Performance Measurement and Management Control : Behavioral Implications and Human Actions 9781783503780, 9781783503773

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PERFORMANCE MEASUREMENT AND MANAGEMENT CONTROL: BEHAVIORAL IMPLICATIONS AND HUMAN ACTIONS

STUDIES IN MANAGERIAL AND FINANCIAL ACCOUNTING Series Editor: Marc J. Epstein Recent Volumes: Volume 14:

Performance Measurement and Management Control: Superior Organization Performance

Volume 15:

A Comparative Study of Professional Accountants’ Judgements

Volume 16:

Performance Measurement and Management Control: Improving Organizations and Society

Volume 17:

Non-Financial Performance Measurement and Management Practices in Manufacturing Firms: A Comparative International Analysis

Volume 18:

Performance Measurement and Management Control: Measuring and Rewarding Performance

Volume 19:

Managerial Attitudes toward a Stakeholder Prominence within a Southeast Asia Context

Volume 20:

Performance Measurement and Management Control: Innovative Concepts and Practices

Volume 21:

Reputation Building, Website Disclosure and the Case of Intellectual Capital

Volume 22:

Achieving Global Convergence of Financial Reporting Standards: Implications from the South Pacific Region

Volume 23:

Globalization and Contextual Factors in Accounting: The Case of Germany

Volume 24:

An Organizational Learning Approach to Process Innovations: The Extent and Scope of Diffusion and Adoption in Management Accounting Systems

Volume 25:

Performance Measurement and Management Control: Global Issues

Volume 26:

Accounting and Control for Sustainability

Volume 27:

Intellectual Capital and Public Sector Performance

STUDIES IN MANAGERIAL AND FINANCIAL ACCOUNTING VOLUME 28

PERFORMANCE MEASUREMENT AND MANAGEMENT CONTROL: BEHAVIORAL IMPLICATIONS AND HUMAN ACTIONS EDITED BY

ANTONIO DAVILA University of Navarra, Spain

MARC J. EPSTEIN Rice University, TX, USA

JEAN-FRANC¸OIS MANZONI INSEAD Chaired Professor of Leadership and Organisational Development, Singapore

United Kingdom
North America
Japan India
Malaysia
China

Emerald Group Publishing Limited Howard House, Wagon Lane, Bingley BD16 1WA, UK First edition 2014 Copyright r 2014 Emerald Group Publishing Limited Reprints and permission service Contact: [email protected] No part of this book may be reproduced, stored in a retrieval system, transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without either the prior written permission of the publisher or a licence permitting restricted copying issued in the UK by The Copyright Licensing Agency and in the USA by The Copyright Clearance Center. Any opinions expressed in the chapters are those of the authors. Whilst Emerald makes every effort to ensure the quality and accuracy of its content, Emerald makes no representation implied or otherwise, as to the chapters’ suitability and application and disclaims any warranties, express or implied, to their use. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN: 978-1-78350-377-3 ISSN: 1479-3512 (Series)

ISOQAR certified Management System, awarded to Emerald for adherence to Environmental standard ISO 14001:2004. Certificate Number 1985 ISO 14001

CONTENTS LIST OF CONTRIBUTORS

ix

PREFACE

xiii

PART I: RELEVANCE OF PERFORMANCE MEASUREMENT AND MANAGEMENT CONTROL TO SOCIAL ISSUES USING MANAGEMENT CONTROL AND PERFORMANCE MEASUREMENT TO SOLVE GLOBAL SOCIETAL CHALLENGES: RESEARCH PROGRESS AND OPPORTUNITIES Marc J. Epstein

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PART II: IMPLEMENTING PERFORMANCE MEASUREMENT AND MANAGEMENT CONTROL FOR IMPROVED PERFORMANCE OPERATING CHARACTERISTICS OF HIGH PERFORMANCE COMPANIES: STRATEGIC DIRECTION FOR MANAGEMENT Belverd E. Needles, Jr., Marian Powers, Mark L. Frigo and Anton Shigaev ENVIRONMENTAL MANAGEMENT CONTROL SYSTEMS IN SMEs
AN IMPLEMENTATION SCHEDULE Pe´ter Horva´th, Sebastian Berlin and Judith M. Pu¨tter

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CONTENTS

MANAGEMENT ACCOUNTING TOOLS AS MEDIATORS OF A NEW ORGANISATIONAL CONSTRUCTION: A STUDY OF THE INTERACTION BETWEEN TOOLS AND ‘PHYSICIAN-MANAGERS’ IN A FRENCH PUBLIC HOSPITAL Isabelle Flache`re

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CULTURE AS A RECOUPLING MECHANISM: RATIONALES FOR CONSTRUCTION OF BUDGETARY SLACK IN LOGISTICS Nadezda Nazarova

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PERFORMANCE EFFECTS OF PERFORMANCE MEASUREMENT SYSTEMS
EVIDENCE FROM A TRANSITION ECONOMY Biljana Pesalj

127

PART III: BEHAVIORAL IMPLICATIONS OF PERFORMANCE MEASUREMENT AND MANAGEMENT CONTROL THE EFFECTS OF INTERACTIVE CONTROL SYSTEM AND TEAM IDENTITY ON TEAM PERFORMANCE: AN EXPERIMENTAL STUDY Laura Go´mez-Ruiz and David Naranjo-Gil

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MEASURING REFLECTIVENESS AS INNOVATION POTENTIAL
DO WE EVER STOP TO THINK AROUND HERE? Sanna Hilde´n, Sanna Pekkola and Johanna Ra¨mo¨

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THE RELATIONSHIPS BETWEEN PERFORMANCE MEASURES AND EMPLOYEE OUTCOMES: THE MEDIATING ROLES OF PROCEDURAL FAIRNESS AND TRUST Debbie P. S. Chia, Chong M. Lau and Sharon L. C. Tan

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Contents

PART IV: COMPENSATION GUIDING MANAGERIAL BEHAVIOR TOWARD THE LONG TERM: THE ROLE OF PERFORMANCE MEASUREMENT AND COMPENSATION SYSTEMS Dietmar Sternad THE ROLE OF TRANSPARENCY AND VOLUNTARY DISCLOSURE ON THE CONTROL OF DIRECTORS’ COMPENSATION Montserrat Manzaneque, Elena Merino and Regino Banegas

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PART V: PERFORMANCE MEASUREMENT AND MANAGEMENT CONTROL IN GOVERNMENTAL AND NONPROFIT ORGANIZATIONS INNOVATION IN THE PUBLIC SECTOR: IS IT MEASURABLE? Sabina Klimentova

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VALUE DISTRIBUTION IN STATE-OWNED FIRMS: THE CASE OF TWO COMPANIES IN URUGUAY Adria´n Zicari and Luis Perera Aldama

317

PERFORMANCE MEASUREMENT AND MANAGEMENT IN GERMAN UNIVERSITIES Rebecca Geiger and Andreas Aschenbru¨cker

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LIST OF CONTRIBUTORS Luis Perera Aldama

Managing Partner at Inversiones SILPA Ltd., Santiago de Chile

Andreas Aschenbru¨cker International Performance Research Institute, Stuttgart, Germany Regino Banegas

Department of Business Administration, University of Castilla-La Mancha, Spain

Sebastian Berlin

International Performance Research Institute, Stuttgart, Germany

Debbie P. S. Chia

The University of Western Australia, Perth, Australia

Marc J. Epstein

Jones Graduate School of Business, Rice University, Houston, TX, USA

Isabelle Flache`re

ESCP Europe & Universite´ Panthe´on Sorbonne, Paris, France

Mark L. Frigo

Driehaus College of Business, DePaul University, Chicago, IL, USA

Rebecca Geiger

International Performance Research Institute, Stuttgart, Germany

Laura Go´mez-Ruiz

Financial Economics and Accounting Department, Pablo de Olavide University, Seville, Spain

Sanna Hilde´n

Cost Management Center, Tampere University of Technology, Tampere, Finland

Pe´ter Horva´th

International Performance Research Institute, Stuttgart, Germany

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LIST OF CONTRIBUTORS

Sabina Klimentova

Public Research Centre Henri Tudor, Luxembourg

Chong M. Lau

School of Accounting (CBS), Curtin University, Perth, Western Australia

Montserrat Manzaneque

Department of Business Administration, University of Castilla-La Mancha, Spain

Elena Merino

Department of Business Administration, University of Castilla-La Mancha, Spain

David Naranjo-Gil

Financial Economics and Accounting Department, Pablo de Olavide University, Seville, Spain

Nadezda Nazarova

Bodø Graduate School of Business, University of Nordland, Norway

Belverd E. Needles, Jr.

