Jean Marc de Leersnyder

English

Research Papers in Economics

© SYMPHONYA Emerging Issues in Management, n.1, 2008 
www.unimib.it/symphonya 
 
 
 
 
Edited by: ISTEI - University of Milan-Bicocca  ISSN: 1593-0319 
Bastia Paolo, Global Markets, Governance and Internal Control Systems, Symphonya. Emerging 
Issues in Management (www.unimib.it/symphonya), n. 1, 2008, pp. 28-33 
http://dx.doi.org/10.4468/2008.1.03bastia 
     28 
Global Markets, Governance and 
Internal Control Systems 
 
 
Paolo Bastia
* 
 
 
 
Abstract 
The global competition sees for effective internal control systems ability to face 
risks  and  to  pursue  business  performances  with  a  correct  balance  between 
economic and financial conditions in the long term. 
Management  of  the  complexity  following  globalization  increases  the  need  of 
adequate internal control systems.  
From a more evolved perspective, the responsibility for adequate internal control 
systems is associated with the top of the organization 
 
Keywords: Market-Driven Management; Global Markets; Global Competition; 
Governance; Internal Control; Internal Control Systems 
 
 
 
1. Governance and Global Competitiveness 
 
In  recent  times,  the  focus  on  corporate  governance  has  increased,  first  at  the 
legislative level, then in terms of best practices for organizations. Following this 
process, a lively scientific debate has emerged within the economic and managerial 
literature. 
In  fact,  the  comprehension  of  complex  phenomena  requests  the  use  of 
correlations  capable  to  select,  if not casualties, at least the fundamental critical 
variables useful in planning and orienting the entrepreneurial praxis into carefully 
judging the adequate evolutions.  
The link between Governance and globalization of competitiveness is really tight; 
this  statement  is  very  important,  among  others,  considering  the  long  period 
perspective  for  the  balance  of  the  firm,  and  the  strategic  planning  of  the 
organization, within the competitive framework of the organization.  
 
Italian firms recently went through a significant legal reform process: 
￿  the  introduction  of  the  Consolidated  Law  On  Finance  for  a  modern 
discipline of the listed companies; 
                                                 
*  Full  Professor  of  Management  Accounting,  Alma  Mater  Studiorum–University  of  Bologna 
(paolo.bastia@unibo.it)  © SYMPHONYA Emerging Issues in Management, n. 1, 2008 
www.unimib.it/symphonya 
 
 
 
 
Edited by: ISTEI - University of Milan-Bicocca  ISSN: 1593-0319 
       
     29 
￿  the  Corporate  Law  reform  introduced  the  monistic  model  (based  on  the 
Anglo-Saxon governance corporate system) and the dualistic model (based 
on the German corporate system); 
￿  the introduction of penal responsibilities for the legal entities according to 
compliance programs of US origin; 
￿  the introduction of the Basil Committee II agreements, that deeply influence 
the relationship among banks and firms, introducing a shared rating system; 
￿  the Bankruptcy Law reform, imported from the American system classes of 
creditors  and  acknowledged  the  international  doctrine  on  crisis 
management; 
￿  the International Accounting Standards (IAS and IFRS) that carried out the 
globalization process on accounting and corporate reporting; 
￿  the  recent  accomplishment  of  MIFID  (Markets  in  Financial  Instruments 
Directive) supervising the investing services and the negotiation of financial 
instruments.  
 
The  need  to  contribute  with  a  contemporary,  modern  discipline  to  the 
international competitiveness is one of the Italian firms’ most frequent, explicated 
objectives within the above-mentioned reforms. 
As  one  can see, the strong evolution of the Italian legal framework has been 
promoted  by  other  legal  systems  in  order  to  harmonize  at  the  European  and 
international level. 
These  phenomena  clearly  indicate  that  the  evolutionary  direction  of  the  legal 
framework – as well as within the competitive system – is certainly oriented to the 
international scenario. 
A further signal of this trend is represented by the diffusion of codes of self-
regulation,  relatively  new  for  the  Italian  national  experience.  For  example,  the 
“Preda Code”, issued in 1999 and reviewed in 2002, defines the governance system 
for listed companies and their subsidiaries. The Preda Code is coherent with the 
new corporate law and, most of all, up to date with international best practices.  
The  increasing  diffusion  of  the  Code  of  Ethics  and  the  Code  of  Behavior 
reinforces the same inclination toward the promotion of high reputation of the firm. 
Codes  should  express  the  ethical  responsibility  of  the  organization  towards 
stakeholders and promote an internal system of shared values.  
From this point of view, the strategic behavior of the firm, based on the dynamic 
relationship  between  the  organization  and  the  environment,  has  to  face  a  new 
scenario preferably with a pro-active attitude rather than a formal and ritualistic 
one. 
 
