Ling Zhou

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We learn a lot about psychology and social psychology from the human ... Compared with the above two models, the institutional school is closer to a truly ...
Book Review on: Complex Organizations—a Critical Essay (by Charles Perrow, 1986, 3rd edition)

By: Ling Zhou

I will first briefly summarize the content of the book by chapters, and then try to discuss several interesting points in the book that may be of interest for accounting studies.

1 Summary

The book starts with the necessity for the existence of bureaucracy (formal organization). Bureaucracy is usually attacked for being unadaptive and stifling the humanity of employees. Perrow argues that these sins result from a failure to bureaucratize properly rather than bureaucracy itself. In fact, if we want our material civilization to continue, we will have to have large-scale bureaucratic enterprises in the economic, social, and governmental areas. The development of industrialization has made this the most efficient way to get the routine work of a society done. Perrow introduces Weber’s model of bureaucracy in detail which contains three groups of characteristics: those that relate to the structure and function of organization, those that deal with means of rewarding effort, and those that deal with protections for the individuals. Perrow then summarizes the development of managerial ideologies. Before 1870, the classical management study focused on specific problems like planning and coordination. Then came some more general models like the social Darwinism which says that only the fittest survives. With the appearance of unions, people began to notice the collective power. Around 1915, scientific management emerged. Separation of management and skilled craftsman became possible. This theory suggests that it is the cooperation between labor and capital that brings success. After World War I, Dale Carnegie proposed that the managers needed to manipulate the workers in order to have them work. Then Elton Mayo suggested in mid-1930s that it was natural cooperation, rather than manipulation, that made workers work. On the whole, the changes in management ideology are toward cooperation. Perrow then introduces several different models on organizations in turn. First, he discusses the positives and negatives about the human relations model. This model was inspired by the “Hawthorne effect”—the productivity is increased when a group of workers are picked out and work with the knowledge that they are in an experiment. The researchers believed that the productivity increased because the workers felt special, not because the objective conditions had been improved. This model concentrates on group norms and sentiments as the bases for explaining behaviors. It counters the extreme rationality of scientific management with a “romantic rationality” wherein all sorts of unconscious needs are posited. But Perrow points out that little empirical evidence supports this school, that one cannot explain organizations by explaining the attitudes and behavior of individuals or even small groups within them. We learn a lot about psychology and social psychology from the human relations model, but little about organizations per se in this fashion. The Neo-Weberian model is a contrast to the human relations model in that it focuses on the technology instead of psychology. This model indicates that organizational structure varies with the type of work done. A fundamental fact about organizations is that they do work. The characteristics of this work process will tell us more about the structure and function of the organization than the psychological characteristics of the members. If the technology does not fit the structure, the organization will pay a heavy price in terms of efficiency. So in the long run, the technology will predict structure. Compared with the above two models, the institutional school is closer to a truly sociological view of organizations. The descriptive and historical nature of this school gives an essential “feel” for how organizations operate. The main contributions of this model are as follows. First, there is the inescapable variety of organizations, a variety that the technological school cannot hope to reflect. Second, it brings up the possibility that organizations do develop an inner logic and direction of their own that is not the result of those who appear to control them. Third, this school has taken the environment seriously and tried to understand the organization’s relationship to it. Neither of the first two models touches environment. Although the institutional school has emphasized the environment, it did not do it self-consciously, and it did not conceptualize it in a distinct way. The environmental school, in contrast, tries to conceptualize it. The basic idea is somewhat anthropomorphic: environment act, organizations respond; environments select some organizations for extinction and allow others to survive. The ecological model identifies three stages in a process of social change: first is the occurrence of variations in behavior, either intended or unintended; second, natural selection occurs as some variations are eliminated and others are reinforced; third, there is a retention mechanism that allows those positively selected variations to be retained or reproduced. The dark side about this model is that it removes much of the power, conflict and social-class variables from the analysis of social processes. Some evolutionary model has been developed to bring in some institutional factors. At last, Perrow introduces the agency theory and transaction-costs economics and discusses power in organizational analysis. He defines power as “the ability of persons or groups to extract for themselves valued outputs from a system in which other persons or groups either seek the same outputs for themselves or would prefer to expend their effort toward other outputs”. Power is exercised to alter the initial distribution of outputs, to establish an unequal distribution, or to change the outputs. This definition of power deals with the type of pie and the division of the pie, not its size. So the power of some can be at the expense of others. Perrow argues that organizations facilitate the generation of zero-sum power, and organizational theory should attend to this problem.

2 Discussion

Perrow’s definition of power is quite similar to the bargaining power in economic theory. Those with a higher bargaining power may get a larger piece of the cake. Bargaining power might be determined by the substitutability of each member. Managers usually have a high bargaining power because they are hard to be substituted. The market for managers are not so liquid as the market for other employees. Note that even when there are a lot of people in the market with similar managerial expertise, they usually lack the knowledge about the particular firm. This definition of power shows that any member in an organization can be “powerful” regardless of her position. For example, an engineer can be “powerful” if she has special expertise that makes her hard to be replaced. On the other hand, a shareholder who is usually assumed to be “powerful” need not to be, if she only owns a small fraction of the firm’s stock and if the capital market for the firm is liquid.

As a criticism to bureaucracy, Perrow mentions rules. People often complain that there are too many rules and these rules are reducing the flexibility of organizations. I have discussed in class that if we regard rules as explicit contracts, this is essentially a problem as when we should have explicit contracts and when we should have implicit ones. I have identified some necessary and/or sufficient conditions for explicit and implicit contracts. Two particularly important ones are common knowledge and self- enforcement. These are necessary for a contract to be implicit. When these are not true, rules (explicit contracts) have to be there.

Perrow also talks about the relationship between professionals and their clients when he touches on the conflicts of interests within an organization. I find this topic particularly interesting as accountants, especially auditors, face this problem everyday. Perrow identifies some specialty about the relationship between professionals and their clients. First, there is less competition among professionals. The reasons might include the entrance hurdle, the restrictions on pricing etc. Second, the professionals are more knowledgeable than the clients making it hard for the clients to judge whose service is better, and the service quality is usually difficult to measure. Third, it is usually costly to change from one professional to another. When related to the accounting (and consulting) business, the third point may not seem valid as sometimes auditing (consulting) firms offer low starting price to attract new business. This should make it cheap for the client to transfer. But note that the reason the auditing firms are offering low starting price is that they are expecting for bigger future profit (in particular, they may expect to get the more lucrative consulting work from the client in addition to auditing). While it is still hard to say that transfer for the client is costly, it is easy to see that transfer is costly for the society: the old auditing/consulting firm has got to know the client, while the new one has to go through the starting phase again to develop some knowledge about the client. This is a waste from the society’s view. Auditor independence is one of the problems concerning the relationship between accounting professionals and the clients. SEC’s new deal with AICPA addresses investors’ concern about auditor independence when the auditors are also providing consulting services to their audit clients. One of SEC’s points is that the important thing is that the auditors should “appear” to be independent to investors. I think the reason is closely related to the superior information or knowledge of professionals relative to others: the investors cannot tell whether or not the auditors are really independent. So they need the auditors to “look good”. When the auditors are providing much consulting services, the investors are in doubt. There are many other interesting research topics in this area. Perrow’s insightful comment on the special relationship between professionals and clients is quite suggestive.

Perrow’s Complex Organization is a very nice summary of the organizational theories in sociology, and when related to accounting and economics, it also initiates a lot of fascinating research topics.