A Survey of Management Control Systems and Managerial Behavior in Japanese Companies

Abstract

Theoretical research on management control systems (MCS) have developed in recent years. Based on Yokota and Senoo (2011), we conduct a mail-based questionnaire survey of 1674 companies listed on the First Section of the Tokyo Stock Exchange from February through March 2012 (263 companies responded (response rate of 15.7)) to clarify the status of and changes in MCS in Japanese companies after the Great East Japan Earthquake that occurred in March 2011. This chapter reports the simple tabulation results of the survey about budgeting, business environments, organizational characteristics, and managerial leadership and behaviors.

Reprinted with permission of The Society of Business and Commerce, Keio University. Originally published in Mita Business Review 55(4): 93–117, 2012 (in Japanese).

3.1 Introduction

The developments in theoretical research on management control systems (MCS) that took place in the early 2000s (Ferreira & Otley, 2009; Malmi & Brown, 2008; Merchant & Otley, 2007) motivated Yokota and Senoo (2011) to conduct a mail-based questionnaire survey during February and March 2010 to clarify the status of and changes in MCS in Japanese companies. However, the Great East Japan Earthquake that occurred in March 2011 impacted Japanese companies such that their MCS may have further changed. Therefore, to clarify the status of MCS in Japanese companies, we conducted a mail-based questionnaire survey from February through March 2012. Specifically, the survey gathered information about budgeting, business environments, organizational characteristics, and managerial leadership and behaviors.

This study reports the simple tabulation results of the survey. The term “manager” was broadly defined in the questionnaire as management; the term is used in this study to describe only high-ranking managers such as organizational unit managers (e.g., business division managers, company system managers, department managers) who head an organizational unit (e.g., business division, company system, department). The tables in the study reflect the questions as written in the questionnaire; thus, “manager” in the tables refers to all managers—a meaning different from the term “manager” as used in this study.

3.2 Survey Method and Sample Characteristics

The survey was administered as follows. On February 27, 2012, a mail-based questionnaire survey titled “2012 Factual Investigation on MCS in Japanese Companies” was sent to those responsible for management control at 1674 companies listed on the First Section of the Tokyo Stock Exchange, with a reply deadline of March 14, 2012. The postal addresses were extracted from Diamond’s “D-VISION” series, “Employee/Manager Information File.” Specifically, the highest priority was to select the person who functioned as the division/department manager of the corporate planning department; the division/department manager of the accounting and finance department was selected for companies without such a position. When companies reported no data for either, the person in charge of management control was independently identified from the company website.¹

A total of 263 companies responded, including responses from 40 companies that were received after the response deadline, resulting in a response rate of 15.7%. Using a 5% significance level, test for non-response bias was performed as follows.² We first compared the industry-type distribution of the responding and non-responding companies; the responses by industry are shown in Table 3.1.³ As a result of the goodness-of-fit test (χ²-test), it was confirmed that the industry distribution of the responding companies conformed to the industry distribution of the companies listed on the First Section of the Tokyo Stock Exchange. Second, the sizes of responding and non-responding companies were compared. Table 3.2 reports the differences between the mean values of the size measures (sales, number of employees) of responding and non-responding companies.⁴ The mean for responding companies is higher for both sales and number of employees, and a t-test of the differences between the means of the two independent groups showed only the difference in sales was significant. Third, when the response results for those received before and after the deadline were compared, there were no significant differences in mean values or ratios. Therefore, the results of this survey appear to reflect the actual status of relatively large companies, and there is no significant non-response bias.

Table 3.1 Response by industry

Table 3.2 Difference in mean values of size of responding and non-responding companies

To improve comparability with previous research, whenever possible, the questions in this survey were prepared by referring to previous research. However, as many of the references used in previous studies come from countries other than Japan, revisions were made to be consistent with the actual situation faced by Japanese companies. In addition, some new concepts were established, and scales were developed in regard to concepts and measurements that were not necessarily clarified in previous studies. During the questionnaire design, the questions were confirmed by two management accounting researchers and one businessperson who did not participate in the survey.

