M A N A G E M E N T
t h e c p a in
industry
Management Control Systems
in a Global Economy
By John C. here and Kris Portz
I
n an increasingly global economy,
accountants may find themselves
working for a foreign-owned multinational corporation; employed by a U.S.based multinational corporation and designing and implementing a management
control system for a recently acquired or
opened subsidiary in another country; or
responsible for the design and implementation of a management control system
for a U.S.-based company that einploys a
large number of recent immigrants.
An accountant employed by a foreignowned multinational corporation may be
faced with a management control system
that differs from U.S. practices. An accountant who has dealt with successful design
and implementation of rrianagement control systems may find that proven practices
may not work well in other countries or
in divisions and companies in the United
States that employ workers with diverse
cultural backgrounds. Differences in cultures can affect the appropriateness and
effectiveness of the practices that make
up a management control system.
Accountants face two questions when
involved with situations where traditional
U.S. management control systems and
practices may not be the most appropriate
or effective: In what meaningful, relevant
ways do cultures differ between countries?
And what do these differences imply about
the elements that make up a management
control system?
How Cultures Differ
Understanding differences between cultures can be complex. Although several studies have examined cultural differences, one
of the most comprehensive was conducted
by Geert Hofstede. From 1967 to 1973,
Hofstede collected and analyzed data irom
more than 100,000 individuals working in
62
more than 70 countries. From those results,
and later additions, Hofstede developed a
theoretical framework that identifies four
primary dimensions that differentiate cultures: power distance, individualism/collectivism, masculine/feminine, and uncertainty
avoidance. He used these dimensions to distinguish the cultures of 50 countries and three
regions. Later, with Michael H. Bond,
Hofstede added a fifth dimension, Confiician
dynamism, which has been used to distinguish cultures among 23 countries.
Hofstede's taxonomy is a widely used framework for differentiating among cultures.
der role differentiation: "Social gender roles
are clearly distinct (i.e., men are supposed
to be assertive, tough, and focused on material success whereas women are supposed
to be more modest, tender, and concerned
with the quality of life)." At the feminine
end, there is a low level of discrimination
between genders: "Social gender roles
overlap (i.e., both men and women are supposed to be modest, tender, and concerned
with the quality of life)."
Uncertainty avoidance. Uncertainty
avoidance focuses on the level of tolerance
for uncertainty and ambiguity within the
Power distance. In his 1991 book. society. This dimension relates not to risky
Cultures and Organizations: Software of situations, but rather to unknown or unfathe Mind, Hofstede defines power distance miliar situations.
as "the extent to which the less powerful
A country with a strong uncertainty
members of institutions and organizations avoidance culture has a low tolerance for
within a country, expect and accept that uncertainty and ambiguity. This tends to
power is distributed unequally." According result in a society that institutes laws, rules,
to Hofstede, workers in large power dis- regulations, and controls in order to reduce
tance countries, where centralized power the amount of uncertainty and ambiguity.
tends to be accepted, "expect to be told Countries with weak uncertainty avoidance
what to do," while workers in small power cultures tend to have less concern about
distance countries, where there tends to uncertainty and ambiguity and more tolbe less tolerance of centralized power, erance for a variety of options. This type
"expect to be consulted."
of society would be less rule-oriented and
IndividualismJeottectivism. The individ- would more readily accept change.
ualism/collectivism dimension addresses
Confucian dynamism. The Confucian
whether the individual or the group is a dynamism dimension is often characterized
focus. In an individualist society, individu- as one of long-term versus short-term orials tend to act according to their best inter- entation. Important values in countries
est. The focus of management is on hiring labeled "long-term orientation" include perand managing individuals, not groups. In a sistence, using status to order relationships,
collectivist society, employees tend to act thrift, and having a sense of shame.
according to the best interest of the group Important values in countries considered
to which they belong. This does not "short-term orientation" include personal
always align with their individual interests. steadiness and stability, protecting your
Hiring focuses on the group to which one "face," respect for tradition, and reciprobelongs and management techniques focus cation of greetings, favors, and gifts.
on the group as a whole.
