The FTX meltdown is a textbook example of the disastrous financial impact that can ripple through an economy when a single business fails to establish adequate management control systems (MCS) to govern its corporate strategy, accountability and risk management.
The collapse of the cryptocurrency exchange forced it into bankruptcy, cost investors billions of dollars and rocked the crypto market, triggering federal investigations and creating renewed calls for tighter regulations on the industry just as Wall Street began embracing de-centralized digital currencies. John J. Ray III, who replaced FTX founder Sam Bankman Fried as CEO in the wake of the bankruptcy filing, identified negligent and potentially fraudulent management practices as the root cause of the debacle.
“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,” he said.
Luckily, MCS are built to help professionals achieve organizational goals, minimize errors, evaluate standards accuracy and improve overall organizational performance. An advanced business degree can equip graduates with knowledge in the area of MCS technology.
What Types of Management Controls Are There?
Management controls are systems that set standards for efficiency, performance and compliance; monitor operations to measure performance against those standards; identify reasons for deviations and provide business leaders with insights to optimize processes and make corrections.
Adobe describes the following types of MCS:
- Feedback measures past operations to measure performance against expectations.
- Concurrent analyzes performance in real time, enabling managers to sync operations to standards dynamically.
- Feedforward looks ahead to identify potential problems and enables corrective action to head them off.
- Behavioral works across departments to evaluate employee productivity and decision making.
- Financial predicts performance by measuring sales, profits and assets against budgetary metrics.
- Nonfinancial provides leaders with insights into other factors for success, such as customer satisfaction and employee engagement.
In the case of FTX, which positioned itself as a “virtuous investor,” controls were based on the largely undefined Environmental, Social and Governance (ESG) model. ESG purports to measure performance on the good companies do — helping save the rainforest, for instance, or advancing animal rights — rather than on standards for instilling organizational discipline and transparency.
“FTX seems to have failed in every way possible,” a Forbes analysis concluded.
What Are the Characteristics of an Effective MCS?
The foundation of an effective MCS is integration with planning development. Establishing performance standards based on strategic goals as they are formulated enables leaders to develop action plans to achieve the standards and performance metrics.
“At the start of the process, planning plays a major role in shaping the control system. By the end of the process, however, the later stages of control exert a primary influence of planning,” according to Business Management Ideas, an organizational research and document archive.
BMI identifies eight characteristics of effective management controls, including the following:
- Acceptability: MCS only work if company personnel from the C-suite to the factory floor understand the purpose and have a stake in developing it.
- Focus: Critical control points that support a company’s success include sales, revenue, inventory and supply chain management and employee churn.
- Cost effectiveness: The benefits of monitoring and measuring performance must outweigh the costs of an MCS, which can include everything from data management to employees who manage the system.
Above all, accuracy is the most critical factor in the effectiveness of an MCS. Imprecise measurements and errors in analyzing and interpreting data defeat the entire purpose of management control: to provide business leaders with insights that optimize accountability, transparency, productivity and profitability.
Who Develops and Implements MCS?
While MCS is an organization-wide, collaborative process, key players in its design include senior operational and strategy managers, business development directors and financial analysts. To acquire the skills and expertise needed for such roles, many earn a Master of Business Administration (MBA) that includes studies in implementing effective MCS.
The MBA general program offered online by Pittsburg State University, for instance, equips graduates for the high-demand roles in MCS development and optimization through courses that:
- Focus on the design, evaluation and effective deployment of management control systems using a case-based format.
- Explore management tools such as Total Quality Management (TQM), Benchmarking, ISO 9000-14000, Lean Manufacturing, Six Sigma, Design of Experiments (DOE), Failure Mode and Effect Analysis and Statistical Process Control.
- Provide case-method studies and simulations of decision-making in all management functions to implement strategy-based operational policies.
Graduates of Pittsburg State University’s online MBA program will be well-prepared for the business sector as employers seek individuals with MCS expertise. Its course titled Management Control Systems “focuses on the design, evaluation, and effective implementation of management control systems using a case-based format.”
Learn more about Pittsburg State University’s online MBA program.