” “ The consequences of minority privatization on management control and management control systems: an exploratory study

(1)

MSc. Business Administration

Organizational and Management Control

“The consequences of minority privatization on

management control and management control

systems: an exploratory

study”

University of Groningen

Faculty of Economics and Business

Jochum Reitsma

Student number: s1813080

Aquamarijnstraat 631

9743 PR Groningen

+31652466614

j.reitsma.5@student.rug.nl

First supervisor: Prof. dr. D.M. Swagerman Second assessor: dr. E.P. Jansen

Words: 17.821

(2)

(3)

3

PREFACE

With the completion of this report, my Master of Science in Business Administration (MSc.BA) at the University of Groningen has come to an end.

In September 2008, I started my Bachelor International Business and Management at the Faculty of Economics and Business. After finishing my Bachelor in July 2011, I took a seat in the Executive Board of the ACLO for a full-time job as treasurer. Next, in September 2012, I started the Master Organizational and Management Control.

Early 2013, I decided to postpone the writing of my Master Thesis until September 2013. Consequently, I had some free time on my hands and applied for an assignment at N.V. Nederlandse Gasunie. From May to October I was busy with this task, concerning stakeholder influence on working purposeful/efficient within a public company.

At the same time, I was looking for an interesting subject for my own Master Thesis. After a while, I came up with (in consultation with some colleagues) a challenging topic: the impact of minority privatization on management control (systems). Eventually, this report became the result of an intensive study.

Last, both during my studies and board-year I have gained valuable theoretical and practical knowledge about organizations, management, (international) business, finance, accounting, bookkeeping, and several other subjects. However, I could not have done this all by myself. Therefore, I would like to thank the following people who were very helpful and inspiring during my stay in Groningen:

- My parents Sjouke and Arendina; my sisters Jantien and Freerkje; and my brother Jurjen for giving me the freedom to study and live in Groningen. Without you it would not have been possible in the first place. Thank you for your trust and support.

- My girlfriend Renee, mainly for believing in me. But also for your endless patience and being there for me when necessary.

- My friends and fellow members of the ACLO Boards for the many special and memorable moments in Groningen. It was awesome.

- My colleagues at N.V. Nederlandse Gasunie, in particular Luuk Feenstra, for receiving me well and your help and support.

- My supervisor, Prof. dr. Dirk Swagerman, for providing me with your comments and your interest during the writing of my Thesis.

Hopefully you will enjoy reading my thesis.

(4)

(5)

5

EXECUTIVE SUMMARY

The goal of this study is to add knowledge to the field of management control and organizational change, by investigating the relationship between minority privatization and management control systems (MCSs). Also, we want to create a set of functional requirements for State-owned enterprises (SOEs) facing the (possible) event of minority privatization. Furthermore, our study is explorative in nature: it represents a preliminary investigation. We intend to generate ideas for empirical testing in a later empirical study.

To test to what extent minority privatization has an influence, we conducted a case study at N.V. Nederlandse Gasunie. Over a period of four months, we gathered data on its MCS, objectives, strategy, uncertainty, and ownership structure. Based on our findings, we classified Gasunie her current MCS using the object-of-control framework (Merchant, 1985). Then, we analyzed what effect the accession of a financial party would have (based on before mentioned variables) on the design of the MCS.

We found the results and action controls as being most important at the company. The results controls are primarily used to direct the higher levels of the organization in achieving the company’s objectives. The main goal of action control is to decrease the company’s internal risks and to guard safety. The personnel and cultural controls are supporting mechanisms. Furthermore, it seems that, overall, the control system is not very tight.

With regard to the contingency variables, we concluded that the addition of a financial party next to the State as shareholder, would increase uncertainty within the organization. Furthermore, it has an effect on the ownership structure (i.e. it becomes more complex) and puts more pressure on Gasunie her third strategic pillar, sustainability, because it does not lead to many solid business cases. Together, this creates a necessity to adapt the MCS after minority privatization. Finally, our analysis of Gasunie her current MCS and the contingency factors, resulted in multiple ideas for further research and a set of functional requirements for the company’s management team.

(6)

(7)

7

CHAPTER 1. INTRODUCTION

1.1 General introduction

All across Europe governments have State participation in companies (i.e. State-owned enterprises or SOEs). Often these SOEs are of vital importance for the development of the (inter)national economy. However, over the last years European governments sold (parts of) several SOEs (e.g. Royal Mail in the UK and DONG Energy in Denmark lately). This is known as (minority) privatization. It brings in money to pay off national debts and usually gives productivity an impulse. The conditions for privatization are ideal in Europe at the moment: investors are eager and the American and German stock markets are around record high (Schinkel & Tamminga, 2013).

The Dutch government currently participates in 38 SOEs. Besides rules and regulation, these companies are an additional instrument through which the government can secure public interest and exercise influence. In June 2013, however, Bernard Wientjes, chairman employers association VNO-NCW, suggested (following the trade unions) to sell ABN Amro, SNS Reaal, and 30 percent of N.V. Nederlandse Gasunie or Tennet (Herderschêe & Meijer, 2013). It would yield billions and relieve the government’s savings. This re-opened a national discussion and recently the Dutch government announced she will sell her ownership in few SOEs (i.e. Holland Casino and de Staatsloterij, and later ABN Amro, SNS Reaal, and ASR). Consequently, a change in the ownership structure of these companies arises.

From past studies there is evidence that, as a consequence of a change in ownership, the new shareholders of a company change the strategic direction of the organization (e.g. Nilsson, 2002; Abernethy & Lillis, 2001). Also, many researchers already studied the influence of ownership on firm performance (e.g. Kang & Sorensen, 1999; Brouthers et al., 2007). However, these studies considered private companies only.

1.2 Problem statement, purpose, and significance of the study

(10)

10

example, financial parties1_{. Does such a change have an impact on the organization of} SOEs (e.g. different goals, objectives, and strategies)? When it does, it is important for the SOE to change its management control system (MCS) as well. According to Merchant and Van der Stede (2012), it is necessary for a company that its MCS internally supports the overall objectives.