 
2. The Managerial Implications of a Coherent Governance System 
 
At the various levels of the organizational structure, the management is the actor 
that interprets new roles defined within the international governance framework 
and that contributes to the definition and the implementation of coherent strategies. 
One  of  the  profiles  that  better  characterizes  the  new  managerial  style  is  the 
integration between decisional processes and compliance. © SYMPHONYA Emerging Issues in Management, n. 1, 2008 
www.unimib.it/symphonya 
 
 
 
 
Edited by: ISTEI - University of Milan-Bicocca  ISSN: 1593-0319 
       
     30 
 
The literature on governance tends to develop its analysis along two directions:  
 
a)  structural  perspective  of  the  governance:  oriented  to  the  morphological 
dimension  defined  by  formal  structures  and  roles  (assets  of  ownership, 
boards, audit committees, boards of auditors, internal auditors, organizational 
structures); 
b)  operational perspective of the governance: studies directives, mechanisms of 
internal  regulation,  policies,  formal  procedures,  delegations  of  authority, 
formal  responsibilities,  internal  control  systems,  information  systems,  and 
disciplinary processes. 
 
In  actual  fact,  the  two  aspects  are  complementary.  They  have  to  be  planned 
consciously and to be defined according to the evolution of the strategic structure 
of the organization.  
The aim, also practical, of this governance framework, is to insure an adequate 
accountability  for  the  firm:  the  recognition,  according  to  the  international 
standards, of profiles of excellence and reliability of actors’ behaviors. Moreover, it 
derives consensus, trust, and availability from the markets and economic operators 
as  conditions  for  the  sustainability  of  strategic  plans,  even  of  those  highly 
competitive and legitimately aggressive.  
The management behaves more and more in a context in which the commercial 
and economic performances have to be balanced with integration skills involving 
the governance structure and the system of rules. In fact, different needs have to be 
conjugated,  together  with  the  pursuit  of  the  following  irrevocable financial and 
economic parameters: 
￿  consistency with the institutional finalism of the organization and with the 
affirmed system of values; 
￿  focus  toward  the  reputational  risk,  within  the  framework  of  the  risk 
monitoring of the firm; 
￿  integration  of  the  individual  decisions  within  the  increasingly  complex 
decisional  framework,  that  includes  competitive  variables,  elements  of 
governance, and organizational structure; preventive advices and ratifications 
of  the  holding;  strategic  guidelines  coming  from  the  industrial  planning; 
delegations of the board; directions from the executive committee; teamwork, 
vertical  and  horizontal  coordination  processes  of  organizational  dynamics 
(project  groups,  quality  circles,  budget  committees,  temporary  work 
laboratories). 
 
Within this evolutionary environment, the managerial style faces new requisites: 
the individual skills must conjugate with a certain degree of formalization, due to 
the  necessity  of  operating  in  structured  contexts  with  high  external  credibility. 
Moreover,  stakeholders  are  more  and  more  attentive  to  the  balance  between 
performance  and  risk  management  of  the  organization:  supervision  authorities, 
control bodies, rating agencies, mass media, industrial and commercial partners, 
other stakeholders. © SYMPHONYA Emerging Issues in Management, n. 1, 2008 
www.unimib.it/symphonya 
 
 
 
 
Edited by: ISTEI - University of Milan-Bicocca  ISSN: 1593-0319 
       
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A fundamental dimension of the globalization consists, in particular, in enlarging 
the  perimeter  of  contact  with  the  social  parties.  This  result  is  due  to  the  more 
significant  articulation  of  businesses,  with  different  markets  and  profiles  of 
customers served, more needs to satisfy, diversity of culture, contractual dynamics, 
local competitors, varied laws and countries’ uses. 
Global  players  are  usually  organizations  characterized  by  the  majority  of 
international employees, foreign customers, different use and symbolic values of 
products  and services, dynamic and differentiated. The phenomenon of demand 
bubbles  together  with  market  driven  management  implies  adaptability  skills, 
versatility, promptness with the production management and the comprehension of 
more instable demand. In fact, the life cycles of products and services are now 
shorter and imitative tension of competitors particularly aggressive.  
Following the evolution that interprets the firm as an open system, management 
must  combine  core  skills  with  the  wide  attitude  of  general  management  in  the 
business; this means the global comprehension of the criticalities of the business, 
the ability to integrate and coordinate processes all along the value system, the 
spirit of belonging to the organization, and the acceptance of its values.  
From this perspective, organizational dynamics favor flexible processes oriented 
to customers and markets that abandon the traditional hierarchical structures and 
the  associated  organizational  inertias,  resistance  to  change,  and  inefficient 
communications.  Information  about  markets  are  transferred  to  logistic  and 
production  cycles  (and  not  more  functions);  organizations  are  progressively 
adaptive in reengineering processes to be coherent with the need of the markets, the 
competitive niches, and the emerging demand bubbles. 
 
 
3. The Internal Control Systems’ Role within Governance 
 
The internal control system represents a fundamental infrastructure of the firm 
and contributes to the correctness of the operational processes. 
From the milestone represented by the COSO Report – the famous American 
report on international praxis of governance and control issued in 1992 after the 
explosion  of  serious  defaults  following  lack  of  internal  control  –  until  the 
recognition  by  the  legal  system  and  the  international  doctrine,  the  role  of  the 
internal  control  system  is  becoming  a  central  point  for  the  functioning  of 
governance. 
Generally speaking, the internal control system involves the following functions: 
￿  pursuing efficiency and effectiveness of processes; 
￿  coherency with decisional processes and strategic goals; 
￿  safeguard and valorization of the assets, also intangibles, of the firm; 
￿  respect of rules, laws, and procedures; 
￿  supervision of the firm’s risks related to the following areas: reputation, 
market,  strategy,  business,  operations,  organization,  finance,  compliance, 
information and legal systems. 
 
