What are Checks and Balances?

Definition: Checks and balances are a system that distributes the power in at least two persons or groups in order to avoid absolute power. This concept is mostly used in governments due to the existence of different branches that check and balance one another. However, the term can be applied in many contexts within both private and public sectors.

What Does Checks and Balances Mean?

In business, many people make decisions on a daily basis to guarantee that processes are developed in a timely manner. Some of these decisions can affect company results in an important extent. In this regard, most of the firms implement checks and balances as a way to distribute the authority and thus control the risks involved in decision-making processes. They impose boundaries to avoid bad choices.

Although, some managers and top executives generally have the power to decide about a wide range of issues, companies tend to have mechanisms to limit power concentration. Some checks and balances can be expenditure controls, decisions submitted to Committees, crossed authorizations and automatic limits enforced through digital information systems.

Example

Techlade Corp is a multinational company operating in the technology sector. It has subsidiaries in five countries with manufacturing plants in three of them. The Finance Manager in Holland decided to buy a new office building for 4.5 million dollars.

He argued that the new building would improve brand image but his real motivation was to work closer to his home. As a control mechanism, four Managers at the subsidiary company must approve any investment exceeding 1 million dollars during a fiscal year. After some analysis and discussion, the other managers decided not to approve this investment but to allocate two million dollars in specialized training for a large group of employees.

As a result of its checks and balances, the firm avoided a bad investment and achieved outstanding results with its better-trained employees.