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In this study, we examine the importance of goal congruence in management control systems (MCS) using a theoretical framework that draws upon both agency theory and stewardship theory. Two aspects of goal congruence are considered: (1) a manager’s voluntary acceptance of an organization’s strategy, i.e., principal-agent alignment, and (2) manager consensus regarding their organization’s strategy, i.e. agent–agent alignment among the potentially divergent interests of multiple agents. We demonstrate the impact of managers’ strategy acceptance (consensus) on four measures of economic benefit: inputs (resource accumulation), outputs (volume of services), operating efficiency (output per unit of input), and cost structure flexibility (adaptability to volume). The results indicate that greater manager consensus is associated with hospitals that accumulate more resources and provide higher levels of service with greater efficiency and additional cost structure flexibility. Our evidence also indicates that hospital managers (MDs, nurses and CFOs) are not motivated by individual opportunism alone, and that goal congruence does not depend solely upon selecting the right performance measures and incentives to remove inefficiencies and moral hazards. We conclude that goal congruence based upon both strategy acceptance and reinforcing incentives may result in MCS that are less costly and more effective.

Prior research has examined the importance of incentive contracts and performance measurement in achieving principal-agent goal congruence (Ittner and Larcker, 2001 and Luft and Shields, 2003). However, goal congruence among managers does not depend solely upon selecting the right performance measures and incentive structures. Stewardship theory provides a complementary view of why agents pursue cooperative actions instead of opportunistic actions ( Donaldson and Davis, 1991). In contrast with agency theory, stewardship theory posits that agents voluntarily exhibit cooperative or pro-organizational behavior because they place higher value (greater utility) on cooperation than self-interested behavior. Relatively little research has examined whether voluntary goal congruence described by stewardship theory affects a firm’s financial performance. In this study, we consider two aspects of goal congruence: (1) a managers’ voluntary acceptance of an organization’s strategy (alignment of principal-agent interests) and (2) manager consensus regarding their organization’s strategy (alignment of potentially divergent interests of multiple agents). 1 Strategy represents a key element of management control systems (MCS), and this study demonstrates the impact of managers’ acceptance of that strategy on four measures of economic benefit: inputs (resource accumulation), outputs (volume of services), operating efficiency (output per unit of input), and cost structure flexibility (adaptability to volume). 2 Agency theory illustrates that failure to align goals among and between a firm’s principals and agents reduces organization value (lower economic performance) through increased information costs (monitoring or bonding), operating inefficiencies, or other manifestations of moral hazard. Managers rely upon various performance measures and financial incentives to increase goal congruence and reduce moral hazard, but the resulting MCS are economically effective only when the cost of control (i.e., incentives and monitoring costs) is less than the cost of divergent self-interested behavior. Feltham and Xie (1994) emphasize two characteristics of performance measures used in incentive contracts: risk sharing (agents assume risk for uncontrollable factors that affect their performance), and distortion (rewarding A while hoping for B).3 Agents’ risk sharing declines when performance measures capture more directly their individual actions (gross sales by salesperson), whereas risk sharing increases when performance measures capture the joint outcome of multiple agents’ actions (total contribution margin). Measurement distortion occurs when agents act to increase a performance measure without simultaneously increasing the value of the firm. Agency theory concludes that when risk sharing and measurement distortion decline, contracting may become more efficient, and firm value should increase. Managers, however, are not always motivated by individual opportunistic purposes. For example, managers may realize greater utility by maximizing organizational performance than they would through individualistic, self-serving behavior. Simons (2000) suggests that managers’ personal utility increases when they make a contribution, do the right thing, realize goal congruence, and/or avoid risk. Stewardship theory posits that the cost of behavioral compliance (monitoring and incentive) will decline when managers voluntarily behave in ways that are consistent with organizational objectives. In some situations, pro-organizational, collectivistic behavior may have higher personal utility than individualistic, self-serving behavior (Davis et al., 1997). As indicated by Simon (1991, p. 41), loyalty, organizational identification, and organizational pride can act as powerful motivators for employees and reduce agency costs: “Identification becomes an important means for removing or reducing those inefficiencies that are labeled by the terms moral hazard and opportunism.” When managers act as stewards, they work toward organizational collective ends in order to meet their personal sense of satisfaction. As shown in Fig. 1, we develop a research framework that draws upon both agency theory and stewardship theory to address the economic benefit of goal congruence. Prior research has attempted to validate one or the other of these theories as the one best way to design MCS. Previous results have been mixed, indicating both the need to reconcile differences