The global competition sees the organization in different, flexible contexts, with 
increasing  rhythms  of  innovation  for  products  and  processes,  financial  markets © SYMPHONYA Emerging Issues in Management, n. 1, 2008 
www.unimib.it/symphonya 
 
 
 
 
Edited by: ISTEI - University of Milan-Bicocca  ISSN: 1593-0319 
       
     32 
more and more volatile, and general turbulences of the environment. This effect 
calls  for  effective  internal  control  systems  ability  to  face  risks  and  to  pursue 
business  performances  with  a  correct  balance  between  economic  and  financial 
conditions in the long term. 
Management  of  the  complexity  following  globalization  –  together  with  the 
numerous and discontinuous combinations of product/market/technology/customer, 
the heavy structure of the organization, and the variety of stakeholders – increases 
the  need  of  adequate  internal  control  systems.  According  to  the  paradigm  of 
differentiation/integration of Lawrence-Lorsch, control systems have the peculiar 
function of integrating and insuring the coordination of a variety of elements within 
the global firm or inside the dynamic boundaries of global networks. 
From a more evolved perspective, the responsibility for adequate internal control 
systems is associated with the top of the organization: the board, which conjugates 
the prerogatives of governance, and strategic orientation supported by a coherent 
organizational structure.  
The supervision of adequacy of the internal controls is also the responsibility of 
the audit committee, within the board and its independent administrators, and the 
board  of  auditors.  These  bodies  exercise  continuous  cross-supervision  with  the 
cooperation  of  the  internal  auditing  that  –  on  the  basis  of  the  principle  of  the 
separation of the managerial control – is an independent body and refers directly to 
the board. The internal audit verifies the formal and substantial correctness and 
monitors the risks related to the different managerial functions, checking anomalies 
and critical aspects for a prompt response.  
Other special control bodies are the compliance manager and the risk manager. 
The first verifies the conformity of the firm’s operations with the legislation, the 
internal  rules  and  the  contracts;  the  latter  supervises  different  operational, 
marketing,  and  business  risks  on  the  bases  of  performance  measures  linked  to 
specific goals. 
These control instruments are necessary and operate typically as controls at a 
distance of second and third level. 
The leading character of the internal control system, however, is management. It 
has  to  interpret  its  own  performances,  within  the  inseparable  process  of 
description-action-control, reassuring the top of the firm and the customers about 
the correctness and the consciousness of its decisions. Managers can also achieve 
the highest level of recognizable skills in terms of reliability, professionalism, and 
ability to reach adequate performance in terms of effectiveness, total quality, and 
compliance. 
Also the system of managerial incentives comprehend more and more frequently 
and  with  more  importance  profiles  of  compliance,  together  with  the  traditional 
parameters of performance such us productivity and net income.  
The management is the leading character of line control of the first level inherent 
to the business, which is more immediate and coherent in terms of promptness, 
local and frontal needs. 
This subsystem of internal control, called management control, represents a kind 
of self-control (“controllo autonomico” with the words of Franco Amigoni) that 
acts like a mechanism of learning and problem solving. It merges the strategic and 
operational dimensions to concretely create a management that is in line with the © SYMPHONYA Emerging Issues in Management, n. 1, 2008 
www.unimib.it/symphonya 
 
 
 
 
Edited by: ISTEI - University of Milan-Bicocca  ISSN: 1593-0319 
       
     33 
governance guidelines, the strategy, the value system, the legislation, the internal 
rules, and the external sensors (markets, competitors, customers, technologies). 
Within  this  delicate  composition  of  constraints  and  goals,  management  must 
experience  and  express  better  performances  and  innovation  compared  to 
organizations with a limited vision. The process is favored by the knowledgeable 
conciliation  of  management  by  commercial  and  profitable  objectives  and  the 
respect of rules and responsibilities for the continuity of the firm. 
Nowadays, management can rely on the reporting system and the controller  - 
planner  and  consultant  professional  at  the  same  time  –  developing  a  strategic 
dimension for the decision-making system and correct behaviors.  
The interactive use and search of data for advanced business intelligence systems 
based  on  ERP  technologies  (enterprise  resource  planning)  is  the  source  of  a 
complex, multidimensional, flexible and predictive information system; the latter 
can also become an instrument of benchmarking when connected with external data 
providers. 
In synthesis, internal control systems assume a strategic role as a competitive 
advantage of the firm in global markets, promoting standing image and high rating 
recognizable by the economic and financial international community. 
More specifically, advanced management control systems, if skillfully planned 
from  a  methodological  point  of  view,  can  profit  from  information  technology 
opportunities. The aim is to promote management professionalism with the ability 
to interpret strategically the discontinuous competitive environment of the global 
economy. 

Corporate Culture and Geopolitics

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Corporate Culture and Geopolitics

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