stating that ... it is always possible for things to go
wrong and ... to think that the potential disasters facing us today are
somehow more awful than those of the past is both ignorant and
arrogant (p. 8). Uncertainty, he believes, is primarily an emotional
response from individuals that cannot simply be changed or taken
away by anything (although creating awareness that it basically is an
emotional response may help). This would render many risk manage-
ment practices and management accounting and control systems that
are said to be designed to present, predict and perhaps even handle
such risks of doubtful validity. Schwartz (1995) argues that this
simplistic conception of an organizational ideal, in which employees
do exactly what is expected from them, and the organization operates
in perfect concordance with its environment, can never be attained
and hence, ought not to be accepted as something the organization
should aim for.
Adopting this view would imply that a considerable part of what
happens in and around organizations simply cannot be controlled,
managed and/or predetermined. Consequently, Kramer (1995) suggests
that it may not be such a bad idea to let employees participate much
more actively in organizations. This, he believes, may be achieved best
when they are allowed to individualize. This would mean that employees
are given considerable freedom to organize their own work (see also
Aubert, 1995). They would also get the opportunity to coordinate that
work with others themselves, so that their professional and private lives
may become more balanced and fulfilling. This is likely to enhance
organizational performance as well, but the latter is not deemed to be
the ultimate goal, or the starting point to think about organizational
prowess or management accounting and control. This would probably
sound like a huge risk in modern-day conceptions of uncertainty and
risk. However, the consequences may be positive, as the anecdote in Box
16.3 exemplifies.
Box 16.3 Work stories of store fitting
During a recent flight, one of the authors sat next to someone who had carried
out contract work as a store-fitter for several years across a number of major
UK retailers such as Tesco and Primark. As they talked about the reason for
their respective flights, the store-fitter started to reflect on a recent time he had
spent working in a more rural area in China, where he had been employed to
fit some new large Tesco stores.
He had been especially impressed by the way Chinese workers, and the
Chinese people in this area, seemed to relate to one another in that area. The
team of UK workers of which he was part, was regularly invited, even during
what he considered to be normal working hours, to share a meal at the
homes of Chinese colleagues working on the same site. He was baffled when
they told him that even though they could hardly pay for the food, they
considered the possibility to share a meal and spend an afternoon or evening
together very important. He recounted that this appeared to be more impor-
tant to them than earning or having more money, or sticking strictly to prede-
termined working hours that their boss deemed fit. After these meals, Chinese
workers also tended to work harder and longer, often well into the night. The
UK team, feeling energized by what they experienced and saw, did the same,
even though the UK team supervisor, located in the UK, had expressed his
surprise, but did not encourage or sanction this.
Epilogue
We claim that neo-classical (micro)economic theories and rational

economic values help to sustain and institutionalize the behavioural
assumptions that form the basis of such theories. These rational
economic assumptions tend to emphasize organizational effective-
ness and the suppression of employees interests by their managers in
the latters quest for productivity and excellence (Vosselman, 2011,
2014). Generally speaking, risk management approaches, management
accounting and control systems and the language associated with these
knowledge domains can be regarded as contributing to prevailing views
on productivity and excellence (MacKenzie, 2006; see also Huber &
Scheytt, 2013). This view, we believe, runs contrary to the acceptance
of life and death that faces all organizations and individuals (Morin,
1995). According to Pauchant (1995), as a consequence, whatever is in
the hearts and dreams of individual employees tends to be forgotten in
todays organizations. This we deem to be the existential perversity of
management accounting and control.
We would argue that a different view of organizational prowess and
effectiveness is long overdue. It is difficult to say what such a view might
look like exactly, because, following the take we have adopted, which
starts from specific notions of organizational and individual well-being,

this is necessarily in the hands of the individuals who make up the
organization. We feel that the least that is needed to accomplish this is a
reconstruction or reconstitution of trust and personal relations in organ-
izations and society, rather than different management accounting and
control procedures intending to stimulate individual and organizational
compliance (Locke & Lowe, 2008).
Of course, adopting a different view on the functioning of organi-
zations, the role of individual employees, and what may be viable
management accounting and control systems, will also have impli-
cations for forms of management accounting and research we would
encourage (see also Malsch & Gunin-Paracini, 2013). We suggest that
performativity analyses may be compatible with the views on organi-
zational well-being expressed earlier (Barad, 2003; see also MacKenzie,
2006). Performativity analyses focus on the importance of the activities,
speech and gestures of employees, and the technologies they employ
that are related to what may be called (organizational) performance.
Such forms of analysis assume that performance is enacted in prac-
tice (Orlikowski & Scott, 2008). We would go further and discuss the
involvement of individual employees in the making up of what may be
counted (perhaps in future periods) as profit, performance, excel-
lence, failure, etc. These are representations that do not (neces-
sarily) have logical counterparts in the world out there. Management
accounting and control language could then, for instance, be inter-
preted as an ordering device, or as an important means to change social
order (Ezzamel, 2012), as it can establish and change social realities
through its utterances and enactment.
Although performativity analyses are not new in management accounting
and control studies (Vosselman, 2014), they have, to our knowledge, not
yet been conducted with a view to emphasizing the expressive function of
work. These ideas about the expressive role of work, which we feel must
be accompanied by a reflexive nature of the research act (De Loo & Lowe,
2012), are especially relevant to improving our understanding of the work
environment and creating (what we deem to be) better organizations.
Notes
The authors would like to acknowledge support from ICAEWs charitable trusts
for the research project from which this chapter is derived.
1. Apparently, managers themselves have such interests in mind at all times (see
also Macintosh, 1994).
2. This anecdote, as well as all other anecdotes in this chapter, should not
be treated as case studies, as they are clearly much less. They are personal
accounts of experiences that the authors have had, or have been told of, that
are related to the issues and concerns expressed.
3. In a broader but similar vein, Whyte (1963) asks whether it is such a good idea
that societies get to be governed by what he calls the mediocrity of business
method. He asserts that it starts from an assumption about the (chiefly) stable
and predictable nature of (business) affairs, and suggests that these affairs will
become substantially less stable and predictable in the years after the publica-
tion of his book.
4. Such behaviours have been the focus of much attention in the past six years
(since the financial crisis), but also prior to these events. The issue of both
self-interest and unsociable types of behaviour at the centre of significant
organizational catastrophes has also been regularly depicted on popular film.
A recent example is the film Margin Call, featuring Kevin Spacey and Jeremy
Irons.
5. Actually, she uses the term death anxiety, which does not translate very well
in English. Hence, the slight rewording that we propose.
6. Various political/social debates have fallen into this negativity trap. For
instance, considerable misgivings have been raised in the recent resurgence
of concern in regard to immigration into the UK, as can be seen here: http://
www.theguardian.com/uk-news/2014/jan/03/romanian-bulglarian-uk-immi-
gration-hysteria-far-right. Similarly, the use of negative language and fear in
the depiction of economic policy and the social problems subsequent to the
global financial crisis can be witnessed as well, as this example illustrates:
http://www.ehfg.org/448.html.
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17
Middle-Range Thinking and
Management Control Systems
Jane Broadbent and Richard Laughlin
For over 25 years, we have undertaken research that has used a research
approach called Middle-Range Thinking (MRT) (cf. Laughlin, 1995,
2004; Broadbent & Laughlin, 2008) as a means of seeking to develop
understanding of the role of accounting in change in the social world. In
considering change in both society and organizations, we have concen-
trated on wide-ranging management controls, particularly those using
accounting technologies, which have been implemented in the attempt
to implement the required change. This chapter explores some elements
of MRT both generally and specifically in the context of understanding
control in conditions of uncertainty.
The basic arguments that will be expounded in this chapter are
twofold. Firstly, we make the case that the research that we have under-
taken over many years studying change in the public services, using
a framework inspired by the work of Jurgen Habermas, is a study of
management control. In particular, the notion of steering that we have
used (see a summary of our work in Broadbent & Laughlin, 2013) is in
fact a management control system (MCS). Secondly, we will argue that
a research approach using MRT provides important insights into the
nature and functioning of MCS, particularly in conditions of uncertainty.
Our general argument is that the nature of the MCS that is required, at
both societal as well as organizational levels, given the uncertainties that
exist, needs to be relational rather than transactional (cf. Broadbent
& Laughlin, 2009, 2013). More specifically, in conditions of uncertainty
we argue relational approaches are essential. To illustrate this argument
we will draw on a variety of examples taken from our research in the
provision of public services.
The chapter will be divided into two major sections and a short
conclusion containing some prescriptions based on the analysis. The
255
256 Jane Broadbent and Richard Laughlin
first section explores a number of key elements of MRT with a concen-