Driehaus College of Business, DePaul University, Chicago, IL, USA

Sanna Pekkola

Lappeenranta University of Technology, Lahti School of Innovation, Lahti, Finland

Biljana Pesalj

Rotterdam Business School, University of Applied Sciences in Rotterdam, The Netherlands

Marian Powers

Kellogg School of Management, Northwestern University, Evanston, IL, USA

Judith M. Pu¨tter

International Performance Research Institute, Stuttgart, Germany

Johanna Ra¨mo¨

Turku School of Economics, University of Turku, Finland

Anton Shigaev

Kazan (Volga Region) Federal University, Republic of Tatarstan, Kazan, Russian Federation

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List of Contributors

Dietmar Sternad

School of Management, Carinthia University of Applied Sciences, Villach, Austria

Sharon L. C. Tan

SP Business School, Singapore Polytechnic, Singapore

Adria´n Zicari

Essec Business School, Paris

PREFACE In 2001, we gathered a group of researchers in Nice, France, to focus discussion on performance measurement and management control. Following the success of that conference, we held subsequent conferences in 2003, 2005, 2007, 2009, 2011, and 2013. This volume contains some of the exemplary papers that were presented at the most recent conference, this time in Barcelona. The conference has grown in number of participants, quality of presentations, and reputation and this year attracted leading researchers in the field from North America, South America, Europe, Asia, Australia, and Africa. Though the conference has been generally focused on performance measurement and management control and has included presentations on many facets of the topic, each year we have also focused on a particular theme of current interest. This year’s theme was directed at behavioral implications and human actions from the use of performance measurement and management control systems. It includes empirical, analytical, and experimental research. There were two plenary sessions at this conference by Marc J. Epstein and Jean-Franc¸ois Manzoni. The chapter by Marc is included here. In addition to the plenary sessions, this volume also includes some of the other excellent papers presented at the conference. The call for papers drew a wonderful response of 250 submissions so the competition to make a presentation at the conference was quite high. Further, given the space limitations in this book, another competitive selection was required. The contents of this book represent a collection of leading research in management control and performance measurement and provide a significant contribution to the growing literature in the area. This collection of papers also covers a representative set of topics, research settings, and research methods. From the first year, the conference has relied heavily on EIASM and Graziella Michelante for organization and management and their enthusiastic participation and excellent work has been critical to the conference success. The two conference chairpersons, Antonio Davila and Eric Cauvin, provided excellent intellectual and administrative leadership of xiii

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PREFACE

the conference. We thank them and all of the speakers and participants at the conference. Their attendance and enthusiastic participation made the conference an enjoyable learning experience. We are hopeful that this book will continue the search for additional understanding and development in performance measurement and management control, and provide guidance for both academic researchers and managers as they work toward improving organizations. Antonio Davila Marc J. Epstein Jean-Franc¸ois Manzoni Editors

PART I RELEVANCE OF PERFORMANCE MEASUREMENT AND MANAGEMENT CONTROL TO SOCIAL ISSUES

USING MANAGEMENT CONTROL AND PERFORMANCE MEASUREMENT TO SOLVE GLOBAL SOCIETAL CHALLENGES: RESEARCH PROGRESS AND OPPORTUNITIES Marc J. Epstein ABSTRACT Purpose
While management control and performance measurement research and practices have advanced significantly in the last decades, the research and applications to social impacts and social purpose organizations are underdeveloped. This chapter reports on three research studies that have important implications for future research and practice in the use of management control and performance measurement to solve global societal challenges. Approach
This chapter provides new frameworks and performance measurement approaches used in three recent series of research projects. It also provides the results of this extensive research in using existing

Performance Measurement and Management Control: Behavioral Implications and Human Actions Studies in Managerial and Financial Accounting, Volume 28, 3
21 Copyright r 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1479-3512/doi:10.1108/S1479-351220140000028006

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theories and managerial practices to improve success and the measurement of success in for-profit and nonprofit organizations that are focused on increasing their positive social impacts. Findings
This research that spans more than 20 years and includes numerous projects and research methods in many countries has discovered a prior lack of application of existing theories, approaches, tools, and measures that are fundamental to management control and performance measurement. It found that much work is still needed in both academic research and managerial practices to apply them effectively in social purpose organizations and suggests areas for future research. Originality
By reviewing the literature comprehensively and doing a series of related research projects, this analysis provides a foundation for future research in the applicability of management control and performance measurement approaches to the measurement and improvement of the social impacts of both for-profit and nonprofit organizations. Keywords: Management control; performance measurement; social impact; corporate social responsibility; poverty; nonprofit organizations

INTRODUCTION For much of my career I have focused on using approaches to management control and performance measurement to improve society. From my days as a graduate student, I was interested in the role of business (and business principles) to improve society. In some cases that was labeled corporate social responsibility (CSR) and philanthropy and focused on specific and targeted programs that were meant to improve corporate social impacts (or reduce negative externalities). In others it was broadened to examine the intended and unintended impacts that are created by organizations on present and future generations and a broad spectrum of stakeholders. Though these areas of study and practice have evolved, and advancements in both academic research and management practices have been made, some fundamental challenges remain. These are, at their core, challenges of management control and performance measurement. Significant needs remain for additional research, design, and implementation that can

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make advancements in both theory and practice. This provides an opportunity for researchers to use the fields’ theories, practices, tools, and techniques to make significant improvements in organizational financial performance and social performance simultaneously. Over the past 20 years, I have conducted (often with coauthors) numerous extensive field research projects to address these issues and answer some critical research questions. I have supplemented some of these field research projects with additional research that involved large existing data bases and new survey research. The research projects included organizations that range from very large to very small, global and local, for-profit and not-forprofit, and in a broad spectrum of industries. They have been conducted in North America, Europe, Africa, Asia, and South America. A selected list of articles and books that describe these research projects and their results can be found in the Further Reading section at the end of this chapter. Some of this prior research has been related to management control and the implementation of strategy. Some has been more related to the development of performance measures for the inputs, processes, outputs, outcomes, and impacts. It has included investigations of strategy, structures, systems, culture, performance measures, and rewards in areas including social, environmental, economic, and governance performance and in many cases included the effects on financial performance. In some of the books and articles cited, sample metrics are provided for both the individual elements of the logic model or causal linkage model and for the various areas of focus. As the research evolved, we discovered solutions to at least some of the questions and were able to provide guidance to managers with new models, approaches, tools, and measures. We were also able to provide some evidence that contributed to the research base in the field. But numerous questions remained. And, though many managers found the new approaches helpful, the translation and implementation of the approaches and measurement systems into improved management practices proved particularly challenging to many. Some of my newest research (along with others) was designed to integrate both the previous research findings and the work with managers in corporations and nonprofit organizations alike. This has enabled us to place the prior projects into perspective and provide some recommendations for both academic research and managerial practice in the future design and implementation of management control and performance measurement approaches.

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In the newest project, Kristi Yuthas and I were working with some leading nonprofits and foundations around the world. Among the most fundamental challenges for them was the creation of a logic model (the language used in the nonprofit sector to describe the strategy maps or causal linkage models used in the for-profit sector.) Without having a clear articulation of what an organization is trying to achieve (including outcomes and impacts) and the related actions (including inputs and processes), the development of useful performance measures was usually unsuccessful. Though this is not new, and we often find this in even the best for-profit organizations also, the lack of clarity and rigor around these issues has been startling. Thus, in academic research and in providing guidance for managerial practice, it is critical that more effort must be spent on the rigorous analysis and the careful articulation of the causal relationships in the logic model well before performance measures are developed. Few organizations (even leading ones) have developed the processes to do this effectively.

A DESCRIPTION OF THE THREE RESEARCH STUDIES This discussion, though integrating various works by me and others over the last several decades, is primarily based on three large research studies that included many individual projects including field research that spans almost 20 years. These projects focused on: (1) New Solutions for Global Health and Poverty
This research focused on the use of business approaches (including management control and performance measurement) to more effectively address challenges in global health and poverty. The research began with work in business’ role in alleviating global poverty and projects related to whether microfinance works at alleviating poverty. It then included the investigation of existing measures of success and the development of new approaches to identifying and measuring the causal relationships that lead to success and the evaluation of results of projects in developing countries. It continued with extensive work and more than 20 visits to developing countries on research projects that included microfinance, microentrepreneurship, education for children and adults, and health. It continued with MBA classes to work on the implementation and measurement of new approaches to improving global health, global education, and reducing global poverty. This research developed a new model that includes innovative and entrepreneurial approaches to dramatically

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increase access, quality, and use of health products and services at very low cost (especially see Bing & Epstein, 2013; Datar, Epstein, & Yuthas, 2008, 2009; Epstein & Bing, 2011; Epstein & Crane, 2007; Epstein & Yuthas, 2012a, 2012c). (2) Measuring and Managing Corporate Sustainability
This research focused on the integration of corporate social impacts into management decisions and the evaluation of success. Beginning almost 20 years ago, this project led to numerous articles and two books (Epstein, 1996; Epstein & Rejc Buhovac, 2014). The project began with field research with more than 35 companies. Additional research was completed with numerous other companies and with other conceptual and empirical research over the succeeding years leading to other articles and the second book (originally Epstein, 2008 and then revised as Epstein & Rejc Buhovac, 2014). (3) Measuring and Managing Social Impacts
This research focused on the measurement, management, and improvement of social impacts among corporations, nonprofits, foundations, and impact investors. This two year long and recently completed project included phone and field interviews with over 60 organizations in North America, Europe, Africa, Asia, and South America. It integrated previous work by me and others on the social impact of (a) corporations (both CSR and other activities) and (b) nonprofits and then added (c) high net worth individuals, (d) other impact investors, and (e) both private and public foundations throughout the world
large and small (Epstein & Yuthas, 2014).

