The influence of the management controller on
long-term values of an organization: a case study
Master thesis, MScBA, specialization organizational management &
control, University of Groningen, Faculty Economics and Business
20 January 2015
Maarten Kuijsten
Student number: 1738909
Winschoterdiep 45
9724 GJ, Groningen
Email: m.t.kuijsten@student.rug.nl
First supervisor/University:
Dr. E.P. Jansen/Rijksuniversiteit Groningen
Second Supervisor/University:
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The influence of the management controller on long-term
values of an organization: a case study
Abstract
This research investigates the role of a management controller on long-term values of an
organization. The case study that is held provides information about this relation. Interviews with managers on key positions in the organization provide insights into control processes regarding long-term values. The influence of the management controller is found to be subordinate. Although they have a supporting role the senior managers fulfill a more important role regarding the control of long-term values. Strategy, long-range planning and several control systems of the control package are important for the control of long-term values.
Keywords: long-term values, management accounting, management controller, management control packages
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Table of contents
Introduction ... 5
Theoretical background ... 7
Long-term values ... 7
Management control systems ... 9
Management control system as package ... 10
Planning ... 11
Cybernetic controls ... 11
Reward and compensation ... 11
Administrative controls ... 11 Cultural controls ... 12 Methodology ... 14 Case study ... 14 Controllability ... 14 Reliability ... 15 Validity ... 15 Case description ... 16 Corporate governance ... 16 Organizational structure ... 17 Potato industry ... 17 Values ... 17 Processes ... 17 Data sources/collection ... 18 Data analysis ... 19 Results ... 20
Long- versus short term values ... 20
Industry ... 20
Design process ... 21
Commitment... 22
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Senior management’s view ... 24
Definition ... 24 Leadership ... 25 Execution ... 25 Cooperation ... 25 Balanced scorecard ... 26 Role of controller ... 27 Control practices ... 27 Co-operation ... 28 Decision making... 29
Use of the ‘package’ ... 30
Strategic planning ... 30
Communication and exposure... 30
Employee selection ... 31
Protection of culture... 31
Discussion and conclusion ... 33
Long- versus short term values ... 33
Senior management’s view ... 34
Role of controller ... 35
Use of the ‘package’ ... 36
Conclusion ... 38
Theoretical and managerial implications ... 39
Limitations and further research ... 40
References ... 42
Appendix A ... 45
Interview protocol ... 45
Mission, vision and goals ... 45
Decision process ... 45
Control processes ... 45
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Introduction
In recent years, much has been published about unacceptable high risk taken by financial companies. During the financial crisis -that started in the fall of 2008- the financial sector took a downfall. There was much criticism on the CEO’s of those financial companies, the high risks which they took and the bonuses they received after taking these irresponsible high risks. The newspapers and the academic journals were more or less clear about one of the causes of the crises in 2008. The structure of the banking sector, short term focus and the culture that dominates the behavior of those within the sector have all contributed to the cause of the financial crisis. Important questions arise: what specifies the culture and structure of this sector? Why do they have a short term focus? What typifies the behavior of those managers? Is it just the banking sector or is this structure/culture/behavior widespread in our capitalistic western economy?
One of the insights Diamond & Rajan(2009) gave in their report is that managers and executives are directed by poorly designed performance measurements. Most of them focus on short-term financial performance indicators and give less attention to indicators that measure performance of a company on the long run. The bonuses which those managers receive are mostly based on short-term financial performance (Turner, 2009). Gregg et al. (2012) further state that the negative consequences of taking high risks are minimal and therefore taking high risk decisions to maximize your performance is stimulated. However, the authors conclude: “the cash-plus-bonus pay-performance sensitivity of financial firms is not significantly higher than in other sectors” (Gregg et al. 2012, p. 117). It seems that short term focus is often rule rather than exception, and not only in the financial sector. For this reason this topic needs further evaluation. Perhaps it is more interesting to focus on the lack of long-term focus in these control processes of performance measurement. Does this long-long-term focus even exist? Do systems exist that control and continue those long-term goals? Are long-term values included in the current controlling systems?
6 suggest that those non-financial measures are better predictors of long‐term financial performance than only financial measures. Therefore, these measures help the managers to refocus on the long‐term aspects of their actions. Empirical investigation of Banker et al. (2000) shows that this theory stands firm because the non-financial measures of customer satisfaction are significantly associated with future financial performance and contain additional information not reflected in the past financial measures.
In the explanation above, management control is explained as a system which uses financial or non-financial measures to control and direct an organization on short and long-term basis. Developments in the past ten years show us that it is not as simple as that. Management accountants and
controllers use several models and measurements to steer an organization. Therefore Malmi and Brown (2008) developed a model which combines different controls into a package. This model consists of the following five controlling parts: cultural controls, planning control, cybernatic control, reward and compensation and administrative controls (Malmi and Brown, 2008 p. 291). Malmi and Brown (2008) indicate that it is not clear how these controls interact. One of the ambiguities in this model is the place of the long-term values, its design and the role of the management controllers in shaping and controlling these long term values. Many studies are published about short-term goals and controlling these goals with several (financial) performance indicators. More promising is the literature about strategic management account systems. This suggests control mechanisms including long-term values. Whether this promise is fulfilled remains to be seen. The contribution to the literature of this thesis is to open the black box of long-term values and define the contribution and the role of the management controller in shaping and controlling the long-term values of an organization. Therefore, the research question is:
What is the role of the management controller in shaping and controlling the long-term values of an organization?
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Theoretical background
This chapter provides the theoretical foundation of this thesis. The foundation and definition of long-term values, the management controller/management accountant and management control system as a package are described and explained. Each section will be closed with (a) sub question(s). These sub questions can all be seen as part of the research question which is discussed in the introduction.
Long-term values
As mentioned before, long-term values and their link with control systems are not extensively
discussed in business literature. On the other hand, long-term values as a separate topic are discussed by many scholars. There are numerous academic papers which focus lies on the influence of culture on work-related values.
