Accountability and KPI in M-Form Organization - Essay Example

RUNNING HEAD: Finance and Accounting Accountability and KPI in M-Form Organization of Part A. 1. Introduction This paper seeks to critically evaluate the claim that accountability along with Key Performance Indicators (KPI) is to vital "to get things done" and to running an M-form business. The paper discusses KPI and its importance, accountability and its importance and then connects the two. The combined ideas would then particularize M-form organizations the latters need to have KPI and accountability to be effective. 2.1 KPI and its importance to the organization. KPI are those that measure how organizations progresses towards the attainment of its goals. It can be viewed as connecting the company’ vision and mission with corporate objectives. Objectives need to be realized and achieved by an organization as way of saying and organization has reached what it wants to reach. One the most important indicators are the profitability target of the business. To support profitability, the company must have its good liquidity and acceptable financial leverage too. Thus, it expected that a company would performance measures on such aspects. Other key performance indicators would include a certain market share, customer satisfaction and other aspects which the business must be able to measure. The essence of indicator is measurability, thus accounting information normally takes a centre stages in many organizations. 2.2. Accountability and its importance Accountability means being answerable to the consequences of one’s actions in business organization by virtue of the exercise of power given. Accountability can categorized personal or organizational. Personal accountability is preparedness to have responsibility for the consequences of a person’s actions (Lachman, 2009). The leaders and managers of organizations need the same in order to be able to deliver results. They could do the same by first setting a measurable a target to investors that would amount to a promise or commitment. This is where the concept of accountability would have its value at is would mean the leaders and managers can be considered reliable, dependable, or trustworthy in their promises. That what they speak or tell or promise as the organization takes risk its activities would come about. Thus, accountable people are known to have integrity. Investors would therefore expect prudence, competence and wisdom from leaders on how they will deliver to their promise. If they promise a too rosy or optimistic picture, they could lose their reliability to investors. They would lose their being honourable. In effect to have accountability is to have honour which must be had in the responsibility to tell the truth and to have fidelity to their promise. A corporate report that something external and went beyond their control could be acceptable to still to investors and stockholders if such was the truth and these leaders or managers have indeed been faith to their commitments but investors would understand if them if the latter have integrity. It is also this integrity that relationships between investors and business managers and leaders are created and made to flourish over the years if there is accountability. Accountability therefore includes facing the moral and legal consequences of one’s actions if the latter happen (Lachman, 2009). To be accountable therefore is be honourable. People can even give higher value to honour than life. This is the reason why the Japanese call it defence of honour when they commit suicide. If the CEO is not honest and will honour his promise to the shareholders, he would have the tendency to lie to shareholder and make false reports. Even the key performance indicators will not be truthful and everything will be a game of false hood. Without accountability there is no responsibility that cab be demanded from the managers. If managers do have not honours or they do not value honour they will be reduced to being like animals since they will mind whether something is wrong or not or whether something is ethical or not. Having discussed personal accountability, it’s easier to connect accountability to organizational level. An organization acts a group where shareholders elect the members of the board who will manage the corporation for them. Developing therefore an accountable organization is also a requirement toward shareholders to deliver results (Lachman, 2009). The decision would definitely require the moral courage to have activities in organizations documented, recorded and preserved for reporting to stakeholders. This is the reason why the all members of the board of directors should be not all part of the executive officers. Some directors should be independent from the CEO and the executive function to qualify some directors to be members of audit committee and compensation committee. To have a CEO to head the audit committee and compensation committee would violate accountability requirement as human nature to be selfish will not be checked. Organizational accountability could also be brought down to low ranking employee by defining their functions in such a way that will honour and make operational the good principles of internal control. Accountability is what is involved when the corporation makes rules of conduct in the organizations where there limits on how people in organizations will behave. 