Agency theory and management control systems in organizations

Function of Control

Ekanayake, S. (2004). Agency Theory, National Culture and Management Control Systems.

The Journal of American Academy of Business, Cambridge. 4(1/2), 49-54.

Credibility: Author Analysis

Dr. Samson Ekanayake is a senior lecturer with the Faculty of Business & Law at Deakin University in Victoria, Australia. His work is in the School of Accounting Economics & Finance at Deakin University. Ekanayake was educated at the University of Kent (UK) and at Lancaster University (UK). He has had substantial experience working in private industry, including serving as finance manager for Mitsubishi Machinery Industry and serving as an economist with the Fiji Sugar Corporation.

Credibility: Intended Audience

The intended audience for this scholarly article is not clearly explained but it appears to be an ideal way to introduce students and other interested parties to agency theory, and how agency theory dovetails with management control systems. Those recent university graduates who plan to go into business or work for a corporation would do well to read and study the ideas and linkages that Ekanayake offers.

Content Summary

Ekanayake asserts that the "premise" of the agency theory is that agents have self-interests that may not coincide with the organization's interests, and that agents tend to be "risk-averse" (that is, doing the thing that entails less risk; e.g., the easy way out) and they need controls in order to be effective. The author seems to be making an unfair generalization though when he writes that agents "always attempt to exert less effort (moral hazards) and project higher capabilities and skills than they actually have (adverse selection)" (49)

That having been said, there are two problems that agency theory seeks to address: a) it allows management to verify whether the agent is doing his or her job appropriately; and b) the agency theory also allows the principal to deal with issues when he or she and the agent have "different attitudes towards risk" (49). Moreover, the agency theory offers a treasure trove of ideas for those designers in the process of developing control systems.

Agency theory has a wide-ranging series of applications when management controls are being designed or instituted, according to Ekanayake (50). For one, when the agency theory is in place, it helps management monitor the agent's "self-interested behavior" through information systems. Secondly, an agency theory's relationship to an organization's control system (which governs compensation and incentive schemes) can be used as "tools" for making sure an agent's goals are aligned with the organization's goals.

Application

The ideas presented in Ekanayake's article are very helpful to any professional in a position to be part of the creation of controls. The tools that Ekanayake offers are fundamentally sound and could apply to any organization, whether it is a college, a private company, a nonprofit organization, or a religious organization.