The Dutch organizational psychologist Hofstede describes in his first publication about this topic in 1980 various work related issues which are influenced through cultural values (Hofstede, 1980). This model was elaborated by Hofstede and Bond (1988) with the cultural values long-term orientation versus short- term orientation. Long-term orientation exists when people are focused on the future. They are willing to delay short-term material or social success or even short-term emotional
gratification in order to prepare for the future. This cultural perspective is typified by persistence, perseverance and adaptability. Short-term orientation is more focused on the present or the past and considers this as more important than the future. In this perspective tradition, social hierarchy and fulfillment of social obligation are important values. The immediate gratification is more important than long-term fulfillment (Hofstede and Bond, 1988).
Long-term orientation and short-term orientation address the differences in cultures regarding how they view time and importance of the past, present and future. Cultures demonstrating a short-term orientation will be more concerned with the past and present and will focus their efforts and beliefs on matters related to the short-term, while cultures demonstrating a long-term time orientation will be more concerned with the future and focus their efforts on future orientated goals (Hofstede and Bond, 1988).
8 Bearden et al. (2006) developed a study to describe the development and validation of measures to assess differences in long- and short-term orientations towards time. They argue in their paper that in addition to cultural-level differences, attitudes toward time have been shown to vary systematically across individuals. For example in consumer behavior, people tend to value immediate outcomes more than events that are delayed. Although under certain conditions, consumers prefer "savoring" future outcomes in favor of present consumption (Prelec and Loewenstein 1998).
Bearden et al. (2006) define long-term orientation as following: ‘Long term orientation is the cultural value of viewing time holistically, valuing both the past and the future rather than deeming actions important only for their effects in the here and now or the short term. As such, individuals scoring high in LTO value planning, tradition, hard work for future benefit, and perseverance.’(Bearden et al., 2006: p.457).
So far, long-term orientation (LTO) is more or less used as a synonym for long-term values. Hofstede and Bond (1988) introduced LTO as a value in a culture. How an organization uses long-term
orientation as a value will be the explanation of the phenomena long-term orientation in this thesis. Therefore the definition will be slightly different as the one used by Bearden et al. (2006). The definition for long-term values in this thesis is: the way an organization views time holistically, valuing both the past and the future, rather than regarding actions important only for their effects in the presence or the short term. Organizations scoring high in terms of long-term values are organizations who value planning, tradition, hard work for future benefits and perseverance.
For this research project it is important to investigate where the organization is located in this
spectrum of long-term versus short-term orientation. The following sub question will provide answers around this theme.
How important are long-term values compared to short-term values in the perception of senior management?
When the position of the organization in this matter is known, the next questions will arise. How did they reach this position? And: are they satisfied with this position of the organization? The following sub question will collect information around this subject.
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Management control systems
The definition of management control systems (MCS) is not as simple as it seems at first sight. First of all, why do management control (MC), management accounting (MA), management accounting systems (MAS) and management control systems seem to be synonyms? They are used interchangeably by many scholars but do these definitions have the same meaning? One of the first scholars who described management control is Anthony (1965). He argues that management control is the process by which managers ensure that resources are obtained and used effectively and efficiently in the accomplishment of the organization’s objectives. However, Ouchi (1979) argues about control on different levels (market control, bureaucratic control and clan control). Fisher (1998) described the difficulty of defining MCS in his paper. There has been a lot of debate among
researchers, and one thing is clear: there is a lack of clarity around the differences between these subjects.
Despite the lack of clarity there is an assumption which is supported by many scholars.
The assumption is that: ‘someone (senior manager/top management team/dominant coalition) is seeking to control the behavior of others (middle management, employees)’ (Malmi and Brown, 2008: p.289). The difference between the definitions depends on what level(s) the researchers approach MCS. For example Merchant and Otley (2007) note that control as a concept can be seen very broadly. It can include almost everything in the organization as part as an overall control system, for example: strategic development, strategic control and learning processes.
Chenhall (2003) makes the distinction between MA, MC and MCS as follows: MA is a “collection of practices such as budgeting or product costing”. MAS is the “systematic use of MA to achieve some goal” and MCS “is a broader term that encompasses MAS and also includes other controls such as personal and clan controls” (p.129).
Abernethy and Chua (1996) argue that the behavior of organizational actors should be controlled by those controlling mechanisms. Therefore, control systems are developed and meant for controlling only on behavioral level. The reasoning of Merchant and Van der Stede (2007) is consistent with Abernethy and Chua, they don’t include strategic control into MCS, but they define control as dealing with employees’ behavior.
10 decision making process and MCS tells us how to direct behavior to reach the organizational goals. This conclusion is more or less the same as Chenhall (2003) made when he concluded that MCS is a more holistic system than a MAS is.
Chenhall (2003) also shared another interesting observation. He observed an evolution over time, he says: ‘The definition of MCS has evolved over the years from one focusing on the provision of more formal, financially quantifiable information to assist managerial decision making to one that
embraces a much broader scope of information.’(p. 129). This observation can be a good explanation for the confusion over time. The evolution of the management accounting systems from only using financial information for decision making towards using a broad scope of information to control the organization without adjustment of the terms can be part of the confusion.
In this research project the following definition of MCS will be used: a management control system includes all the devices and systems managers use to ensure that the behaviors and decisions of their employees are consistent with the organization’s objectives (Malmi and Brown, 2008). The managers where Malmi and Brown (2008) refer to are the controllers/accountants in the organization.
The definitions of management control systems and management controller are now established. The relevancy and applicability for this research can be explained. The role of controllers in using the devices and systems has become clear, but specifically for this research there are still some questions left. One of the questions is: what is the role of the controller in shaping and developing those devices and systems? Next to this question about shaping the instruments this research focuses in a particular direction, namely: long-term values. Therefore other questions about time orientation arise. Are the controllers aware of their role in time focus? What is their role in strategic decision making? What is their own timeframe? An answer on the following question will gather information about the role of the controller in this process.
What is the role of controllers in shaping long-term values?
Management control system as package
11 throughout the different groups in their organizations. These as a whole are control systems as a ‘package’.
The development of MCS as a package is one of a long haul. Otley (1980) started to discuss the contingency factors into a framework and over time there are several scholars who mentioned the need for exploration of this phenomenon. Chenhall (2003) is even concerned about the absence of an aggregated model of control mechanisms. Malmi and Brown (2008) developed a conceptual
framework wherein several controls interact which each other. These controls are: planning, cybernetic, reward and compensation, administrative and cultural controls.