The descriptive statistics of the survey results are shown in tables in this study, which also describe the previous studies referenced. The abbreviations in the table are as follows: “n” is the number of valid responses, “Mean” is the mean value, “SD” is the standard deviation, “Median” is the median value, “Min” is the minimum value, and “Max” is the maximum value. Most question items were measured using a seven-point scale. In addition, when measurement scales of previous studies were referenced, Cronbach’s alphas were calculated to examine internal consistency. In the table, “α” indicates Cronbach’s alpha coefficient. The questions in the table are not presented in the order in which they were presented in the questionnaire; rather, they are sorted from high to low using the ratio of the number of responses to the total number of valid answers or the mean value. However, the number preceding the question in the table reflects the order of the items in the questionnaire.

First, to clarify the characteristics of the responding companies, Question 1 enquired about the organizational structure. Table 3.3 shows the survey findings regarding the sample firms’ basic organizational structures. These results indicate that many of the responding companies have either a functional or divisional organizational structure.

Table 3.3 Basic organizational structure (n = 262) (Q1)

3.3 Budgeting (Question 2)

Budgeting has been central to management control (Hansen et al., 2003, p. 95); however, Hope and Fraser (2003) advocated that firms go “beyond budgeting” and claimed that budgets should be abolished. In recent years, increasingly more studies have been conducted outside Japan to examine the validity of their claims (e.g., Libby & Lindsay, 2010).

In Question 2, to clarify the actual state of company-wide budgeting in Japanese companies, budgeting was defined as, “formulation of a budget for a certain period (within one year) in the future from a comprehensive perspective of the company, and the use of this as a means to guide and coordinate daily activities of each department, in addition to a variance analysis between the budget and the actual results; it is a comprehensive management control method based on numbers to take appropriate improvement measures based on the analysis, and is a specific means of corporate profit management.”⁵ The survey was conducted primarily using Miki et al. (2003)⁶ and Libby and Lindsay (2010) as references.

Table 3.4 shows the survey results regarding whether the sample companies use budgeting across the company. The questions were created with reference to Miki et al. (2003 p. 130) and Libby and Lindsay (2010 p. 69).

Table 3.4 Implementation of company-wide budgeting (n = 262) [Q2 (A)]

Table 3.5 presents the results of survey questions regarding how budgets affect purposes. In recent years, an increasing number of studies have analyzed the effect of budgets on purposes (e.g., Hansen & Van der Stede, 2004); however, the questions in this survey were created with reference to Ekholm and Wallin (2011, p. 158). Each item was measured on a seven-point scale, from “1: no effect at all” to “4: neutral” and “7: extremely effective.” However, since the measurement scale has not been established in previous studies, Table 3.5 does not include Cronbach’s alpha coefficients.

Table 3.5 Effects of budgeting on purposes [Q2 (B)]

Table 3.6 shows the results of survey questions about whether budgeted financial statements are prepared (multiple answers were allowed). The questions were created with reference to the “Questionnaire Survey on Understanding the Actual Conditions of Management Accounting in Japanese Companies” (FY2011), by the Global Center of Excellence (COE) Program (Management, Accounting, and Commercial Group), a collaboration between Keio University’s Graduate School of Economics and Graduate School of Business and Commerce and Kyoto University’s Institute of Economic Research.

Table 3.6 Whether budgeted financial statements are prepared (n = 254) [Q2 (C)]

Table 3.7 shows the results of survey questions about the degree of linkage between budget and strategy. The questions were created with reference to Libby and Lindsay (2010, p. 72). Each item was measured on a seven-point scale from “1: not at all” to “4: neutral” to “7: absolutely agree.” Table 3.8 shows the budget period and Table 3.9 shows the budget preparation time.

Table 3.7 Link between budget and strategy [Q2 (D)]

Table 3.8 Budget period (n = 255) [Q2 (E)]

Table 3.9 Budget preparation time (n = 258) [Q2 (F)]

Table 3.10 presents the responses to questions about whether the initial budget was revised and the revision method (multiple answers were allowed). Number 3 in Table 3.10 (Question 2 (G)) is a question regarding “rolling budgets.” The questions were created with reference to Miki et al. (2003, p. 131, p. 133) and Libby and Lindsay (2010, p. 70, p. 72).⁷

Table 3.10 Whether revisions are made to the initial budget and revision method (n = 256) [Q2 (G)]

Table 3.11 reports the results of questions on the company-wide performance measures that are most important for budgeting. The question items were created with reference to Miki et al. (2003, p. 132) and Yokota and Senoo (2011, p. 70).