tration on the theoretical frame that has informed our research, demon-
strating its links to different forms of MCS. The second section argues
for the use of MRT in researching MCS in society and in organizations in
conditions of uncertainty. Finally, by way of conclusion we will provide
some prescriptions on the future design of any MCS given the uncer-
tainties under which we live.
Middle-Range Thinking (MRT)
All research approaches are built on a range of assumptions about the

nature of the social world, how to understand it and whether change is
part of the agenda of concern. It is important for researchers to acknowl-
edge this holistic appreciation and avoid reducing the understanding of
research approaches to a choice of data collection methods often crudely
categorized as qualitative and quantitative. In short, choices must be
made about the nature of the research approach adopted.
Laughlin (1995) categorizes the various alternatives into three broad
types which he described as Comtean, Kantian/Hegelian and Kantian
Fichtean with MRT being a modal type of a Kantian/Fichtean research
approach. Figure 17.1 provides a comparison of these modal research
approaches with MRT, with its critical and discursive analytical approach,
in the middle in relation to the highly defined (Comtean) positivistic
approaches and more interpretive (KantianFichtean) approaches.1
MRT adopts the position that the nature of the social world is not
rule governed but is, instead, interpretively constructed. This social
construction is undertaken in the context of social interaction that itself
is embedded in the context of existing yet dynamic societal structures
and institutions. As such, the social world cannot usefully be described
by tight theoretical descriptions. Neither are the relationships between
elements of social interaction rule governed. It follows that replications
of previously described relationships between different elements of
social life leading to tightly defined all-encompassing theories cannot
be tested in different empirical situations in the simplistic way which
comes with positivistic research approaches.
Despite the rejection of rule-governed relationships neither does MRT
assume that it is possible to enter the research site the field as a tabula
rasa, theory-less. The world is socially constructed but is so on the basis
of the taken-for-granted assumptions of individuals, what Schutz (1967)
called the stocks of knowledge in hand. Given the infinite possibilities
for interpretation, we cannot go into any social situation or any research
Middle-Range Thinking and Management Control Systems 257
COMTEAN (LOW KANTIAN/HEGELIAN KANTIAN/FICHTEAN (LOW

CHANGE) (MEDIUM CHANGE) CHANGE)
ASSUMED GENERAL
EMPIRICAL PATTERNS COMPLETE PARTIAL NONE
RELEVANCE OF PRIOR
THEORY AT OUTSET OF ALL DEFINING & PROVIDING IGNORED
RESEARCH: TO BE ENCOMPASSING SKELETALTHEORY
ROLE OF OBSERVER
SUBJECTIVITY IN
EMPIRICAL ENGAGEMENT MINIMISE STRUCTURED
COMPLETE
METHODOLOGICAL POSITIVIST CRITICAL

APPROACH REALIST DISCURSIVE INTERPRETIVE
ANALYSIS
DATA NARRATIVE QUANTITATIVE

QUANTITATIVE 2 QUANTITATIVE 1
QUESTIONNAIRES
DATA COLLECTION INTERVIEWS
METHODS DOCUMENTS OBSERVATION
ORGANISATIONS AND SOCIETIES MADE UP OF PEOPLE AND NON-HUMAN

PHENOMENA
Figure 17.1 Alternative research approaches
project without some underlying assumptions about the variety of rela-

tionships that may or may not exist. Socialization gives us some frames
with which to work and without them we could probably not manage
to navigate our social existence. Although these are continually devel-
oped in the context of social interaction, we nevertheless recognize or at
least assume we recognize many aspects of the interaction. Given these
assumptions, approaches suggesting they are building interpretations
without preconceptions, for example, using the techniques of grounded
theory, are unsatisfactory.
The relevance of prior theory is very specific. Although accepting the
socially constructed and interpretative nature of the social world, MRT
requires the need to be explicit about the theories that are used in all
research projects. The skeletal theories provide a language that allows
researchers to discuss the empirical situation and are used reflexively
with the empirical data. Just as the theoretical skeleton needs empir-
ical flesh to give it meaning, so the empirical flesh is given shape by
the theoretical frame. This is middle-range in that it provides a frame-
work with which to explore an empirical situation but not to define it.
The empirical understandings remain as important as the theoretical
framework. For avoidance of doubt, the use of the framework is not to

test a theory, but to provide a language to enable discursive processes to
develop understandings of the social world. The two elements theory
and detailed empirics are developed reflexively, each informing the
other.
All these differences have implications for the role of the observer and
the subjectivity of empirical engagement. MRT sees the role of the observer
as inevitable, eschewing the claims that objectivity is possible, yet seeking
some level of structure in that engagement, the structure being informed
by the theoretical frame. Equally, the data narrative is qualitative, but
theoretically informed, and the data collection methods reflect this.
In summary, the nature of the assumptions of MRT are such that
they inherently accept uncertainty in the creation of knowledge and
understanding and the whole approach is premised on seeking to under-
stand the way in which we resolve uncertainty in our everyday lives.
The research approach we adopt builds on the way in which we use
implicit frameworks (our stocks of knowledge) to help us understand the
social world, yet it makes this process more explicit. But it also accepts,
unlike the Comtean and Kantian/Fichtean alternatives, that theoreti-
cally informed understanding needs to lead to critical evaluation and
possibly to change in the empirical situation (the social world under
consideration).
The nature of the middle-range theoretical framework

