Implication of agency theory in MCSs

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The shared values and norms a society holds dear have been found to affect the approach to which management controls are instituted and activities coordinated within such society (Schuleze et al., 2001) Anwar and Jabnoun (2006) describe these shared values and norms as culture. They argue that shared values differentiate the behavioural patterns of one group from another. Many academic articles have been directed at how these shared values and norms of different societies are affecting the institution of management control systems (MCSs) in organizations (Armstrong, 1991; Ekanayake, 2004; Hofstede, 1980; Sharp and Salter, 1997; Lau and Buckland, 2000; Harrison and Mackinnon, 1999; Hoppe, 2004, Vance et al., 1992; HassabElnaby and Mosebach, 2005; Van der Stede, 2002; Kessapidou and Varsakelis, 2003).

MCS has been defined by Lebas and Weigenstein (1986) as 'the process by which an organization ensures that its sub-units act in a coordinated and cooperative fashion, so that resources will be obtained and optimally allocated in order to achieve the organization's goals'. MCS according to (Ekanayake, 2004) are instituted because of the perceived agency problems that exist between agents (managers) and principals (shareholders). Agency problems are based on the premise that agents would rather act in their self-interest than to benefit the principal (Armstrong, 1991; Eisenhardt, 1989). Many of the articles investigating the impact of culture on management control systems have supported the argument that culture has a significant impact on management control systems (Hofstede, 1980; Ekanayake, 2004, HassabElnaby and Mosebach, 2005; Lau and Buckland, 2000; Vance et al., 1992; Harrison and Mackinnon, 1999; Kranias, 2000). However, Granlund and Lukka (1998) argue that there is now a tendency towards 'convergence' of management controls systems fostered by globalization as against the support for divergence posed by cultural differences (Yoshikawa and Rasheed, 2009; Harrison and Makinnon, 1999; Shields, 1998).

The purpose of this paper is to critically evaluate the impact of national culture on management control systems. To achieve this objective both sides of the arguments as have been presented by relevant literature would be criticized. As managers are said to be self focused (Armstrong, 1991; Eisenhardt, 1989) rather than organizationally focused, the agency theory that supports this argument would be discussed. Although Chow et al., (1999) pointed out the existence of other frameworks developed by Trompenaars (1994) and Schwatz (1994), Hofstede's work forms the basis for most research on the relationship between MCSs and culture (Hoppe, 2004), hence would be discussed and critiqued.

The arguments in support of the impact of national culture on MCSs would also be discussed presenting various supports. It would be followed with a discussion of the various views writers have presented in support of convergence of practices rather than divergence. The work would be rounded with concluding statements following the various points of views that writers have presented and the opinion of the current work.

Implication of agency theory in MCSs

Merchant and Van der Stede (2007), defined management control systems (MCS) in a broad sense as an embodiment of all that managers do to guarantee the successful implementation of their organizational strategies and plans. It is regarded as a core function of management. Harrison and McKinnon (1999, p. 100) defined it as "the set of mechanisms that assist organization to achieve its objectives". Davila, Foster and Li (2009), are of the opinion that MCS enhances innovation. Devine; O'clock and Rooney (2000) suggest it is important for management control systems to take cognizance of the influence of national culture. Businesses stand to benefit from adopting and adapting management style and control systems to national culture (Divine, O'Clock and Rooney, 2000). Management controls are instituted because of the 'moral hazards' inherent in the agency relationship that exist between the principal(s) and the agent(s) (Ekankanye, 2004).

A good understanding of the agency relationship is necessary for the design of control systems since management control systems are intended to manage relationships in an optimal way so as to achieve organizational objectives (Ekanayake, 2004). When the contractual relationship between the principal and agent are based on verifiable outcomes by means of available information, the agents are more likely to act in the interest of the principal (Eisenhardt, 1989). This would help in solving two main problems of: ascertaining whether the agent(s) will act appropriately in the principal's interest and whether the perception of risk would be in principal's interest (Eisenhardt, 1989). Alternatively, 'social/cultural controls (Ekanayake, 2004) or what Ouchi (1980), described as 'clan control' could serve in aligning the goals of principals and agents.