THE PROBLEM: SOCIAL CHALLENGES RIPE FOR BUSINESS SOLUTIONS These three large research studies (or series of studies) were focused on addressing business’ role in solving social challenges. The specific challenges have evolved since CSR became more prominent in management concerns and discussions and also as a field of study in academic research about 40 or 50 years ago. There have been concerns including the quality of the products and services, the environmental emissions from manufacturing processes, and the labor practices engaged in by the companies and their suppliers. The products and services discussions have included the social impacts of the manufacturing, distribution, and use of products as

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varied as tobacco products, weapons, and high calorie foods. The processes have included the details of the production process and related waste along with broader issues of the impact of the production facility on its surroundings including both community members and natural resources. Discussions around the social impact of hiring and other labor practices included living wage, child labor, and excess overtime issues that are complicated by geography and balancing often difficult tradeoffs for different stakeholders. On a global basis, corporations and others have also been constantly faced with issues related to education, health, and poverty. This includes how the issues impact each business specifically and society more generally. These are often complicated with discussions narrowly concerned with a particular organization struggling to do business in a socially responsible way when competitors choose to be less responsible at a lower short term financial cost. The necessity to make a business case and the challenges that corporations have in operating in a global environment especially in developing countries is significant. Globally, corporations are aggressively trying to expand their markets and more effectively penetrate the emerging and developing economies. With slowed growth in developed markets, corporations are seeking to enter these new markets with products and services that are suitable for consumers and also profitable. But, they are often faced with dilemmas related to entering markets with significant social challenges to increase growth and profitability. Both domestically and globally, companies are increasingly cognizant that they need to adjust their business models and make a business case for addressing societal needs in a financially sustainable way. The balancing of social and financial objectives has become increasingly important and corporations often lack confidence that they know how to do the balancing and evaluate possible tradeoffs. They are also often struggling to effectively integrate social and environmental issues into operational and capital investment decisions. One of the primary obstacles is that strategic business units focused primarily on increasing short term profits often do not see a compelling business case to focus on the social impacts. Just as with other types of organizations, corporations often find it difficult to balance their social and financial objectives and do not have effective measurement systems to capture the goals or the measurement of success
especially related to social performance. Underlying all of this and a broader issue than only the projects developed explicitly to address concerns for CSR are fundamental issues of the

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impact of corporate activities on society. This includes not only the CSR activities, but the impact of organizational products and services, processes, and all other activities. So, whether the organization is an oil company doing offshore drilling and considering the impact of company activities both onshore and offshore or a country’s sovereign wealth fund considering how to invest funds to create the greatest social impact, the issues are similar. Likewise, the issues are similar to foundations and impact investors considering donations or investments of their money for the most social benefit. And also for the nonprofit organizations or other social enterprises that typically benefit from these donations or investments. How can the money be invested for the greatest social benefit? And how should success be measured? These are questions that have been addressed in the academic and managerial literature for corporations. But developing approaches for understanding the drivers and measures of success for social purpose enterprises has not been extensively completed in either academic research or managerial practice. Examples of the practical questions that often arise include whether to invest in Africa or North America, to invest in health or education or job creation, and whether to invest in research or clinical treatment? Managers need better guidance and frameworks for how to do the analysis and make improved decisions. The questions relate to a clearer articulation of the need for a comprehensive identification of the objectives and of the stakeholders (current and future) and a broader definition of the impacts (both positive and negative and both intended and unintended). This is applicable to for-profit and nonprofit organizations and individual programs and projects. And a clearer analysis is needed to make improved decisions that will lead to improvements in both social and financial performance. Without a clearer understanding of the definitions and path to success and clearer measures of social impact, poor decisions will often be made. There is extensive academic literature, accepted managerial practices and standards, and centuries of experience in the measurement of financial impacts and performance. There is little of any of these for the measurement of social impacts and performance. For for-profit organizations, this literature and practices provide extensive guidance on how to evaluate success. Social purpose organizations (including nonprofit organizations, social enterprises, and the socially concerned functions and activities of corporations) likewise need to measure success. Given the current size and increasing importance of the social sectors, the need to develop measures of success has become particularly critical.

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THE SOLUTION: THE CRITICAL ROLE OF MANAGEMENT CONTROL AND PERFORMANCE MEASUREMENT IN SOLVING SOCIETAL CHALLENGES Managers need more guidance as to how they can more effectively implement strategy in social purpose organizations (or parts of organizations such as the corporate CSR function) and how to measure success related to social performance. There is also a dearth of quality research in the academic journals that can provide an effective foundation for further needed research on these questions. But, the fields of management control and performance measurement should be providing the academic research and guidance to managerial practice. They have made significant contributions to the design of the effective implementation of corporate strategies and the development of effective measure of corporate performance. The need now is to focus on the approaches to the implementation of strategies in the social sector that are likely to be most successful and the most appropriate measures of success. That is what these three research studies were designed to do. They focus on the drivers and measures of success in social impact in both social purpose organizations and in organizations in general. So, these studies include corporations, nonprofits, charities, governments, and impact investors. We have examined management control aspects including the strategies, structures, systems, rewards, culture, and people that are important drivers of success. We have also examined the performance measures that can be used to more effectively measure success. In each case, we have developed new models and new measures for use. There are significant research opportunities for the models and measures to be further tested and validated. The critical issues we are addressing need more attention. Millions of people are dying throughout the world of diseases we know how to prevent, diagnose, and treat. We don’t need additional research in science or medicine. What is needed is more effective implementation. We have the skills and knowledge to minimize the negative social impacts or increase the positive social impacts of organizational activities, but too often it is not done well even if the intentions and funds are available. Similarly, increasing numbers of foundations and impact investors want their capital to create more social impact, and are too often frustrated by the lack of success in achieving social impact. In all of these cases, improved management control and performance measurement theory and practice can make a positive difference.

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This broad set of concerns relates to how society and its organizations can more effectively address these challenges. To address these challenges the management control and performance measurement communities have increasingly focused on defining the drivers and measures of success. These three research projects have focused on addressing these issues. In the discussions below, examples from each of the three projects are included. Models for each of the three projects and extensive sample measures for each can be found in the articles and books cited in this manuscript. The examples below are illustrations of the systems and performance measures that can be developed and are sorely needed throughout these sectors and critical for their success. The needs are great for individual organizations in the sector and for the sector generally. This applies to organizations and investors that are both local and global. Among the important implications for researchers in management control and performance measurement is that in general the causal linkage or logic models are usually underdeveloped and underspecified. The performance measures are also underdeveloped. Many study participants and readers of the findings even question whether the social impacts can be measured and are surprised when a list of sample measures are developed and reported.

Global Health and Poverty This research stream was prompted by a recognition that millions of people are dying of diseases that we know how to prevent, diagnose, and treat. The challenges of saving these lives is not a need for medical or science research but rather a need for better systems to disseminate the products and services that already exist. And this is typically not much more expensive (and often less expensive than current practices). So, why are so many people dying if we know how to solve these problems? This project was built on extensive field experiences of the two coauthors that were obtained in very different ways. Eric Bing was a professor of medicine and a researcher in global health as he was doing field research in developing countries and working on the implementation of programs to address global health and poverty. I was a professor of business researching business solutions for alleviating global poverty and teaching a class that included a visit to either Rwanda or Liberia with all of the students doing projects on the commercialization of health or education technologies in developing countries.

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The solutions seemed to rely heavily on the concepts and practices of management control and performance measurement. We developed a new causal linkage model (commonly called a logic model in the nonprofit literature) to specify and articulate the inputs, processes, outputs, outcomes, and impacts that were expected (see exhibit 1). This and some of the core concepts were included in our first academic article (Epstein & Bing, 2011) that preceded our book (Bing & Epstein, 2013). Much of the effort in developing the logic model was spent on the processes and that we described as a comprehensive implementation approach to saving lives and reducing global poverty. Called the IMPACTS approach, it contains the process and activity elements that are necessary for success (see exhibit 2). For those that have worked extensively in performance measurement and management control, the elements are logical descriptions of the processes that are necessary to make the improvements. Some of these approaches are new concepts but most are the application of existing approaches and customized for these challenges. In addition to the extensive discussion of the processes, the articulation of the flow of the causal relationships and the expected outcomes has

Exhibit 1.

Global Health Impacts Model.

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Exhibit 2.

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The IMPACTS Approach.

proved very helpful to those involved in the design and implementations of programs on the ground. For example, the book includes an extensive discussion of the four expected outcomes that can be seen in the logic model: increased access, increased use, increased quality, and reduced costs. Much of the academic and managerial literature and practice in development focuses on increasing access to areas such as education, health, and capital. But increasing access is not enough. Though it is seen as the ultimate objective for many of the NGOs, that focus is also an important reason for their lack of success. Microfinance usually focuses on increasing access to capital but often does not provide the necessary education and training to facilitate

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the effective use of the capital received. Governments have been mandating increased access to education but without providing improved facilities and higher quality teachers, the quality of education is often not increasing. Increasing the number of vaccines available without providing access and education as to why it is important to increase use provides little benefit. As with most other effective systems for implementation of strategies, success here can be dramatically increased through a coordinated effort to implement all of the components of the system rather than expecting success from partial implementation. Careful articulation of both the processes and expected outcomes typically significantly improves the likelihood of success. In addition to the development of the logic model and the specification of each of its elements, we then proceeded to develop measures for the items in the logic model. Sample metrics are shown in exhibit 3. The development of metrics is significantly easier once a clear logic model and its elements are articulated. This is a logical next step in the application of the concepts and tools of performance measurement and management control to solving societal challenges. The result is a comprehensive approach to achieving solutions for global health and poverty.

Corporate Sustainability Long before my work in developing countries, I began work on how corporations could make significant positive impacts on society. Focusing my work on CSR, the corporate social audit and social accounting, and sustainability, the studies have spanned almost 40 years. This work included numerous books and dozens of articles in both academic and managerial publications. The primary focus was on the implementation of sustainability strategies and the measurement of success. It has included various research methods such as a very large field study with extensive field visits with more than 35 corporations in 1996 and numerous other field studies with additional organizations since (see, e.g., Epstein, 1996; Epstein, 2008b; Epstein & Rejc Buhovac, 2014) It has also included other empirical work with existing and constructed data bases and model development that was used by researchers and managers alike. The research studies have centered on the performance measurement and management control aspects of sustainability and the challenges that corporations often have in integrating the consideration of social and

Global Societal Challenges

Exhibit 3.

Sample Global Health Metrics.

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Exhibit 4.