The MRT theoretical framework that has informed our research is
centrally concerned to understand MCSs at societal and organizational
levels as steering systems and is informed2 by the thinking of Jurgen
Habermas, a German sociologist and philosopher. The model works
at both a societal and an organizational level and combines structural
elements and recognition of the importance of values, taken-for-granted
assumptions and social interaction in the context of defining and devel-
oping those structures.
At the societal level, the theoretical framework acknowledges the
notion of a societal lifeworld, which is the intangible and indeed amor-
phous and changeful set of values, culture, taken-for-granted assump-
tions which are discursively formed. The lifeworld defines the relevant
and legitimate societal systems, such as schools and hospitals, which are
the tangible expression of and meet the demands of the lifeworld. These
are guided in their behaviour by societal steering media Habermas
suggests law and money are key steering media even though in his later
work he privileged the power of law.
Mirroring some aspects of Emil Durkheims argument that the divi-

sion of labour in society is inevitable as society becomes more complex,
we see that the process of steering that Habermas highlighted has
become more complex. Thus, we argue (Broadbent et al., 1991) that
steering is undertaken by specialized societal steering institutions that are
created to take on the complex task of steering using steering mecha-
nisms. Thus steering is institutionalized and becomes more tangible as it
is embedded into societal structures in societal steering institutions that
have the societal role to enact lifeworld desires. Although Durkheims
analysis was far more functionalist than that we would wish to offer, it is
interesting to note that like Habermas, Durkheim saw law as important.
In his case, he saw law as important in maintaining social solidarity,
regulating relationships between different parties and this has particular
resonance with the idea of law as a steering mechanism.
Our position is rather different. Although we see the importance of
law as a means to define what is right or wrong, and thus an impor-
tant steering mechanism, we also see steering as enacted through the
power of money and indeed through the control of this resource which
we see as the role of accounting. This is operationalized through the
power relationships that are embedded in the structure of society where
societal steering institutions have the legitimate role to guide the behav-
iour of societal systems in line with societal lifeworld demands. Societal
steering institutions with both the position and the financial resources
to control societal systems have great power, and that power is linked to
the use of money as a steering mechanism. Accounting, as a technology
of resource allocation and accountability, aligned to money, is argu-
ably as powerful as law. Indeed, in some situations when availability of
resources is a limiting factor, financial elements as represented through
process of accounting are definitive. For example, the failure to agree
a Federal Budget in the USA in October 2013 led to the closedown of
many federal government functions for two weeks. All this was a means
to oppose the law that had been passed to provide medical insurance
for those who could not afford private schemes (known as Obamacare).
Thus, for some time the lack of a budget over-ruled the legal position
and stopped enactment of the law.
This linkage between the intangible sphere of values and taken-for-
granted assumptions and systems activity through the use of steering
mechanisms is replicated at the organizational level. Thus using the
organizational language developed by Bartunek (1984) and Hinings
& Greenwood (1988) the organizational interpretive schemes are the
intangible, discursively produced equivalent of the lifeworld and the
design archetypes are the steering systems and mechanisms guiding the
organizational systems.3
In a Weberian ideal type situation then all the elements of society
and organizations should be synchronized; however, this is not usually
the case. Research that we have undertaken over the years has demon-
strated differences in the discursively formed societal lifeworlds and
organizational interpretive schemes and a propensity for resistance by
organizations to imposed and perceived inappropriate societal steering
mechanisms. Intuitively this is unsurprising, as we should expect
interpretively and discursively formed actions and assumptions to be
diverse.
Steering as MCS
The argument that has been presented so far has been conceptual but
provides some introduction to the key elements of the framework that
are relevant to consideration of MCSs both those that regulate internal
organizational actions (intra-organizational MCS) and those which take
place between societal steering institutions and organizations where the
former seek to regulate the latter (inter-organizational MCS). Management
Control Systems are, in our model, the steering mechanisms or design
archetypes emanating from the organizational structures and societal
steering institutions set up to manage them. If we are to understand MCS
then we need to understand processes of societal steering that impact on
the design archetypes that control at the organizational level namely
inter-organizational control. We must also understand the impact of design
archetypes in an organizational context intra-organizational control.
Broadbent & Laughlin (2009), building on Ferreira & Otley (2009),
conceptualize these inter-organizational and intra-organizational
controls as performance management systems (PMSs) which can be
of two fundamentally different forms which are referred to as transac-
tional and relational. This theoretical differentiation informed and was
informed by research exploring the nature and use of PMSs in Higher
Education in England (Broadbent et al., 2010). We will briefly return
to this research later but for now it is important to distinguish between
transactional and relational steering/PMSs/MCS.4 Put simply an MCS,
in this context, is concerned with exercising control over the ends and
means of actions and activities that are pursued through the use of
money. When an MCS is transactional in nature it assumes that the ends
and means of the use of money can be defined and controlled in much
the same way as occurs when money is exchanged for some defined
and measurable goods or services. This way of thinking is indifferent
to whether there is any type of market, efficient or otherwise, at work

all money transfers are simply transactions with definable and measur-
able ends to achieve through the purchase as well as definable means
to achieve these clear ends. The MCS guiding this financial transac-
tion reflects this. A relational MCS, on the other hand, although still
concerned with the use of money, sees the resulting use coming out
of discourse between all those affected by and responsible for its use.
Money transfers, through relational MCSs, are no longer simple defin-
able measurable transactions driven by a something for something
logic, as comes with transactional thinking, but are guided by discourse
and agreement on use between all parties involved.
These two different approaches to MCS are informed by diverse
rationalities. Instrumental rationality describes a view that ends are
instrumental and the performance indicators to describe them are
derived using formal rationality, engagement with stakeholders is likely
to be low and the authority structure is legalrational in its nature. It is
the logic behind a something for something approach that has been
foundational in defining the use of performance indicators, notably, but
not exclusively, in the public services. Here funds have been provided
for the provision of services with the expectation that particular ends
are achieved. This is contrasted with communicative rationality where
measurement of the ends is based on substantive rationality, with
engagement from stakeholders and a reflexive authority structure. In
this situation although there is recognition that ends must be achieved,
not only is there some engagement with the providers of the ends, but
also the nature of the means adopted is much less closely specified.
There is therefore a reflexive relationship between the controllers and
those controlled. This enables negotiation and open discourse to be a
possibility.
With this key distinction in mind, we turn now to issues about
contexts of control and more importantly the uncertainties that exist
in these contexts.
Introducing conditions of uncertainty in

understanding MCS
As is the case in relation to management accounting techniques more

generally, it is arguable that many of the main approaches to developing
techniques for MCS assume levels of certainty. If not they assume known
levels of risk that can be incorporated into the models used. Emmanuel
et al. (1990) recognize the different situations and differentiate between
programmed and non-programmed decisions. They noted that tradi-

tional accounting techniques work best in a programmed situation. At
the time of writing their book, they noted the two main responses to
uncertainty were to avoid it or to change organizational structures in
response. We will return to this, but first another important point is
worthy of introduction at this early stage.
Traditional management accounting and management control
approaches also tend to assume that control is possible. Berry et al. (1995)
remind us of Tochers work in the early 1970s, which was adopted and
developed in Otley & Berry (1980), and is also mirrored in this chapter.
Put simply, which is all that is required at this stage, is to recognize that
control can only be achieved if four necessary conditions are achieved:
There is a known objective