Table 3.11 Most important company-wide performance measures in budgeting (n = 247) [Q2 (H)]

Table 3.12 shows the results of questions about the properties of the company-wide performance measures that are most important for budgeting. In these questions, the focus was placed on the precision and sensitivity of the performance measures. Precision is the degree that performance measures are affected by factors outside the manager’s control, and sensitivity is the degree that performance measures are influenced by manager behavior (Moers, 2006, p. 899). The questions were created with reference to Moers (2006, pp. 920–921). Each item in Table 3.12 was measured on a seven-point scale from “1: not at all” to “4: neutral” to “7: absolutely agree.” All questions related to the precision of performance measures are reverse scored; thus, the numbers in the table have been reversed.

Table 3.12 Properties of company-wide performance measures most important for budgeting [Q2 (I)]

Table 3.13 shows the results of questions about performance evaluation methods and the existence of budget-based performance evaluation for organizational unit managers. Note that Number 1 in Table 3.13 (Question 2 (J)) is a question regarding evaluation based on a “fixed performance contract” (Hope & Fraser, 2003). The questions were created with reference to Libby and Lindsay (2010, p. 73).

Table 3.13 Performance evaluation methods and existence of budget-based performance evaluations for organizational unit managers (n = 250) [Q2 (J)]

Table 3.14 presents the results of questions on the degree of linkage between the results of budget-based performance evaluations for organizational unit managers and reward.⁸ The questions were created with reference to Yokota and Senoo (2011, p. 72) and Bouwens and van Lent (2007, pp. 691–692). The items in Table 3.14 were measured on a seven-point scale, from “1: no influence at all” to “4: neutral” to “7: extremely influential.”

Table 3.14 Degree of link between results of budget-based performance evaluations for organizational unit managers and reward [Q2 (K)]

Table 3.15 shows the results of questions about budget culture. Budget culture is a concept developed by Anderson and Lillis (2011) based on Marginson and Ogden (2005) and Van der Stede (2000). It is categorized into four sub-concepts: budget firmness, management attention, target difficulty, and reward link. The questions were created with reference to this in Anderson and Lillis (2011, p. 1370). Each item was measured on a seven-point scale from “1: not at all” to “4: neutral” to “7: absolutely agree.”

Table 3.15 Budget culture [Q2 (L)]

3.4 Business Environment of Major Organizational Units (Question 3)

Many studies have revealed that the business environment affects MCS (Chenhall, 2007). However, since modern Japanese companies have various organizational units, the business environment may differ for each organizational unit. Therefore, respondents to this survey were asked to identify the company’s major organizational units.

Then, as shown in Table 3.16, the relationship between company-wide budgeting and budgeting for each major organizational unit was explored. The results show that in almost all companies, each major organizational unit’s system is implemented based on the company-wide system for budgeting.

Table 3.16 Relationship between company-wide budgeting and budgeting in major organizational units [Q3 (A)]

In Question 3, to clarify how the business environment impacts MCS, perceived environmental uncertainty as the external business environment and the importance of a strategy to differentiate the internal business environment was investigated for each major organizational unit.

Table 3.17 shows the results of survey questions on perceived environmental uncertainty. The questions were created with reference to Ekholm and Wallin (2011, p. 158) and Hoque (2004, p. 499). Each item was measured on a seven-point scale of “1: very unpredictable” to “4: neutral” to “7: very predictable.” Note that as these questions are reverse scored, the numbers in the table have been reversed.

Table 3.17 Perceived environmental uncertainty [Q3 (C)]

Table 3.18 reports the results of questions on the importance of differentiation strategies. The questions were created with reference to Anderson and Lillis (2011, p. 1366).⁹ The items were measured on a seven-point scale, from “1: not important at all” to “4: neutral” to “7: extremely important.”

Table 3.18 Importance of differentiation strategies

3.5 Characteristics of Major Organizational Units (Question 4)

Importance has been placed on the relationship between organizational characteristics and MCS (Ferreira & Otley, 2009; Malmi & Brown, 2008). In addition, new concepts and measurement scales have been proposed to capture the characteristics of advanced organizations (Anderson & Lillis, 2011; Simons, 2005).