Corporate Sustainability Model. PROCESSES

INPUTS

OUTPUTS

OUTCOMES

Broader environment Sustainability strategy Internal context

Sustainability structure

Sustainability performance 2

(may be both an output and outcome)

Stakeholder reactions

3

Long-term corporate financial performance

Leadership Human and financial resources

Sustainability systems, programs, and actions

Business context

Corporate costs/benefits of actions 1 Feedback Loop Three major sets of impacts:

1

Corporate costs/benefits of actions

2

Social, environmental, and economic impacts

3

Financial impact through sustainability performance

environmental impacts into the operational and capital investment decision making processes. Included are considerations of various management control mechanisms including strategy, organizational structure, systems, culture, performance measures, and rewards. Companies often claim commitment to sustainability but complain that integrating it into global businesses is extremely challenging. Exhibit 4 displays the model that was developed in 2008. In addition, similar to the discussions above on global health, extensive discussions and lists of sample metrics for each of the inputs, processes, outputs, and outcomes have been described in numerous publications (including Epstein, 2008a; Epstein & Rejc Buhovac, 2014). In addition to the model specification and a listing of sample measures, the book (Epstein & Rejc Buhovac, 2014) is organized around the management control elements that have been successfully applied to implement sustainability. It also summarized numerous large research studies that examined elements essential for successful sustainability implementation. Among the most recent and interesting is the field research investigating sustainability success at Nike, Home Depot, Nissan, and Procter & Gamble (Epstein, Rejc Buhovac, & Yuthas, 2012).

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Social Impacts of Foundations, NGOs, and Impact Investors We had developed measures for corporations in the corporate sustainability studies mentioned above. We also developed performance measures for another project focused on nonprofit performance measurement (Epstein & Rejc Buhovac, 2009). Yet, leaders in the burgeoning field of impact investing and in increasingly large and important charities and foundations often stated that they did not have adequate performance measures to evaluate success nor models to carefully identify and communicate the drivers of success. The field research studies that we embarked on to respond to this need with interviews and field visits with more than 60 organizations confirmed this. Just as in the two previous sets of studies, we developed models of causal relationships and specific performance measures were developed. The Social Impact Creation Cycle shown in exhibit 5 seems quite simple, yet both the flow and the related integrated content is mostly absent from both the academic and managerial literature in the field. As in the previous projects, details of the management control mechanisms are included in the

Exhibit 5.

The Social Impact Creation Cycle.

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MARC J. EPSTEIN

books and articles that report on project results. In addition to the importance of the development of the performance measures, this study also found more explicitly than previously the critical importance of a rigorously prepared and clearly communicated logic model. Many of the observed and reported failures in implementation related to the lack of a clear logic model. When developed, these models should be based on logic, on empirical evidence, or both. Too often, we found that they were developed based on neither. Further, the clearly articulated logic model is the basis of the development of the performance measures. Without the logic model, developing associated performance measures is difficult. We have shown in this project, in the previous projects in corporate sustainability, and in previous projects in nonprofit performance measurement that appropriate measures can be developed once a clear logic model is specified (see Epstein & Yuthas, 2014 for a complete report of the results of the research on social impacts of foundations, NGOs, and impact investors).

NEXT STEPS FOR ACADEMIC RESEARCH AND MANAGERIAL PRACTICE These three series of research projects were all focused on the use of management control and performance measurement approaches and mechanisms to solve global societal challenges. Research has shown the importance of these approaches and mechanisms in corporations but has not adequately examined their use in social purpose organizations. Similarly, managerial practices and use of these approaches and mechanisms are much more prevalent in corporations than in nonprofit organizations. This provides great opportunities for additional research and guidance for managerial practice. To increase the positive social impacts that organizations can make, guidance is needed on the application of management control and performance measurement to the formulation and implementation of strategies and to the measurement of success. Some of this is on the development of the logic models for organizations including the content and the managerial processes necessary for successful development. Additional research and guidance is needed on which organizational structures, systems, cultures, performance measures, and rewards are likely to lead to greater positive societal impacts and success. In some cases new theory is needed. In other cases, new designs of mechanisms are needed. Contingency research and

19

Global Societal Challenges

testing on when various mechanisms are more successful and determining the factors leading to success is critical. The three series of research studies reported here conclude that effective management control and performance measurement systems are critical for success. To successfully implement a strategy to increase organizational positive societal impacts, clear definitions and measures of success must be specified. We have developed these here, but additional design and testing is important. So, how can researchers provide more guidance to managers to more effectively measure and increase social impacts? And how can researchers do the empirical and field research necessary to move this forward? Researchers in management control and performance measurement can make a significant impact by more rigorously addressing these questions and applying knowledge and research experience in the effective implementation of corporate strategies and measures of financial performance to the implementation of strategy in social purpose organizations (and social impacts of corporations) and the measurement of social performance to compliment the measures of financial performance that already exist. The challenges are huge. Millions of people are dying of diseases we know how to prevent and cure. Organizations are creating negative social impacts that can be reduced. Social purpose organizations can more effectively create greater positive social impacts. Better application of management control and performance measurement approaches and mechanisms are a significant part of the solution. By working more extensively on both the academic research and the guidance to managerial practice, these challenges can be more effectively addressed and we can make a more significant contribution to society.

REFERENCES Bing, E. G., & Epstein, M. J. (2013). Pharmacy on a bicycle: Innovative solutions for global health and poverty. San Francisco, CA: Berrett-Koehler. Datar, S. M., Epstein, M. J., & Yuthas, K. (2008). In microfinance, clients must come first. Stanford Social Innovation Review, 1, 38
45. Datar, S. M., Epstein, M. J., & Yuthas, K. (2009). Management accounting and control: Lessons for and from the world’s tiniest businesses. Strategic Finance, 5, 27
34. Epstein, M. J. (1996). Measuring corporate environmental performance: Best practices for costing and managing an effective environmental strategy. Burr Ridge, IL: McGraw-Hill. Epstein, M. J. (2008a). Implementing corporate sustainability: Measuring and managing social and environment impacts. Strategic Finance, 7, 25
31.

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Epstein, M. J. (2008b). Making sustainability work: Best practices in managing and measuring corporate social, environmental and economic impacts. San Francisco, CA: BerrettKoehler. Epstein, M. J., & Bing, E. G. (2011). Delivering health care to the global poor: Solving the accessibility problem. Innovations, 2, 117
141. Epstein, M. J., & Crane, C. (2007). Alleviating global poverty through microfinance: Factors and measures of financial, economic, and social performance. In V. Rangan, J. Quelch, G. Herrero, & B. Barton (Eds.), Business solutions for the global poor. San Francisco, CA: Jossey-Bass. Epstein, M. J., & Rejc Buhovac, A. (2009). Performance measurement of not-for-profit organizations. Society of Management Accountants of Canada and the American Institute of Certified Public Accountants. Epstein, M. J., & Rejc Buhovac, A. (2014). Making sustainability work: Best practices in managing and measuring corporate social, environmental and economic impacts (2nd ed.). San Francisco, CA: Berrett-Koehler. Epstein, M. J., Rejc Buhovac, A., & Yuthas, K. (2012). Managing social, environmental, and financial performance simultaneously. Long range planning. Published online December 2012. Awaiting print publication. Epstein, M. J., & Yuthas, K. (2012a). Analyzing sustainability impacts. Strategic Finance, 7, 27
33. Epstein, M. J., & Yuthas, K. (2012c). Scaling effective education for the poor in developing countries: A report from the field. Journal of Public Policy & Marketing, 1, 102
114. Epstein, M. J., & Yuthas, K. (2014). Measuring and improving social impacts: A guide for nonprofits, companies and impact investors. San Francisco, CA: Berrett-Koehler.

FURTHER READING Bekefi, T., & Epstein, M. J. (2006). Integrating social and political risk into management decision making. Society of Management Accountants of Canada and the American Institute of Certified Public Accountants. Bekefi, T., & Epstein, M. J. (2008). Measuring and managing social and political risk. Strategic Finance, 8, 33
41. Epstein, M. J., & Freedman, M. (1994). Social disclosure and the individual investor. Accounting, Auditing, and Accountability Journal, 4, 94
109. Epstein, M. J., & McFarlan, F. W. (2011a). Joining a nonprofit board: What you need to know. San Francisco, CA: Jossey-Bass. Epstein, M. J., & McFarlan, F. W. (2011b). Measuring the efficiency and effectiveness of nonprofit’s performance. Strategic Finance, 4, 27
34. Epstein, M. J., & Rejc Buhovac, A. (2010). Solving the sustainability implementation challenge. Organizational Dynamics, 39, 353
356. Epstein, M. J., Rejc Buhovac, A., & Yuthas, K. (2010). Implementing sustainability: The role of leadership and organizational culture. Strategic Finance, 10, 41
47. Epstein, M. J., & Roy, M. J. (2001). Sustainability in action: Identifying and measuring the key performance drivers. Long Range Planning, 5, 585
604. Epstein, M. J., & Roy, M. J. (2007). Implementing a corporate environmental strategy: Establishing coordination and control within multinational companies. Business, Strategy, and the Environment, 6, 389
403.

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Epstein, M. J., & Schnietz, K. (2005). Exploring the financial value of a reputation for corporate social responsibility during a crisis. Corporate Reputation Review, 4, 327
345. Epstein, M. J., & Widener, S. K. (2011a). Facilitating sustainable development decisions: Measuring stakeholder reactions. Business Strategy and the Environment, 2, 107
123. Epstein, M. J., & Widener, S. K. (2011b). Identification and use of sustainability performance measure in decision making. Journal of Corporate Citizenship, 40, 43
58. Epstein, M. J., & Wisner, P. (2005). “Push” and “pull” impacts of NAFTA on environmental responsiveness and performance in Mexican industry. Management International Review, 3, 327
347. Epstein, M. J., & Yuthas, K. (2012b). Redefining education in the developing world. Stanford Social Innovation Review, 1, 19
20. Wisner, P. S., Epstein, M. J., & Bagozzi, R. (2006). Organizational antecedents and consequences of environmental performance. Advances in Environmental Accounting and Management, 3, 143
167.