Planning
There are two broad approaches of planning. The first is action planning; this includes goals and actions for the near future (short-term). The second is the term planning which includes long-term goal. This approach has a more strategically intent. Flamholtz et al. (1985) argues that overall planning is an ex-ante form of control.
Cybernetic controls
Cybernetic control is the type of control where most organizations ascribe their MCS. It includes budgeting, financial measures, non-financial measures and hybrids (financial measures combined with non-financial measures, for example: the balanced scorecard).
Reward and compensation
The third one is reward and compensation controls. This control typology focusses on motivating and increasing the performance of individuals and groups within organizations, by achieving congruence between their goals and activities and those of the organization (Bonner and Sprinkle, 2002).
Administrative controls
12 Cultural controls
Finally the last control typology: cultural controls. There are three aspects of this control mechanism. First, the value based controls (Simons, 1995). This belief system contents the formal organizational definition that senior managers communicate towards their employees.
Secondly, the symbol controls (Schein, 1997). This control mechanism exists when organizations build visible expressions. The third and last one is clan controls (Ouchi, 1979). Individuals, who are
members of a subculture in an organization, acquire a set of skills and values through a socialization process.
Cultural control should be seen as an overarching control mechanism with subtle controls. Planning, cybernetic controls and reward and compensation are positioned under this umbrella of cultural control. All these elements work with the fundament of administrative control (Malmi and Brown, 2008).
The control mechanisms in their entirety are the ‘control package’ as Malmi and Brown (2008) describe in their paper. The question arise: where do the long-term values become visible and what is the influence of the management controller as it comes to this? In the ‘planning’ part of the model the long-term values are discussed as the second broad approach. Through long-term planning controllers can set a long-term goals which functions as navigation point. However, to use planning as a strategic controlling mechanism, “it is important for researchers to understand whether planning is done simply to decide on future activities or whether the process involves building employees’ commitment to these plans“ (Malmi and Brown, 2008, p.292). In the cultural controls, the ‘believe systems are described by Simons (1995) as an important aspect. Simons (1995) defines these systems as: “the explicit set of organizational definitions that senior managers communicate formally and reinforce systematically to provide basic values, purpose, and direction for the organization” and “values and direction that senior managers want subordinates to adopt” (p. 34). This theory does not implicate a direct role for the controller to design and set long-term values, but assigns this role to the senior manager. Question is: is the management controller part in this designing aspect?
13 There are a lot of unanswered questions; it’s an illusion to suppose that this case study will give answers to all this questions but some clarity is given. In this case the following question embodies the place of long-term values in this control ‘package’.
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Methodology
The following chapter will give an overview of the research method and its characteristics that are used to conduct this study. There will also be a description of the case which is the basis of this study. Final part of this methodology section is an explanation and argumentation of the processes of this study.
Case study
In the following quote Benbasat et. al (1987) gave the definition of a case study: “A case study examines a phenomenon in its natural setting, employing multiple methods of data collection to gather information from one or a few entities (people, groups, or organizations)”(p.370). This type of research is used in this thesis. Actually, in this thesis a single case study is explored. In a single case study there is only one research entity. Instead of comparing data of different sources the data is collected from one source. Although a case study can include a quantitative part, this research will only focus on qualitative research. The main reason for the choice of a case study is to obtain in-depth insight about the complexity of relations and processes in the organization, especially the relation between the control process and design process of long-term values and the management controller. The present literature is not very extensive about these relations and as Eisenhardt (1989) describes, a case study is a good research method to develop new theory. “The case study is a research strategy which focuses on understanding the dynamics present within single settings” (p.533). One of the strengths of theory building or broadening existing theory from cases is its likelihood of generating novel theory. Creative insight often arises from the juxtaposition
contradictory or paradoxical evidence (Eisenhardt, 1989). Several authors confirm the strength of theory building aspect in qualitative research in general and case studies in particular (Miles &Huberman, 1994; King, 1996; Yin, 1984). Despite these confirming researches there are some concerns about the controllability, validity and reliability of this type of research (Swanborn, 1996). These methodological issues, their role and the justification in this case study research is discussed below.
Controllability
15 ‘processes’ part of this chapter. Subjects as data sources, data collection and data analyses will also be discussed in these section.
Reliability
The results of a study will be reliable when they are independent of the characteristics of that particular study (Yin, 2003; Swanborn, 1996). The researcher, the instrument, the respondent and the circumstances are known as potential biases that threat this in-dependability (van Aken, et.al, 2012). Van Aken et.al, (2012) concludes that a possible solution to treat the researcher bias is to increase the number of researchers.
In this research project there is no possibility to increase this number and therefore, this method isn’t applicable for this situation. Yin (2003) comes up with a possible solution; he designed a case study protocol. The reasoning behind this protocol is: the more standardised procedures, the less personal characteristics of the researcher can influence the results. This case study protocol is used during this research project.
Issues as the data collecting procedure are described later in this methodology chapter and the interview questions can be found in the appendix (appendix a). The instrument bias problem is countered through the use of triangulation (Yin, 2003). Triangulation is reached through the combination of multiple sources of evidence (in-depth interviews, organisation documents and observations; see: ‘data sources’).
People in the organization whom are chosen to be interviewed are carefully selected. Consultations with a contact in the organization and with the supervisor of this project resulted in a balanced list of potential interviewees from different levels in the organization which are representable for the control process we want to investigate. Another strategy to increase the respondent’s reliability is to increase the numbers of respondents (van Aken, 2012). Eleven respondents is a sufficient number in this kind of research and therefore this bias is warded.
Finally, the circumstance bias was limited by interviewing the same respondents more than once. Overall, the reliability of a study lies in the hands of the validity (Patton, 2001). Therefore, validity is an important concept and it will be discussed below.
Validity
16 increases construct validity. The interview of this thesis can be checked in the appendix A where the interview subjects are attached.
The second concept of validity is internal validity; this is achieved when conclusions about
relationships are complete and justified (van Aken, 2012). In this thesis highly cited academic papers are used for the theoretical foundation of relationships.