Furthermore, following the contingency theory, a company’s MCS is influenced by contextual variables (Otley, 1980). Appropriate matching between the factors and a company’s MCS results in increased organizational performance (Fisher, 1998). However, these variables might change as well due to the accession of financial parties. Yet, with regard to minority privatization, the variables and their impact on the design of MCSs are not sufficiently researched in literature. This leads to the following problem statement, purpose, and significance of our study.

1.2.1 Problem statement

The mismatch between the MCS of a SOE and its objectives and relevant contextual variables, caused by a change in ownership due to the accession of financial parties, can lead to serious problems and inferior organizational performance.

1.2.2 Purpose and significance

Not much is known about the influence of minority privatization on the MCS of a SOE yet. Accordingly, our first goal is to add knowledge to the field of management control and organizational change in SOEs. More specifically, as can be expected from an exploratory study (see paragraph 1.3) and based on the outcomes of a theoretical and empirical study, we want to generate a number of ideas about minority privatization and management control. Those ideas should provide a basis for further research (for example on management control and other kinds of ownership change like private to public ownership). Thus, our study can be seen as a ‘building block’, which can lead to a more general theory in a later stadium (George and Bennett, 2004). This makes our study relevant for the academic world.

Second, we want to create functional requirements for management teams which face the event of minority privatization (in the future). It is crucial for companies facing the accession of (new) financial parties to learn about its impact on management

1_{Although there are different forms of minority privatization, we focus on the accession of financial}

(11)

11

control. The functional requirements can help prepare organizations to alter their MCSs if necessary. This is important for organizations, because alignment between a company’s MCS and its objectives and contextual variables leads to increased organizational performance (Fisher, 1998). Thus, the study is practical relevant as well.

1.3 Research method

Our research represents a preliminary investigation, which is intended to generate ideas and hypotheses for rigorous empirical testing at a later stage. This means we care less about testing a particular hypothesis, but more about providing information about a phenomenon. Consequently, we decided to conduct an exploratory case study, as it is regarded as a good way of investigating plausible relations before being tested on a comprehensive study (Yin, 2013). Exploratory case studies are used to explore the possible reasons for particular practices. It will generate a deeper understanding of management control in particular and the different management controls at the case organization in specific. Also, it will give insight in the relevant contingency variables. We will gather our data from academic literature, direct observation, multiple interviews, document study, and previous studies (see methodology chapter).

1.4 Research questions

To determine what questions are most pressing, as well as to gain some precision in formulating these questions, we reviewed literature on the topic and conducted a preliminary research (see methodology chapter). Furthermore, Yin (2013) stated that ‘what’ questions are appropriate for exploratory research. Accordingly, we formulated the following main and sub-questions (besides the fact that they help achieve our objectives and structure our paper).

1.4.1 Main question

To what extent is the management control system of a State-owned enterprise influenced by a change of ownership due to the accession of (new) financial parties?

1.4.2 Sub-questions

SQ1: How can we best describe a Dutch SOE?

(12)

12

SQ4: What are the most important situational factors influencing the design of a MCS?

1.5 Unit of analysis

To create functional requirements for management teams facing minority privatization, we conduct a study at a SOE. This company is Gasunie (see methodology chapter). Within this company we specifically focus on their management control (system). Thus, Gasunie her MCS is the unit of analysis, or research object, of this study. To answer the research questions and to bound the case, we elaborate on a few relevant contextual factors (described in paragraph 2.4.2). Together the unit of analysis and its context are relevant because not much is known about them during the event of minority privatization. Yet, it is necessary to gain more knowledge because alignment between a MCS and its contextual factors is assumed to lead to increased organizational performance.

1.6 Structure

(13)

13

CHAPTER 2. THEORETICAL FRAMEWORK

2.1 Introduction

According to de Leeuw (1996) a theoretical framework is needed before one can conduct research in an empirical setting. It is important because it shows what previous researchers have discovered. Accordingly, this chapter outlines the framework for the current study and places the research in a broader theoretical context. It illustrates and discusses the key concepts from the research objective and research questions. Because the objective of this study is to gain more knowledge about minority privatization and MCSs, the framework focuses on academic literature regarding management control (instead of organizational control or management accounting; see Chenhall, 2003, for a discussion about the differences).

First, in paragraph 2.2 we start with a draft of the context to guide the literature review. More specifically, the next paragraph provides insights on Dutch SOEs. Then, in paragraph 2.3 we explain management control and MCSs in more detail. The section serves as background and contains several definitions and a classification. Both become important in the second part of our study. Third, we discuss the contingency theory in paragraph 2.4. This theory points out that there is no best approach to create a MCS, but there are different factors which have an influence on the design. Last, we draw a conclusion and develop the conceptual model in paragraph 2.5.

2.2 Context: Dutch State-owned enterprises (SOEs)

According to the Nota Deelnemingenbeleid Rijksoverheid 2013 (http://www.rijksoverheid.nl), Dutch SOEs are private partnerships which are not part of the government. Often, these companies are of vital importance for the Dutch economy. Also, they are an additional instrument through which the government can secure public interest and exercise influence. The difference with other private companies lies within the characteristics of the shareholder. A SOE has a public shareholder (the State), while other companies have private shareholders. The State becomes shareholder by investing risk-bearing capital in the company.

(14)

14

decide on the SOE’s objectives and strategy. The State does not need to approve the strategy formally, however, she expects it to be in line with the public stake.

This means the company can choose and change its own MCSs as well, without interference of the government. The following section provides a literature overview regarding management control (systems).

2.3 Background: management control and management control systems (MCSs) Already in 1916 Henri Fayol formulated one of the first definitions about control with regard to management. Nowadays, however, control itself is a highly ambiguous term as is evidenced by the difficulty of translating it into many European languages and the list of 57 varieties in its connotations given by Rathe (1960). In academic literature it has many meanings and has been interpreted in many ways as well (e.g. Weber, 1947; Galbraith, 1973). Since management control and MCSs are the key concepts of this study, it is important to provide a background. We clarify the concepts using academic literature. Subsequently, a control framework and control tightness are discussed in more detail.