PART II IMPLEMENTING PERFORMANCE MEASUREMENT AND MANAGEMENT CONTROL FOR IMPROVED PERFORMANCE

OPERATING CHARACTERISTICS OF HIGH PERFORMANCE COMPANIES: STRATEGIC DIRECTION FOR MANAGEMENT Belverd E. Needles, Jr., Marian Powers, Mark L. Frigo and Anton Shigaev ABSTRACT Purpose
The present study investigates whether companies that exhibit high performance characteristics in the pre-financial crisis period can maintain their high performance in the financial crisis period of 2007
2009 and, in particular, the post-financial crisis period of 2010
2011. Methodology
The current study of 1,473 companies in 25 countries and 66 industries (MSCI index) (1) extends the empirical research of prior studies through the year 2011; (2) identifies the operating characteristics (performance drivers and performance measures) and associated risk factors which were most critical with regard to sustaining, exiting, and entering HPC companies during the five 10-year periods since 1998
2007, and (3) summarizes conclusions about HPC results

Performance Measurement and Management Control: Behavioral Implications and Human Actions Studies in Managerial and Financial Accounting, Volume 28, 25
51 Copyright r 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1479-3512/doi:10.1108/S1479-351220140000028008

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from the 13 ten-year periods (1989
1998 to 2002
2011) in this stream of research. Findings
(1) Companies that sustain high performance over periods of financial stress clearly excel in asset turnover performance driver and on the performance measures of growth in revenues, profit margin, return on equity and return on assets. Sustaining HPC had less debt than other companies and consistent cash flow yields. Operating turnover ratios became less important in recent years as an indicator of high performance. (2) Although exiting companies maintained profitability, financial risk and liquidity, the key factor in their dropping out of HPC status is their failure to grow revenues. (3) Entering companies did not exhibit the superior performance in all categories. Practical implications and value
The results provide strategic direction for management of companies that aspire to HPC status and to maintain HPC status once gained, particularly in times of global financial stress. Keywords: Strategy; financial analysis; ratio analysis; performance measurement; financial crisis

INTRODUCTION Global companies often face challenges that threaten their ability to perform at a high level. High performance companies, those that can sustain exceptional performance over a long period, will inevitably encounter challenging periods. Consider that during the period covered by this study
1989
2011, crises in the world financial markets have occurred every 5
10 years: 1989
1991: Savings and Loan Crisis 1997
1998: Asian Financial Crisis 2000
2001: Dot-Com Bubble 2007
2009: Subprime Mortgage Financial Crisis Prior research cited in the next section has shown that these companies represent a small percentage of companies. It is therefore critical to understand the key operating variables and associated risks that can lead to a

Operating Characteristics of High Performance Companies

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company falling from elite status or to maintaining elite status and the opportunities for companies that achieve this status. Vital to the success are the links among strategy, execution and financial performance. It is important that management focus on the performance drivers associated with five key performance objectives and link them to the performance drivers and to common performance measures in the Financial Performance Scorecard (FPS). Further, it is essential to link the patterns of these operating variables for HPC to specific strategic risks, which cannot be anticipated, but which can be planned for. The global financial crisis of 2007
2009 is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s (Pendery, 2009). This period presented a challenge to all companies and opportunities for a few companies around the globe. The present study investigates whether companies that exhibit high performance characteristics in the pre-financial crisis period can maintain their high performance in the financial crisis period of 2007
2009 and, in particular, the postfinancial crisis period of 2010
2011. We find that there is significant turnover of HPC during these periods. We identify the operating characteristics that are most important in managing a company through these periods. We identify the operating characteristics of companies that were not able to maintain high performance, companies that were able to enter high performance, and companies that were able to sustain high performance. Identifying the important operating characteristics of each group of companies enables us to identify of the specific areas of risks associated with working through a period of crisis. We then summarize conclusions about HPC results from more than a decade of this stream of research. The results provide strategic direction for management of companies that aspire to HPC status and to maintain HPC status particularly in times of global financial stress.

PREVIOUS RESEARCH Financial statements provide important information about a company’s ability to achieve the strategic objective of creating value for its owners. The intelligent user of financial statements will be able to discern how well the company has performed in achieving this objective. Financial analysis provides the techniques to assist the user in this task. In short, the financial statements reflect how well a company’s management has carried out the

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strategic and operating plans of the business. The marketplace, in turn, evaluates this performance, and a value is placed on the company. Analysts have traditionally conducted ratio analysis by examining ratios related to various aspects of a business’ operations. Previous research related to financial statements, financial analysis, and ratio analysis has been conducted by, among others, Nissim and Penman (1999, 2001), Brief and Lawson (1992), Fairfield and Yohn (1999), Feltham and Olsson (1995), Fera (1997), Jansen and Yohn (2002), Lev and Thiagarajan (1993), Ohlson (1995), Penman (1991), Piotroski (2000), Selling and Stickney (1989), Burns, Sale, and Stephan (2008), Raynor, Ahmed, and Henderson (2009), and Raynor and Ahmed (2013). Soliman (2008) provides a thorough review of financial statement analysis literature. Initial research into the link between strategy and value creation began with an examination of the relation between three contrasting strategies: efficiency, innovation, and customer service by Needles, Frigo, and Powers (2002a), which the authors then extended to the entering economy of India (Needles, Frigo, & Powers, 2002b). These studies found that different strategies are characterized by exceptional performance on different measures, that efficiency and innovation are better differentiators of high performance than customer service, and finally that developing and the entering economy of India displays similar links among strategies and performance. These early studies were followed by a more comprehensive examination of the links between strategy and integrated financial performance measurement by Needles, Frigo, and Powers (2004) and Frigo, Needles, and Powers (2002). The objectives of this study were first to identify the financial characteristics of HPC over a test period (1990
1999) and then to observe the sustainability of these measures over contrasting test periods (1997
2000 and 2001
2003). Selection of HPC relied on a decade of research by Frigo and Litman (2002, 2008) that emphasized defined a “Return Driven Strategy” framework under which business activities are highly aligned with ethically achieving maximum financial performance and shareholder wealth creation. According to Return Driven Strategy (Frigo, 2003a, 2003b; Frigo & Litman, 2002, 2008; Litman & Frigo, 2004), the pathway to superior financial value creation is through the customer, by fulfilling unmet needs in increasing market segments. The Return Driven Strategy framework describes the strategic activities of HPC in various industries. It describes the underlying “strategic performance drivers” that have been shown to lead to sustainable shareholder wealth creation. It is robust in its ability to also explain the decline of companies where by charting how the tenets of Return Driven

Operating Characteristics of High Performance Companies

29

Strategy were neglected or could not be executed. Meanwhile, the rise of these companies’ performance and the sustainability of high performance can be attributed to attention to these tenets. Companies with mediocre or poor performance demonstrate significant gaps in their business models when viewed through the lens of Return Driven Strategy. This work provided the strategic underpinnings of our research. Comparisons of HPC and other companies served to identify a set of ratios that were statistically independent of each other and a set of ratios that interact in integrated financial ratio analysis. This research resulted in the development of an expanded set of financial performance objectives linked to financial performance, as follows: Financial Performance Objectives

Links to Financial Performance

Total asset management

Ability to utilize all the assets of a company in a way that maximizes revenue while minimizing investment

Profitability

Ability to earn a satisfactory net income

Financial risk

Ability to use debt effectively without jeopardizing the future of the company

Liquidity

Ability to generate sufficient cash to pay bills when they’re due and to meet unexpected needs for cash

Operating asset management

Ability to utilize current assets and liabilities to support growth in revenues with minimum investment

This global research included in the development of the FPS. The FPS is based on the premise that management must achieve these financial performance objectives in order to create value and that these financial performance objectives are interrelated. The FPS relates to a company’s strategic objectives as reflected in its financial statements through a structure or framework of value creation that shows the interaction of performance objectives, financial ratios, with particular emphasis on the drivers of performance and their relationship to performance measures as shown in Fig. 1. Further, the FPS relates the performance measures that analysts and the financial press commonly use to assess a company’s financial performance to certain independent financial ratios, called performance drivers, which

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BELVERD E. NEEDLES, JR. ET AL.

Strategic Objectives Investing Financing Activities

Operating Activities

Financial Statements

THE FINANCIAL PERFORMANCE SCORECARD

Cash Cycle

Profita bil

Op e Ma ratin na g ge m

Performance Drivers

ui

Asset Turnover

ity

ty

di

Return on Equity

Growth in Revenues

g

set As ment e

Cash Flow Yield

Liq

Cash Flow Returns

Operating Turnover Tot Ratios Mana al

set As ent

Free Cash Flow

Fin a n c i a l Ris k

Debt to Equity

Profit Margin

Return on Assets

Performance Measures Cost of Capital Value Creation or Destruction

Fig. 1.

