It is down to controllers to ensure that managers make rational decisions (Controlling as Assuring Management Rationality). Controllers can achieve this more easily if they bear in mind the three perspectives mentioned above.
The first step for controllers is to consider “factually correct” solutions, which abstract any potential rationality deficits of the managers involved. This approach is sufficient for many problems. Here, we consider the controller’s “day-to-day business” to be working out a project’s profitability, forecasting the expected profit of a business unit, or calculating the potential sales price for a line of business. This is where you will find most (almost all) business tools – it calls for standard textbook knowledge.
However, solutions found in this way are not always sound. On closer inspection, the calculations may conceal a manager’s personal interests which are damaging to the company. In this case, there is a broad spectrum of examples to be drawn from past experience: A manager doesn’t want to dismiss his staff and consequently pushes through new products, which on closer inspection prove to be high-risk; or managers gloss over their unit’s performance to help them get to the next career step. So, in the second step, it is essential for controllers to check whether a “factually-based” decision could have been distorted by the potential opportunism of the parties involved. To do this, it helps to have a detailed knowledge of the managers involved as well as the actual situation in which they find themselves.
The third perspective is also based on the “factual solution“. Here, controllers have the additional task of excluding any cognitive errors that may have an impact on the solution. Perhaps the decision was reached too quickly, an “escalation of commitment“ cannot be ruled out, or the individuals involved distorted the results. All of these would lead to the wrong decisions being made. So, controllers have to bear in mind the psychological perspective, and not only – as we illustrated earlier – when solving concrete problems, but also when preparing to develop new management control systems. These should allow little room for managers to exercise opportunistic behavior, while also ensuring that they do not overtax – by being too complex – their cognitive capabilities.
If controllers want to do justice to their task of ensuring rationality, they must combine economic and psychological perspectives. In isolation, neither of these is adequate. The combination is necessary and puts high demands on controllers, but this – especially since the call for a business partner – comes as no surprise.
Professor Utz Schäffer & Professor Jürgen Weber