Individuals and companies in cultures with
Masculine/feminine. Hofstede's mas- a short-term orientation tend to adapt to
culine/feminine dimension is less about change more rapidly, because long-term
gender than about gender roles. At the mas- traditions and commitments do not become
culine end, there is a high degree of gen- impediments to change.
SEPTEMBER 2005 / THE CPA JOURNAL
Different Cultures and Management
Control Systems
The potential implications of cultural differences on management control systems
are vast. Hofstede's framework can indicate how differences in cultures can affect
the appropriateness and effectiveness of the
various practices that make up a management control system. There are potential
impacts of the differences on each of
Hofstede's five dimensions.
Power distance. Sweden, Norway,
Great Britain, and Israel are small power
distance countries, as is the United
States. The cultures of Asian and Central
and South American countries are generally large power distance. A large power
distance tends to be associated with centralization and less participative decisionmaking, whereas a small power distance
tends to be associated with decentralization and greater participative decisionmaking. Therefore, management control
practices consistent with centralization tend
to be more effective in large power distance countries. For example, in a centralized organization, management control
is likely to remain at high organizational
levels, there is likely to be little if any delegation, and managers may have limited
authority to make decisions. As a result,
measures of performance focusing on
following plans and procedures laid out by
top management are more likely to be
effective in companies in large power distance countries than are measures focusing on the outcomes of decisions made.
Therefore, one would expect little, if any,
use of accounting measures, such as
profit, variances, return on investment
(ROI), and residual income, as indicators
of managers' performance in large power
distance countries.
Practices consistent with a decentralized
organization will tend to be more effective
in small power distance countries. In a
decentralized organization, managers perform more independently and can devel-
op and apply leadership qualities, problemsolving skills, and decision-making skills.
Therefore, measures focusing on the outcome of decisions made are more likely to
be appropriate and effective in small power
distance countries.
Individualism/coHectimm. Out of the 53
countries and regions studied by Hofstede,
the United States scored the highest (most
individualistic) on the individualism/collectivism dimension. Other individualistic
countries include Australia, Canada, Great
Britain, and the Netherlands. Collectivistic
countries include Colombia, Costa Rica,
Ecuador, Guatemala, Panama, El Salvador,
Indonesia, Pakistan, Portugal, and Taiwan.
Because individuals tend to act for
their best interest in individualistic cultures,
work and incentives should be designed so
that acting in the best interest of the
employee coincides with acting in the
best interest of the employer. Organizations
may want to set up individual-level rewards
and hold individuals accountable for
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results. Training may also be more individual-based.
The tendency to act according to the best
interest of the group in collectivistic cultures means that there may be less need
to use rewards and performance measures
to align the interest of the individual with
the interest of the group or orgatiization.
Management may find it more effective
to emphasize work-unit cohesiveness and
provide team-based rewards and training.
uncertainty and ambiguity. Companies in
such a country tend to be less rule-oriented than compatiies in strong uncertainty
avoidance countries.
These differences are likely to influence
the responsibility delegated to managers and
the measures used to evaluate and reward
performance. In rule-driven companies in
strong uncertainty avoidance cotintdes, the
role of a manager might not be to make decisions, but rather to see that the rules or proMasculine/feminine. Japan, Austria, cedures are followed. Accounting meastires
Great Britain, and the United States have are less likely to be used to indicate perforan above-average ranking (more mascu- mance than as targets to be strictly followed.
line) on the masctiline/feminine dimension. Accounting measures as overall indicators
Denmark, Sweden, and Norway rank low of performance would be more appropriate
in weak uncertainty avoidance cultures.
on this dimension (more feminine).