The Financial Performance Scorecard: Key Component of the Value Creation Chain.

are critical to achieving the interrelated performance measures commonly reported in the financial press, as follows: Performance Objectives

Performance Drivers

Performance Measures

Total asset management

Asset turnover

Growth in revenues

Profitability

Profit margin

Return on assets

Financial risk

Debt to equity

Return on equity

Liquidity

Cash flow yield

Cash flow returns Free Cash flows

Operating asset management

Turnover ratios: Receivables turnover Inventory turnover Payables turnover

Cash cycle: Days’ sales uncollectible Days’ inventory on hand Days’ payable Financing Period

Operating Characteristics of High Performance Companies

31

While HPC uniformly excel on the basis of performance measures, they will not display uniform characteristics when it comes to performance drivers because these measures are more a function of the various strategies that the companies may employ to achieve high performance (Needles et al., 2002a, 2002b, 2004; Needles, Powers, & Frigo, 2006, 2009; Needles, Powers, Shigraev, & Frigo, 2010). The performance measures in the FPS are reflected ultimately in a return that is compared with a benchmark cost of capital. If the return exceeds cost of capital, value has been created. If the return is less than cost of capital, value has been destroyed. The “spread” between return on investment and the cost of capital was used as a criterion for selecting the leading companies; however, for purposes of evaluating the FPS, it is assumed that the cost of capital is determinable and given (Adman & Haight, 2002; Gebhardt, Lee, & Swaminathan, 2001). Specifically, the previous research investigated (1) evidence with regard to the components of the FPS
in particular, the relationships between the performance drivers and the performance measures and (2) the relationships between the performance of the HPC and that of their respective industries. The empirical results confirmed the basic propositions of the FPS and the criteria for choosing HPC. These results are summarized as follows: 1. The performance drivers and performance measures are independent of each other, as shown by low correlation among each other or low rank correlation. This proposition held true for all companies, for selected industries, and for industry leaders, all of which show independence among the ratios, with low correlations among performance drivers (except asset turnover and profit margin) and performance measures. 2. The criteria for choosing HPC were validated by the performance measures in the FPS model. The HPC exceed the industry averages across all performance measures and across all industries. 3. The HPC show mixed results with regard to performance drivers when compared with industry drivers. HPC excel on profit margin, are lower on cash flow yield, have lower financial risk, and have variable results for asset turnover. These results are due in part to the different strategies that companies may employ. Subsequently, Needles et al. (2006) replicated the above study with refinements that focused on the sustainability of performance by HPC and on operating asset management performance drivers and measures. The goal of liquidity is closely related to the goal of operating asset

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BELVERD E. NEEDLES, JR. ET AL.

management. Operating asset management is oriented towards the management control of the cash conversion cycle, which is the time required to make or buy products, finance the products, and sell and collect for them. Operating asset management is the ability to utilize current assets and liabilities in a way that supports growth in revenues with minimum investment. The drivers of operating asset management are the turnover ratios, and the performance measures are the days represented by each turnover measure. Taken together, the performance measures give an indication of the net cash cycle or financing period. The financing period represents the amount of time during which a company must provide financing for its operating activities. (Financing period = days’ receivable + days’ inventory on hand
days’ payable). The hypothesis was that HPC would have a shorter financing period than S&P companies because their superior financial performance would be a reflection of their operating efficiency. The results confirmed this expectation, as follows: 1. The financing period for HPC compared to S&P companies was shorter in almost all cases by about 28 days for the 1997
2001 period and 30 days for the 2002
2003 period, which equates to fewer days that need financing, thus lowering the financing costs for HPC relative to S&P companies. 2. The operating asset turnover ratios, however, showed more variability among industries and between HPC and S&P companies. We expected HPC to outperform S&P companies on receivables turnover, and this was generally the case; however, overall, the HPC advantage was nonsignificant. This result could be accounted for by the fact that HPC have less need to sell receivables and take advantage of off-balance-sheet financing than S&P companies. Further, HPC are better able to take advantage of trade creditors. 3. Inventory turnover ratios were in line with our expectations that the HPC would outperform the S&P companies. Inventory turnover for HPC exceeded that of S&P, which represents fewer days of financing needed, more than offsetting the shortfall from receivables. HPC had a slightly lower payable turnover than S&P companies. Strong operating results and low debt loads of HPC enable these companies to obtain longer terms than average from their trade creditors, which accounted for most of the difference. Thus, the HPC’s deficiencies noted above in receivables and inventory are overcome, so that these companies outperform their industry on the financing period.

Operating Characteristics of High Performance Companies

33

In an extension of HPC research to a second study of the developing country India (Needles, Powers, Shigaev, & Frigo, 2007), to the natural resource rich country of Australia (Needles et al., 2007) and the emerging industrial economy of Turkey (Needles, Turell, & Turell, 2012), the relationships among performance drivers and performance measures observed in the Western economies were found to hold with the exception of asset turnover in India and payables turnover in both countries. The low asset turnover ratios in Indian companies were attributed to the preponderance of asset-intense infrastructure companies among the HPC. The existence of higher payables turnover in Western developed countries reflects more willingness to rely on the credit of suppliers in these countries. Further extensions involved studies of corporate governance in high performance companies in India (Needles, 2009), Turkey (Needles, Turell, Sengur, & Turell, 2012), and Australia (Needles, Powers, & Shigaev, 2013). Further, 20 year (1988
2007) longitudinal results confirm the results of prior studies as to the long-term superior performance of HPC over other companies. For sustaining HPC, results were consistent as to total asset management, profitability, financial risk, and liquidity. Exiting HPC companies fail at total asset management, profitability, and operating asset management and significantly increase their financial risk. Entering HPC companies improve liquidity through improved operating asset management and cash flows. To become a HPC management must generate increased cash flows from income, manage receivables and inventory vigorously, and reduce its debt in relation to equity. Thereafter, management must concentrate on maintaining its asset turnover and growth in revenues while maintaining its profit margin and not increasing its debt to equity (Needles, Powers, Shigaev, & Frigo, 2013; Needles, Shigaev, Powers, & Frigo, 2010). In addition, it is essential to link the patterns of these operating variables for HPC to specific strategic risks, which cannot be anticipated, but which can be planned for (Frigo & Anderson, 2009, 2011).

RESEARCH QUESTIONS As noted above, previous research addressed issues of on what measures do HPC excel and can they sustain high performance over contrasting future periods. This study focuses on the issue of which performance drivers and measures are most likely to lead to falling from HPC status and the risks associated with those drivers and measures. Specifically, this study

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empirically investigates 1,473 companies in the United States and 24 other countries (MSCI index-Appendices A and B) representing 66 industries over the periods 1998
2007 (benchmark) and 2008
2011 to identify HPC from the former period that exited, maintained, or entered HPC status in the latter period including: (1) The operating characteristics of companies that were able to sustain high performance from 1998 to 2007 into 2008
2011. (2) The operating characteristics (performance drivers and performance measures) and associated risk factors which were most critical for companies that exited HPC status in 2008
2011. (3) The operating characteristics that were most critical for companies that emerged to HPC status in the post-financial crisis period.

EMPIRICAL SAMPLE Data for this study came from the CompuStat database. The analysis focuses on two groups of companies: companies in the MSCI World index, and HPC. In the benchmark group, we started with companies in the MSCI World index for which data exists consecutively from 1998 to 2011. Based on this condition, data for 1473 companies existed: 600 companies from United States and 873 companies from other countries. The current countries and industries that make of the MSCI World Index are shown in Appendices A and B. The following adjustment was made to the benchmark group of MSCI World companies: we excluded several industries whose financial structures typically depart from industrial, retail, and service businesses. These industries are banks, savings institutions, credit institutions, other financial institutions, financial services (broker) companies, insurance companies, real estate agents and operators of buildings, real estate investments trusts, hotels, personal services, miscellaneous recreation services, health services, hospitals, educational services, and child day care services. In total, 176 companies (147 companies from the United States and 29 companies from other countries) were excluded from the benchmark group. This adjustment improved the comparability of the benchmark group with the HPC. After that screen, our sample had 1297 MSCI World companies (453 companies from the United States and 844 companies from other countries).

Operating Characteristics of High Performance Companies

35

Companies included in the HPC group were removed from the MSCI World sample. After all screens, the size of the benchmark group in the benchmark period (1998
2007) was equal to 1244. HPC were identified from the HOLT database from Credit Suisse. In determining Global HPC, we identified five samples of HPC for five consecutive 10-year periods (from 1998
2007 to 2008
2011) where data was available from 1998 to 2011 according to the following criteria: • Cash flow return on investment (CFROI) (Madden, 1999) at twice or more the cost of capital or greater than 5% discount rate for 10 consecutive years. • Cumulative growth rate in total assets over 10-year period exceeds cumulative growth rate of World GDP over the same 10-year period. • Cumulative total shareholder returns (TSR) over 10-year period above the MSCI World cumulative return over the same 10-year period.

METHODOLOGY The performance of the HPC was compared to that of their respective industries and were expected to excel above their industry peers on performance drivers and measures which are overall indicators of success or failure in achieving the financial objectives of total asset management, profitability, financial risk, liquidity, and operating asset management. Ratios were calculated for each company for each year for years 1998
2011 (year 1997 was used to calculate averages that were used in the formulas). The next parts of the study examined the performance of sustaining, exiting, and entering HPC. In the analyses, HPC were grouped in three categories: • Sustaining
Companies that appeared in the 10-year period of 1998
2007 and in the period 2008
2011. • Exiting
Companies that appeared in the 10-year period of 1998
2007 but lost HPC status in the period 2008
2011. • Entering
Companies that did not appear in the period 1998
2007 but gained HPC status in the whole period 2008
2011. Companies were also grouped by the first two digits of the SIC code. In the benchmark sample, 51 industries were identified based on this grouping. In some industries, there were not enough HPC to derive reliable industry averages and discuss industry-specific results. We provide test data for industries in which we had at least three HPC (with two-digit SIC indicator).