The view point presented by the agency theory enhance better understanding of entire management control system of an organization, which may include internal controls, information processing and systems performance measurement, evaluation and compensation system as well as audit (Ekanayake, 2004). Eisenhardt (1989) opined that agency theory implies management controls can be used to monitor agent(s) self-centered behaviour. Information systems such as budgeting, management reporting, surveillance, and management observation are vital aspects of control that could be better understood through the agency theory (Eisenhardt, 1989). Baiman (1990) suggest that agency theory is more useful when the incentive system comprises both performance evaluation and reward functions.

Hofstede (1980), looking at the agency relationship from national culture point of view asserted that there is a significant volume of evidence to distinguish between agents in the Asian cultural setting and Western agents. Sharp and Salter (1997) testing the universality of agency and prospect theory in explaining escalation decisions for losing capital expenditure projects showed that the various factors tested were found to be smaller in Asia than in North America. The conclusion was that Asian managers are less self-interest inclined (Sharp and Salter, 1997).

National Culture and impact on management control systems (MNCs).

Majority of researches linking MCSs and national culture have been based on the framework of culture as proposed by Hofstede (1980) and are relatively new, having been on the spot light for just about 15-20 years (Harrison and McKinnon, 1999). Hofstede (2001, p.9) defined culture as "the collective programming of the mind that distinguishes the members of one group of people from another". His research was from a psychological perspective and investigated values that are work-related on IBM employees across their subsidiaries all over the world. Although the survey he conducted was not originally designed for comparison across countries, the analysis showed significant similarities in values for people within national cultures and significant difference in other national cultures (Harrison and McKinnon, 1999). His argument was that values are central to culture (Harrison and McKinnon, 1999). In his taxonomy called 'dimensions of culture', Hofstede (1980) disintegrated culture into four units, that is: power distance (PD), individualism-collectivism (IDV) masculinity- femininity (MAs) and uncertainty avoidance (UA). Successive study included another dimension, 'long-term orientation' (Hofstede, 1983).

In his work, Hofstede rated 50 countries based on his parameters as identified above. The first of which is power distance (PD) relates to the way in which people accept the unequal distribution of power in organizations and institutions. Societies with high power distance give acceptance to status differences created by wealth, social status and position, and believe that it is ideal for people with higher social standing to command respect, rights and privileges. This runs contrary to people in low power distance societies where an atmosphere of equality is created (Devine, O'Clock and Rooney, 2000). Relating this to some set of controls as was done by (Chow, Shields and Wu, 1999) suggest that the implication of low power distance is an inclination towards equality in a perpendicular relationship. People in this kind of culture like having to contribute to the decision making process, whereas in high power distance cultures, superiors make decisions without subordinates inputs (Chow, Shields, and Wu, 1999). In reference to active participation, (Hofstede 1980) and subsequent work in 1983, 84 and 1991, implies that people in lower power distance societies would resist being passive to superiors evaluation and active involvement in budgeting. Devine, O'Clock and Rooney, (2000) suggest that the reward system of societies with high power distance be set at mangers discretion since he has the power (created by the gap) to do so.

Collectivism as a social pattern requires individuals seeing themselves as part of a whole before self. In other words, individuals give priority to the values, beliefs and norms imposed on them by the whole or collectives, and are ready to pursue the goals of the collectives against personal goals (Harrison and McKinnon, 1999). Following Hofstede's rating, they seem to be a reverse of pattern between power distance scores and individualism-collectivism score. In relation to the controllability principle as concerns employees performance evaluation, individualism inclined cultures would have a desire for accountability of own actions and would prefer a say on their performance evaluation criteria (Chow, Shields and Wu, 1999). Devine, O'Clock and Rooney, 2000 suggest that in a highly individualistic environment, reward system should be designed to reward individual efforts of subordinates, while the contrast is deemed more appropriate for low individualistic society. In the opinion of Devine, O'Clock and Rooney (2000), managers in an individualistic society would most likely prefer budgeting system that allows for the use of initiatives and motivation that gives more autonomy.