Finally, external validity; this refers to the generalizability of research results and conclusions (van Aken, 2012). The external validity in this case study is guaranteed by theoretical generalizability. Yin (2003) describes that in case of this kind of studies the generalizability isn’t guaranteed by statistical but by theoretical generalizability (p.43). Case studies rely on analytical generalization. In analytical generalization the researchers are striving to generalize a particular set of results to some broader theory (Yin, 2003). Through the analysis of several relations and the contribution to existing theory by theoretical generalizability, this thesis is valid and reliable.
Case description
HZPC is a global supplier of seed potatoes and it is the company where this research is held. This organization is based in the Netherlands and its head quarter is in Joure. HZPC also has ten
subsidiaries in different parts of the world. Together with 230 employees, 800 potato growers and 55 breeders they realize a dominant position in the global seed potato sector. HZPC’s annual turnover of the past five years lies between 210 and 285 million euro’s.
Corporate governance
17 Organizational structure
The organization is divided in five sectors, and each of these sectors has its own management. Beside these sectors there are supporting departments as human resource and finance. The production and logistics department is responsible for the supply and delivery of the potatoes. The department research and development provides the breeding of new potato varieties and researches potato diseases.
Potato industry
The core business of HZPC is to export seed potatoes. To sustain this business for the future they focus on breeding new varieties. The seed potato industry in general and specifically the research and development in this industry is typified by a long-term focus. An illustration of this long-term focus is breeding a new variety. It takes at least 10 years to become a variety that is commercially marketable. Therefore a long-term focus is an absolute necessity. Another example is the long-term relation with their suppliers, the potato growers. A relationship between HZPC and their growers that lasts for more than three generations is not exceptional. The whole industry has to take a long-term focus into account. This is caused by the characteristics of growing potatoes. Normally, it will take a season to multiply a potato. All these aspects lead to a long-term focus of the industry and the organizations within this industry. Therefore it is not surprising that HZPC is committed to his long-term orientated statements.
Values
HZPC use four long-term values which functions as the fundament of their organization. These values are: "We are dedicated to reach our goals; we think in opportunities to create outstanding solutions; we build long term relations and take responsibility for our actions and our success is driven by knowledge and personal development"(www.hzpc.nl). These values are the basis for the long-term goals and essences they developed. Eisenhardt (2003) described in her article that “it makes sense to choose cases such as extreme situations and polar types in which the process of interest is
transparently observable.”(p.537). This case is in comparison with other companies in other industries an extreme one regarding the long-term perspectives described above. This case gives a unique insight in the processes of shaping and controlling the long-term values.
Processes
Controllability is an issue that is mentioned before. The selection of sources, collection and analyses of the data are part of this controllability. Therefore, a description and a justification of these
18 Data sources/collection
The data collected for this research is derived from multiple sources. This triangulation (Yin, 2003) is achieved through in-depth interviews, field notes/observations and company documents. Through those unstructured in-depth interviews it is possible to understand and get to the bottom of the organizational dynamics. The likelihood of discovering creative insights and novelties is bigger with this strategy of interviewing (Patton, 2005).
The subjects of the questions (appendix A) are discussed and adapted in co-operation with the supervisor of this project. The observations/field notes are derived from meetings with employees and suppliers (other than the interviewees) and company presentations. Company documents are mostly provided through interviewees to strengthen their argumentation and explanation. The annual reports and the CSR-report, which have a supporting role in this research, are publicly available and can be found on the website of the organization.
The collection of the data will be done by interviews with carefully chosen candidates. These candidates are selected in co-operation and consultation with the contact in the company and the supervisor of this research project. The selected candidates are managers on the so called ‘key’ positions in the organization. In table 1 you can find a list with those managers, their function etcetera.
The data collection started with interviewing the members of the team of executives. It is important to start with them because they are most likely responsible for the development of the long-term values. At least they will know the origin, elaboration and interrelation with culture of those values. The managers in the management team are interviewed because they control their department in daily practice. They can provide information about the performance indicators they have within their department. This is interesting because the long-term values of the company are probably processed in these indicators. To interview the members of the finance department seems to be obvious. These members fulfill the internal controlling of the company and are interesting because they know which measurements are important.
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Name Function Member
Gerard Backx CEO Board of directors
Herman Verveld Commercial Director Board of directors
Herman D. Heijtmeijer CFO Board of directors
Koenraad Witteveen HR manager Management Team
Frank van der Werff Manager Production and Logistics Management Team Lilian Escalon Manager sector Retail Fresh Management Team Martin Jansen Klomp Manager sector Processing Management Team Robert Graveland Manager Research & Development Management Team
Edwin van Schaik Manager Finance Holland Finance team
Rudolf Visser Controller Finance team
Hans van Doorn Manager Quality R&D team
Table 1 Data analysis
Analyzing data is the core of building theory from case studies, but it is both the most difficult and the least codified part of the process (Eisenhardt, 1989). In order to generate knowledge and new
insights from this case, the analysis chapter is divided into four separate parts. This separation is based on the sub questions which you can find in the theory chapter. Answers to the four sub questions will lead to an answer on the research question. Providing the results in order of the sub questions will benefit the transparency of the results and discussion chapter.
This strategy of analyzing data is derived from one of the four general strategies Yin (2003) described. One strategy is to follow the theoretical propositions that lead to this case study. In this thesis the original objectives and design of the case study are based on the absence of academic literature about the role of long-term values in control systems. This gap in the literature led to the problem statement and the sub questions. In this thesis the sub questions lead to analytic priorities (Yin, 2003).
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Results
The analysis of the interviews is the instrument to gather information from the collected data. Since this information will lead to an answer of the main question of this research project, it is important to structure and present this analysis very carefully. In the methodology section there is an
argumentation of the analysis strategy. Out of this strategy the following structure of this chapter is made. The first section is about the long- versus short term focus of HZPC. The second section provides data about the view of the senior management on HZPC’s long-term values. In the third section the role of the controller is discussed and the final section will cover the use of the control ‘package’. The paragraphs in this chapter are linked to the four sub questions which are presented in the theoretical chapter of this paper.
Long- versus short term values
As stated and defined earlier in this thesis, long-term values are the way an organization views time holistically, valuing both the past and the future rather than regarding actions important only for their effects in the presence or the short term. Therefore it is important to investigate how important the long-term values are to the senior management of HZPC in comparison to the short-term values.
