How Should Controllers See Their Managers?

Breaking away from the strictly rational homo economicus

Managers are not strictly rational beings. They are likely to act in their own interests and are prey to cognitive mistakes. Moreover, managers have very different preferences, perspectives and biases. This is why it is necessary for controllers to accept and take into account the individuality of each manager. Differentiation is essential.

Managers have a special meaning for controllers. These are the people they support by carrying out unburdening, complementary and constraining tasks. They are the channel through which controllers can contribute to a company’s success by helping them to make better decisions that are carried out more effectively.

If managers are so important to controllers, then they also need to have a clear conception of their characteristics and behavior. Beyond their personal differences, what can a controller expect from a manager?

The answers to this question differ greatly, and each perspective is reflected in developments in the field of business administration. Initially, managers hardly ever cropped up in matters of business administration. It was all about corporate decision making in general. Cost accounting, for example, was a basis for making general decisions, and not specifically to help a particular manager to do so (“corporate accounting” vs. “entrepreneurial accounting”). The person who actually makes and carries out the decision is, from this perspective, of no consequence. The implicit assumption is that each manager acts in the same way. In doing so, he doesn’t make mistakes and he acts as a loyal trustee in the interests of his company.

This leads to a second perspective of managers. Although managers are still seen to be economic beings through and through, we now have to expect that they will also – or perhaps only – pursue their own goals. They may potentially demonstrate opportunistic behavior, strive for power or even social recognition and legitimacy, and don’t shy away from lies and deceit. Today, this perception has almost come to be accepted as the prevailing view. It forms the basis of the Principal Agent Theory, for example, which enjoys great popularity at universities and – by means of incentive schemes, for instance – has become widely accepted in practice.

The third behavioral perspective has its origins not in economics, but in psychology. According to this perspective, managers are portrayed as actors, who on the one hand – as in the last perspective – don’t always pursue the company’s goals, but on the other hand, have cognitive limitations. Here, we speak of intuitively plausible deficits of motivation in the first case and deficits of ability in the second. The word “deficit” in each case refers to the skills and attitudes that can legitimately be expected of a manager in a certain position.

Deficits of motivation also exist at the psychological, behavioral level. However, in this case they aren’t primarily concerned with potential opportunism – which in any case has a lower significance from a psychological perspective than in economics. Aspects such as community or altruism appear alongside the pursuit of self-interest. Here, we find novel features which are fundamentally different from the economic approach. The best known is the ”Prospect Theory” developed by Kahnemann and Tversky: People fear losses more than they value gains. This can lead to a situation where they become risk-averse if losses are likely, which as a rule is not rational from an economic perspective! A second important difference concerns the behavior of managers who are content with the “satisfactory” and don’t strive to maximize their achievements. From an empirical point of view, this is often found among older managers who have already achieved a lot during their careers. While managers from an economic point of view try to make their lives easier by keeping their objectives as low as possible, the psychological perspective considers that ambitious targets are not even worth pursuing.

Deficits of ability apply to people in many respects. There is a very broad spectrum of corresponding rationality deficits. We highlight just a few examples here to illustrate what we mean: People choose what they perceive (they only see what they want to see); and they are more likely to perceive what confirms their own opinion (confirmation bias) and to completely overlook whatever lies below their recognition threshold. People are heavily influenced by first impressions (the anchoring effect). People are only able to process a limited amount of information at any one time, which can lead to an ‘information overload’ that hampers rational decision making. People overestimate the likelihood of rare events and are, in general, cognitively better able to grasp the concept of the present than the future. People like to take a heuristic approach, although it would be more appropriate to use analytic methods (Interplay of Analytics and Intuition). People are prone to over-optimism which can easily lead to an illusion of control. Contrary to common belief, groups of people do not generally reach better decisions (swarm intelligence). It is much rather the case that groups in stress situations are exposed to a considerable risk of error (groupthink) – the list of deficits of ability could go on and on.

Fig. 1: Three steps that lead to rational decisions

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

  • Weber, J., & Schäffer, U. (2014). Einführung in das Controlling (14th ed.). Stuttgart: Schäffer-Poeschel.
  • Kahneman, D. (2011). Thinking Fast and Slow. New York: Farrar Straus & Giroux.