Uncertainty avoidance is related to peoples' reaction to ambiguity. People in high uncertainty cultures regard it as a hazard which brings apprehension and pressure. People in this situation try to limit uncertainty through legislations, devotion to religious beliefs, and institutional activities (Harrison and McKinnon, 1999). On the other hand, people in low uncertainty avoidance cultures accept life with all the uncertainties it brings and thus are less anxious about what uncertainties may befall them (Hofstede, 1980).

The tendency towards specific gender stereotype in a society is referred to as masculinity versus femininity. Societies high in masculinity place value on competition, assertiveness and open demonstration of achievements. Whereas in societies low in masculinity, i.e. feminine societies, regards is given to personal relationship, diffidence in achievements, less value for materiality, and being supportive of one another (Harrison and McKinnon, 1999). Financial rewards related performance requires that actual performance be measured against budgeted in the allotment of reward (Chow, 1985). Preference to this control is expected in a society higher in the scale of masculinity. A culture that has a low score on masculinity would most preferably welcome an evaluation as a group and a reward system that comprises inherent values (Devine, O'Clock and Rooney, 2000). Chow et al., (1999) however noted that this inclination emphasize differences in pay across workers within organizations which runs contrary to cultures with low rating on individualism.

However, Hofstede's work has been criticized for being psychologically based and ignoring important literatures and views on culture, not taking cognizance of sub-cultures within national culture, grouping countries as homogeneous culture, concentrating on middle managers in one firm, measures being obsolete and reducing the complexity of culture into set of aggregate measures (Harrison and McKinnon, 1999). Hofstede's work has also been criticized for lacking causal relationship backed by statistical evidence which has remained a major weakness to the conclusions that culture influences MCS (Geppert, Matten and Williams (2002).

National cultural attributes have effects on the set of approaches to control which is instituted (Labas and Weigenestein (1986). HassabElbany and Mosebach (2004, p.29) investigating the culture's consequences in controlling agency cost concluded that 'aspects of nation's culture cause either resistance or acceptance of the method used to control agency cost'. While an approach may work effectively in a national culture, it may produce dysfunctional behaviour in others to which they may be implemented (Labas and Weigenestein (1986). Lere and Portz (2005) noted that 'differences in culture can affect the appropriateness and effectiveness of the practices that make up management control systems". They assert that although several studies have examined cultural differences, one of the most comprehensive has been that conducted by Hofstede (1980). In their opinion, when MSCs are designed, certain points should be noted, this includes noting that:

  • Differences in culture can impact effectiveness of practices that add up to make the control system.
  • That in setting up bench-marks, the culture of the company should be given priority.
  • That additional training may be required to bridge the gap between MCSs and local culture.

Offermann and Helpmann (1997) are of the opinion that as businesses search for better opportunities establishing their outfits and exploring market opportunities globally, the need for the understanding of the cultural impacts of nations in which establishments are based becomes important. Disparities in national culture may cause managers to interpret or respond differently to the same strategic issue (Schneider and Meyer, 1991). Businesses that adopt and adapt management style and control systems to national culture stand to benefit from the process. It is important for MNCs to take cognizance of the influence of national culture (Devine, O'Clock and Rooney, 2000).

The implication of cultural dimensions in the planning and design of control systems should not be taken lightly. Various dimensions of culture have implicative outcomes on the budget process, reward systems and thus the controls that ate likely to come out successfully (Devine, O'Clock and Roooney, 2000). Studies conducted by Vance et al. (1992) showed a significant difference between the Asian countries examined in terms of impact of national culture on MCSs and their US counterpart. These differences were also observed between the Asian nations examined. In the opinion of Hoppe (2004), identifying the cultural differences which individuals or colleagues in organizations hold has proved to be very useful in the outcome of the quality of services or products. Anwar and Jabnoun (2006) assert that national culture influences organizational culture and posses a great implication of the efficiency of an organization. The manner of superiors evaluation of subordinates (which may be impacted by national culture attributes) significantly impacts the job performance and attitude displayed by subordinates (Lau and Buckland, 2000).

Convergence of management accounting practices

The arguments on the divergence and convergence of management accounting practices have been a major enigma among researchers of global management (Granlund and Lukka, 1998). While much attention has been paid to issues around divergence, it has not been quite so with the issues of convergence. The defiency of analysis of issues about convergence of management accounting practices could mean severe limitation as the outcome may pose a serious challenge to the study of national culture differences in relation to management accounting (Granlund and Lukka, 1998; Goddard, 1997; Dent, 1991).