Outputs can be measured in terms of the objective
Control actions have predictable outcomes
There is an ability to act to reduce deviations from the objective.
This set of necessary criteria is not often achievable and hence it is heroic
to claim that control can be achieved in all situations. For control to
be achieved, there is a need for a programmed activity that meets the
above criteria. This point is often forgotten, and the assumption that
is often made is that all activity can be controlled and can be made
programmable.
During the past 25 years, a good deal of effort has been expended
on finding ways in which decisions in non-programmable situations
might be taken, often adopting a more positivistic approach. These
approaches have been based on a view that, despite the complexity of
the social world, rule-governed patterns do exist if we can only find
them. Therefore, efforts have focussed on approaches that seek to
systematize decisions using models based on quantitative studies of past
data. They have focussed on the use of models that seek to take into
account the risk inherent in a situation and factor in different levels of
risk-adjusted outcomes, using more or less sophisticated mathematical
modelling. These approaches assume away uncertainty although they
seek to accommodate risk.
However, although risk can be factored in (the known unknowns),
uncertainty (the unknown unknowns) is often disregarded. Given that
uncertainty means that there is no possibility of placing a probability on
something occurring; this clearly creates a problem for the mathematical
modelling approaches that seek to attempt to capture reality in this way.
In such circumstances, the uncertainties do become disregarded either

by assuming they dont exist or by simplifying their nature so that they
can fit the mathematical model requirements.
Other proposed solutions to dealing with uncertainty have looked at
the use of different organizational structures recognizing the importance
of the complexity in the external environment as well as the complexity
in the internal organizational environment.
In complex environments (both external and internal environments) a
variety of ways have been proposed to seek to achieve the required levels
of control and one of those is to simplify the environment by segmenting
it by divisionalization and delegation. Ashbys Law of Requisite Variety
proposed that systems must have within them the requisite variety of
responses to be able to deal with the complexity of the environment. In
non-programmed and complex situations, judging the level of variety
needed is difficult. In order to minimize this problem, one solution, a
process of delegation, has been a central strategy for many institutions.
Our research in the public services has demonstrated that those
seeking to control the deliveries of these services have not been slow
at adopting this type of approach. Here the intention is to narrow and
simplify the environment by delegating operational decisions and
actions to individual organizations. Yet such an approach to deal with
uncertainty poses a range of problems when applied particularly in the
public services to which we now turn.
Dealing with uncertainty in the public services

The delegation of control to public service organizations is intended
to reduce the level of uncertainties, but is problematic for the societal
institutions that are in place to steer these organizations. Put simply,
steering institutions still have very clear ideas about what they want
to achieve and although the means might be delegated the ends are
clearly specified. Although it might be argued that delegation provides
the basis of a relational MCS, in actuality not only are the ends to be
pursued constrained but also how these ends are to be achieved will
be defined. It is for this reason that when any form of delegation is
pursued, only constrained discretion (Balls et al., 2004: 18) is intended
to occur. Although constrained delegation has been and still is being
pursued, we would argue (and will illustrate this later) that it has been
accompanied by an increasing transactional emphasis in the inter-
organizational MCS. This intensification of a transactional emphasis
disregards the real uncertainties facing public service organizations by
assuming the societal steering institutions know and can specify clearly
what these public service organizations should be pursuing and have

the power and societal authority to seemingly implement these require-
ments, albeit running the risk of the organizational resistance that is
likely to occur.
We will provide two illustrations of this delegation under constrained
discretion and the increasing transactional emphasis of the inter-or-
ganizational controls over public service organizations. The examples
are drawn from research in schools and higher education in England
that we have undertaken in different time periods.
One early example involved the introduction of Local Management
of Schools (LMS) and the National Curriculum through the Education
Reform Act of 1988. LMS was the first in a long set of changes that dele-
gated responsibility to individual schools rather than to a local authority
in charge of all the schools in a particular area. This focus on delegation
has continued and is now represented by the creation of Free Schools
and Academies. Both are independent schools that are publicly funded
and are driven by local preference: the schools themselves, groups of
parents or other interested parties such as faith groups, for example.
Discussion of the strengths and weaknesses of such approaches is not
an aim of this chapter. Suffice it to say that the intentions of the then
Department for Education (in terms of our framework this is the societal
steering institution) were that operational decisions should be made as
close to the activity as possible. Thus, inter-organizational MCSs were
developed to delegate resources to schools and schools in turn devel-
oped intra-organizational MCSs to manage the resources internally. Yet
this delegation only allowed constrained discretion. It was accompa-
nied by a set of outcome expectations about pupil achievement meas-
ured through testing of pupils and process controls relating to how
pupils were taught operationalized through the work of the Office for
Standards in Education (Ofsted). Equally, finance was delegated through
formulae that related broadly to the number of pupils in the school.
This in turn was, and remains, driven by the results of the pupils
achievements and Ofsted report results. Thus, finance was volatile as
pupil numbers could fluctuate and indeed government policy could also
affect funding streams.
Our research demonstrates that head teachers rapidly realized how
constrained they were in terms of the financial flexibility they had to
deal with the uncertainties they faced. Head teachers did not see control
of finance as something that should affect the core educational purpose
of schools. This led to the formation of absorbing groups to manage
the administration involved and accountability required for the money

delegated (cf. Laughlin et al., 1994).
This case study reinforces again that delegation from any societal
steering institution does not come without expectations. Thus, although
operational matters have been delegated to deal with operational uncer-
tainty, strategic direction has not been delegated. This, again, is some-
thing that is reflected in delegation schemes in all sectors but has a clear
and siginificant impact on the provision of public services. In short,
although societal steering institutions are able to delegate, their posi-
tion and role does not allow them to delegate responsibility for the
outcomes achieved. Hence, the MCSs that these institutions develop to
delegate operational responsibility to public service organizations also
have elements to specify and monitor the outcomes of organizational
actions. These MCSs are more performance measurement and perform-
ance management systems than ones that create freedoms for flexible
decision-making in the light of uncertainty.
Performance measurement and performance management systems
are ubiquitous. They enable any societal steering institution to steer
organizational systems and this is often done by a series of inducements
and sanctions. A key inducement might be a performance bonus; a key
sanction is naming and shaming the latter is a popular approach in
the public services with targets such as hospital waiting times, or school
league tables. The steering is often operationalized through monetary
flows making the transactional nature of the MCS clear. Yet some-
times this stronger form of control is not immediately apparent and can
even be perceived in the first instance in terms of apparent freedoms.
This was the case with the delegation that came with LMS. However,
as the LMS case demonstrates, the constrained discretion that comes
with such systems eventually becomes all too apparent and the claimed
freedoms rapidly evaporate.
The second case analyses the chains of control that societal steering
institutions exercise over Higher Educational Institutions (HEIs) to guide
the delivery of higher education on behalf of society demonstrating an
even stronger transactional emphasis in these controls (cf. Broadbent
et al., 2010).
Two distinct chains existed at the time that the research was under-
taken one was a resource flow from the then Department for Education
through the Higher Education Funding Council of England (HEFCE) to
HEIs in the form of a contract to provide research and teaching and
a number of third stream activities in return for block grants for
these three activities. Some aspects were specified quite carefully, for
example widening participation to include under-represented groups