Industry
First of all, there is an important distinction to make between the characteristics of the potato industry and other industries. The process of producing potatoes lasts over at least one season (a year). Therefore the potato industry is an industry with a long term perspective. One of the members of the board of directors compared the research and development processes of the potato industry with one in the IT sector:
‘A company like TomTom acts in a totally different environment as HZPC does. Development processes in an IT environment are a lot faster than the same processes in the potato industry. For example:
breeding a new potato variety costs at least 20 years. The development and decline of a whole company in the IT sector can take place in less than half of the time of this breeding process.’ (Gerard
Backx, CEO)
Another aspect of the agricultural industry is their connectedness with the environment. The manner in which the industry is dependent of the earth -for example the way of soil treatment- needs a long-term vision regarding the sustainability of operations. The following quote underlines this philosophy:
‘When we want to feed our next generations, companies in the agro and food business are forced to think about sustainability and corporate social responsibility. These issues are by definition long time
21 The last important aspect of the agricultural industry is the responsibility for the world food problem. By 2050, the world population will be seven billion people which all need to be fed. HZPC and the individuals in the organization are very aware of this rising problem/challenge for their sector. The CEO formulated it as follows
‘We want to contribute to the development of responsible food for a growing world population.’ (Gerard Backx, CEO)
Further, the importance of long-term values within the organization of HZPC is mainly expressed by two aspects: the design process and the commitment to their values.
Design process
The origin of the long-term values goes back to the merger of Hettema and ZPC. Fifteen years ago they merged into HZPC and the aggregated board of directors started a strategic planning process. This process resulted in a strategy with a time span of ten years and within this decade two strategic periods of five years. Within the strategic period of five year, the board of directors and the members of the management team will have two strategic sessions every year. Designing long-term values was a continuous process in these sessions.
‘The establishment of the four values of HZPC has been a developing process where we as board of directors together with the management team have written the actual statements.’
(Gerard Backx, CEO)
These strategic sessions are not only important meetings for the company, but for the individual employees as well so they can align their current direction with the previously chosen strategy. Several quotes of interviewees indicate that these sessions are crucial.
‘After the merger HZPC has done two important things. The first one was the start of the strategic planning process, including the timeframe with a plan of ten years. The second one was the strategic sessions with the board and the MT.’ (Herman Verveld, Comercial Director)
‘The development process of the long-term values was a broad-based growth process that was supported by an external consultant’ (Koenraad Witteveen, HR manager)
22 Aspects of this design process - like the frequency of the strategic sessions, hiring an external
consultant and the growth and broad-based element in the process - indicate the importance of long-term values for HZPC.
Commitment
The other aspect that shows the importance of the long-term values is the commitment to the values. On different levels in the organization, commitment is a recurring theme.
For example, on corporate level there is a strategy with a time span of ten years. Commitment and determination to fulfill this planning is very important. The commercial director pointed this out by saying this:
‘Even when we are in difficult times, or plans turn out badly, we firmly stick to the plan. We do make adjustments to our strategy in the strategic sessions but those are relatively small modifications’
(Herman Verveld, Commercial Director)
Commitment is of commercial interest on the level of the suppliers and customers of HZPC.
The relation with suppliers sometimes lasts for more than three generations. HZPC and the farmers are interdependent. Therefore reliability is one of the most important aspects which is reached through clarity about the organizational goals and commitment to those goals for a longer period of time.
‘Securing our long-term values and commitment to our long-term goals are very important with regard to the relationship of our breeders and growers. We both take advantage of a stable relationship. Clarity about the long-term goals of HZPC helps to strengthen this relationship.’ (Frank
van der Werff, manager Production and Logistics)
The guaranteeing of the long-term values and the commitment to it is also reflected on departmental level of the organization. An example of this is the evaluation interviews taken with the employees.
‘The evaluation form is based on our four values. Each employee has to fulfill some fixed targets. This is one of our ways to secure our long-term values.’(Koenraad Witteveen, HR manager) The different methods on several levels show that long-term values are meaningful to the organization. Therefore one may conclude that long-term values are important to the senior
23 Short-term values
The importance of the short-term values appears in the daily activities of the departments and on individual level. The departments have their own targets and key performance indicators. Some of these KPI’s focuses on the short term and are significant in that way.
An important difference has to be made between departments. The research and development department is for example much harder to control on a short-term basis then the retail fresh sector.
‘The research and development department works at least with planning on annual basis. Consequently this is long-term focused. To control our department on operational level we develop
individual targets for our employees. However, it happens that these targets have a long-term character as well.’ (Robert Graveland, Manager R&D)
‘Some of our daily activities are very straightforward, for example our sales and revenues are easy to measure over time. They are the so called hard measurements. We do have targets on sales and revenue level and you can argue that these targets are short-term based.’ (Lilian Escalon, manager
Retail Fresh)
Another manager is very clear in his point of view with regard to long versus short-term orientation.
‘We actually do not measure anything on the short-term in my department.’ (Martin Jansen Klomp, Manager Processing)
The most important difference that indicates the importance of long-term values in comparison to short-term values for HZPC, is made by the CFO.
‘The main difference between us and short-term focused companies is the focus on financial ratios. In short-term orientated companies, financial ratios have much greater prominence. The symbiosis between the financial department and the business in our organization is different from short-term
orientated companies’ (Herman D. Heijtmeijer, CFO)
‘In the first place our values are important, value comes afterwards.’ (Herman D. Heijtmeijer, CFO) During these interviews, a comparison of HZPC with an oil tanker was made. Such a big sea craft is hard to correct and it costs time to shift direction. The same applies to HZPC. A company with these kind of products needs a long-term orientation and has to commit to his long-term values otherwise it won’t survive.
24
Senior management’s view
Several topics like leadership, implementation, balanced scorecard and communication are looked into in the analysis of the senior management‘s view on HZPC’s long-term values.
Before these themes are discussed, a recurring item in the interviews must to be clarified.
