Control: Vital Ingredient in Business

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. Credibility: Findings Ekanayake gets right to the point in his article, explaining that agents (employees) are "opportunistic and will always engage in self-serving behavior" when they have a chance (49). And so, control systems must be in place in order to monitor, reward, penalize or simply to evaluate the behaviors of agents.

Those control systems give management ("principals") the tools in order to curb those opportunistic moments that agents may use -- with some personal or professional motive. It seems as though Ekanayake is actually doing more than simply presenting the agency theory; he has had practical experience in the private business world and he understands that unless controls are in place, employees will drift away from the actual goals of the organization.

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.