Convergence involves the embrace of western ideologies as nations develop into industrialization, it implies a considerable change in values towards 'free-market capitalism' (Ralston, 1997). Calhoun, Teng and Cheon (2002) noted that the development of information technology has mainly come from the west, and in the course of development western culture has been embedded into the technologies, therefore acceptance of these technologies or their rejection by the receiving side are influenced by culture. Evidence supports convergence of management accounting practices especially in terms of techniques and technologies across European countries and other nations (Shields, 1998). Although it is possible to point out significant differences in management accounting practices at the firm level within countries necessitated by factors like culture and or government regulations, evidence supports convergence playing more role, i.e. drivers of convergence are outweighing divergence (Grandlund and Lukka, 1998).

However, even though it has been acknowledged that there is national convergence of management accounting practices globally, there exists divergence in practices across industries within nations and across national boundaries, this leads to say there is a diminishing difference in management accounting practices across nations than there is across industries that operate within nations (Shields, 1998; Granlund and Lukka, 1998).

Convergence may exist in form and in function (Yoshikawa and Rasheed, 2009, Gilson, 2004). Similarity in legal framework and institutions is associated with convergence in form, while convergence in function is when different rules and institutions apply to different countries but still able to carry out the same function (Yoshikawa and Rasheed, 2009). Convergence has also been classified as 'de-jure' and 'de- facto' convergence by Khanna, Kogan and Palepu (2006). It is de-jure convergence when similar corporate governance laws apply to different countries, and de-fact convergence when there is actual convergence in practices.

National convergence in management accounting practices has been observed for a long period. Japanese firms adopting management accounting practices from America and Germany dates back to periods before the Second World War. American management accounting techniques have also been found to have influence on France and Germany (Shields, 1998). However, Yoshikawa and Rasheed (2009) caution that when discussing convergence, it is important to know exactly what direction the convergence is taking. For instance, one may need to find out if the convergence is towards the Anglo-American practices, the Japanese style, towards a central position or an entirely new direction.

Evidence of convergence has been observed among nations that are actively participating in the global economy. Granlund and Lukka, (1998) identified and classified the drivers of convergence into four broad groups, that is; economic pressure, coercive pressures, normative pressures and mimetic processes. Some of the identified drivers of convergence that fall into this group are:

  • High level of competition by firms (Shield, 1998; Grandlundand Lukka, 1998; Yoshikwawa and Rasheed, 2009).
  • The existence of comparable technologies and techniques across nations (Shields, 1998).
  • Easier access to communication and transportation which enabled the infiltration of management accounting techniques and information around the world (Shields, 1998).
  • Education; wide use of the same study materials (Grandlund and Lukka, 1998; Shields, 1998).
  • The prominence of global consultancy firms who's similarities of methods and techniques have aided convergence (Shields, 1998).
  • Multinationals may also impose their practices and policies in their operations worldwide (Shields, 1998).

However, Shields (1998) posits that the same drivers of national convergence in management accounting practices would be responsible for driving divergence at industries level of operation.


Various evidences provided by researches assert that national culture impacts the implementation of MCSs. It has been suggested that a proper understanding of national culture is important in their design. MNCs are intended to reduce the agency problems that exist in corporations as a result of differences in priorities between the agent(s) and the principal(s). Most of the work evaluating the impact national culture has on MNCs have been based on the work of Hofstede (1980). However Harrison and McKinnon (1999) criticize Hofstede's work for being psychologically based and ignoring important literatures and views on culture in other fields and using a set of measures to evaluate culture.

Anwar and Jabnoun (2006) argue that in the real sense of the World, 'national culture spreads out along the measurement scales' and therefore difficult to say a society is either feminine or masculine. Although majority of the studies conducted have asserted that there is a divergence in national culture impact MCSs, the work of Shields (1998) as well as Granlund and Lukka (1998) among others argue that there is a drive towards convergence in practices fostered by certain factors like globalization, education, consultancy services, wide use of the same sources of study material, technological innovation among others.