in society. However, the contract had flexibility allowing HEIs to
meet the aims imposed by HEFCE in a flexible manner. The nature of
this type of MCS we described as moving towards being relational
because even though it involved financial delegation with clearly
constrained discretion as to expenditure, it did involve some levels
of active engagement between HEFCE and HEIs to specify the strategies
and activities that should be pursued, thus giving greater freedoms to
deal with uncertainty.
Other flows were directed through the Department for Trade and
Industry and more directly through the Research Councils. This resource
flow is one that was and remains allocated on the basis of particular bids
made by researchers bidding to either undertake research in particular
programmes or in open call mode. This stream of funding is project
based and Principal Investigators are awarded grants through a variety
of schemes and have to deliver that which they were funded to under-
take. Monitoring of what is being delivered is rigorous and there are
expectations about dissemination and impact of research. The control
of this funding scheme is more rigorously specified and we argued this
inter-organizational MCS was clearly transactional in nature having a
clear something for something underlying ethos.
As the research was undertaken, the funding of higher education in
England has changed considerably leading to changes in the controls
over HEIs. Government funding for HEIs now comes from one govern-
ment department (Department for Business, Innovation and Skills) and
the teaching grant from HEFCE has been largely replaced by student
fees. The details are less important than to note that the relational MCS
that HEFCE was attempting to engender is under increasing pressure.
The shift to the transactional is all too apparent to see as funding
flows now become associated with particular transactions. These include
the direct payment of fees by individual students attracted to particular
universities on the basis of their reputation, mediated by their position
in the league tables of performance in different activities. More direct
allocation of resources from government is based on performance indi-
cators, for example the Research Excellence Framework. These resource
flows provide something for something and the definition of what
constitutes higher education is increasingly being specified in clear
measurable form. As a result all uncertainties around what higher educa-
tion is and how it should be delivered are being disregarded and open
debate as to what activities should be undertaken in HEIs, coming from
a relational MCS, are being squashed.
Some concluding thoughts
The emphasis of this chapter has been to argue that in this complex
world where uncertainties abound, MRT is a research approach that
enables us to develop useful understandings. MRT accepts that we can
derive generic theories, which can inform future empirical studies but
that such theories will always be skeletal in nature as the nature of
understanding is uncertain and changing. All theories therefore can be
used to inform future endeavours to understand the empirical world but
will always be incomplete and will need to be open to revision through
these empirical engagements. In this sense, MRT disagrees with the claim
of theoretical closure of the positivists and the theoretical denial of those
of a more interpretive persuasion. But it shares more with the latter and
values the empirical detail as necessary flesh for the skeleton.
More specifically, in the context of seeking to build MCS that can deal
with uncertainty, our research using MRT has argued that MCSs need to
be relational rather than transactional. This will enable us to deal with
the uncertainties that exist in society and organizations. Put simply trans-
actional MCSs assume away uncertainty by disregarding it through seeing
all control as nothing more than a simple measurable something for some-
thing issue. This is simply not the case and thus control will not be achieved
and such systems will generate dysfunctions. Relational MCSs, on the other
hand, recognize uncertainty. Rather than defining the outcomes required
and/or the process for achieving those outcomes, the ethos of relational
MCS understands the need for engagement in order to enable meaningful
outcomes. Relational MCSs define a process by which to enable outcomes to
be achieved using an open discursive model to arrive at models of control.
Where there is uncertainty, an ongoing reflexive approach provides a better
possibility of dealing with new demands as they arrive.
In conclusion, in conditions of uncertainty, MRT provides a basis for
meaningful theoretical engagement with organizations and relational
MCSs provide a practical approach to improving control in organizations.
Notes
1. More detail about the arguments informing the analysis in Figure 17.1, drawn
from Laughlin (2004: 272), can be found in this original source or in Chapter 2
of Broadbent & Laughlin (2013).
2. It is important to stress that our theoretical framework is informed by
Habermass thinking but is far from a simple replication of his ideas.
3. See Laughlin (1991) and Broadbent & Laughlin (2013) Chapter 3 for more
details.
4. For ease of referencing for the remainder of this chapter, we will refer to this
complex control activity as an MCS.
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Index
Abdel-Kader, M., 39, 40 Bazerman, M., 165

academics, 5 Beasley, M., 239
accountability, 8, 10, 17981, 183, Becker, E., 246
185, 1878, 189, 190 behavioural economics, 11718
accounting behaviour controls, 58, 63
cost, 48, 98101 Bernoulli, D., 164
culture shift and, 2305 Bernstein, P. L., 164
information, 101, 1368, 2434 Berry, A. J., 179, 262
practices, 98101, 2305, 236 Beyond Budgeting, 89, 102
accounting & taxation journals, Bisbe, J., 41
337, 43n4 Black, F., 164
action research, 168, 174 Black, J., 10
actor-network theory (ANT), 3940 boards of directors, 33
Adams, J., 167, 170 Boland, R. J., 243
Adler, P. S., 41, 149 Borys, B., 41, 149
administrative man, 165 bounded ethicality, 165
affect heuristic, 165, 166 bounded rationality, 48, 165, 167
agility, 89 Bourne, M., 4, 9
Alcouffe, S., 39 Broadbent, J., 41
Alkaraan, F., 170 Brown, D. A., 31
alliance risk, 62 budgeting, 95, 219
ambiguity, 41, 115, 1523, 207, 210, capital, 1634, 204
232 budgets, 99100
Anderson, S., 39, 50 bureaucracy, 1501, 1556
Anthony, R. N., 2, 48, 136, 1568, Busco, C., 1723
178, 179, 186 business environment
anxiety of death, 241, 2458 changes in, 1012
appropriation, 52, 63, 210 dynamic, 1023, 1058
assessment-driven management, 107 business schools, 42, 21415
asymmetric information, 545, 125
attitudes toward bureaucracy/ Cadbury report, 179
formalization, 143, 14950 capital budgeting, 1634, 204
Aubert, N., 240, 241, 245, 2467, 249 carbon emissions, 198
autonomy, 2, 1618, 134, 135, 145, case studies, 4, 23, 37, 38, 71, 126,
187, 233, 244 168, 169, 172, 180, 183, 185,
216
balanced scorecard (BSC), 2, 137, Central Electricity Generation Board
1723, 174, 210 (CEGB), 194
banks/banking sector, 32, 1415, 171, Chandler, A. D., 99, 230
178, 188 chief executive officers (CEOs), 33, 127
Barnard, C., 152 chief financial officer (CFO), 235
Base Erosion Profit Shifting (BEPS) clan control, 137
action plan, 21 classical economic theory, 117
269
270 Index
Coase, R., 4750, 62, 63, 64n1 as performative state, 1356

