Suboptimal practices in companies are a situation whereby responsible managers fail to do the right thing just to take advantage of existing controls and procedures. Management and decision makers have to continually struggle with highly unpredictable human factors in the quest to provide lasting solution to incongruence actions that various mangers are vulnerable to take. Knowledge of strategic management tells us that we need to manage company’s resources- including managers of all levels to work in a manner that will ultimately lead to the achievement of overall objective of the company.
This effort of trying to co-ordinate the activities of various assets in a company will become a futile exercise if nothing is done to control the activities of the main asset that every business enterprise has- people! This article will attempt to identify some of the most common causes of lost of motivation to do the right thing in a company.
FACTORS THAT MAKE MANAGERS ACT IRRESPONSIBLY
As the general saying ‘no smoke without fire’ dysfunctional decision by managers can reasonably be traced to the following seriously debated aspects of management accounting:
IMPROPER VARIANCE ANALYSIS: a lot of superior managers tend to take adverse or favourable variances on face value without taking time to investigate some non financial factors that affects the outcome of variances. Good variances analysis should consider factors outside the control of responsible managers. Same goes to contribution analysis. Accounting figures from these analysis should not be acted on without due diligence!
WRONG TRANSFER PRICING: many have in recent time cast so many blame to companies attempt to fix a selling price within its own territory. This is what is known as transfer pricing. Managers engage in a sort of cold war with one another just to ensure that they look favourable in the eyes of top management that often base performance measurement criteria on a divisions ability to report. This has motivated managers into buying materials from outside sources or outsourcing a service for instance even at the detriment of the overall financial stand of the company at large.
BAD REWARD SYSTEM: because of the generally observed practice that rewards of most companies are closely tied to performances of managers, there is every tendency that managers will try cutting corners just to meet with what is expected of them. Expectancy valence theory is a good example of one of such wide practice. The debate as to whether reward system play negative role on managers’ motivation is still on with many scholars and managerial accounting researchers coming up with different theories to solve the inherent problem of reward system.
OVER RELIANCE ON FINANCIAL PERFORMANCE MEASURE: most of the blame for corrupt practices in companies these days has been placed on the shoulders of accounting information. This is however notwithstanding the many importance of accounting in investment appraisal and capital budgeting process. The strongest point against financial information is the issue of measurability. It is a well know fact that financial information is quite difficult to measure and many managers leverage on this weakness to perpetrate all sorts of fraud in companies.
SETTING OF WRONG TARGET: the wrong standard will simply inspire the exhibition of sharp practices and questionable actions that will definitely not work in the best interest of the management at large. Standard setting is a problem area for businesses to cope with. In theory, the optimal standard should be the one that will neither be too easy or too difficult to attain but, in practice, identifying those points are much more difficult than many imagine. What is difficult for one manager may be quite easy for another manager- making level of difficulty a relative term. Many suggestions have been made in this regard and one of the most acceptable theory seem to be to employ an ad hoc measure or what many call ‘rolling standard’
PRESSURE FROM THE CAPITAL MARKET: this however maybe argued to be otherwise by many as the EMH (efficient market hypothesis). The truth still remains that fundamental investors still make profits here and there through business valuation; and this in fact is what makes the market seem to be efficient. Also, many investors that use the financial statements of companies only look at the reported figures to make their investment decision, these classes of people are called the naive or intuitive investors, and they simply can’t go away from the market.
One of the major business success factors today is the ability of a business to manage her managers. One way of doing this is to identify the factors that cause managers and other responsible persons in a company to act in a suboptimal manner and continually seek to resolve them. No company can make head way when the activities of separate but connected agents within a company do not work in harmony!!