Definition
It appears that the definition of long-term values in the interviews isn’t clear. The comments of the managers indicate that they use a different definition of long-term values then the one that is used in the literature (and also in this thesis). Long-term values are the way an organization views time holistically, valuing both the past and the future rather than regarding actions important only for their effects in the presence or the short term. In this definition the view on time is valued. The definition of HZPC is slightly different. The long-term values are the values which form a framework where everybody operates in. It is a lot more about behavior towards one another then a valuation of time.
‘There is a difference between long-term goals and long-term values. Long-term goals are strategic points on a timeline that you can measure over time. Values are much more abstract ideas which are
woven into the DNA of an organization.’ (Gerard Backx, CEO)
‘The values that we have developed are much more an expression about who we actually are and/or who we want to be.’ (Frank van der Werff, manager Production and Logistics)
‘Values are about behavior and frameworks in which we want to operate.’ (Koenraad Witteveen, HR manager)
At the same time some answers indicates that the values of HZPC are developed because their strategic goals were hard to communicate to the employees of the organization. It is therefore not only an expression of their identity but also a translation of the strategic goals.
‘An important step was the translation of the strategic goals to identifiable values. Actually, these values are simplifications of our strategic goals that are much easier to communicate to our
employees.’ (Koenraad Witteveen, HR manager)
Out of these answers one can conclude that the strategic goals and the long-term values are
interacting topics, since the long-term values are derived from the strategic goals. The strategic goals are subsequently made by the senior management. They are entrusted with the DNA of the
25 Leadership
The board of directors - specifically the CEO – was named several times for ensuring the long-term values. The managers indicate that the role of the CEO is very important in shaping and ensuring a specific environment where strategic goals are developed, readjusted, measured and reached.
‘Our CEO, Gerard Backx, fulfilled a very important role in the development of the strategic processes. The growth and broad based elements in these processes are parts of the success and can be
attributed to him.’ (Herman D. Heijtmeijer, CFO)
‘Gerard Backx is an important part of our success in the long-run. The spaces he creates shapes an environment where everyone can work with a long-term orientation. The Rijnland management
model is applicable on our organization.’ (Koenraad Witteveen, HR manager)
‘The board of directors invites us managers to think on the long run.’ (Robert Graveland, R&D manager)
Leadership – and more specific the leadership style - can determine the success of the development and execution of long-term values. Within HZPC the prevailing thought is that this part of execution of their long-term values can be attributed to the leadership style.
Execution
Another matter that asks attention more than once is the execution of the strategy and values. Many companies and organization do have a strategy and values under which they operate. The question is: do they actually execute their strategy and values? The managers of HZPC are convinced that the carefully planned execution of their values distinguishes them from other organizations. These are not just some vague statements but are simplified and usable. That is why they are satisfied with their strategy on long-term values on this level.
‘We actually implement our strategy and together with this strategy, our values. That is the big difference with other organizations.’ (Herman Verveld, Commercial director)
‘Execution is the most important issue in strategy development. You shouldn’t drown in the amount of measurements. The success of your strategy depends on the accessibility and simplicity of the
execution’. (Herman D. Heijtmeijer, CFO) Cooperation
26 Gerard communicates the values on a regular basis when he speaks to his employees, during company
meetings for instance .’ (Robert Graveland, R&D manager)
Another communication medium is their website. Lilian Escalon - sector manager retail fresh - came up with the example of a conference in France about strategic development. He was the only one who could easily find and explain the values of his company on the company website.
‘It was really fascinating to see the surprised faces of the people there. During the rest of the conference we used HZPC as example of a company with visible values.’ (Lilian Escalon, Manager
Retail Fresh)
Leadership, execution and communication are factors the senior management points out to be the success factors of their long-term values.
Balanced scorecard
In every organization developments take place. The improvement of HZPC lies in the challenge of developing a balanced scorecard that can be used. Concerning the visibility of the strategy, the balanced scorecard can be an important tool. However, HZPC has not been able to form uniformity about developing and executing a balanced scorecard.
‘Issues as the balanced scorecard are definitely issues we have to optimize.’ (Gerard Backx, CEO) ‘The balanced scorecard does not really live in our organization.’ (Koenraad Witteveen, HR manager)
‘We are intensively working on a balanced scorecard, it is work in progress.’ (Robert Graveland, R&D manager)
‘We do have a balanced scorecard. Actually I don’t use it at all.’ (Martin Jansen Klomp, manager Processing)
The managers are aware of the fact that the balanced scorecard is an instrument that may contribute to the visibility of the strategy. That makes it a high ranked item on their priority list.
Another point of attention is the Business Action Plan’s (BAP’s). These are action plans for each department on a strategic level. However, there are possible improvements that will serve the long-term values.
27 ‘BAP session should be more focused on cooperation. There is too much synergy missing between departments. Long-term values will be served more and more when cooperation plays a bigger role.’
(Herman D. Heijtmeijer)
The overall conclusion can be that the management of HZPC is satisfied with their strategy and long-term values. There is still room to improve and develop some aspects of it but employees are proud of their values and especially the execution of their strategy.
Role of controller
One of the questions in this thesis is: what is the role of the controller in shaping and developing control systems? Next to this question about shaping the instruments this research focuses in a particular direction, namely: long-term values. Therefore other questions about time orientation arise. Are the controllers aware of their role in time focus? What is their role in strategic decision making? What are their own timeframes? To answer these questions, we first have to answer another question: what are the tasks of the control department within HZPC?
Control practices
The role of the control department of HZPC is not completely different from the role of the control departments in other organizations. They provide information for the managers of the sector departments. They participate in the annual budget application every department has to make and provides the departments with a financial check every four months.
‘Together with the control department we control the progress of the long-term forecasts on a regular basis.’ (Martin Jansen Klomp, manager Processing)
‘The databases with information of our annual targets are in the hands of the control department. I use this information for the strategic sessions.’ (Robert Graveland, manager R&D)
‘Our annual budget application is made in cooperation with Rudolf Visser (finance department). He assist us with decisions concerning the projects we have to select.’ (Robert Graveland, manager R&D)
‘We provide the relevant financial data every quarter of a year for every department.’ (Rudolf Visser, Controller)
‘Our primary job is to control the performance of the organization. We developed several indicators to measure the performance. The type of indicator and the time frame varies a lot. It depends on the departments which timeframe we use. For example R&D has a total different timeframe than retail
28 These examples are just a small insight in the daily practices of the control department. However as argued before, the interesting part is not the common practices but the particularities of the control processes within HZPC.