coercive, 40, 41, 75, 137, 145, 149, supportive context and, 756
154, 155 critical research, 210
cognitive biases, 125, 167 crowd-sourcing, 174
cognitive maps, 1679, 171 cultural theory of risk, 5, 2247, 236
collaboration, between organizations, culture shift, 22736
3, 4765 customers, 2, 8
collaborative agreements, 55 Cyert, R. M., 211
collectivism, 1678
Collier, P., 8, 10, 168 Dane, E., 167
Committee of Sponsoring Davila, A., 39, 40
Organizations (COSO), 1801 decentralization, 4765
Common Consolidated Corporate decision-making, 207
Tax Base (CCCTB), 21 balancing analytical and intuitive,
compensation systems, 4, 11430 1713
competition, 123, 126 dual processing in, 172
compliance, 64n7 heuristics, 165, 166, 169, 172, 173
conceptualization, 68, 212, 217, management accountants and,
21820 2245
consensus, 169 naturalistic, 167, 168, 173, 174
consumerism, 102 social and organization context of,
contract design, 32 16771
contracts, inter-firm, 516 strategic, 16275
control decoupling, 4, 190
see also management control defensiveness, 4, 12, 190
archetypes, 567 Dekker, H. C., 39, 56
internal, 323, 98 demand forecasting, 48
nature of, 41 Demski, J. S., 40
control package, 136, 1445, 150, deregulation, 9
1568 diagnostic control, 401
control systems, 4, 5, 24850 Ding, S., 32
see also management control Dirsmith, M. W., 243
systems (MCS) disclosure requirements, 33
consolidation of, 1578 discounted cash flow, 1634
in electricity generation market, discriminating alignment hypothesis,
1945 64n3
role of, 8 distribution
Cools, M., 214 Gaussian, 85
copycat behaviour, 171 probability, 88
corporate governance, 4, 1011, 33 of real capital, 20
COSO framework, 179, 1801 Ditillo, A., 39
cost accounting, 48, 98101 diversification, 88
cost-benefit analysis, 171 double entry book keeping, 98
Covaleski, M. A., 243 Douglas, M., 12, 167, 2245, 227,
creativity, 12, 789, 13446 228, 235, 236
case examples, 13845 du Pont Company, 99
incentives and, 76 Durkheim, E., 259
vs. innovation, 135 Dye, R., 49
management control and, 724 dynamic control systems, 1058
Index 271
earnings predictions, 7 framing, 169, 172, 173, 208

economic growth, 134 French elite school system, 21315
economic man, 165 Froud, J., 170
education, 5, 20720 functionalist research, 210, 21112
effectiveness, 12, 239 fund management, 912
efficiency, 12, 2501 future investment, 99
egalitarianism, 30, 168, 2267, 236
Electricity Act (1983), 194 Gaglio,, 39
electricity generation market, 45, 10, Galbraith, J., 73, 115
193205 game theory, 164
Emmanuel, C., 2, 1415, 215, 169 Gardner, D., 239, 248, 249
employee creativity, 724 Giddens, A., 8, 170
employee motivation, 137, 240 global competition, 102
enabling, 40, 41, 75, 137, 145, 149, global financial crisis, 67
154, 155 globalization, 89
enabling control, 36, 97 goals/goal setting, 1, 8, 1516, 32, 43,
Energy Market Reform (EMR), 203 578, 60, 73, 989, 106
Enron, 149 Google Scholar, 30, 334
enterprise risk management (ERM), Gordon, L. A., 239
181, 186, 239 governance, 910, 189
entrepreneurs, 168 corporate, 4, 1011, 33
environmental change, 1, 4, 67 practices, 2
environmental regulation, 1957, government, 2
199200 Grant, R. M., 228
environmental uncertainty, 123 grid-group model, 2257
Espeland, W. N., 179 Guthrie, J., 201
evidence-based management, 21516
excellence, 23941, 246 Habermas, J., 255, 2589
exchange hazards, 59 Harris, E., 167, 169
expertise (accounting), 235 healthcare, 87
expressive function of work, 241, 244, Hendry, J., 228, 229
251 Henri, J. F., 41
external environment, 67 heuristics, 165, 166, 169, 172, 173
external pressures, responses to, 1112 heuristics as bias (HB), 167
external stakeholders, 2 hierarchical culture, 5, 225, 22732,
234
fads/fashion, 11 hierarchy/hierarchists, 12, 33, 489,
Fagerberg, J., 135 1678, 226, 2356
fear, 239, 248 higher education, 10, 1801, 260,
Feltham, G. A., 40 2646
Ferreira, A., 32, 136, 145 Higher Education Council for England
financial measures, 137 (HEFCE), 18090, 2656
firm boundaries, 478, 49, 63 higher education institutions (HEIs),
food supply, 89 10, 18090, 2079, 21315, 265
forecasting, 48, 867, 10910, 134, hire, 236
145, 153 Hofstede, G., 99
forecasting models, 867, 89, 149, Hopwood, A. G., 40
1502 human behavior, 6979, 2414
formalization, 35, 95, 143 hybrid organizational forms, 4850, 62
272 Index
IBM Global University Programs, international alliances, 50

13841, 1445 International Management Control
ideal type, 260 conference, 3
illusion of control, 1112 inter-organizational control, 2, 260
implementation of control,15054 inter-organizational relationships,
improvement of control, 1546 39, 42
inbound processes, 135 interpretive research, 210
incentives, 76 intra-organizational control, 260
income shifting, 14, 1921, 25 investment hiatus, 194, 203
individualism/individualistic culture, investment theory, 2013
5, 1678, 22730, 2325
industrial revolution, 98 Johnson, H. T., 989, 100, 101, 102
informal controls, 94
information asymmetry, 545, 125 Kahneman, D., 165, 167, 174
information processing, 166 Kaplan, R. S., 101, 137, 172, 173
information society, 8 Kelly, G., 168
innovation, 3, 4, 12, 56, 63, 13446 Keynes, J. M., 164
case examples, 13845 Klein, G., 167, 170, 174
vs. creativity, 135 Knight, F., 178, 248
as performative state, 1356 knowledge, 20813, 21518
product, 73 Kramer, R., 240, 249
institutional rationality, 40
institutional theory, 40 late modernity, 89
insurance, 878, 239 Laughlin, R., 41, 256
interactive control, 41 leadership style, 76
interdependencies, 124 learning, 789
inter-firm contracts, 516 management control and, 745
asymmetric information and, 545 as process, 768
broad view of, 545 legal boundaries, 32
clause specificity, 53 legal systems, 49
contingency adaptation, 534 levels of control framework, 137,
flexibility, 55 21213
functions and dimensions of, 524 life cycle of control, 1508
incomplete, 556 Local Management of Schools (LMS),
issue inclusiveness, 53 2645
risk types and, 512 Loewenstein, G. F., 166
inter-firm management control, 50, long-term goals, 1
5563 lottery tickets, 165
control archetypes, 567 Lounsbury, M., 40
formal controls, 578 luck, 4, 878, 914
incomplete contracts and, 556 Luther, R., 39, 40
partner selection, 5960
risk and, 567 make vs. buy decisions, 63, 64
traditional control frameworks Malmi, T., 31
and, 612 management accountability, see
trust and, 601, 64n5 accountability
inter-firm relations, 501, 5663 management accountants, 12
partner selection, 5960 role of, 48
internal control, 323, 98 as strategists, 2245, 2305
Index 273
management accounting, 2, 5, 89 managers

