Managerial Discretion - Essay Example

Introduction Managerial discretion has long been considered a tremendously important strategic business factor. "The importance of managerial discretion in the operations of the large corporation has been widely recognized" (Williamson 1963). Thus, it is important to consider and understand the scope and constraints on discretionary behavior by managers, as well as the effectiveness of those constraints. The exercise of discretion by managers may be constrained by numerous factors, some of which being universal and others depending on the context of a specific organization and circumstance. These include the manager's position within the structure of the organizational hierarchy, the amount of authority invested in the manager at whatever level, the ethical rules and culture of the organization that bind managerial conduct and decision-making, legal constraints, and general management styles such as laissez-faire or micromanagement. The ability of managers to act with discretion also depends on the level of discretion that would be considered appropriate in a given situation. Still other influencers of managerial discretion involve such considerations as age, education level, gender, length of tenure, the size of an organization, and the nature of the industry in which it operates (Finkelstein & Hambrick, 1990; Haleblian & Finkelstein, 1993; Hambrick & Abrahamson, 1995; Montanari, 1978). These constraints vary in effectiveness, relying to a large extent on the leadership ability of a manager, most importantly the degree to which he/she is able to effectively wield influence within the organization and achieve buy-in from stakeholders. In effect, organizational constraints on managerial discretion are effective when they are imposed on managers who, for one reason or another, do not seek to circumvent them. For example, a manager may have a financial incentive to submit to discretionary constraints, or may be compelled to do so out of concern for his/her job security. Certainly, a manager's discretionary behavior is an important tool in his/her management toolkit. Absent that ability, a company would encounter myriad problems relating to a failure to preserve the confidentiality of sensitive information both internally and externally. Moreover, managers need to be able to exercise their own judgment in hiring decisions, strategic planning, effective administration and resource allocation decisions. The consequence of not allowing such discretion would be a lumbering organization that is unable to take nimble actions that can keep it competitive in a global marketplace. Absence of managerial discretion would lead to a heavily bureaucratized company that takes much more time to make and implement strategic decisions than its competitors and thus would fall by the wayside. At the same time, allowing managers to run amok with their own preferences can be equally dangerous by setting up a situation in which conflicting decisions are made at different levels of an organization that end up stalling progress. The effective organization strikes just the right balance by allowing a high degree of managerial discretion while instituting appropriate constraints to keep the business functioning effectively. Defining Discretion Key (1997) defines discretion as "a belief that individuals can influence their environment. The concept of discretion, originally borrowed from the judiciary, involves decision making that is guided by individual principles and beliefs unfettered by external control" (par. 13). Thus, discretion is necessarily a subjective determination that a particular manager has a range of options available to him/herself. Key (2002) further maintains that "Discretion is based on the belief that one has responses available with which to influence the environment. Individual perception influences whether or not an individual believes there are actions available to him or her" (par. 2). This subjective determination has been described as "perceived latitude of action." The concept of managerial discretion often arises within the context of organizational ethics and corporate social responsibility. According to Key (1997), "It is reasonable to posit that organizational misdeeds, and ethical failures and successes, are the consequence of complex series of individual actions. It is the exercise of discretion - acts or failures to act in organizational settings-which played a role in disastrous incidents such as the failure of the Barings Bank, the Dow Corning and PharMor bankruptcies, the Bre-X Mineral gold fraud, and a variety of other organizational events deemed 'irresponsible' and which engender intense study" (par. 15). Accordingly, the importance of determining the appropriate constraints on managerial discretion cannot be over-stated, as such a determination can have serious repercussions for the business. As Key asserts, "corporate social responsibility involves managerial responses to events in the internal and external environment. Managerial responses are often chaotic, meaning not formally planned or coordinated" (par. 16). Thus, managerial discretion can represent a tremendous risk to overall organizational security. The importance of managerial discretion to the strategic success of an organization is tremendous. There is very real potential for effective application of discretion to benefit an organization. At the same time, managers who are ineffective in their use of discretion can deal a profound setback to a business organization. "The abuse of managerial discretion