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IN TODAY'S BUSINESS ENVIRONMENT, control systems are de rigueur for safeguarding a corporation's assets.With regulatory requirements at a fever pitch, corporate leaders must assess the effectiveness of various controls, and they need to understand how the interplay of formal and informal controls impacts the overall effectiveness of these same checks and balances. Explicit mechanisms, such as formal procedures, audits, financial reporting methods, and performance standards, prevent mistakes as well as outright fraud on the part of employees, management, and business partners. Informal controls, such as the corporate culture, institutional values, and interpersonal trust in an organization, are also essential to promoting cooperation, which serves to complement and support more formal efforts.
In choosing the most appropriate formal controls, an organization must consider the benefits as well as the costs, both economic and psychological. A potential psychological cost is the deterioration of an important informal control-trust. Interestingly, some formal controls can erode trust more than others.While no one would suggest tossing aside needed oversight, it appears that controlled parties, such as employees, will construe formal controls with suspicion and as a signal of mistrust in their competence and integrity. They also may consider certain formal controls as an intrusion into their privacy.
Coauthors Christ, Sedatole, and Towry conducted a study, which was sponsored by the Institute of Management Accountants (IMA®), to understand how formal controls affect trust and cooperation. After all, if formal controls become a bitter pill to swallow for management, employees, and/or business associates, then trust, cooperation, and the overall control environment can be compromised. Collaborative relationships, such as alliances between organizations, are particularly at risk of falling prey to this phenomenon.With no common principle to stand behind, cooperation sometimes becomes difficult to ensure. Yet trust is often the key determinant of successful alliances and cooperative behavior. That's why getting a handle on the relationship between the various organizational controls and their impact on cooperation and trust becomes a serious cost consideration for today's corporate managers.
We'll now describe our causal model, experiment, and conclusions on how formal controls affect the bottom line.
THE CONTROL-TRUST-COOPERATION CAUSAL MODEL
We developed a control-trust-cooperation causal model linking formal controls to three perceptions: scrutiny, intrusion, and threats to autonomy (see Figure 1). As the model shows, as the...