2.3.1 Management control

According to Merchant (1982), if all employees could always be relied on to do what is best for the organization, there would be no need for management control. However, the problem of organizations is the problem of obtaining cooperation among a collection of individuals or units who share only partially congruent objectives (Ouchi, 1979). Although Ouchi’s study dates from 1979, this problem is still highly visible within many (large) organizations. Management control is thus used to make sure that the objectives of an organization are achieved.

(15)

15

within the field. This can be seen from the more recent definitions of management control (e.g. Slagmulder, 1996; Fisher, 1998).

Thus, management control addresses the question whether employees are likely to behave appropriately. It includes all devices or systems which are commonly referred to as management control systems (MCSs). Consequently, we discuss MCSs next.

2.3.2 Management control systems (MCSs)

Managers use MCSs to ensure that the behaviors and decisions of their employees are consistent with the organization’s objectives and strategies. Properly designed MCSs influence employees’ behaviors in desirable ways, and consequently, increase the probability that the organization will achieve its objectives (Merchant & Van der Stede (2012). Like management control, however, the definition of MCSs has evolved over the years. Earlier, they focused on the provision of more formal, financially quantifiable information to assist managerial decision making. Nowadays, they embrace a much broader scope of information. Consequently, MCSs are categorized in research in many ways (e.g. Hopwood, 1976; Ouchi, 1977 and 1979; Merchant, 1985; Simons, 1995). Langfield-Smith (1997) provides an excellent discussion of these classifications.

(16)

16

2.3.3 Object-of-control framework

Merchant (1985) distinguishes four management control mechanisms to influence the behavior of employees. The systems are based on the object of control, which can focus on the results produced (results controls), the actions taken (action controls), or the types of people employed (personnel controls) and their shared norms and values (cultural controls). Each has its own characteristics and (dis)advantages, and they differ in tightness of control. Together, they work because they address all three control problems (i.e. lack of direction, motivational problems, and personal limitations). What follows is a brief description of each of the control mechanisms (see, for example, Merchant & Van der Stede, 2012, for a more extensive overview).

Results controls

Results controls are an indirect form of control: the organization does not dictate to employees what actions or decisions they should take. Instead they focus on the results achieved. Thus, they involve motivating employees to produce the outcomes the organizations pursues. Pay-for-performance is a prominent example of this type of controls because it involves rewarding employees for generating good results.

However, results controls are effective only when the following three conditions are present: (1) knowledge of the desired results, (2) ability to affect the desired results, and (3) ability to measure controllable results effectively. Therefore, they are often supplemented by action, personnel and cultural controls.

Action controls

Actions controls are the most direct type of controls because they ensure that employees act in the organization’s best interest by focusing directly on their actions. They involve ensuring that employees perform (do not perform) certain actions known to be beneficial (harmful) to the organization. According to Merchant (1998), these controls can take any of four basic forms:

Behavioral constraints make it more difficult for employees to do things that

(17)

17

Like results controls, however, these controls are not effective all the time. They are feasible only when managers know what actions are (un)desirable and have the ability to observe that the (un)desirable actions (do not) occur. As a consequence, organizations use personnel and cultural controls to help fill some gaps.

Personnel controls

Personnel controls build on employees’ natural tendencies to control or motivate

themselves. These controls are designed to make it more likely that employees will

perform the desired tasks satisfactory on their own because the employees are experienced, honest, and hard working, and derive a sense of self-realization and satisfaction from performing tasks well. The controls can be implemented through (1) personnel selection, (2) training, and (3) giving employees a good job environment and the necessary resources. This increases the probability that employees behave appropriate and that the job will be done properly.

Cultural controls

Cultural controls, on the other hand, exist to shape organizational behavioral norms and to encourage employees to monitor and influence each other’s behaviors. It is a powerful form of group pressure on individuals who deviate from group norms and values. Organizational culture, and therefore cultural controls, can be shaped in many ways (e.g. codes of conduct, mission and vision statements, group-based incentives, employee rotation).

2.3.4 Control tightness

The benefit of any MCS is derived from the increase in the likelihood that the organizational objectives will be achieved relative to what could be expected if the MCS were not in place (Merchant & Van der Stede, 2012). This benefit can be described in terms of MCS tightness. Tight control is defined here in terms of a high degree of assurance that employees will behave as the organization wishes. According to Kober et al. (2007) tightness of control refers to the level of monitoring exerted over operations.

(18)

18

(Merchant, 1998). However, except from companies with strong cultures, tight control probably cannot be affected with the use of personnel or cultural controls alone.

When managers wish to tighten controls, they often use multiple forms of controls. The controls can either reinforce each other or overlap. On the other hand, it is possible to loosen controls. However, both too little and too much control can be harmful to the organization (Herath, 2006).

2.3.5 Conclusion

This section provided background information on management control (systems). It showed that both evolved over the last decennia. From a focus on more formal, financially quantifiable information to assist managerial decision making, to one that embraces a much broader scope of information (Chenhall, 2003). However, there are many ways in research to categorize MCSs. This study focuses on the object-of-control framework by Merchant (1985) (table 1).

Although the original framework by Merchant dates from 1985, we believe it is among the most complete categorizations at this time. It focuses on the spectrum of control practices, but still provides sufficient rigidity with the specific objects of results, action, personnel, and culture (Sandelin, 2008). Furthermore, the classification centers on the use and effects of financial performance measures but does not forget the human aspect to put it in perspective. Both, of course, are of great importance at modern organizations. The only disadvantage is that the framework lacks specificity in explaining the couplings between control elements. Other classifications, however, have this same pitfall. Therefore, we believe the framework by Merchant (1985) is an excellent starting point to discuss Gasunie her MCS.

(19)

19 Control problem

Lack of direction Motivational problems Personal limitations

Results controls Pay-for-performance x x x Fee-for-service x x x Action controls Behavioral constraints x Pre-action reviews x x x Redundancy x x Action accountability x x x Personnel controls

Selection and placement x x x

Training x x

Job design and provision of necessary resources x Cultural controls Codes of conduct x x Group-based incentives x x x Employee rotation x x Physical arrangements x

Tone at the top x

Table 1. Control mechanisms and control problems. Source: based on Merchant (1998)

2.4 Framework: contingency theory

In 1937, Ronald Coase wrote an influential article on why organizations exist, which is still seen as a landmark in institutional economics. In one of the first (neo-classical) attempts he gave an economic explanation of why individuals choose to form partnerships, companies, and other business entities rather than trading bilaterally through contracts on a market. People begin to organize their production in firms when the transaction cost of coordinating production through the market exchange, given imperfect information, is greater than within the firm (Coase, 1937). The main reason to establish a firm is to avoid some of the transaction costs of using the price mechanism.

