Leadership and Control System Abernethy, M.A; Bouwens, J.; Lent, L. 2009
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  Electronic copy available at: Leadership and Control System Design *   Margaret A. Abernethy a , Jan Bouwens b , Laurence van Lent b   a  Faculty of Economics & Commerce, The University of Melbourne, Australia b  Department of Accounting, Tilburg University, the Netherlands Abstract Little attention has been given to the role of leadership characteristics in the organization design literature despite significant evidence of its importance in explaining firm behavior. This study develops and tests a model to assess the effects of leadership style on three control choices that are considered integral elements of a firm’s management control system; namely the delegation choice, the use of planning and control systems and the performance measurement system. Our results, based on data collected from 128 profit center managers, indicate that leadership style is a significant predictor of senior management’s use of the planning and control system and their use of performance measurement system for rewarding lower level managers. After controlling for operating contextual factors (namely, subunit interdependencies and knowledge asymmetries) we find no effect of leadership style on delegation choices but do find that leadership style influences the use of planning and control systems as predicted.  JEL classification:  M41 Keywords:  leadership style, empowerment, communication, execution, control system use, organization design September 2009 1 *  Margaret Abernethy acknowledges the financial support from the University of Melbourne. We would like to thank workshop participants at the 2006 MAS Section Midyear Meeting, the University of Melbourne, Tilburg University, Vrije Universiteit Amsterdam and Nyenrode University as well as Michael Bromwich, Eddy Cardinaels, Chris Ittner, Murray Lindsay, Mina Pizzini, Steve Salterio, Frank Selto, and two anonymous referees for helpful comments.  Electronic copy available at: Leadership and Control System Design   INTRODUCTION The role of leadership and its impact on the organizational design of firms virtually disappeared from the accounting literature 20 years ago. Management scholars continue to explore the influence of leadership on firm performance and, more recently, are concerned with ‘when and under what circumstances leadership might matter more or less’ (O’Reilly, Caldwell, and Chatman, 2005; p. 5; Bass 1990; Cannella and Monroe 1997; Wasserman,  Nohria and Anand 2001). Economists are beginning to recognize the importance of the leadership role in the firm. 1  Part of their interest stems from the desire to explain the considerable amount of heterogeneity observed in corporate governance and accounting  practices (Rotemberg and Saloner 2000; Malmendier and Tate 2002; Bertrand and Schoar 2003). Practice, of course, has never abandoned the view that it is the attributes of a leader that are key to understanding what goes on in organizations. Bolton, Brunnermeier and Veldkamp (2008) draw on practice 2  to develop a conceptual framework of leadership and include five elements of leadership: (1) setting a vision; (2) communication (3) empowering others (4) execution and (5) integrity. While acknowledging the importance of these key elements practitioners as well as management scholars recognize that individuals approach the task of leadership differently, that is, they adopt different ways of setting the vision and communicating it to employees; different approaches to communication; variance in the extent to which employees are empowered and differences in the way in which the vision is implemented through monitoring and control choices. The management literature argues that these differences are explained by the personality and behavioral traits of managers which is 1  See Bolton et al. (2008) for a recent review of formal models of leadership in economics. 2  In particular they refer to the writings and commentary of Richard Parsons, former CEO of Time Warner and recently appointed Chairman of Citigroup. 2  conveniently summarized as ‘leadership style’, i.e. the style used to influence “others to understand and agree about what needs to be done and how to do it, and the process of facilitating individual and collective efforts to accomplish shared objectives” (Yukl 2005,  p. 8). While the management research, and more recently the economics literature, recognize that leadership influences organizational functioning accounting researchers have so far been relatively silent on how the leadership style influences the design and use of management control systems. It is clearly likely to be an important correlated (but often omitted) variable given that control choices are the means by which top managers communicate, empower and execute their vision. We address this oversight in the accounting literature and develop a model to evaluate the effect of leadership style on control choices. We draw on themes in Bolton et al.’s (2008) conceptual framework to focus on three control choices that correlate with the key elements of leadership – communicating, empowering and executing the vision. We assess how the planning and control system (PCS) is used by leaders for communicating  to agents within the firm; the extent to which a leader delegates specific managerial decisions (e.g., decisions relating to human resources; marketing, internal process, etc.) as a means of empowering  subordinates; and the use of the performance measurement system (PMS) as a means of executing and ensuring accountability for the goals of the firm. We expect that the choice in the use and design of these controls will be influenced by the leadership style of senior management. Our model enables us to explore how leadership style influences the way in which a leader communicates, empowers and executes the vision of the firm. The results, based on a broad-based sample of profit center managers, indicate that control choices are determined by leadership characteristics. After controlling for contextual operating factors, i.e., interdependencies among profit centers, and knowledge asymmetry between 3  the profit center manager and his superior, we find that leadership style significantly influences top management’s use of planning and control systems as a communication device within the firm and their reliance on quantitative performance measures for compensating and rewarding profit center managers. Contrary to our expectations we do not find that leadership characteristics influence the decision to delegate managerial responsibilities to subordinates within the firm. This decision is only influenced by the operating context. Consistent with prior literature, we find that increasing levels of knowledge asymmetry lead to greater delegation and as interdependencies among profit centers increase top management will retain decision rights. The following section provides the theoretical justification of the model. HYPOTHESES DEVELOPMENT Effect of Leadership Style on Control Choices The authority that resides with top management enables them to define structures, shape strategic priorities, implement formal controls, set targets, and then take action to correct deviations. However, the authority to direct and control subordinates is only part of the story. It is also the behavioral tendencies and personal traits associated with a leader that influence how they use controls to influence the behavior of subordinates (Bass 1990; Hunt and Conger 1999; Waldman and Yammarino 1999; Waldman, Ramirez, House and Puranam 2001; Yukl 2005). It is the ability of leaders to articulate and communicate their vision for the firm as represented by their own values, their role modeling of those values, their ability to communicate performance expectations and provide subordinates with the confidence to achieve those expectations (Roberts 2004). In other words, it is the personal relation between the leader and his/her followers that results in changes in firm behavior. 4
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