and the failure of managers to exercise discretion can be very costly to organizations. For this reason, there has been a renewed interest in understanding managerial discretion. The fraudulent reporting of financial data by managers at Enron Corporation illustrates what can happen when managers step beyond appropriate discretionary boundaries, while the current litigation embroiling Arthur Andersen represents what can happen when managers fail to exercise discretion when they are faced with ethical issues" (Key 2002, par. 1). The corporate scandals of recent years, particularly in the United States, but certainly elsewhere, are indicative of the potential of discretion to derail a company's strategic plan. It is essential that a company get a handle on the extent to which managerial discretion is accommodated and monitored. This is a delicate balance, because too little discretion can be as harmful as too much. Factors Influencing Discretion There are numerous factors influencing a manager's exercise of discretion. "Researchers have hypothesized that individual discretion is a function of individual and organizational variables, and that there are significant differences in individual discretion" (Key 1997, par. 17). To be sure, managerial discretion varies from person to person, and from organization to organization. Nevertheless, there are several key elements that appear to be common delineators of that discretion. First, age has been found to affect the extent to which managers exercise discretion in their jobs. Some studies have suggested that "older managers are less innovative than younger managers and that corporate growth is associated with managerial youth. These findings suggest that older managers are less willing to consider risky strategies, and may imply that older executives may exercise less discretion than younger managers" (par. 18). With age often comes resistance to change, which can dissuade a manager from trying new and innovative ideas that might benefit the organization. Such a finding is perhaps not surprising for many, considering that older managers would tend to be more established in their jobs and might be more emotionally attached to the protocols of the organization than younger managers would be. Further, younger managers may be somewhat more zealous about trying to make an impression within the organization; and so exercising discretion gives them the opportunity to stand out and perhaps advance, assuming the results are positive. Clearly, the impact of age on managerial discretion is also related to job tenure, as older people may tend to have greater seniority within the company, and be more likely to have climbed the ranks of the management hierarchy. "Job tenure has . . . been hypothesized to affect discretion. It has been argued that executives with greater tenure will be less flexible, consider fewer options, and hence exercise less discretion" (par. 17). Thus, just as there is a negative correlation between age and use of discretion, there is also a negative correlation between length of tenure and use of seniority for many of the same reasons. Educational attainment is yet another factor influencing the exercise of a manager's discretion. "Level of education has consistently been found to be positively associated with reception to innovation; thus, level of education may affect other aspects of the decision making process such as discretion" (par. 17). Innovation is a tremendously important variable relating to managerial discretion, because it implies a level of independent thinking and risk-taking that are also important ingredients in the exercise of managerial discretion. Those who are more highly educated may tend to be more receptive to innovation because they may have a greater understanding of the potential associated risks and benefits, and a higher aptitude for conducting the risk/benefit analysis necessary to determine whether a particular innovation effort is worth pursuing. Consequently, they would be more confident in making the decision to pursue an innovation, which would be an exercise of their discretion. Gender has also been found by some studies to be a determining factor in the exercise of managerial discretion. "There have been inconsistent findings on the role of gender in the ethical aspects of decision making. Some studies suggest that women consider more ethical options in their decision making process, and are more likely to exercise discretion. Other studies have not found significant differences in decision making which can be attributed to gender" (par. 17). Even though these studies have conflicted somewhat, there is ample reason to think that gender would arguably play a role in determining the extent to which managers would be inclined to exercise discretion. The divergent life experiences of men and women position them to think differently in many aspects of life, both personal and professional. Men and women have been found to utilize different portions of their brains when solving problems relating to the same situation. Thus, it is reasonable to assume that men and women would act differently in a managerial context that potentially calls for the exercise of discretion. Another key variable that can be predictive of use of discretion is the personality trait known as "locus of control," which considers whether a person makes decisions based on their own internal influences or based on those of the external environment. Locus of control has been found to have a negative correlation with use of discretion by managers. "As with