To clarify the relationship between organizational characteristics and MCS, Question 4 investigates the levers of organizational design and corporate frugality, which are newly proposed concepts, as features of major organizational units.

Table 3.19 presents the results of questions on corporate frugality. Corporate frugality is a concept developed by Anderson and Lillis (2011) to an enduring corporate trait of consistent, disciplined management of spending to achieve long-term strategic objectives and sustainable profits (Anderson & Lillis, p. 1350). This concept is categorized into three sub-concepts: spending discipline, resourceful reuse, and deferred gratification. The questions were created with reference to Anderson and Lillis (2011, p. 1358). Each item was measured on a seven-point scale from “1: not at all” to “4: neutral” to “7: absolutely agree.”

Table 3.19 Corporate frugality [Q4 (A)]

Table 3.20 shows the results of survey questions on the levers of organizational design (organizational mechanisms). The questions were created with reference to the description of an interactive network, which was proposed by Simons (2005) as one of the levers of organizational design. Each item was measured on a seven-point scale from “1: not at all” to “4: neutral” to “7: absolutely agree.” However, since this concept and measurement scale are not clarified in Simons (2005), Cronbach’s alpha coefficient is not reported in Table 3.20.

Table 3.20 Levers of organizational design (organizational mechanisms) [Q4 (B)]

3.6 Leadership of Managers [Question 5 (A)]

In recent years, several studies have analyzed the relationship between leadership and MCS (e.g., Abernethy et al., 2010). In addition, managers of Japanese companies have adopted various leadership styles (Yokota et al., 2012).

In Question 5 (A), leadership styles of consideration and initiating structure, and transformational leadership were studied to clarify the relationship between leadership and MCS concerning the leadership of organizational unit managers.

Table 3.21 shows the results of survey questions about leadership styles of consideration and initiating structure of managers of major organizational units. The questions were created with reference to Abernethy et al. (2010, p. 14). Table 3.22 shows the results of survey questions about transformational leadership of managers of major organizational units. The questions were created with reference to Yokota et al. (2012, p. 128). Transformational leadership can be categorized into four sub-concepts: idealized influence, inspirational motivation, intellectual stimulation, and individual consideration. In Tables 3.21 and 3.22, each item was measured on a seven-point scale from “1: not at all” to “4: neutral” to “7: absolutely agree.”¹⁰

Table 3.21 Leadership styles of consideration and initiating structure of managers of major organizational units [Question 5 (A) First part]

Table 3.22 Transformational leadership of managers of major organizational units [Question 5 (A) Second part]

3.7 Managerial Behavior [Question 5 (B)]

Managers are central to the concept of MCS, and it is thought that there are various interactions between managerial behavior and MCS (Ferreira & Otley, 2009; Merchant & Otley, 2007). The discussion of the levers of organizational design in Simons (2005) assumes that managerial behaviors play an important role in network construction.

In Question 5 (B), to clarify the relationship between managerial behavior and MCS, behaviors of managers of major organizational units that contribute to network construction were examined.

Table 3.23 shows the results of questions about the degree that managers of major organizational units encourage subordinates to construct personal networks. The questions were created with reference to Takada and Yokota (2010). Table 3.24 shows the results of survey questions on the levers of organizational design (behavior of managers of major organizational units). The questions were created with reference to Simons (2005). Each item in Tables 3.23 and 3.24 was measured on a seven-point scale from “1: not at all” to “4: neutral” to “7: absolutely agree.” Since these concepts and measurement scales have not been clarified in previous studies, Cronbach’s alpha coefficient was not calculated in either Table 3.23 or Table 3.24.

Table 3.23 Degree that managers of major organizational units encourage subordinates to construct personal networks [Question 5 (B) First part]

Table 3.24 Levers of organizational design (behavior of managers of major organizational units) [Question 5 (B) Second part]

3.8 Conclusion

This study reports the results of a mail-based questionnaire survey conducted to clarify the status of MCS in Japanese companies concerning budgeting, business environment, organizational characteristics, and managerial leadership and behaviors. In the future, the plan is to conduct empirical research to analyze these results in detail.