Assuring Management Rationality – The Heart of Controlling

Controlling is considered to be a multifaceted field spanning from information provision to the coordination of management. For us, controlling is about assuring the rationality of management. This is based on the interaction of economic and behavioral aspects of management, which allow us to take the various different perspectives of controlling and put them on common ground. In this article we show controllers a clear path forward.

Controllers are responsible for a a lot of tasks, which traditionally include calculating, planning, and controlling. Today, they see themselves more as business partners, acting on an equal footing with management and supporting their managers on important issues. The line that distinguishes controllers from managers is becoming increasingly blurred. The obvious question here is whether there is anything specific to connect this wide spectrum of activities. The obvious answer is to assume that it is the actual function of controlling.

But what actually is controlling? This question has been discussed at great length in German universities for some time now, especially as the term does not originate from the theory but from Albrecht Deyhle, the well-known trainer, who developed it along the lines of the term “marketing”. To Deyhle, controlling means to realize a management by objectives. This encompasses the full range of corporate management tasks from setting objectives through to monthly talks on potential discrepancies. From the start, Deyhle has advanced the view that managers and controllers practice the function of controlling together. While the controller provides the methodological and analytical support, the manager relies on his intuition and is ultimately responsible for the decisions.

Over the years, the management tasks in which controllers have supported their managers have become more and more manifold. Besides routine management activities, other issues such as incentive systems and organizational matters have been added to the list along with diverse project work. Ultimately, the controller as business partner assumes the role of an all-round internal management consultant, who is expected not only to offer advice to management but also to take joint responsibility. The controller is often said to be co-pilot. In this case, it is difficult to distinguish between the controller and the manager, or indeed to separate controlling from management. This does not make it any easier to take a clear position on the issue.

So, what actually is controlling? Some time ago at WHU, we developed a theoretical basis to answer this question that draws a distinction between controlling and management: We understand controlling as assuring management rationality. This perception is drawn from the basic assumption that managers do not always act in the company’s interests and are not beyond making mistakes (What Do We Think of Managers?). In a nutshell, we presume that – at least some – managers also pursue their own objectives (for example, to maximize their income or accelerate their careers), which means that they may behave opportunistically and not always act as faithful servants to the company. Moreover, we assume that managers have – the typically human – cognitive limitations, and this means that they sometimes make a false assessment of a situation or use inappropriate heuristics. The field of psychology has developed a long list of such irrationalities in recent decades.

When managers make mistakes and/or follow their own, deviating targets, the result is that the company and its shareholders make a financial loss. If these losses are substantial, it makes sense to do something to address the mistakes. We know this from quality management: high quality does not just happen, but has to be actively secured using a whole bunch of different measures – as long as those measures pay off. Quality assurance costs money.

We now see controlling in an analogous way. Controlling is not about products, but about management and leadership. The quality of management and leadership has to be assured. We speak of this as ‘assuring management rationality’. This can and will turn out very differently, as there is a wide variety of deviations from “good leadership” that may occur. It may be that some of the information required for a decision is not available, or the information available is falsely interpreted or deemed to be irrelevant. Managers may use the wrong instrument to reach a decision, or they aren’t able to use the right instrument correctly. Or, managers may abuse their power and charisma to get their own way – the list could go on and on.

What can be done about this? Controllers have at their disposal a diverse range of measures for assuring rationality. The first group is used when mistakes have already been made or, as the case may be, already had a negative impact. The best example is the controller’s intervention when deviations occur (”how can we achieve our target at year-end given the discrepancies accrued to date?”). There are various other examples, which range from identifying errors in investment proposals through to initiating disciplinary action on discovering that the books have been manipulated. These measures are of a reactive nature.

The second group is concerned with routine decisions and the management process. Again, we can find many examples from day-to-day controlling. For example, providing all necessary information, and thereby ensuring that decisions are not made based on selective or even false information. Or, using the tools (for example, to prepare a present net value analysis). A further example is the controller’s role as devil’s advocate (Interplay of Analytics and Intuition) in the decision making process, or as guardian of the financial interests. Finally, it is often helpful to make sure that you’ve got right people around the table when decisions are being made. This group of measures is of an active nature.

There is one more group of measures. They come up in the organization structure where management decisions are made. The best-known example is the setting of new ground-rules, for example, in the form of an investment policy in which the responsibilities, the calculation methods to be used, the steps of the process to be followed, etc., are included. They offer the best guarantee against making wrong decisions. This level also includes training managers in the use of business tools or even – something that is much more difficult to achieve – creating a culture of transparency. The measures in the last group are of a proactive nature.

Fig. 1: Assuring rationality in decision making – the measures available

It is not without reason that the above examples of concrete measures for assuring rationality stem from the controller’s area of work. The task of assuring rationality has always played an important role for them, whether in the course of creating data transparency, or as critical counterpart, or as the “long arm” of head office (policeman). However, the task of assuring rationality is not limited solely to controllers; supervisory bodies (such as the supervisory board), external consultants, the capital market, among others, also help to ensure that the management reaches the right decisions. Nevertheless, a considerable share of this activity is attributed to controllers. It is a core function of controllers to ensure that “everything is done properly” from a business perspective.

Let’s go back to our original discussion: What distinguishes a manager from a controller if the latter develops into a business partner? If you follow our reasoning, then the answer is clear. The controller will always be the one with the “assuring rationality hat” in his bag. He won’t need to wear it when carrying out all of his activities; in fact he will often be acting as a manager. Nevertheless, the hat is always with him. It is one of his core functions and ultimately forms the framework of his activities. His focus will shift depending on the situation; each company – indeed each particular leadership situation – has different rationality deficits and shortages and the level of rationality assurance required can also vary considerably. The role of “minder” for high-quality leadership has many facets and an exciting variety of detail. This makes it a fascinating role for controllers and the best preparation for moving on to a management position later in their careers: A person who knows the typical rationality deficits is less at risk of succumbing to them.

Professor Utz Schäffer & Professor Jürgen Weber

  • Weber, J., & Schäffer, U. (1999). Sicherstellung der Rationalität von Führung als Aufgabe des Controlling. Die Betriebswirtschaft, 59(6), 731–746.
  • Weber, J., & Schäffer, U. (2014). Einführung in das Controlling (14th ed.). Stuttgart: Schäffer-Poeschel.