discretion, locus of control measures an individual perception of one's power to influence events and have impact on the external environment. Research suggests that internally-oriented individuals (low scores) perceive that they have more control over the environment and may thus perceive that they have greater discretion, while externally-oriented individuals (high scores) perceive they have less control over the environment and may perceive that they have less discretion" (par. 19). Essentially, the level at which a person feels constrained by their environment in the decision making process is indicative of the extent to which he/she feels comfortable exercising discretion. This is certainly a logical conclusion to draw. That being said, there is a clear distinction between discretion and locus of control. Discretion "involves proactive judgments while locus of control involves reactive judgments. Locus of control focuses on post-hoc attributions that individuals make regarding the causes of events, while discretion focuses on a priori judgments that individuals make regarding what actions are available to them. Thus, discretion may be influenced by attributions that individuals may make regarding their previous experiences, but it is not synonymous with locus of control" (par 20.). In effect, while there is a correlation between discretion and locus of control, the terms are not interchangeable. Organizational Culture and Discretion One of the most important constraining factors on discretionary behavior by managers is the strength of an organization's culture, particularly with regard to ethics. "Culture provides individuals with information about what is normative in an organization and can influence individual decision making. Rules and policies, formal and informal, influence organizational culture. Belief about the ethical policies of an organization has been defined as organizational ethical culture. Scholars have demonstrated a link between organizational culture-specifically ethical policies of organizations-and decision-making behavior" (par. 21). A strong organizational culture is therefore based upon well-defined rules and policies in many areas, including ethics. There is a strong correlation between such a culture and the extent to which managers feel constrained in the exercise of discretion. "Individuals who believe that the organization's ethical policy is clearly articulated and consistently enforced may feel their discretion is constrained. Conversely, individuals who perceive their organizational culture as very ethical may view this as a clear message from the firm that they should be proactive in the area of ethics, thus enhancing their discretion. In sum, beliefs about an organization's ethical culture may have implications for discretion in individual policy decisions" (par. 22). Thus, the ways in which managers respond to a strong ethical culture will vary based on their perception of the mandate provided to them by their company as far as enforcement of ethical standards and guidelines. Conclusion The importance of managerial discretion to modern companies is substantial, and has long been recognized as such. Discretionary behavior by mangers is essential to the strategic operation of a company; but at the same time allowing unfettered discretion can be hugely detrimental to the well-being of a corporation, as evidenced by the scandals that have taken place in recent years in the United States and elsewhere. While managers must have the ability to analyze a situation and determine and appropriate course of action, there must be some guidelines - or constraints as it were - placed on that discretion in order to protect the company from these types of damaging developments. Several studies on the scope and limits of managerial discretion have found that there are several variables influencing and limiting the exercise of discretion in modern business. These include such factors as age, length of tenure, educational attainment, gender, locus of control, and organizational culture. Each of these factors has a direct impact on the extent to which managers feel free to exercise discretion, or not; and consequently they affect the success or failure of a business. Ultimately, managerial discretion is a critical balancing act for any business that seeks to compete successfully in today's global business environment. References Finkelstein, S., & Hambrick, D. C. 1990. 'Top-management-team tenure and organizational outcomes: The moderating role of managerial discretion', Administrative Science Quarterly, vol. 35, pp. 484-503. Haleblian, J., & Finkelstein, S. 1993, 'Top management team size, CEO dominance, and firm performance: The moderating roles of environmental turbulence and discretion', Academy of Management Journal, vol. 36, p. 844. Hambrick, D. D., & Abrahamson, E. 1995, 'Assessing managerial discretion across industries: A multimethod approach', Academy of Management Journal, vol. 38, pp. 1427-1441. Key, S. 1997, 'Analyzing managerial discretion: An assessment tool to predict individual policy decisions', International Journal of Organizational Analysis, vol. 5, no. 2, p. 134. Key, S. 2002, 'Perceived managerial discretion: An analysis of individual ethical intentions', Journal of Managerial Issues, vol. 14, no. 2, p. 218. Montanari, J. R. 1978, "Managerial discretion: An expanded model of organizational choice', Academy of Management Review, vol. 3, pp. 231-241. Williamson, O. 1963, 'Managerial discretion and business behavior', American Economic Review, vol. 53, no. 5, p. 1032. Read More