In the 1960s however, the neo-classical theory of the firm was seriously challenged by alternatives such as managerial and behavioral theories. Managerial

theories of the firm suggest that managers would seek to maximize their own utility and

(20)

20

case (e.g. Baumol, 1962). This means that, to an extent managers can pursue their own interests. The behavioral approach places emphasis on explaining how decisions are taken within the firm. Cyert and March (1963) argued that the firm cannot be regarded as a ‘monolith’, because different groups and individuals within it have their own aspirations and conflicting interests. Yet, to overcome the problems of ‘moral hazard’ and conflicting interests, organizations use control systems.

Among the class of behavioral theory is the contingency theory. This theory claims that there is no best way to organize a corporation, to lead a company, or to make decisions (Fisher, 1998). Because we want to explore to what extent MCSs are influenced by a change of ownership due to the accession of financial parties, we believe the contingency theory is an excellent framework to use. When looking at MCSs it is clear that the systems do not exist separately from the environment. Rather they are influenced by the context in which they operate. The contingency theory underlines this aspect. Consequently, it is useful to briefly describe the contingency theory and the relevant factors.

2.4.1 Contingency theory

Prior to 1960 most theorists tended to assume that organizations could be understood apart from their environments. Accordingly, they believed there was a universally best MCS that applied to all situations in any organization. However, in the 1960s the contingency theory emerged, mainly as a result of the work of Woodward (1965). The contingency theory rests upon the open systems view that regards the organization as dependent upon the wider environment in order to survive (Otley et al., 1995). The optimal course of action is contingent (dependent) upon the internal and external situation. This movement from a universalistic view prior to 1960 to a contingency approach in management accounting is partly influenced by the necessity of explaining otherwise contradictory observations (Otley, 1980).

(21)

21

Figure 1. A general MCS contingency framework. Source: Merchant (1998), p. 728

Last, according to the contingency theory, appropriate matching between contingency factors and a company’s MCS will result in increased organizational performance (Fisher, 1998). Besides, when there is a good fit between the contingency variables and the MCS, it will be easier for an organization to achieve its goals and objectives (Chenhall, 2003). Therefore, it is required to provide some background on the contingency factors which are important in our study.

2.4.2 Relevant contingency factors

Within the current contingency theory there is a strong consensus about the need for a fit between a MCS and the context is operates in. However, there are a lot of differences between different authors about the relevant situational variables. Earlier, many theorists focused on the impact of environment and technology on organizational structure (e.g. Burns & Stalker, 1961; Lawrence and Lorsch, 1967). However, because the range of organizational settings is large, many other relevant contingency factors exist. A few examples are national culture; structure, uncertainty/stability, size, growth, competition, and regulation of the industry or market; ownership, size, strategy/mission, and culture of the organization; and experience, skills, and training of the management. However, it is impossible to include all these factors in one study.

Despite these many different factors, and several well-known frameworks (e.g. Fisher 1998; Jackson, 2000), we decided to focus on three variables in particular. These are environmental uncertainty, ownership structure, and strategy. We believe these factors are interesting for SOEs facing minority privatization. That is, in our opinion and based on the preliminary research, these factors will largely determine whether or not the accession of financial parties has influence on a SOE’s control system. Furthermore, we think these factors form a representation of the complex environment of SOEs. What follows is a description of each contingency factor and an explanation of why we believe they are useful for our study.

Contingent

factors MCS elements and characteristics

MCS outcomes

Amount of control

(22)

22 Environmental uncertainty

Companies operate in an open and turbulent setting. Consequently, it is important not to look at them in a vacuum. Rather, it is wise to include the influence of external factors in a study on companies’ MCSs. Therefore, the first contingency factor we look at is the environment. It is an important factor that lies at the heart of the contingency approach. However, a lot of variables can be taken into account with regard to the external environment (see Khandwalla, 1977). Yet, it is too complex to identify all different environmental variables that have an influence on MCSs.

Among the most widely researched aspects of the environment is its uncertainty. Furthermore, Chapman (1997) and Hartmann (2000) stressed the importance of uncertainty as a fundamental variable in contingency-based research. Uncertainty can stem from (potential) changes in natural conditions; the political and economic climate; or actions of customers, suppliers, competitors, and regulatory groups such as government agencies (Govindarajan, 1984). Furthermore, uncertainty is higher where the pace of technological change is higher and the farther one tries to look into the future (Merchant & Van der Stede, 2012).

Already in 1961, Burns and Stalker found that uncertainty of environmental variables has an influence on the structure of the organization. Obviously, uncertainty can be regarded as one of the most prominent challenges for being in control. Thus, for a SOE which faces minority privatization (in the future), it is important to know that the uncertainty it brings along, has an influence on its MCS. Consequently, we believe it is required to take this contingency factor into account in our study.

Ownership structure

In a study on ownership structures of large companies, La Porta et al. (1999) identified three different types of corporations: widely held, family owned, and State-owned firms. ‘Each type behaves differently, dependent on the owners of the firm and their interests and investment motives and the ability of the owners to influence the firm’s behavior’ (La Porta et al., 1999). Therefore, it is interesting to consider ownership structure as an internal contingency factor.

(23)

23

change its strategic direction (e.g. Abernethy & Lillis, 2001; Nilsson, 2002). Others suggest that a change of ownership results in improved financial performance (e.g. Martin & Parker, 1997; Andrews & Dowling, 1998). However, these findings are mixed and cannot be taken for granted. Also, the studies did not center around minority privatization of SOEs. Consequently, we think ownership structure is another interesting contingency variable to look at when dealing with minority privatization. Also, because it influences the next contingency factor to be discussed: strategy.