A major impact of this dimension on
Confucian dynamism. Long-term orimanagement control systems is apt to be entation countries include Hong Kong,
on how the rewards used to align the inter- Taiwan, South Korea, and Singapore; the
ests of managers with the organization United States is a short-term orientation
are defined. Because achievement, hero- country. Differences in this dimension are
ism, assertiveness, and material success are likely to affect the types of measures used
valued in a masculine culture, workers in to evaluate performance and the types of
these cultures tend to emphasize perfor- incentives offered.
mance and growth, focus on excelling to
Profit-based measures, such as profit
be the best, believe work is central to life, growth, ROI, and residual income, tend to
and find job recognition is important. focus more on short-term performance and,
Therefore, opportunities for high earn- therefore, are more likely to be used to evalings, recognition, advancement, and uate performance in short-term oriented culrewards based on merit are apt to be effec- tures. Measures such as sales growth, custive motivators in masculine cultures.
tomer satisfaction, and employee training
In feminine cultures, relationships, mod- tend to reflect a long-term orientation.
esty, and caring for the weak are imporWhile financial incentives may be effectant values. Work is less central to life; tive in short-term oriented cultures, rewards
quality of life, time off, and vacations are that convey status, such as titles and progiven greater emphasis by organizations in motions, may be more effective in longfeminine cultures. Financial rewards are apt term oriented culttires.
to be less effective in such a culture.
Uncertainty avoidance. Countries with Recognizing Cuiturai Differences
a strong uncertainty avoidance ranking and
When designing a management control
a low tolerance for ambiguity include system to be used in multiple countries or
Greece, Guatemala, and Portugal. Weak with employees from several countries,
uncertainty avoidance countries include there are several points to remember:
Jamaica, Singapore, Denmark, and the • Differences in culture can impact the
United States.
effectiveness of the practices that can be
Because strong uncertainty avoidance combined to make up a management conimplies discomfort with unfamiUar situa- trol system. Practices that work well in the
tions, individuals in such a culture would United States may not be effective in other
want guidance for any situation they might countries or with employees from other
face. To accommodate this, effective man- countries.
agement control systems operating in • When benchmarking, a company's culstrong uncertainty avoidance cultures will ture should be considered. Because culture
tend to have many formal or informal rules can affect the appropriateness of managethat limit the decision making of managers. ment control system practices, benchmarkIndividuals in a weak uncertainty avoid- ing against a company with a dissimilar culance culture are less uncomfortable with ture may be ineffective or undesirable.
64
• Additional training may be necessary to
help bridge the gap between the management control system and the local culture.
Responding to Cultural Differences
Studies have indicated several ways that
multinational companies have responded
to differences in culture. Some companies
select subsidiary managers whose attitudes
more elosely reflect the culture of the
multinational's home country than that of
the subsidiary country, and use postings
to the home country to modify the employees' attitudes. Other companies have modified their home-country system to refiect
differences in a subsidiary country's culture. If the management control system is
to be designed or modified to refiect differences in culture, there are important
points to recognize:
• Systems designed to operate in highly
decentralized U.S. companies are likely to
be less effective the larger the power distance
or strength of uncertainty avoidance that characterizes the subsidiary's country. A more
centralized system may be appropriate.
• Delegating to individuals, which is
common in the United States, is apt to be
less accepted in collectivistic countries.
Because in collectivistic cultures the
focus is on the group, efforts should be
made to delegate decision making and
implementation to the group.
• Collectivism mayresuUin less need for
extemal incentives than in the United States.
• In subsidiaries in countries at the feminine end of the masculine/feminine dimension, rewards recognizing quality of life
may be more effective than the financial
rewards common in the United States.
• Performance measures reflecting a
longer-term orientation, such as sales
growth and market share, may be more
meaningful in a long-term orientation culture. Nonfinancial rewards, such as rank
and title, may also carry greater meaning
than financial rewards. Greater emphasis
on long-term measures can result in
improved system effectiveness in long-term
orientation culture.
•
John C. Lere, PhD, is a professor of
accounting, and Kris Portz, CPA (inactive), PhD, is an associate professor of
accounting, both at St. Cloud State
University, St. Cloud, Minn.
SEPTEMBER 2005 / THE CPA JOURNAL
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