The System Matters More Than the People: Controlling in Companies and in the State

Controlling in the enterprise and in the state (inspired by a post by Anuar D. Ushbayev)

The core mission of a commercial company is to increase its value for its shareholders. The core mission of a state is to increase the well-being of its citizens. There are many ways to increase a company's capitalization, ranging from speculative to various innovative methods. Any speculative venture always ends in the collapse of the company. Any innovative venture largely does too, since it carries many risks (1 in 100 ventures becomes successful).

That is why, when a state resorts to populism and speculation, nothing good comes of it. Venezuela is a vivid example.

The exception is SMEs, where the company is managed directly by its owner and the outcome depends more on the entrepreneur than on the management system. Incidentally, entrepreneurship differs from classical management, but that is a separate question. (I would not want to compare Kazakhstan to a small business.)

Any corporate management system must accomplish several tasks:

1. The system must consistently generate correct decisions. For example, if the system works, the company will, with a high degree of probability, purchase inventory correctly, choose the right equipment, conduct sales properly and hire the right people. Incidentally, when people say that "cadres decide everything," that is not quite true. The system decides everything, even the selection of the right personnel who are capable of making the right decisions.
2. The system must eliminate any theft in the company, from top management down to theft on the ground. This is a difficult task that involves many different subsystems. Roughly speaking, there is physical protection of warehouses and production sites against theft on the ground; there are procurement procedures for goods, works and services to prevent theft in purchasing; there is an incentive structure for sales staff bonuses so that they do not steal; there are production process charts so that nobody steals in production; there are loss norms, and so on. In a well-run enterprise all of this is in place and the system works in such a way that stealing is very difficult and costly. As a result, employees who join a well-run company do not even think about stealing, because the system will not allow it. They focus instead on creating value, since that is what they will benefit from and it is the only way to earn money in the company.
3. Proper accounting and planning, so that decisions are made correctly. Accounting and planning are the foundation of decision-making in a company. The principles of accounting must always match the principles of planning. When I am told that an economist does not need to know accounting, I cannot agree at all. An economist without knowledge of accounting will never be able to collect and compare actual figures, and will never be able to draw up a plan correctly. Moreover, building management accounting into the bookkeeping system is strictly a task for the economist. For example, an accountant does not always know which cost item an expense should be assigned to, on what basis costs should be reallocated, or to which division they should be attributed. Such accounting is undoubtedly set up only by an economist, who then uses it to make a proper comparison against the budget. Further, once there is correct cost allocation and a proper link to cash flow, an automated system for controlling payments against the budget is introduced, which eliminates the human factor in payments, and so on.

Any large, well-run enterprise is a product of its system. Replace a person and nothing changes: everything keeps working as it did before. The state is no different from a large enterprise, nor are its management principles.

Therefore, for a state to be well run, it must have a proper management system built on institutions. The principles are the same everywhere; only the implementation differs.