contracts and, 512 educating, 21518
control and, 23952 role of, 207
management control, 16 manufacturing, 989
changes in, 4 March, J. G., 1519, 178, 211
costs of, 103 markets, 4750, 63, 69,72, 1012, 105,
creativity and, 724, 13446 1389, 171, 1789, 203, 228, 236
crisis, of late 20th century, 1012 Markowitz, H., 164
current approaches to, 1024 McGoun, E. G., 180
defined, 178, 179 measurement-driven management,
delineating field of, 313 1067
dynamic, 1058 Merchant, K., 240, 241
in electricity generation market, mergers, 50
193205 Middle-Range Thinking (MRT), 5, 9,
human behavior and, 2414 25568
innovation and, 3, 4, 56, 63, 13446 Mikes, A., 32
inter-firm, 50, 5563 Miller, P., 8, 179
learning and, 745 misalignment hypothesis, 64n3
managing, 14959 mitigation, 61, 170
middle-range thinking and, 25568 modernity, 89
nature of work and, 2445 Morgenstern, O., 164
objectives of, 149 Morin, E. M., 245, 249, 250
origins of, 97101 mortality, 246
practices, 39, 42 multinational enterprises (MNEs),
research, 3, 5, 3044, 6979, 20723 transfer pricing and, 1426
risk management and, 17890 multi-site manufacturing, 99
scope of, 2
in strategic alliances, 4765 naturalistic decision-making, 167,
tax compliance and, 214 168, 173, 174
textbooks, 20910 neo-classical economics, 240, 243, 250
themes in, 3841 neo-liberalism, 9
transfer pricing and, 1518 network society, 8
uncertainty and, 15, 89, 1112, New Electricity Trading Agreement
8395, 97100, 17890, 207 (NETA), 194
in universities, 18390 new product development (NPD),
Management Control Association 104, 10910
(MCA), 30 New Public Management (NPM), 181,
management control systems (MCS), 217
11, 12, 6970, 723, 756, 134, Nohria, N., 246
1368, 255 non-financial performance measures,
conditions of uncertainty and, 4, 137
2616 non-financial performance measures
inter-organizational, 260 (NFPMs), 123, 126
intra-organizational, 260 non-routine tasks, 150
steering as, 2601 Northcott, D., 170
management knowledge, 5 Norton, D. P., 172, 173
managerial judgement, 163, 169, 173
managerial performance, 34, 914 Obamacare, 87
managerialism, 190 obsolete controls, 150, 1569
274 Index
operational boundaries, 149 non-financial measures, 4, 123,

operational performance, 149 126, 137
opportunistic hazards, 55 systems, 402, 745
option pricing theory, 164 performance measurement and
organizational culture, 5, 12 compensation systems (PMCS),
organizational effectiveness, 23940, 11430
244, 245, 2478, 250 design and use of, 1225, 126
organizational excellence, 5, 240, dimensions of, 1202, 1268
246, 248, 250, 251 intensity or importance of, 122
organizational ideal, 24850 research on, 11430
organizational learning, 768 subjective use of, 121
organizational practices, 186, 219 performance risk, 52, 62
organizational roles, 12 performance targets, 934
organizational theory, 118 performativity, 251
organization context, of decision Perrow, C., 14953, 156
making, 16771 personal construct theory (PCT),
organization man, 247 1689
organizations perversity of management control,
collaboration between, 3, 4765 23951
goals of, 1 planning, 89, 22930
operating environment for, 1 policy-makers, 217
responses to external pressures by, political behaviour, 170
1112 political economy, 9, 1634
uncertainty faced by, 1, 68 Pondy, L. R., 243
Otley, D., 31, 32, 41, 115, 150, 158, portfolio theory, 164
262 post-industrial society, 8
Ouchi, W. G., 1367 Power, M. K., 8, 170, 178, 179, 180,
outbound processes, 1356 183, 189, 23940, 248
outcome controls, 578 practitioners, 70, 103, 105, 110, 125,
outcome-driven solutions, 107 162, 171, 1734, 2079, 21213,
215, 21820
partner selection, 32, 5960 pragmatist, 165, 208, 220
Pauchant, T. C., 239, 244, 246 Pratt, M. G., 167
Penrose, E., 489, 50, 63 predictive models, 867
perfomativity analyses, 251 privatization, 1946, 200
Performance Alignment Matrix, 106 probability, 164, 165
performance evaluation, 4, 11 problem-framing, 208, 21112, 216,
performance indicators, 1368, 219, 21819
261, 266 problem-solving, 56, 58, 208, 21112,
performance management, 2413 215, 216, 219
performance management systems, problems, ready-made solutions to,
312, 265 1112
performance measurement, 5, 58, 63, procedural rationality, 170
73, 172, 174, 21718, 265 procedures, 24, 1112, 579, 134,
choice of measure, 1201 141, 1445, 14953, 1556, 170
costs of, 103 product development, 73, 104,
financial measures, 137 10910
multi-dimensional, 102, 103 product innovation, 73
noise in measures, 1245 production function, 4950
Index 275
profit motive, 163 risk

project appraisals, 1623 alliance, 62
progress, 12 analysis, 85
prospect theory, 165 appetite, 167, 171, 173, 186
psychology, 117, 1657, 171, 174 attitudes toward, 171
public services, 2636 avoidance of, 87, 168
cultural theory of, 5, 2247, 236
Quattrone, P., 1723 defined, 181
enterprise, 186
rankings, 78 fear and, 239, 248
rational, 9, 40, 127, 137, 1635, as feeling, 1667, 169, 171
16973 HEFCEs, 1803
ready-made solutions, 1112 inter-firm contracts and, 512
Reagan, Ronald, 228 inter-firm control and, 567
real options theory, 2012 mitigation, 170
redundant controls, 158 paradox of, 173
regulation, 45, 810, 149 performance, 52, 62
in electricity generation market, psychology of, 1657
193205 regulatory, 64n7
impact of, 199200 relational, 52, 53
internal control and, 323 reporting, 182, 186
regulators, 2 in strategic decision-making,
regulatory risk, 64n7 16275
relational risk, 52, 53 transaction, 56, 63
Reliance on Accounting Performance uncertainty and, 85, 124, 178, 248
Measures (RAPM), 210 value at risk, 164
removal of controls, 150, 151, 1567 risk management, 2, 4, 1012, 32, 43,
renewable energy, 1979 58, 62, 90, 95, 149, 164, 16870,
reputation risk, 10, 179 23940, 24850
research enterprise, 181
alternative approaches, 257 forecasting models and, 867
in French elite school system, management control and, 17890
21315 in universities, 4, 17890
knowledge and, 2089 risk registers, 10, 179, 1839
management control, 3, 5, 3044, risk society, 8, 170
20723 role segregation, 230
paradigms, 21013 routine tasks, 150
on performance measurement and rules, 1539
compensation systems, 11430
practice and, 2078, 20913 Sarbanes-Oxley Act, 323, 149
survey-based methods, 3, 6979 Sauder, M., 179
teaching and, 20720 Scholes, M., 164
research and development (R&D), Schutz, A., 256
1356, 137 Schwartz, H. S., 249
resource scarcity, 489, 247, 264 Sedatole, K. L., 50
responsibility, 11, 14, 223, 53, 149, Shapira, Z., 178
1868, 212, 217, 232 shareholders, 2, 33
results, 7, 11, 14, 15, 16, 19, 578, 60, short-term goals, 1
94, 101, 107 Simon, H. A., 137, 165, 167, 21213
276 Index
Simons, R., 40, 41 tax accounting, transfer pricing and,