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For sustaining HPC, companies were identified which were HPC in the period 1998
2007 and continued to be HPC in the period 2008
2011 and the means for each ratio were calculated for the period 2008
2011. For exiting HPC, the means for each ratio were calculated for the period 2008
2011. It includes companies, which were HPC in the period 1998
2007 but lost HPC status in the period 2008
2011. For entering HPC, companies were identified which were not HPC in the period 1998
2007 but were HPC in the period 2008
2011 and the means for each ratio were calculated for the period 2008
2011. The next part of the study examined the relative performance of the HPC in relation to the mean performance of their peers among MSCI World index constituents for each of the abovementioned test periods (2008
2011 for sustaining HPC, 2008
2011 for exiting HPC, and 2008
2011 for entering HPC). We expect “high performance” companies to excel above their industry peers on performance drivers and measures in periods when they held the HPC status. As to the periods when exiting and entering HPC did not hold the HPC status, we expect more variation in their performance. The results are shown without outliers. In order to detect and eliminate outliers in the samples, we applied the Grubbs’ test (NIST/SEMATECH). The Grubbs’ test detects one outlier at a time. The outlier is expunged from the dataset and the test is iterated until no outliers are detected. There are no outliers at the specific significance level if the Grubbs’ test statistic is less than the upper critical value for the Grubbs’ test statistic distribution corresponding to that specific level. To get better results on the T-test, we eliminated outliers for various ratios. In all cases, outliers represent less than 5% of the sample, usually much less than 5%. The elimination of outliers did not change the conclusions reached in examining the full set of data, but did affect the significance level on some ratios. In most cases, the results improved with the elimination of outliers. In the following sections, we will discuss the results with outliers eliminated, unless otherwise noted.

FINDINGS As noted above, the following criteria from previous studies (see above) as determined by Frigo (2002, 2003a, 2003b) were applied to the period 1992
2011: • Cash flow return on investment (CFROI) at twice or more the cost of capital or greater than 5% discount rate for 10 consecutive years.

Operating Characteristics of High Performance Companies

37

• Cumulative growth rate in total assets over 10-year period exceeds cumulative growth rate of World GDP over the same 10-year period. • Cumulative total shareholder returns (TSR) over 10-year period above the MSCI World cumulative return over the same 10-year period. Table 1 shows the results of this screen over the 11 ten-year periods. The number of high performance companies increased from only 53 in 1992
2001 to a peak of 151 in the period (2000
2009). The number dropped in the 2001
2010 period to 140 and continually dropped to 119 in the 2002
2011 period. U.S. companies have dominated HPC throughout but over time companies in other countries have increased their presence as HPC. For instance, in 1988
1997, 10 of the 13 HPC were from the United States with one each from France, Germany, and Japan, but by 2000
2009, 52 of 151 HPC were from 16 countries outside the United States. The complete period-by-period breakdown may be found in Appendix C. As a benchmark for HPC, Tables 2a
2c show the performance of HPCs relative to the MSCI World for the most recent two 10-year periods. Note that in all cases, HPC outperformed the World MSCI companies for all performance drivers and performance measures in all periods. The differences in favor of HPC in all cells were significant at least at the 0.000 levels (except payables turnover which was significant at the 0.0029 level. Significant movement by HPC among recent 10-year periods may be observed and is summarized in Table 3. (A comprehensive list of HPC for the five time periods under study is available from the authors). This table shows the movement of HPC in the five most recent 10-year periods including the period of financial crisis. In summary, only 45 companies sustained high performance over the entire period and the number of HPC is constant over the years. Up to 55 companies exited in one of the next periods, with the number dropping gradually over the years. Up to 10 companies exited and reentered in the last four periods, and up to 121 companies entered in the current period and any of the previous periods after 1998
2007. The following sections examine performance characteristics of the sustaining, exiting, and entering HPC.

1998
2007 Sustaining, Exiting, and Entering HPC Performances Compared with MSCI World: 2008
2011 Table 4 addresses 1998
2007 HPC performance compared with MSCI World: 2008
2011. In Table 4a, as in previous periods, sustaining HPC

The Number of Companies Selected by the Consecutive Application of each Screen.

240

129

53

Asset growth screen

TSR screen

62

122

228

71

139

248

77

166

278

99

205

311

105

234

339

110

231

334

134

150

232

151

171

235

140

171

242

119

155

232

1992
2001 1993
2002 1994
2003 1995
2004 1996
2005 1997
2006 1998
2007 1999
2008 2000
2009 2001
2010 2002
2011

CFROI screen

Time period

Table 1.

38 BELVERD E. NEEDLES, JR. ET AL.

26.77% 0.000000 11.20% 0.000176

2001
2010 all 2001
2010 T-test 2002
2011 all 2002
2011 T-test

Inventory turnover

−94.47% 0.000000 51.12% 0.000782

Receivables turnover

−86.04% 0.000000 −54.55% 0.000000 15.36% 0.000059 10.60% 0.002963

Performance Drivers Payables turnover

55.56% 0.000000 56.68% 0.000000

−18.14% −11.86%

48.58% −104.58%

35.29%

Average days’ payable

25.70%

103.10%

Financing period

62.71% 0.000000 59.83% 0.000000

Free cash flow

50.28% 0.000000 50.14% 0.000000

Return on equity

46.25%

Average days’ inventory on hand

Performance Measures

12.29% 0.000115 11.99% 0.000007

Cash flow return on stockholders’ equity

Average days’ sales uncollected

34.40% 0.000000 36.13% 0.000000

−127.84% 0.000000 −122.70% 0.000000

(2c) Global HPC: Operating Asset Management

2001
2010 all 2001
2010 T-test 2002
2011 all 2002
2011 T-test

Cash flow return on total assets

78.06% 0.000000 78.64% 0.000000

−47.41% 0.000000 −91.14% 0.000000

Return on assets

Performance Measures

Growth in revenues

Performance Measures Debt to equity

Cash flow yield

47.69% 0.000000 51.92% 0.000000

Profit margin

Performance Driver

(2b) Global HPC: Liquidity

2001
2010 all 2001
2010 T-test 2002
2011 all 2002
2011 T-test

Asset turnover

Performance Drivers

(2a) Global HPC: Total Asset Management, Profitability, and Financial Risk

Table 2. Global HPC Performance Compared with MSCI World
all 10-Year Periods. Operating Characteristics of High Performance Companies 39

40

BELVERD E. NEEDLES, JR. ET AL.

Table 3. High Performance Companies in Five 10-Year Time Periods. Regular TSR criteria. Group of HPC Sustaining Exiting in one of the next periods Entering in the current period and any of the previous periods after 1998
2007 Exiting and reentering in the last four periods Total

98
07 99
08 00
09 01
10 02
11

Number of HPC

45 55


45 31 53

45 25 74

45 17 75

45
67

45 55 121

10

5

7

3

7

10

110

134

151

140

119

231

excel in total asset management, profitability, and financial risk performance drivers and performance measures are significant at least at 0.0001 levels. These companies are very strong on asset turnover performance driver and on the performance measures of growth in revenues, profit margin, return on equity and return on assets. It is important to note that sustaining HPC had much less debt than other companies, a factor helped them make it through the recession period. Also, note that although exiting companies were able to maintain good performance drivers, they were not able to maintain an advantage in the performance measures of growth in revenues or in return on equity. Finally, entering companies did not exhibit the superior performance in all categories, particularly, asset turnover and return on equity, as did companies that were able to sustain high performance. These results reflect the years these companies were not high performers. Table 4b examines liquidity measures. A prior study (Needles et al., 2006) examined the apparent anomaly of generally lower cash flow yields for HPC. This analysis showed that weak companies tend to have lower incomes and more noncash adjustments such as restructurings and losses on sales of assets that produce very high artificial cash flow yields. HPC tend to have very consistent cash flow yields in the range of 1.0 to 3.0. The results in Table 4b are consistent with these prior findings. HPC had lower cash flows yields than other companies and the differences are significant. However, the low cash flow yield translates into exceptional performance in cash flow return on stockholders’ equity in which HPC exceed other MSCI companies by significant amounts (0.007 level). Neither exiting nor entering HPC exhibited a significant difference in cash flow return on equity.

1998
2007 HPC Performance Compared with MSCI World: 2008
2011.

21.61% 0.000106 25.33% 0.000087 −21.80% 0.003296

53.95% 0.000000 37.94% 0.000083 71.05% 0.000000

Profit margin 96.96% 0.000000 75.34% 0.319159 97.43% 0.000001

−74.44% 0.000000 −54.82% 0.000005 −116.96% 0.000000

Sustaining All Sustaining T-test Exiting all Exiting T-test Entering all Entering T-test

Cash flow return on total assets 32.11% 0.000000 36.16% 0.000000 46.45% 0.000061

Cash flow yield

−113.45% 0.000000 −68.99% 0.000000 −115.59% 0.000000

Performance Driver

15.65% 0.007176 23.28% 0.163564 −52.87% 0.121046

Cash flow return on stockholders’ equity

60.65% 0.000000 53.43% 0.000000 69.67% 0.000000

Return on assets

Performance Measures

Performance Measures

Growth in revenues

Debt to equity

(4b) 1998
2007 Sustaining, Exiting, and Entering HPC: 2008
2011 Liquidity

Sustaining all Sustaining T-test Exiting all Exiting T-test Entering all Entering T-test

Asset turnover

Performance Drivers

64.28% 0.000000 65.55% 0.000000 74.32% 0.000006

Free cash flow

57.41% 0.000000 53.68% 0.023948 31.64% 0.238275

Return on equity

(4a) 1998
2007 Sustaining, Exiting, and Entering HPC: 2008
2011 Total Asset Management, Profitability, and Financial Risk

Table 4.

Operating Characteristics of High Performance Companies 41

(Continued )

Sustaining all Sustaining T-test Exiting all Exiting T-test Entering all Entering T-test

−167.09% 0.000000 −45.78% 0.036469 −110.68% 0.000000

Receivables turnover

Payables turnover

−129.18% 15.98% 0.000000 0.014871 −116.83% −17.75% 0.000000 0.005076 −224.96% 29.37% 0.000000 0.113476

Inventory turnover

Performance Drivers

56.37% 53.88% 69.23%

31.40% 52.54%

Average days’ inventory on hand

62.56%

Average days’ sales uncollected

134.71% 97.93%

−41.58%

97.26%

Financing period

15.08%

−19.02%

Average days’ payable

Performance Measures

(4c) 1998
2007 Sustaining, Exiting and Entering HPC: 2008
2011 Operating Asset Management

Table 4. 42 BELVERD E. NEEDLES, JR. ET AL.