Strategy

Many studies within the stream of management control and strategic contingency suggests that ownership and corporate strategy are related (e.g. Porter, 1980; Thomsen & Pedersen, 2000; Brouthers et al., 2007). However, strategy has been defined in many ways. For example, as a pattern of decisions about the organization’s future (Mintzberg, 1978), to achieve the most favorable match or alignment between the external environment and the organization’s structure and processes (Miles and Snow, 1978). In that, strategy is somewhat different from other contingency variables. In a sense it is not an element of context, rather it is the means whereby managers can influence the nature of the external environment, the technologies of the organization, the structural arrangements, the organizational culture, and the MCS (Chenhall, 2003).

There is evidence that high organizational performance may result from a matching of an organization’s environment, strategy and internal structures and systems (Govindarajan & Gupta, 1985; Govindarajan, 1988). Consequently, it has been suggested that the MCS should be tailored explicitly to support the strategy of the business to lead to competitive advantage and superior performance (Simons, 1987a and 1990; Dent, 1990). Furthermore, Kober et al. (2007) found evidence that the MCS both shapes and is shaped by strategy. This contrasts the traditional view, which regards a MCS as an outcome of strategy.

(24)

24

2.4.3 Conclusion

This section discussed the contingency theory and several important contingency factors. The first contingency approaches were developed in the late 1960s. It is a class of behavioral theory that claims that there is no best way to organize a corporation, to lead a company, or to make decisions. Instead, the optimal course of action is contingent upon the internal and external situations.

We believe the contingency theory is an excellent approach to study MCSs as well. When looking at MCSs it is clear that the systems do not exist separately from the environment. Rather they are influenced by the context in which they operate. The theory argues that the design and use of control systems is dependent upon the context of the organizational setting in which these controls operate (Fisher, 1998). A better match between the control system and the contingency variable is hypothesized to result in increased organizational performance. Therefore, it is necessary to closely look at several situational factors in times of change.

Although there are many situational factors and contingency frameworks discussed in literature, our study focuses on three variables in particular. These are environmental uncertainty, ownership structure, and strategy. We believe, based on the literature research and the preliminary study, these factors play an important role during a change of ownership in a SOE due to the accession of financial parties. More specifically, they will mainly determine whether or not the MCS of a company needs to be adjusted to recreate fit with the context it operates in.

2.5 Conclusion

This chapter started with a brief draft of the context to guide the literature review. From the Nota Deelnemingenbeleid, we know Dutch SOEs are private partnerships which are often of vital importance for the Dutch economy. Among these SOEs is Gasunie. Although the Dutch government is currently studying forms of strategic cooperation through ‘cross-participation’ with other network operators, minority privatization of Gasunie (and other SOEs) is still subject to debate. Therefore, the company is highly relevant for our study.

(25)

25

control tightness to ensure that the behaviors and decisions of employees are consistent with the organization’s objectives and strategies. This classification becomes essential in the empirical part of our study.

Furthermore, we used the contingency theory to point out there is no best way to create a MCS, but there are different situational factors which have an influence on the design. Although most research has examined the effect of only one contingency variable at a time (Donaldson, 2001), for the purpose of our study it is necessary to understand that MCSs and their situational factors do not exist in isolation. However, it is important to recognize beforehand that different contingencies can impose conflicting demands on a MCS (Fisher, 1998). When this occurs, a trade-off has to be made.

With regard to minority privatization of SOEs, we believe environmental uncertainty, ownership structure, and strategy are the most influential variables. Uncertainty can stem from (potential) changes in natural conditions. The accession of financial parties in a company which is fully State-owned, can create such changes and thus brings along uncertainty. Accordingly, uncertainty is highly relevant as situational factor. Furthermore, each type of business behaves differently, dependent on the owners of the firm and their interests and investment motives. Consequently, ownership structure is another important factor to consider in our study. Last, it is researched that new shareholders of a company change its strategic direction and MCSs should be tailored explicitly to support the strategy of the business. Therefore, strategy is the third contingency variable we discuss. Together, the alignment between the contingency factors and MCS should lead to an increase in organizational performance.

2.6 Conceptual model

(26)

26

Figure 2: Conceptual model

Alignment

Management control systems

* Control mechanisms * Control tightness - Results - Tight - Action - Loose - Personnel - Cultural Environmental uncertainty Objectives Strategy Ownership structure

ACCESSION OF FINANCIAL PARTIES IN STATE-OWNED ENTERPRISE

(27)

27

CHAPTER 3. METHODOLOGY

Now that we have a better understanding of Dutch SOEs, management control, MCSs, and several contingency factors, which together resulted in a conceptual model, we can continue to investigate the model empirically. Before we share our findings, this chapter first reveals how the research is executed. In that, it is a blueprint for the researchers themselves and others who want to repeat the study.

We first describe the preliminary research in paragraph 3.2. Here we explain briefly how we arrived at the topic of our study and subsequent research objective and research questions. Then, we discuss the research method in paragraph 3.3: we elaborate on the case study method (type and number of cases). In paragraph 3.4, we define the design of our study. We describe the case organization, Gasunie, and discuss the data collection methods and the way we analyzed the collected data. In paragraph 3.5, we address reliability and validity issues. Last, we give a conclusion of the methodology chapter in paragraph 3.6.

3.2 Preliminary research

For the writing of a Master thesis in the specialization of O&MC in combination with an internship at a company (Gasunie; see paragraph 3.4), the subject needs to be both theoretical and practical relevant. To come up with such a topic, we consulted several employees from the division Economy & Financial Strategy (FE), where I started in May 2013. The input we gained from a few open conversations was helpful and eventually we decided to focus our study around minority privatization. Within the organization this is a ‘hot topic’ because the Dutch government (Gasunie her only shareholder at the moment) considered it as an option due to increasing national debt and pressure from several unions. Although the minister of finance recently announced minority privatization of Gasunie is not on their agenda anymore (Nota Deelnemingenbeleid), it remains a topic of discussion within society, government, and company.2_{This made the study practical relevant and therefore we decided minority} privatization should be the point of departure for our research.