Slovic, P., 165, 166 1821
social context, of decision making, taxation, 3
16771 tax compliance, transfer pricing and,
social controls, 94 214
social man, 165 Tax Reform Act (1986), 1920
social policy, 9 teaching, 20720
social relationships, 2567 technical controls, 14959
societal change, 1, 48 consolidation of, 1578
societal steering institutions, 259 effective, 1534
soft skills, 2445 improving, 1546
Soin, K., 8, 10, 248 management of, 1518
solution-driven outcomes, 1078 quality of, 1501
Spekle, R. F., 41 reasons to implement, 1513
stakeholders, 1, 2, 8, 190 removing obsolete, 1567
Standard Chartered Studios, 1415 Tessier, S., 41, 14950
standardisation, 179 textbooks, 208, 20910
status, of accountants, 230, 231, Thatcher, Margaret, 228
2335 theory, 71, 162, 1634, 190
steering mechanism, 259, 2601 actor-network, 39
stewardship, 225, 232, 235 agency, 16
strategic alliances, 4765 cultural theory of risk, 5, 2247,
strategic boundaries, 149 236
strategic decision-making (SDM), economic, 117, 245
16275 game, 164
economics and finance, 1634 grounded, 257
literature review, 1634 institutional, 40
management accountants and, middle-range, 9
2245 options pricing, 175n2
psychology of, 1657 organizational, 17, 118, 120
strategic investment decisions, 4 personal construct, 168
strategic management accounting portfolio, 164, 175n1
(SMA), 2325 prospect, 165
strategic performance, 149 real options, 194, 2012
strategy, 1234, 126, 127, 231 transaction cost, 52, 57
culture shift and, 22830 utility, 164
formulation, 170 Thompson, J. D., 114, 115
subjectivity, 127 Tirole, J., 49
suppliers, 2 trade barriers, 102
supply chains, 2, 3, 11 transaction cost economics (TCE),
supportive context, creativity and, 4950
756 transaction costs, 4750, 64n4
survey-based methods, 3, 6979 transaction risks, 56, 63
sustainability, 5, 10, 134, 1959, 200, transfer pricing, 23, 1426
205 empirical literature on, 1426
system 1, 166 management control perspective
system 2, 166 on, 1518
tax accounting perspective on,
targets, performance, 934 1821
task complexity, 124 tax compliance perspective on, 214
Index 277
transparency, 183, 189 in later modernity, 89

travel, 7 management control and, 15,
triple bottom line (3BL), 172, 174 1112, 8395, 97110, 17890,
trust 207
creativity and, 756 management of, 20723
inter-firm control and, 601, 64n5 managerial performance and, 914
Turnbull report, 179, 181 MCS and, 2616
Tversky, A., 165, 167 performance evaluation and, 4
predictive models of, 867
UK electricity generation market, in public services, 2636
193205 reactions to, 878
background, 1945 regulation and, 45, 10, 199205
control systems, 1945 research on, 9
investment in, 1945, 200, 2045 risk and, 85, 124, 178, 248
prices in, 194 as subjective, 34
privatization in, 1945, 196, 200 unexpected events, 7, 84, 85, 91, 153
real options theory and, 2013 United Kingdom, electricity
regulation of, 195205 generation market, 45, 10
sustainability of, 195200, 205 universities
uncertainty in, 199205 management control in, 18390
UK universities, 8, 10 risk management in, 4, 17890
creativity in, 12 US business schools, 42
management control in, 18390 utility theory, 164
risk management in, 4, 17890
uncertainty, 1 value at risk, 164
avoidance of, 152 Van den Abbeele, A., 56, 58, 59
compensation systems and, 4 Van der Stede, W. A., 70, 71, 78, 211,
conceptions of, 68 240
consequences of, 68 Verbeeten, F. H. M., 41
current approaches to, 1024 vertical integration, 48
defined, 834, 115 von Neumann, J., 164
as determinant of performance
measurement and compensation web-based research, 180, 1836, 189
systems, 11430 White, W., 2012
in electricity generation market, Wildavasky, A., 167
193205 Williamson, O., 47, 48, 50, 62, 164
environmental, 123 work, nature of, 2445
handling, 901, 95 Worldcom, 149

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Management Control and Uncertainty

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Management Control Association

Notes on Contributors xiii

Obituary: Clive Emmanuel 19472012 xxiv

1 Management Control and Uncertainty 1

2 Transfer Pricing: Insights from the Empirical

3 Management Control Research: A Review of

4 From Make-or-Buy to Coordinating Collaboration:

5 Researching the Human Side of Management Control:

7 Managing through Uncertainty 97

8 Uncertainty as a Determinant of Performance

9 Controlling Creativity and Innovation:

10 Managing Management Controls 149

11 Feel the Risk: Strategic Investment Decisions in an

12 Management Control and Uncertainty:

13 Management Control, Regulation and Investment

14 Management Control Research and the Management of

15 Cultural Theory of Risk and the Notion of Management

16 The Existential Perversity of Management

17 Middle-Range Thinking and Management Control Systems 255

7.1 The Performance Alignment Matrix 107

3.1 Most influential journals in Accounting & Taxation 34

This book has been written on behalf of the Management Control

at Manchester Business School until he left for Sheffield in 1971. He

Margaret Abernethy holds a research position as the Sir Douglas

Shannon Anderson is Professor of Management at the UC Davis

and the Journal of Management Accounting Research. Her work has

Michael Bourne is Professor of Business Performance at the Cranfield

Jane Broadbent is Professor of Accounting at Royal Holloway University

Martine Cools is Associate Professor at KU Leuven campus Antwerp

Henri Dekker is Professor of Management Control in the Department

Ivo De Loo is Professor of Management Accounting and Control at the

on management accounting had its focus on differences in practices

Elaine Harris is Professor of Accounting and Management and was

Christian Huber is Lecturer at the Helmut Schmidt University

previously worked at Innsbruck University where he received his PhD

Anne-Marie Kruis is Associate Professor of Management Accounting

Richard Laughlin is Professor Emeritus of Accounting at Kings College

Alexander Linsley holds a degree in Economics and Management from

financialization, the global credit crisis and bank risk reporting. He

Philip Linsley is Head of the Accounting and Finance group at the

Alan Lowe is Professor of Accounting and head of accounting group

financial services sectors, she undertook her PhD at the University of

David Otley is Distinguished Professor of Accounting and Management

Jan Pfister is Postdoctoral Researcher at Turku School of Economics,

on an interpretive and interdisciplinary approach that considers the

Olivier Saulpic is Professor, Head of the Management Control

Kim Soin is Associate Professor of Accounting and Management at the

workshops and doctoral colloquiums as well as contributing chapters to

Roland Spekl is Professor of Management Accounting and Control at

Sophie Tessier is Associate Professor at HEC Montral. After obtaining an

Liz Warren is Principal Lecturer at the University of Greenwich where

Management Accounting and Strategic Financial Management. In these

Sharon Wheatley is Lecturer at BPP University Business School where

Sally Widener is Associate Professor of Accounting at Clemson

Accounting. Widener has received several teaching awards including

Philippe Zarlowski is Professor at ESCP Europe, Paris campus, in the

Reprinted (with permission) from Management Accounting

Contents lists available at SciVerse ScienceDirect

Clive Emmanuel died suddenly on 7

He started his working life in 1964

Clive was always at his best at conferences: contributing papers,

He had other interests, most notably in rugby and singing, as befits a