and the potential benefit from integrating the two theories (Bénabou and Tirole, 2003 and Falk and Kosfeld, 2004). Managers may conduct themselves as self-interested agents or as pro-organizational stewards. When managers accept their firm’s strategic plans, voluntarily or otherwise, goal congruence will improve and financial performance should also improve. Alternatively, when managers do not accept their firm’s strategic plans, principals may impose MCS that restrict agents’ actions in an effort to reduce losses resulting from divergent agent interests.Fig. 1 also describes our research design and illustrates how we extend the literature on goal congruence in three ways. First, we develop a measurement scale that captures the extent to which individual managers accept their organization’s strategy (i.e., strategy acceptance). Second, we test for the agreement between managers that their firm’s strategy has or has not been accepted throughout the organization (i.e., manager consensus). We believe that manager consensus represents an important component of effective goal congruence in that higher levels of agreement among managers should facilitate strategic decision-making and improve overall organizational performance. As cited by Kaplan and Norton (2001, p. 1), strategy implementation (acceptance) may prove more important than the strategy itself in achieving higher levels of performance and firm valuation. Third, we examine whether manager consensus affects the four measures of financial performance (i.e., economic benefit) previously identified. We control for the potential effects of operational objectives (profit/nonprofit) and system affiliation (system/nonsystem). We study the hospital industry because health care managers often sacrifice personal gain for organizational success (e.g., serving the public good by providing a wider range of treatments, or serving a wider range of patients). Moreover, nonprofit organizations continue to dominate the industry, which indicates that financial performance may not be the primary goal of these organizations, at least in terms of wealth maximization (Phillips, 2003). Additionally, the allocation of national resources to health care is a significant public policy issue, as is the efficient use of those resources. Not only is a substantial portion of health care cost paid for through government programs and agencies, but we have also seen a continued growth in managed care contracting. To the extent that greater goal congruence can increase the efficiency of hospital operations, fewer resources would be necessary to deliver the same level of health care services, and/or more resources would be available for a wider range of services. Three primary professional groups typically exist within each hospital: physicians, nurses and administration. Each group is represented by an individual with direct access to the Chief Executive Officer and typically the Board of Directors. In our study, physicians are represented by the Medical Director (MD), the Director of Nursing (DN) represents the nursing staff, and we use the Chief Financial Officer (CFO) as a representative of hospital administration. These individuals evaluate hospital decisions from the perspective of their constituencies, and their perspectives may not agree. Ultimately, goal congruence should align different perspectives. In our study, we first examine whether perspectives differ among these professional groups, and then we examine whether goal congruence (alignment of perspectives) affects financial performance. We conducted our study using data obtained from a national survey of hospital managers (MDs, DNs and CFOs), and an archival financial performance database from the American Hospital Association. Our results indicate that overall hospital performance improves when managers accept and support their organization’s strategy, thereby achieving goal congruence and manager consensus. More specifically, levels of inputs increase (more resources), outputs increase (higher volume of services), cost structure flexibility increases (greater adaptability to volume), and to a lesser extent, operating efficiency increases (more output per unit of input). Our analysis of strategy acceptance among CFOs and DNs produced some additional and unexpected results. Cooperative behavior among these CFOs and nursing managers appears to reduce costs (i.e., resource consumption), shift care delivery to outpatient procedures, increase efficiency, and result in more flexible cost structures. We believe our findings can contribute to the design of improved MCS. First, in those instances where managers accept their organization’s strategy (goal congruence), other incentives may be unnecessary, and heavy reliance on financial incentives could undermine performance and managers’ willingness to cooperate (Kreps, 1997, Davis et al., 1997, Bénabou and Tirole, 2003 and Falk and Kosfeld, 2004). In contrast, when managers fail to accept strategy and instead comply only in response to financial incentives, agency-based MCS may prove most effective (Bénabou and Tirole, 2003). Second, effective MCS design should consider specifically the extent to which manager consensus regarding strategy acceptance exists within an organization. Third, we also provide initial insight into the link between operational performance and manager consensus. For example, when one manager exhibits self-interested behavior (agency) and another pursues pro-organizational initiatives (stewardship), an incentive-driven MCS may prove relatively ineffective in achieving consensus or optimal performance. The remainder of this paper is organized as follows. Section 2 describes our theoretical support and defines our hypotheses. Section 3 describes our data, and Section 4 defines our variables and methodology. Section 5 describes our results, and Section 6 discusses our conclusions and implications.