Co-operation
One of the recurring topics in the interviews was the intensive co-operation between the
control/finance department and the other departments. According to the CFO this is essential for several reasons:
‘Drafting indicators is a long and incremental process. Collaboration between the people who provide information and the manager of that specific department is essential for the long-term goals. The
enablers are essential in this process and most of the time these enablers are our controllers.’ (Herman D. Heijtmeijer, CFO)
‘In the developing processes of the action plans, the focus should be more on co-operation. In that way the controllers can be our connecting link between departments. The long-term values of our organization will be automatically reflected in the action plans when this interaction is optimized.’
(Herman D. Heijtmeijer)
It is interesting to see that one of the targets/objectives – co-operation between departments –isn't always achieved. Other interview results confirm this observation and show the discrepancy between theory and practice. The balanced scorecard is also a recurring theme.
‘After the strategic session with the board of directors, our department together with the control department gets started with developing action plans and measurable indicators. Developing these
indicators is an intensive and reciprocal process.’ (Koenraad Witteveen, manager HR)
‘The performance indicators of our department are derived from the corporate strategy. This has been established together with the finance and control department.’ (Martin Jansen Klomp, manager
Processing)
However some results implicate a less intense collaboration with the control department.
‘My predecessors didn’t always keep an eye on the measurability of business action plans. For this reason I want to be part of the strategic sessions on departmental level. In this session the strategic goals are developed and we can establish some controllability in these business action plans. It is the
task of the enablers in these sessions to focus on co-operation.’ (Herman D. Heijtmeijer, CFO) ‘There should be more support from the finance and control department with regard to the related indicators between departments. This can then be processed into a coherent balanced scorecard on
29 There isn’t consensus between the managers about the way it works. However, there is a consensus about the way it should work. Co-operation between departments is important as it comes to the BAP’s and the establishment of the values. In this process the controllers should be the connecting link.
Overall, the most important comment is made by the R&D manager:
‘We are happy that we are not a public traded company where the controllers just control and measure financial results. Our controllers are part of the team and the long-term focus in our business
action plans.’(Robert Graveland, manager R&D) This is supported by the CFO:
‘The long-term values influence our way of controlling. We use fare less financial ratios in comparison to short-term focused companies.’(Herman D. Heijtmeijer, CFO)
One can conclude that the time-frame of the controller is broad and depending on the demand of the operational manager. Therefore, the controller can have a time-frame of –for instance- five year. They don’t hold on to standardized management control cyclizes but collaborate with the operational manager.
Decision making
Next to the part about co-operation in the interview results, another outcome was remarkable: the decision making process and especially the role of the controllers in this process. The prevailing thought is that long-term goals -and the strategic decision making process around these long-term goals- can be negatively influenced by too much measurements and control processes. Therefore accounting information doesn’t play a huge role in strategic decision making.
‘People need space to think and perform in the long-run. Freedom and intuition is a great asset in decision making with regard to reaching your long-term goals.’ (Herman Verveld, Comercial Director)
‘We don’t want the organization to drown in the measurement moments. It is possible for an organization to measure too much; especially for your long-term goals it can be fatal.’(Herman D.
Heijtmeijer, CFO)
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Use of the ‘package’
The control package - described extensively in the theory section - exists out of five control mechanisms. These five mechanisms are: planning, cybernetic control, reward and compensation, administrative control and cultural controls. The main objective is to gather information about the use of this package by the controllers in relation to the long term values. There are four remarkable issues with regard to this package and they are discussed below.
Strategic planning
A recurring issue - discussed earlier in this analysis - is the strategic planning. Long-term goals are important for HZPC. The semiannual strategic sessions provide long-term goals which are measurable over time. Another aspect is the awareness of the managers towards the long-term goals.
‘Strategic planning and the related long-term goals are very important to HZPC. Thereafter we can relate the values to the strategic goals. One of the important aspects of strategic planning is the inspiring character of these goals. People know what they are working for because these long-term
goals are measurable over time and the progress is visible.’ (Gerard Backx. CEO) Another important aspect that was mentioned is:
‘Sharing your strategic planning and the related values provide a positive vibe among your employees. This is how you keep your employees inside your organization.’ (Herman Verveld, Commercial
Director)
As already shown as an outcome of the interview results this strategic planning process takes place in sessions with the management team and board of directors. It displays there isn't a direct role for the controller. But as a control instrument it is definitely part of the control package.
Communication and exposure
One of the most important outcomes derived from the answers is the communication of the long-term values. This communication can be linked to value based control as part of cultural control in the package. The CEO has an important role in this communication.
‘Communication about our values goes through the company newsletters and annual reports. Every month a newsletter is publicized where I communicate at least one value which is related to an actual
issue.’ (Gerard Backx, CEO)
‘Communicating the values is part of guaranteeing the values. Our CEO plays an important role in this communication through his newsletter and New Year’s speech.’ (Frank van der Werff, manager
31 Exposure, communication and interaction between managers and employees of their department is an important aspect that is mentioned.
‘The guaranteeing of the values, or controlling if you like, mainly happens through conversations with your employees. In this way you create a state of awareness.’(Martin Jansen Klomp, manager
Processing)
‘The values pop up everywhere, on our website but also on posters on the walls of our offices. I even have them on the wall of my office at home.’ (Lilian Escalon, Manager Retail Fresh)
In the examples mentioned above there isn’t a direct role for the controllers of the organization. It is again much more a task of the senior management.
Employee selection
Employee selection is the most important and most often mentioned aspect of long-term values control. Literally every manager came up with this issue. The following quotes summarize the prevailing thought.
‘Certain types don’t belong in our organization. An example is a salesman in retail. In this environment you get motivated by your daily sales. This kind of motivation contradicts our way of working.’ (Gerard
Backx, CEO)
‘Selection of the right people is very important concerning controlling our long-term values. This process is closely monitored by the board of directors.’ (Herman D. Heijtmeijer)
‘People have to fit in the long-term character of our company otherwise they won’t feel happy in our organization.’ (Frank van der Werff, manager Production and Logistics)
‘It is very important that your personal character fits within the long-term character of our company.’ (Robert Graveland, R&D manager)
The conclusion must be that the controlling part happens in advance. Again, there isn’t a direct role for the controllers. Although you can argue controllers were also hired at a certain time and in that way part of the control process. They were selected for their long-term orientation skills after all. This argumentation will be more explored in the discussion chapter.
