The Covid-19 pandemic and management controls

Abstract

We examine how firms respond to the Covid-19 pandemic by adjusting their management controls and what the consequences are in terms of firms’ resilience to the crisis. We review literature that deals with the influence of the Covid-19 pandemic on business and investigate results from a survey conducted within a large international multi-divisional service firm and the German Business Panel. We find evidence consistent with the claim that the Covid-19 pandemic is associated with a shock to transparency and increased incentive problems. We document firms’ adjustments of their management controls in response to the Covid-19 crisis: Action controls are stronger, result controls are more flexible, and cultural controls are weaker. Regarding firms’ resilience, we provide supportive evidence that more resilient firms face a smaller shock to transparency, adjust their management controls to a smaller extent, and are associated with stronger cultural controls in terms of higher organisational trust.

Keywords:

• Covid-19
• management controls
• resilience

JEL:

• L22
• M12
• M41

Acknowledgements

For helpful comments, we thank Robert Hodgkinson; Mark Clatworthy, Juan Manuel Garcia Lara, and Edward Lee (editors); Tristan Price (discussant); an anonymous reviewer; and participants of the 2022 ICAEW conference on Adaptability and Resilience during a global pandemic.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 ‘Pandemic has companies dropping earnings guidance, and some say it should be nixed altogether,’ CNBC April 17 2020 (https://www.cnbc.com/2020/04/17/pandemic-has-companies-dropping-earnings-guidance-and-some-say-it-should-be-nixed-altogether.html, accessed March 18, 2023).

2 The service firm offers a large and diverse spectrum of technical B2B and B2C services. In 2021, employing more than 25,000 employees, the firm has generated revenues of more than €2.5 billion. The German Business Panel (GBP) is a long-term survey panel which is part of the trans-regional research project TRR266 ‘Accounting for Transparency’ funded by the German Research Foundation (DFG, Deutsche Forschungsgemeinschaft). The GBP surveys participants employed at German firms every six months on questions in the domains of financial accounting, managerial accounting, and taxation.

3 Oates and Tuck (2019) discuss whether increased ‘tax transparency’ – the transparency about the tax affairs of multinational corporations – is a means to address corporate tax avoidance.

4 The second survey wave was distributed from November 16th 2020 to June 24th 2021. In the first survey wave from July to October 2020, roughly 10,000 firms participated in the survey. For more information on the GBP see https://gbpanel.org/page/e.

5 We note that we include in the statistics the answer category 4 which states ‘does not apply to us’. This answer category may indicate that firms do not worry about this type of adjustment since there is – simply by definition – no impact on the firm in this dimension. However, this is arguably only possible for the answer category (c) credit agreements as some firms may not have credit agreements. The other three categories refer to rather broad adjustments associated with Covid-19 which plausibly apply to most if not all firms.

6 In the following, we also include literature that discusses working from home and predates the Covid-19 pandemic as well as literature that considers firms’ responses to crises other than the Covid-19 pandemic.

7 In addition, for some occupations the nature of tasks has evolved: Employees are now responsible for additional tasks, for example, informing clients about the social distancing regulations and promoting mask-wearing and hand-washing habits to the public.

8 We distributed the online survey in March and April 2021 among 3459 employees with and without supervisory function with a response rate of roughly 60 percent.

9 We expect that the survey insights generalize to other firms, including manufacturing firms, as the surveyed employees engage in back-office activities that are present in many firms (e.g., HR, accounting, marketing).

10 Compared, for example, to the financial crisis 2008, the Covid-19 pandemic is at its core a health crisis. While both, the 2008 financial crisis and the Covid-19 crisis have economic consequences on firms’ operations and consumers’ spending patterns, the Covid-19 pandemic created health anxiety, which arguably takes a large toll on perceived stress and subjective well-being. In comparison with other health crises that were contained at the local or regional level, the Covid-19 impact is measured at the global scale, affecting all countries and sectors within. Furthermore, and quite uniquely, the Covid-19 pandemic resulted in an unprecedented adaptation of remote work and digital transformation.

11 Using this variable measurement, we do not account for the extent to which firms experienced a decline in revenues due to the Covid-19 pandemic. Few firms/industries did not experience a severe decline in revenues or even experienced an increase in revenues. By definition, these firms did not experience a crisis such that it is inappropriate to refer to firm resilience here. Thus, we acknowledge that in case we have these firms in our sample, they would be classified as more resilient firms. Future research may investigate the role of firm industry in explaining adjustments in management controls.

Additional information

Funding

We gratefully acknowledge financial support from the Deutsche Forschungsgemeinschaft (DFG, German Research Foundation): Collaborative Research Center (SFB/TRR) – Project-ID 403041268 – TRR266 Accounting for Transparency.