The results of this study demonstrate that significant economic benefits occur when organizations realize goal congruence (manager consensus). When manager consensus relative to strategy acceptance exists, incentives may not be as important in the design of management control systems (MCS). We use a hospital setting to examine manager consensus because hospital managers are likely to agree with their organization’s overall mission and strategy (i.e., delivery of high-quality cost-effective patient care). Accordingly, individual managers should demonstrate cooperative pro-organizational behavior consis- tent with stewardship theory. Nonetheless, managers may have divergent moti- vations and priorities due to their differing professional orientations (MDs, DNs and CFOs). Our evidence indicates that managers are not motivated by individual opportunism alone, and that goal congruence does not depend solely upon selecting the right performance measures and incentive structures to remove inefficiencies and moral hazards. We develop a strategy acceptance scale to examine the impact of goal congruence based upon MCS, which inte- grates agency theory and stewardship theory. Our results indicate that when strategy acceptance exists within a hospital’s MCS, facilities accumulate more resources and provide higher levels of service with greater efficiency and addi- tional cost structure flexibility. To evaluate manager consensus within hospitals, we developed three paired- response datasets: CFO–MD, CFO–DN, and MD–DN. We constructed a strategy acceptance scale ( a = 0.81) that allows us to categorize managers according to their level of strategy acceptance. When individual managers indi- cate a high level of strategy acceptance, we interpret that as an indication of goal alignment. Strategy represents a key element of any organization’s MCS, and our study investigates the impact of strategy acceptance on 13 per- formance measures, which represent four categories of financial performance: inputs (resource accumulation), outputs (volume of services), operating effi- ciency (output per unit of input), and cost structure flexibility (adaptability to volume). We demonstrate the economic benefit of managers’ strategy accep- tance (consensus).Our findings should contribute to the design of improved MCS. Our evi- dence indicates that managers are not always motivated by individual self- interests, and goal congruence can occur without financial incentives. In those instances where managers truly accept their organization’s strategy, financial incentives may be less necessary, and heavy reliance on financial incentives could undermine performance and managers’ willingness to cooperate. More- over, we suggest that financial incentives may prove largely ineffectual, in some instances, or too costly to achieve goal congruence. In contrast, when managers fail to accept strategy and instead comply only in response to financial incen- tives, agency-based MCS may prove most effective. We also provide initial insight into financial performance when managers operate with divergent objectives. For example, when manager consensus fails to occur, an incentive-driven MCS will become more necessary. When manag- ers accept their organization’s strategy, however, they are more likely to exhibit cooperative, pro-organization stewardship behavior, and financial incentives may prove less important and perhaps detrimental. More specifically, for example, hospitals could achieve greater goal congruence by employing physi- cians directly, rather than using the traditional independent contractor model. Ultimately, goal congruence should align different perspectives and with rein- forcing incentives should result in MCS that are less costly and more effective. Our study is subject to several limitations. First, our study is limited because we use a nonrandom sample of large, generally nonprofit hospitals and conse- quently our results may not be generalizable. Large hospitals, however, offered us the opportunity to specifically identify distinct professional groups within each hospital. Furthermore, large hospitals would have the resources necessary to employ professionals in each of our three manager categories. We believe that the opportunity to create paired-response datasets was critical to our investiga- tion of manager consensus and our results may offer insight for other organiza- tions where MCS must span multiple discrete employee groups (e.g., engineering and marketing professionals, multiple unions, and diverse ethnic groups). Second, a key underlying assumption is that the hospitals in our study are sufficiently sophisticated to utilize financial incentives, and that the types of incentive systems used are randomly distributed across the three datasets and among the quadrants in our theoretical model. No statistically significant dif- ferences were found across the datasets indicating no response bias. However, we cannot be sure that the strategy acceptance identified within a hospital is independent of that hospital’s underlying financial incentive system. To address this issue, we focused our strategy acceptance scale on management behavior relative to strategy acceptance, rather than incentives. Third, our strategy acceptance scale is subject to the typical concerns regard- ing survey limitations and construct validity. Fourth, although we use multiple performance measures from archival data to represent inputs, outputs, effi- ciency and flexibility, each individual measure is subject to potential measure-ment error. Fifth, our results depend upon those hospitals that provided multi- ple manager responses, which may result in response bias and correspondingly limited statistical power. As previously noted, however, no statistically signif- icant differences were found between the datasets when comparing demo- graphic data. Despite these limitations, our study makes an important contribution to the MCS literature. We distinguish between overall goal congruence and manager consensus, and examine the complementary nature of agency theory and stew- ardship theory. We demonstrate that manager consensus leads to larger and more flexible organizations. We also provide initial evidence on the impact of inconsistent objectives (low strategy acceptance) on organizational performance. Finally, we provide a theoretical framework to direct future MCS research that integrates strategy acceptance with financial incentives. We conclude that goal congruence based upon both strategy acceptance and reinforcing incen- tives may result in MCS that are less costly and more effective. Without strat- egy acceptance, the cost of goal congruence achieved through behavioral compliance induced by financial incentives may in some cases be prohibitive at best; if indeed it can be achieved at all.