Protection of culture
32 ‘I see myself as cultural guard. One of the ways I secure the culture is through performance reviews
where the values play an important role.’ (Koenraad Witteveen, manager HR)
‘We create a degree of pride through celebrating our successes. In this way we show our employees that our long-term orientation is successful.’ (Frank van der Werff, manager Production and Logistics) Another part of the culture is that people address each other on the values of the company.
‘There is a family feeling in our company where our employees feel comfortable to address each other on their behavior.’ (Herman D. Heijtmeijer, CFO)
‘People address each other if they think someone does not act according to the company values.’ (Lilian Escalon, manager Retail Fresh)
An aspect that is also relevant in the light of the control package is shown by the example of the introduction of performance based pay. The company tried to introduce a salary which was partially based on (sales) performance. The attitude of the employees towards this idea was absolute negative. Therefore this idea was canceled and never implemented.
‘The introduction of performance based pay has gone badly. Our employees where very negative about this idea because the prevailing thought is that we all do it together. Also the long-term
33
Discussion and conclusion
This final chapter provides conclusions of this research project. The answer to the research question will result in the main conclusion. This chapter will show a summary and a discussion of the results – with relevant theory applied to explain the findings – before pointing out its final conclusion.
Potential theoretical and managerial implications will be displayed based on the discussion and conclusion. Finally, limitations of this research project and suggestions for future research will be given.
Long- versus short term values
Whether policy is based on short-term or long-term focus is heavily influenced by the nature of the industry. When this study started, it made sense to choose cases in extreme situations (Eisenhardt, 2003). The downside to this argumentation will be explained further on in the limitations part. However, in the introduction chapter the relation between the financial sector and focus on short-term policy was questioned. Gregg et al. (2012) concluded in their research that: “the cash-plus-bonus pay-performance sensitivity of financial firms is not significantly higher than in other sectors” (Gregg et al. 2012, p. 117). This study indicated the financial sector was not the only sector that was influenced by short-termism. However, the results of this study are not supported by their research because the focus on the long-term found in this study.
One of the conclusions that can be made is that the time orientation and control focus of the management is influenced by the nature of the industry. Hambrick et al. (1993) confirm this assumption. They found in their research that there are moderate and strong associations between industry and adherence to existing long-term strategy. However, this was a by-catch in their study and this relation isn’t deeply investigated yet. Further research has to provide clarity about the influence of the type of industry on time orientation of companies.
34 involvement of a management team are important ingredients that can lead to successful long-term orientation.
However, this thesis wasn’t about factors of successful implementation of long-term values. It handles about how important long-term values are to the senior management as compared to short-term values. The answer is that long-term values are more important to the senior management than short-term values. The base for this assumption is shown by the following quote: ‘In the first place our values are important, value comes afterwards.’ (Herman D. Heijtmeijer, CFO). Bearden et al. (2006) represents it in the following way. 'Individuals who value planning, tradition, hard work for future benefit and perseverance more than actions only important for the presence, score high in long-term orientation’ (p.457). The senior management of HZPC fulfills this definition and is therefore long-term orientated.
Senior management’s view
Firstly, a discussion that can’t be seen separately from the debate that started above. It is about the definition of long-term values. The results show several cases in which managers indicate their definition of long-term values differ from the one that is used in this thesis. Their long-term values are a translation of HZPC’s strategic plans into behavioral frameworks. However, the given definition of long-term values in this thesis was about the valuation of time (Bearden et al., 2006). Although these two definitions appear to be different from each other (time valuation versus behavioral frameworks) in essence they have a lot in common. Since the values of HZPC are based on their strategic plans and these strategic plans have a time path of five year. In both cases long-term orientation is the common factor. When for instance the satisfaction and implementation of long-term values are discussed in the interviews, the interviewees talk about satisfaction and
implementation of their strategic plans and the associated behavioral frameworks. In the end both definitions are about time orientation of the company and therefore the discussions serve the same purpose. It is good to realize that a definition in professional literature can differ from one used in the business world.
There are several factors that determined the long-term strategy of HZPC is successful. They are: leadership style, degree of execution, simplicity and communication. The way the CEO creates a culture where everybody can contribute to the design, development, execution and/or achievement of the long-term goals is seen as one of the main contributions to the successes of the long-term strategy. This assumption is supported by Ogbonna and Harris (2000). They investigated the
35 they found an indirect relation, they prove that leadership style and performance was mediated by the organizational culture.
The other factors of success are interrelated. By successful implementation of business action plans the long-term strategy is implemented. Communication of the strategy by simplified statements about the strategy (the organizational values) is seen as important factor for the success and satisfaction about the long-term values.
The balanced scorecard needs special attention in this context. Results show that the balanced scorecard is subordinate and there is a lot space for improvement. Development and implementation of a balanced scorecard is in progress at HZPC but is still an unfinished project. At the same time HZPC is very satisfied with their long-term strategy and related values. Their vision demands that design, development, execution and achievement of long-term strategy and related long-term values are well managed.
There is a striking element in this case study. Until now the balanced score card is seen as a control instrument to secure strategy (Kaplan and Norton, 1996). These authors argue that the balanced scorecard have a strategic intend. It helps to link a company’s long-term strategy with their short-term actions. In this case HZPC found another way to implement and control a long-short-term strategy. Therefore, one can conclude that the balanced scorecard isn’t the only way to control your long-term strategy. There are alternatives. The challenge is to define these alternatives.
The question was: what is senior management’s view concerning the organization’s long-term values? The answer is that senior management is satisfied with the organization’s long-term values. Although they see the balanced scorecard as a future improvement to control the long-term strategy, they are satisfied with their current way of controlling.
Role of controller
The role of the controller is one that has a supporting character. They provide information for the operational managers and help them controlling their business action plans. Therefore cooperation is seen as an important role for the controller. In the literature this is defined as a safeguarding
management accounting style (Lambert and Sponem, 2012).