2_{This is an ongoing political debate. It can be that the succeeding government has different plans.}

(28)

28

To relate this topic to the orientation of my Master study, we investigated what was written about it with regard to management control. More specifically, we conducted a literature search on subjects like ‘organizational change’, ‘minority privatization’, ‘ownership structure’, and ‘management control (systems)’, using Business Source Premier and Google Scholar. We discovered no research is done specifically on minority privatization and its influence on the management control (systems) of (State-owned) organizations. Furthermore, we found that different contextual factors have an influence on the design of MCSs and that misalignment between them causes inferior organizational performance. Consequently, we became to believe that the addition of financial parties leads to changes in several contingency factors, which subsequently affect the MCS of an organization. These findings developed into a relative broad notion: does minority privatization has an impact on management control within an organization?

Because of the fact that a relationship between both subjects is not explicitly researched earlier, it led to some uncertainty with regard to the research objective and questions and data collection. To reduce this uncertainty five semi-structured interviews were conducted (see appendix 1), with several managers and employees from four divisions (i.e. FC, FE, TF, and DA) (see appendix 2). Each interview lasted between 30 and 60 minutes. The divisions and interviewees were chosen based on their knowledge of the subject and/or because they deal/dealt with it (in the past). In all interviews it became apparent that the subject is relevant for Gasunie and more knowledge is welcomed. Furthermore, based on the interviews (and a more extensive literature search later on) the problem statement, research objective and research questions were clarified and developed into their current form. Last, the interviews helped determine the right data collection methods (see paragraph 3.4).

3.3 Research method

Not much research is done on the influence of minority privatization on the MCS of a SOE. Consequently, one can say our study is exploratory in nature.According to Yin (2013), there are different methods to collect data in an exploratory study.

3.3.1 Research method alternatives

(29)

29

empirical evidence and has its own (dis)advantages. Furthermore, there are three important conditions that distinguish the different methods. Table 2 displays the conditions and shows how each is related to the five research methods.

METHOD Form of research question

Requires control of behavioral events? Focuses on contemporary events?

Experiment How, why? Yes Yes

Survey Who, what, where, how many/much? No Yes Archival analysis Who, what, where, how many/much? No Yes/no

History How, why? No No

Case study How, why? No Yes

Table 2: Conditions for different research methods. Source: Yin (2013), p. 9

From this table, it can be seen that both the survey, archival analysis, and case study are appropriate research methods for our study. That is, they are useful because in our study there is no control over the behavioral events and the focus is on contemporary (instead of historical) events. However, another condition is that we want to generate a deeper understanding about the impact of minority privatization on the design of a MCS. Based on this understanding, we can create functional requirements for management teams. Furthermore, because the study is exploratory in nature, we deal with several questions of uncertainty. Therefore, we believe the case study is the most appropriate research method for our study. This method is expected to provide maximum insight in the (practical) relevance of the proposed framework. Also, the method serves to generate a better understanding of the different management controls at the case organization, leads to more insight in the contingency factors, and is useful in producing functional requirements and ideas for further study.

3.3.2 Case study research

(30)

30

management control and organizational change. Thus, our research method can be described as being an exploratory case study.

Furthermore, we need to decide on whether to use a single- or multiple-case study. Each has its own advantages and disadvantages. For example, the possible suspicion that arises with single-case studies can be reduced with additional cases (Green et al., 2006). Also, when a researcher is looking for general explanations, a multiple-case study would be more appropriate (Ghauri & Gronhaug, 2002). However, the larger the number of cases, the larger the amount of time it takes to conduct the research. The available financial resources have an impact on the number of cases that will be studied as well (Ghauri & Gronhaug, 2002). Therefore, although for generalizability purposes, a multiple-case study probably would have been a more optimal research method, this study uses a single-case due to a lack of time and resources. Nevertheless, the case used can be regarded as illustrative because it includes all elements of the conceptual model, justifying a single-case study (Yin, 2013) and allowing for theoretical generalization (Lukka & Kasanen, 1995).

Last, we should not be mistaken between case study research and grounded theory (Glaser & Strauss, 1967). Although both are a systematic methodology in the social sciences involving the discovery of theory through the analysis of data, grounded theory is a research method which operates almost in a reverse fashion from case study research. The first step in grounded theory is data collection, without specifying any propositions (or purpose in case of exploratory studies) at the outset of the inquiry, nor defining a ‘case’. Then, from the data collected, the key points are marked with a series of codes and later grouped in concepts and categories, which in the end are the basis for the creation of a theory. This contradicts with case study research, where we cannot proceed quickly into fieldwork, without an understanding, or theory, of what is being studied (Yin, 2013). Thus, to come up with the functional requirement for management teams facing minority privatization, we first need an understanding of management control (systems) and the relevant contingency factors.

3.4 Research design

(31)

31

us with the opportunity to have, amongst others, (in)formal conversations about organizational matters, working conditions and worker attitudes. Furthermore, we have to analyze the collected information. The following sub-paragraphs, therefore, discuss the case organization and explain how we collected and analyzed our data.

3.4.1 N.V. Nederlandse Gasunie

Gasunie is owned by the State because of their monopoly and vital importance for society and economy (see appendix 3). Consequently, it is an excellent company to conduct our study What makes this organization even more interesting is the fact that a recent company poll shows that around half of the employees is against minority privatization and at least 27.2% of the respondents does not know what minority privatization means for their organization (see appendix 4).3

Gasunie was founded in 1963 after the discovery of the ‘Slochterenveld’ in 1959. The Dutch State took a share of 50% and the companies Shell and Esso each 25%. Gasunie, then, took care of the distribution and sale of gas. In 2005, however, GasTerra was separated from Gasunie to divide the production and distribution of gas from its transport. The State became 100% shareholder of Gasunie.

Nowadays, Gasunie is a European gas infrastructure company, which provides the transport of natural and green gas in The Netherlands and the Northern part of Germany (figure 3). The company is headquartered in Groningen and employs over 1,600 people. Their reported income over 2012 was €1,506 million and the company’s balance total in 2012 was €11,073 million.

Gasunie consists of three business units, which are Gasunie Transport Services (GTS), Gasunie Deutschland (GUD) and Participations & Business Development (P&BD). Both GTS and GUD are financially regulated by an independent authority: Authority for Consumers and Markets (ACM) and Bundesnetzagentur (BNetzA). This means their expected turnover is largely determined by the authority.

More information about the company and its key (financial) figures can be found at the company website (http://www.gasunie.nl).

