Just like every year on Christmas Eve, a portly, white-bearded and red-garmented man delivered gifts to all the good children in the world, with only the help of some reindeer and a few elves. Even if the reindeer could actually fly and if you corrected for all the different time zones, admittedly, it sounds incredible.
Still, millions of children believe in Santa Claus. More specifically: they behave as if Santa Claus is real. As well they should: once children openly confirm they do not believe in Santa Claus, they are off the gift list. In other words: the Santa Claus construction collapses when its fictional dynamics are unveiled.
Similarly, the assurance of management heavily leans on all stakeholders’ silent conformity, lest its construction – companies, processes, tools, people – disintegrates. Most managers, even those who feel in control, would do whatever it takes to sustain their belief.
Let’s have a look at three specific ‘in control’ cases we recently lived at customers.
Case #1: The narrative fallacy
In order to scale up and diversify its business, an audio equipment manufacturer had been buying several companies. Senior leadership left the integration to operational management, but wanted to ensure that the new subsidiaries were in control. “I want to gain assurance that they operate according to our accomplished standards”, the CFO confided.
After a remote data assessment, we flew to their latest and largest acquisition. Responding to our initial series of process audit questions, the local management team proudly stated they “had sharp controls in place, adjusted the process narratives and re-aligned all policies”.
The local management team proudly stated they 'had sharp controls in place'
At first we were optimistic. But as we were performing our fieldwork, we realized that nobody was operating as per the narratives. Escalating the issue to the controller, we asked whether people had been trained on the new controls. “We have published the policies on the portal, distributed a corporate communication and held a conference call", he replied.
But when we inquired whether he checked that the message was received, understood and implemented, he could no longer hide his annoyance. Our discussion ended with his “I can’t be behind everyone’s desk”.
Case #2: Unforeseen events
A large toy retailer wanted to turn its performance around by increasing brand reach and putting customers first. The Chief Operating Officer was looking for “a compelling plan”.
We were assured they had the required business expertise, but needed consultants to “dig into the data and support the marketing team with financial modeling and analysis”. We provided data on customer definition, segmentation and many more angles to help sales and marketing elaborate the plan.
At the end of the project, the COO expressed satisfaction with the plan. He expected it to bring double digit growth due to “clear capital allocation for new stores opening, a new incentive plan to drive channel performance and various point-of-sales initiatives”. A few months later, we asked how things had unfolded – according to plan? “Not really”, he replied. As it turned out, “many unforeseen events” they could not possibly have anticipated, had materialized, and basically ruined the plan.
Case #3: Need more workgroups
Discussing the scope for an audit of the strategic plan for a European food producer, management wanted to have comfort that a system was in place to ensure trade-off and collaboration across all strategic projects.
As we progressed through our fieldwork, we noticed that the key set of internal controls revolved around the implementation of “transversal platforms”. Those were supposed to each cover specific topics such as suppliers, investments, quality, et cetera, in what could be called workgroups. The platforms seemed to be well designed, with a clear scope, purpose and frequency – at least, as such they were presented.
The key set of internal controls revolved around the implementation of “transversal platforms”
Deeper analysis of those meetings, however, showed that occurrence and attendance were remarkably poor. To our surprise, around 60% of the meetings were not occurring or, if they were, managers were sending delegates who refrained from decision making. When we reported our observations to senior management, they had the answer ready: “We need a workgroup to tackle the problem”.
The suspension of disbelief
Just like Santa Claus, the narratives, the development plan and the workgroups are fiction. The ‘actors’ in these cases act as if their management solutions guarantee that the situation is in control, as if these solutions will actually master an unpredictable future. What theory, action plans and management reporting claims, is not necessarily made up or false, but it often is imagination and expectation, rather than real knowledge.
In his recent book 'Imagined Futures', the German sociologist Jens Beckert points out the blatant similarities between economic theory and practice, and literary fiction. Both management and literary fiction are realities in which the participants pretend as if the described reality is real.
The power of the concept lies in what the romantic poet Samuel Taylor Coleridge called the ‘the willing suspension of disbelief’. Readers suspend their disbelief because that what is told, is credible and convincing, rather than true. Similarly, management often rather pretends to be in control, rather than it actually is.
We are talking about people here
Obviously the suspension of disbelief is not the only thing at stake. As always, the cases are also about poor implementation and embedding. And, more importantly, we are talking about people here. A common issue in all cases above is that the internal controls and management systems failed to take into account people, human behavior and (unpredictable) reaction to controls.
An obsession with control has led to a proliferation of controls in place: new regulation, the scaffolding of supposedly automated controls and GRC tools being implemented, an endless stream of ideas and new frameworks from audit and advisory firms.
An obsession with control has led to a proliferation of controls in place
Auditing fees paid by companies, for example, increased significantly following Sarbanes-Oxley. Still fraud, scandals and dysfunctional governance continue to happen, sometimes even by those who promotes the rules and controls. It typically boils down to an individual or a group of individuals that became rogue, and some others who are or feel too weak to react.
That is hardly a surprise. According to BCG’s Yves Morieux and Peter Tollmann, “no amount of structures, processes, and systems are ever enough to anticipate the kinds of problems employees face every day on the front line of the business”.
The question is: if we all know, why do we entertain the fiction? Is it crucial to the workings of our companies and economy?
Beyond dead ideas
The main challenge might well be to get over our anal fixation on control – and focus on the people aspect of governance. The solution does not lie in more functions, procedures and controls, but in finding out what the people in your company actually do, and why do they do what they do.
Most people will act rational, at least from their own perspective. In our experience, they want to collaborate and crave autonomy at the same time. People thrive on trust – and other people will tell you, if others do not honor this trust.
The essence of controls is people. The result is not about HR policies or processes, but about real action taken. In order to ensure the correct topics are being addressed, here is how you can challenge your existing internal control agenda. Have you asked these questions:
- How can we make sure to recruit the right people?
- How can we make sure to retain and nurture talent?
- How can we make sure our middle management have the adequate leadership skills?
- How can we make sure our people correctly react to incentives?
- How can we make sure to work with 3rd party providers with the adequate experience and expertise?
Imagine the impact. Imagine that you can devote the intelligence and skills of your employees to the core of the matter, not just to controls, policies, narratives and any other latest “dead ideas”. That is our Christmas wish and resolution for 2017: do not add complexity, but put people at the center of your internal controls framework. Even if you don’t believe in Santa Claus – he’s gone for the year anyway.