Those who cannot remember the past are condemned to repeat it. George Santayana

The Wizard of Oz: Pay No Attention Control: Enron, BP old Ch. 13, new Ch. 14

Planning Leading Organizing Controlling We’ll discuss: Did Enron violate control system principles/ mechanisms? Any parallels to BP/Amoco—Texas City explosion, Gulf spill? Control systems: regulate activity bureaucratic: budgets, rules, policies, procedures market: pricing, economic information clan control: culture, norms, values

Have you ever experienced evidence of poor controls? Lax top management No policies No agreed-upon standards “Shoot the messenger” management No periodic reviews of people or plans Bad information systems No ethics in the culture

Control Control - any process that directs individuals toward the achievement of organizational goals Four steps: 1. Set performance standards Standard - expected performance, a benchmark 2. Measure performance 3. Compare to the standards Principle of Exception - a managerial principle—control is enhanced by concentrating on the exceptions to or significant deviations from the expected result or standard But, need data about the norm (e.g., SPC) 4. Correct or reinforce

Control: 3 Ways to Get It Bureaucratic Control—budgets, rules, regulations, authority Market Control—pricing mechanisms and economic information to regulate activities Clan Control—culture, norms, values, shared goals

Bureaucratic controls

Feed-forward control before operations begin create plans, structures, policies, procedures, and rules Concurrent control while plans are being carried out direct, monitor, and fine-tune activities Feedback control Audits, performance data Use information about results to correct deviations from the acceptable standard Bureaucratic controls

Accounting policies and audits— Internal—ensure our numbers are accurate, draw conclusions about past, present, and future External—similar, bound by law to be objective and legal Board of directors—committed to but not controlled by us, dispassionate semi-outside guidance and decision-making. Consultants—help us (why keep separate from auditors?) Regulators and politicians—balance needs of firm, industry, society HR practices, decision-making policies, organizational structure

Bureaucratic controls: Financial Budgets: What are our plans and expectations? Sales, Production, Cost, Cash, Capital, Master budget Income Statement: How did we do? Revenue – Expenses = Net Income Balance Sheet: What’s our status? Assets: Values of things we own Liabilities: What we owe to creditors Stockholders’ Equity: The remainder—belongs to owners Current Ratio – Can we pay short-term liabilities? Debt-Equity Ratio – Can we pay long-term liabilities? Return on Investment (ROI) – Is it worth investing in us?

Bureaucratic controls: Financial Example: Whitewing 1 of Enron off-balance sheet Special Purpose Entities (SPEs) (from whistleblower Sherron Watkins’ book)

Downsides to bureaucratic control Rigid bureaucratic behavior—gotta follow the rules Tactical behavior—focus on short-term goals and methods, not long-term Management Myopia: Focusing on short-term earnings and profits at the expense of longer-term strategic obligations Resistance—people might dislike, cheat, not comply

Market controls Price indicates how well we do things, value of goods and services Competition means we have to be good to succeed External: Stock price Stock analysts—give honest appraisals of firm Opinion makers/advisors—help firm, but in context of stakeholders. Internal: Using profitability, market share to evaluate employees Capital allocation process Using external labor market rates to determine pay rates

Clan controls Culture: norms, values, shared goals What do we want?—what are our company and individual goals? How do we get it?—what is acceptable or desirable? Dissent versus conformity Trust versus distrust How do we share rewards? How do we deal with problems?

Enron: Bad bureaucratic, market, clan controls

Any parallels to BP/Amoco— Texas City explosion, Gulf oil spill?

What we just did: Control Why control systems? Bureaucratic controls: Financial and others Market controls: External and internal Clan controls: Culture Next time: Communication (old Ch. 12, new Ch. 13)