(32)

32

Figure 3: Gas transport network Gasunie. Source: Gasunie annual report 2012, p. 24

3.4.2 Data collection

According to de Leeuw (1996), a theoretical framework is needed before one can conduct research in an empirical setting. Therefore, we distinguish data collection between the theoretical and empirical phase of our study.

Theoretical phase

(33)

33 Empirical phase

According to different authors (e.g. Cooper & Schindler, 2003; Van der Velde et al., 2004) qualitative data is most appropriate for exploratory research. Furthermore, Yin (2013) states that case study evidence can come from many sources. Accordingly, data for the empirical phase of our study comes from direct observation, document study, interviews, and prior researches, over a period of four months (September till December 2013). We used different sources of data to reduce potential threats regarding research-oriented quality criteria (see paragraph 3.5).

To collect information about the MCS of the case organization, we first acquired internal documents using the Intranet of Gasunie. Among these documents were Gasunie her annual report 2012, handbook ‘Control’, and brochure ‘Minimum requirements for management control’. These documents gave a good first impression of management control at Gasunie. However, to create a deeper understanding (and to protect against reliability issues; see paragraph 3.5), we also conducted seven semi-structured interviews, lasting between 45 and 60 minutes each (see appendix 5). The interviews were held with managers/employees from six different departments (i.e. FA, FC, FCC, FE, HM, and TS) (see appendix 2). The choice for the employees and departments was based on their knowledge about management control at Gasunie. Together, they were able to give a complete picture of the company’s MCS. Furthermore, anonymity of the interviewees was guaranteed and all interviews were recorded on a voice-recorder. After each interview a transcript was written, which was then send to the interviewee for check-up and approval.

(34)

34

3.4.3 Data analysis

However, collecting data is not an end in itself. Eventually, our goal with the data is to add knowledge to the field of management control and organizational change, and to create a set of functional requirement for management teams facing minority privatization. Therefore, we need to properly analyze the collected data.

Based on the nature of this study, being an exploratory case study, the technique we use to analyze the collected data is most close to explanation building (instead of pattern matching, time-series analysis, or logic models) (Glaser & Strauss, 1967). However, our goal is not to conclude this research, but rather to develop ideas for further research as well. Consequently, one can label our analytic technique more specifically as a hypothesis-generating process (Glaser & Strauss, 1967).

The data analysis consisted out of multiple steps. First, an inquiry was done to identify the current types of controls within the organization, using multiple sources of data (see paragraph 3.4.2). We classified these controls according to the framework of Merchant (1985) (see theoretical framework). The outcomes are presented in chapter 4. In that chapter we provide different statements from the interviews, together with evidence from direct observation and document study. In the second stage, we analyzed the relevant contingency factors (as described in the theoretical framework). We considered the current situation and the possible future direction might minority privatization occur, by using the data gathered. Finally, we integrated our findings of the prior steps. We identified whether a change in the MCS’s design was necessary due to a shift in any of the relevant contingency factors. We investigated if there were controls missing, if certain mechanisms should be substituted or complemented, whether there were controls in conflict with each other, and if (elements of) the MCS should be more tight or loose. Together, this resulted in an explanation of the current MCS, a set of functional requirements for the management team, and future research directions (see chapter 5).

3.5 Reliability and validity issues

(35)

35

controllability, they are the most important research-oriented quality criteria (Swanborn, 1996).

3.5.1 Reliability

A reliable research suggests that the results of the study are independent of specific study characteristics and can be replicated in other studies. According to Cooper and Schindler (2003), research results should be independent of four potential sources of bias: the researcher who conducted the study, the measuring instrument employed, the respondents, and the specific situation in which the study was carried out. Furthermore, we made sure we took care of the reliability issues to solve potential problems with validity (see paragraph below).

To improve the researcher independence, we made use of as much standardization as possible (Swanborn, 1996). Therefore, the interviews were semi-structured instead of open. The interviews were not completely semi-structured, because of the different backgrounds of the interviewees. Also, we employed multiple sources of evidence (document study, interviews, and direct observation), which complemented each other. That way, we used methodological triangulation (Denzin, 1978) to overcome problems with the instruments. During the data collection phase we took notes (handwritten or audiotaped), so that we could retrieve them efficiently at some later date. Furthermore, we decided to collect data from several managers/employees from different departments (see appendix 2). Together, we believe, they gave a complete image of management control at the case organization. This also made the results independent of the respondents (data triangulation). Last, we conducted interviews at different moments in time (see appendix 2) to secure for situation-specific biases (data triangulation). Furthermore, we secured anonymity and sent an interview transcript to the interviewees for approval. Thereby, we created the possibility for the interviewees to reconsider their earlier responses.

3.5.2 Validity

Validity refers to the relationship between a research result and the way is has been generated (Yin, 2013). We use construct, internal, and external validity to discuss how attained our results.

(36)

36

management control (systems), as can be read in the theoretical framework. That way we were able to choose the, in our eyes, best instrument to measure more accurately what we were intended to measure/classify (Yin, 2013). In the end, we decided to use the framework by Merchant (1985), because it is widely accepted, broad, and covers the concepts of management control completely. This also increased the internal validity of our research as we took a broad theoretical perspective to study the problem. We made use of triangulation as well, through data collection from direct observation, document study, and interviews. This led to convergence of evidence, which strengthens our conclusions about management control at the case organization. Last, due to the exploratory nature of our study, it is hard to transfer the research results directly to other situations (statistical generalization). Therefore, to overcome this flaw, we suggest to conduct a multiple case or longitudinal study. On the other hand, based on similar theoretical concepts and the observation of public sources, analytic generalization is possible. Yet, because of time constraints our study was unable to work this out in more detail (see paragraph 5.4 limitations and further research).

3.6 Conclusion

This chapter discussed the way we conducted our research. Because there is relatively few written about the influence of minority privatization on management control (systems), this research only represents a preliminary investigation. In that, the study is exploratory in nature. This means that we care less about testing a particular hypothesis, but more about providing information about a phenomenon. Consequently, we decided to conduct a case study, as it is regarded as a good way of investigating plausible relations before being tested on a comprehensive study (Yin, 2013). An exploratory case study is appropriate because of the method’s theory building potential, verifiability, and empirical validity (Eisenhardt, 1989).