2.3. How KPI is related to accountability? Performance measures imply the attainment of measurable objectives. Objectives are quantified because their measurable would allow organizations to translate the corporate vision that must be attained. If the visions are attained organizations are deemed to have attained their purpose or vision (Pearce and Robinson, Jr. 2004). Objectives are to be realized in the form of KPI made clear to people who should have the authority to use resources and being responsible for the consequences from the use of these resources in activities including the meeting of corporate objectives as monitored by KPI. 2.4. The importance of accountability and KPI with M-form business M-form refers to multi-divisional business where an organization consists of relatively of large number of somewhat autonomous units (Eroglu, 2008). There is however still a setting of target from the centre to allow the working together of the units in accomplishing the organizational objectives. The claim that accountability along with Key Performance Indicators (KPI) is to vital "to get things done" and to running an M-form business can be easier to defend after the combining the ideas. Since under M-form business would entail flat rather than vertical organization, the autonomy must have with it accountability for results from the leaders of the autonomous units which can be accomplished by having measurable targets or key performance indicators for each units. This would have the effect encouraging local and independent decision making and better accountability. This analysis may found consistent with presence of profit centres managed by their own senior management under M-form firms. Thus, in such multi-divisional firm, responsibility for management is decentralized to separate product lines or units operating in specific market segments (Martin, and Parker, 1997). Each division would have reason to ensure the profitability of each unit and would have better position to negotiation for the allocation of common cost with other units. To aim for reduced cost that would support better profitability would held decision making better in making sure that they are kept running in relation with the objective of the whole organization. From the vision and mission statements of the combined parent and subsidiaries, the latter may be allowed to operate as separate business units with their own KPI and managers which are accountable to the whole group whose board of directors have the central and ultimate control of the organization as far as meeting corporate objectives are concerned. Vision statements normally signify direction for inspiring people in the organization. The could be taken as expression of organizations intentions that could change mind-sets of people who want change direction (Martin, and Parker, 1997) if there is a need to do so as influenced by the internal and external environment of organizations (Pearce, and Robinson, Jr. 2004). These statements would be best complemented by mission statements which express the purpose of the organization. Such vision statements are however translated into measurable objectives which the company would use as KPI in demanding accountability for results. 3. Conclusion This paper has proven the accountability is important and the same must be connected with KPI to get things done in organizations and to running M-form business. That accountability or the willingness to be bound by the consequences even to the extent of allowing oneself to be legally or morally liable for any wrong doing or done or breach of promise or commitment must be connected with measurable objectives or otherwise known as KPI in things need to be done. M-form of business would need most combination of accountability and KPI as the autonomy of the business units can only be best evaluated if the presence of measurable KPI from accountable people in the organization towards stockholders and accountable organization towards the investors and creditors. Part B - By supporting your answer with relevant calculation, assess if it is financially beneficial for Virginia Railways to begin the new contract on 31 December 2011. It appears that it is beneficial for Virginia Railways to begin the new contract on December 31, 2011 since the net present value of cash flow was found negative at £4,545, 000. See Appendix A. This would mean it is advantages to have to contract than not in the absence of other options to invest the money. Given the cost of capital at 10% used as discount rate, it would mean that the company can alternatively invest the money that would generate a return at 10% cost of capital. By generating a positive net present value of the contract at 10% cost of capital, the project or the new contract is deemed acceptable. The use of the net present value in discounting the cash flow of the project should be deemed a more scientific basis than getting the accounting rate of return of the proposal. The same NPV method considers the time value of money while the ordinary accounting rate of return will disregard the same. Note the preparation of cash flows include the computation of the needed revenues and related expenses from the project. There is also the need to get the contribution margin from the revenues are incremental cash flows from the proposed contract. There was the need to get the net operating cash flow which is computed by deducting the cost and expenses from revenues to get the net income. The net income must be reduced by 30% taxes to net the net income after tax. The net income after tax will have add back depreciation expenses as the latter do not represent actual cash outflows to get the net operating cash flows. The initial investment of £10 million was considered as outflow and the salvage value of £2 million was an inflow also at the end of five years. It was also important to get the terminal value of the £300,000 pre-tax cash inflow to perpetuity by multiplying the same 70% and dividing afterwards the result by the 10% cost of capital. After taking the net cash flows from the NPV of cash flow for five years and present value of the terminal value, the total was discounted at 10% cost of capital and the resulting net present value was positive. See Appendix A. References: Lachman (2009), Ethical challenges in health care: developing your moral compass, Springer Publishing Company, Jun 15, 2009 Martin & Parker (1997). The impact of privatisation: ownership and corporate performance in the UK, Routledge, page 190, Pearce, J._ and Robinson, Jr. R. (2004), Strategic Management. Ninth Edition. Eroglu (2008). Multinational enterprises and tort liabilities: an interdisciplinary and comparative examination. Edward Elgar Publishing Read More