(37)

37

annual reports and the Nota Deelnemingenbeleid. An analysis of all data led to multiple functional requirements for the management team of Gasunie (see chapter 5).

(38)

(39)

39

CHAPTER 4. ANALYSIS AND DISUSSION

This chapter analyzes and discusses the collected data from the interviews, (internal) documents, previous studies, and observations in an organized way. We first elaborate on management control at our case organization in paragraph 4.2. Here we present what aspects of control are (most) important at Gasunie. Then, in paragraph 4.3, we discuss the influence of minority privatization. Accordingly, we focus on the contingency variables from the conceptual model. We end the chapter with a discussion in paragraph 4.4. Thereby, we summarize our findings, reflect on multiple academic studies (and their contradictions), and ventilate on society’s image of Gasunie.

4.2 Management control at Gasunie

Gasunie is responsible for a significant proportion of the (inter)national energy supply. It is very important that Gasunie continues to operate at optimum level. Therefore, Gasunie has to comply with relevant legislation that applies to Gasunie in the Netherlands and Germany.4_{Furthermore, the following standards apply to Gasunie:} corporate governance code, code relating to information security, Gaswet, regulator’s guidelines, various ISO standards, occupational health and safety legislation, Data Protection Act, technical and statutory safety standards, and financial accounting standards. However, to strive for an effective and efficient organization, a MCS is implemented. The following sub-paragraphs present and analyze the data we gathered.

4.2.1 Planning and control

Gasunie has formulated business objectives, which are attuned to its mission and chosen strategy. In line with the business objectives, the units and departments formulate their own objectives. These objectives should be sufficiently concrete, specific and quantifiable, and fit with the Gasunie policy. This results in the unit business plans. Consequently, each unit is responsible for the realization of its own objectives, within the limits of their budget. This is known as the planning and control cycle (see appendix 6).

4_{Paragraph 2, Art. 141, book 2 of the Netherlands Civil Code: The Executive Board shall, at least once per}

(40)

40

To help realize the objectives, Gasunie has set up ‘minimum requirements’ for management control. Meeting these requirements means that business activities are properly controlled and risks are managed. Herein, each manager is responsible for ensuring that employees are aware of and comply with the standards and requirements. The Executive Board expects the organization to interpret management control in an efficient manner.5

Furthermore, Gasunie wants to be a dynamic and flexible organization. Therefore, their control philosophy is to put more emphasis on control afterwards than beforehand. To check whether a department’s systems of controls is sufficiently effective, it is periodically determined via operational audits and internal control. The Control department helps in this process as it reports about the financials and targets:

“Each month a report is brought forward to the Executive Board and every quarter we report to the Supervisory Board and shareholder.” - Controller

4.2.2 Results, action, personnel, and cultural controls

From direct observation and seven semi-structured interviews, we gained much knowledge about Gasunie her current MCS. It became apparent that Gasunie employs different types of controls to make sure that their employees behave in the organization’s best interest. Some of these controls are company-wide, while others are unit- or department-specific.

Structured by the framework of Merchant (1985), we now discuss the different types of control mechanisms the company makes use of. The sentences between inverted commas represent actual quotes from Gasunie managers/employees.

Results controls

The most prominent type of results control at Gasunie is pay-for-performance. The company uses it to direct employees in the right direction. In that, the organization distinguishes between collective and individual targets. Three areas are most dominant in the collective targets: safety/reliability, financials, and sustainability (see appendix 7).

5_{Gasunie uses the definition by Antony (1988) to define management control: “Management control is}

(41)

41 “I believe the collective targets inform employees on what they should do and what the company’s priorities are.”

When the collective targets are met, the whole company benefits and everybody is (financially) rewarded. On the other hand:

“When a corporate target is not met, there are dashboards turning red. They are talked about in the Supervisory Board. It creates movement within the company.”

Pay-for-performance on the individual level, however, starts at a specific salary scale. About 400 employees are rewarded this way. Together with a manager, the individual targets are determined during the job evaluation conversation.

“Lower in the organization, people do not have their own budgets, then targets become more like working agreements.”

“Together with my manager, I make a results agreement. One part takes care of my personal development, the other part consists of a contribution to the business process. Both must have some relation with Gasunie-wide objectives.”

Yet, this kind of reward only represents a small portion of the whole income, it varies between 5 and 25% (depending on the salary scale):

“We are a State-owned company and always busy with public money. Consequently, we will never use incentive structures like, for example, a bank. People should just do their job. Therefore, the pay-for-performance mechanism is rather reserved.”

Also, employees which are rewarded on their results gain more autonomy. They can decide on how to reach a target, as long as it is in line with the company’s rules and regulation.

(42)

42

However, only few employees are actually guided by their individual targets. It are the higher-management levels where the targets are leading.

“At the top of the company, the targets are leading. In the day-to-day business, however, only few people guide themselves by the targets.”

“When I look at myself and my direct colleagues, my intrinsic motivation is bigger than the financial incentives. You need to have pleasure in your work, otherwise you should not do it. The work ethos should be good, that is more motivating than the incentives.”

“Honestly.. I have to look up my personal targets for this year.”

Thus, although the results control pay-for-performance seems to be the most important control mechanism, together with multiple action controls, at Gasunie, it is suggested that the mechanisms is not always as effective as intended. A reason for this could be that pay-for-performance at Gasunie is relatively new. Therefore, it is supplemented with other control mechanisms.

“In my opinion pay-for-performance at Gasunie does not yet work as it should. A target is something you need to walk a little faster for. At Gasunie, the targets are more often like working agreements. Pay-for-performance should be something which creates an extra drive.”

“In the end the focal point of control for the management level is around results. That is also why we introduced two competencies that all Gasunie employees should possess: the ability to work together and to be result orientated. Especially the latter highlights the focus on results instead of compliance. However, sometimes you do want to fall back on your procedures, because otherwise undesirable risks might emerge. Thus, the results are leading, however the action controls are helpful.”

Action controls

” “ The consequences of minority privatization on management control and management control systems: an exploratory study

MSc. Business Administration

Organizational and Management Control