Operating Characteristics of High Performance Companies

43

Operating asset management results in Table 4c display a major anomaly. Inventory turnover and receivables turnover are lower as compared to MSCI industries. Past results would as shown in Table 2c above would lead to the expectation that HPC would usually excel in these turnover ratios in difficult times. However, this is not the case in the period ending in 2008
2011. This may be due to the financial difficulties of customers and the slowness of payment during the GFC years 2008
2011. HPC accounts receivable collection is dependent on the ability of customers to pay the bills, as well as the receivable processes of the HPC. The consistent cash flows of the HPC may enable them to be more accepting of slower payment from customers in order to keep them. Also, the longer inventory turnover may be explained by the desire to manage risk in the supply chain during the financial crisis plus low demand on the customer side. On the other hand, it is likely the banking crisis which limited loans to companies and in light of the high financial risk characteristic of non-HPC companies led to these companies reducing receivables and inventories to come more in line with high performers. Payable turnover did not show a significant difference. It is important to note that exiting companies had a significant longer financing period than do both sustaining and entering HPC, indicating that management of the cash cycle is very important to achieving and sustaining high performance.

SUMMARY AND CONCLUSIONS Companies receive the designation of high performance by achieving: • Cash flow return on investment (CFROI) at twice or more the cost of capital or greater than 5% discount rate for ten consecutive years. • Cumulative growth rate in total assets over 10-year period exceeding cumulative growth rate of World GDP over the same 10-year period. • Cumulative total shareholder returns (TSR) over 10-year period above the MSCI World cumulative return over the same 10-year period. Sustained high performance over 10 years or more is rare, never exceeding 10% of the companies in the MSCI index and averaging about 7%. Further, sustaining high performance is difficult. No company maintained high performance in all 11 ten-year periods studied. And only 57 (3.8%) sustained high performance over the last five periods since the beginning of the financial crisis in 2008.

44

BELVERD E. NEEDLES, JR. ET AL.

The results of this study provide a framework through the FPS (performance objectives > performance drivers > performance measures) for companies regardless of industry or country to focus their strategic efforts. To achieve HPC status and keep it once achieved, management must aggressively manage on operating performance as measured by six key numbers: • • • • • •

Revenue Net Income Cash flow from operating activities Total Assets Total Liabilities Total Equity that provide the components of four key performance drivers:

• • • •

Asset Turnover (Revenue/Average Total Assets) Profit Margin (Net Income/Revenue) Cash Flow Yield (Cash Flow From Operating Activities/Net Income) Debt to Equity (Total Liabilities/Total Equity)

Our research has shown that these numbers and ratios are statistically independent and thus measure difference components of performance as measured by such ratios as return on assets, return on equity, and free cash flow. The latter measures do not exhibit statistical independence. These findings validate key aspects of such frameworks as the DuPont model (ROA and ROE), but add the key dimension of cash flow as reflected by the cash flow yield, a measure first reported in our earlier research. Contrary to our priors, HPC do not have higher cash flow yields than other companies but have very consistent cash flow yields in good times and bad. This allows HPC to have predicable cash flows that allow them to do well and actually strengthen during times of stress. Further, HPC consistently manage the cash flow cycle well, especially the turnover ratios associated with receivables and inventories. In contrast to the tendency of many to focus only on revenue growth (Raynor & Ahmed, 2013; Raynor et al., 2009), HPC must control the growth of assets while growing revenues. While profit margin is an important driver of return on assets for HPC, asset turnover has proven to be a key variable in achieving and maintaining HPC status. Despite their apparent ability to take on more debt and make use of leverage, HPC control the level of debt in relation to equity. In summary, HPC excel at controlling risk by managing growth of assets (asset turnover), cash cycle turnover ratios, cash flows through the cash flow yield, and debt to equity.

Operating Characteristics of High Performance Companies

45

In all cases, unadjusted numbers have proved to be better at judging a company’s performance than adjusted numbers for measuring long-term high performance. For instance, total assets is better than “assets adjusted for goodwill” at giving a true asset turnover over time. Since non-HPC tend to have more special items in the income statement than HPC, “bottom-line” or unadjusted net income does not exclude these “special” items as measures such as “income before interest, taxes and depreciation (EBITDA) do. Our study of executive compensation also showed more emphasis by HPC on unadjusted bottom line benchmarks as well as nonfinancial measures when compared to non-HPC companies. Although the operating characteristics as represented by the six key numbers and four key ratios and the cash cycle can vary greatly from industry to industry, the same measures are important for all industries studied. As mentioned above, this study included companies in 66 industries. Similarly, studies of HPC across the diverse economies of the 25 countries in this study yielded similar results. Our in-depth studies of HPC in the specific varied economies of Australia, India, and Turkey confirmed the findings from the HPC research. Different industries rise to high performance depending on the country: Australia (mining and minerals), India (infrastructure and transportation); Turkey (emerging industries supplying the EU.) The present study has examined HPC in the MSCI index over five 10-year periods: 1998
2007, 1999
2008, 2000
2009, 2001
2010, and 2002
2011. The latter five periods correspond roughly to the period since the global financial crisis. It is now possible to draw some guidance to management during periods of stress: • Companies that are able to maintain high performance over periods of financial stress clearly excel in asset turnover performance driver and on the performance measures of growth in revenues, profit margin, return on equity and return on assets. It is important to note that sustaining HPC had much less debt than other companies, a factor helped them make it through the recession period. HPC tend to have very consistent cash flow yields in the range of 1.0
3.0. It is also clear that turnover ratios
operating management of receivables, inventory, and payables
has become less important in recent years as an indicator of high performance. The latter finding is very likely the direct result of the financial crisis, which forced all companies to reduce receivables and inventories due to shortage of debt, high financial risk, and lacking of lending ability by banks.

46

BELVERD E. NEEDLES, JR. ET AL.

• Although exiting companies are able to maintain profitability, financial risk and liquidity, the key factor in their dropping out of HPC status is their failure to grow revenues resulting in a decline in return on equity. • Entering companies did not exhibit the superior performance in all categories. Asset turnover in particular is not a key factor in becoming HPC. It appears to be more important in sustaining HPC status. Also, as above, operating asset measurements do not appear to be key factors with entering to HPC status. Obviously there are many factors and drill-downs that lie behind the six key financial statement elements and the resulting four key ratios but they should serve to focus management’s attention intensely. The risk management faces is that the profitability and liquidity financial performance measures that flow from these basic elements and key ratios will quickly suffer in periods of financial downtown. Further, for managements that aspire for their companies to achieve HPC status, they provide opportunities. This is clear from the number of companies that were able to sustain high performance and the number able to emerge as a high performers, periods of financial stress can be a period of opportunity.

LIMITATIONS AND FUTURE RESEARCH Although it is intended to be broadly representative of global financial markets, the MSCI Index used in this study is weighted toward large companies in developed countries. We have not taken into account the effects of many countries that adopted IFRS or a variation thereof during the past five years. Future studies can address a broader population and examine the effects of IFRS. We also did not look at effect of industry classifications on high performance. This will be the subject of future research.

REFERENCES Adman, M. A., & Haight, G. T. (2002). A fresh look at economic value added: Empirical study of the fortune five-hundred companies. The Journal of Applied Business Research, 18(2), 27
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Fairfield, P. M., & Yohn, T. L. (1999). Changes in asset turnover signal changes in profitability, McDonough school of business. Washington, DC: Georgetown University. Feltham, G. A., & Olsson, J. A. (1995). Valuation and clean surplus accounting for operating and financial activities. Contemporary Accounting Research, 11, 689
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11. Frigo, M. L. (2003b). Performance measures that drive the goal tenets of strategy. Strategic Finance, 85(4), 8
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176. Jansen, I., & Yohn, T. L. (2002). Using changes in asset turnover as signal of potential earnings management. McDonough school of business, Washington, DC: Georgetown University. Lev, B., & Thiagarajan, S. R. (1993). Fundamental information analysis. Journal of Accounting Research, 31, 190
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39. Madden, B. J. (1999). CFROI valuation. Oxford: Butterworth Heinemann. Needles, B. E. (2009). Corporate governance in India: Issues and practices of high-performance companies. Working paper presented at IAAER-ANPCONT Third International Accounting Congress, Sao Paulo City, Brazil, June 12. Needles, B. E., Frigo, M., & Powers, M. (2002a). Strategy and financial ratio performance measures. In M. Eptstein & J.-F. Manzoni (Eds.), Studies in financial and managerial accounting (Vol. 13, pp. 341
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Needles, B. E., Powers, M., & Frigo, M. (2008). Performance measurement and executive compensation: Practices of high performance companies. In M. Eptstein & J.-F. Manzoni (Eds.), Studies in financial and managerial accounting (Vol. 16, pp. 303
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853.

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Operating Characteristics of High Performance Companies

APPENDIX A: INDUSTRY COMPOSITION OF THE GLOBAL MSCI INDEX − 2011 Industry Group

Quantity of companies

13 15 16 20 26 27 28 29 32 33 34 35 36 37 38 44 45 48 49 50 53 54 56 59 60 63 67 73 79 99 Other

41 31 17 69 21 26 110 23 21 34 18 92 93 55 62 16 18 71 83 24 17 18 16 16 32 37 25 91 18 15 263

Total

1473

>14 (1%) at least 1% of the sample.

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BELVERD E. NEEDLES, JR. ET AL.

APPENDIX B: COUNTRY COMPOSITION OF THE GLOBAL MSCI INDEX − 2011 Country Code AUS AUT BEL BMU CHE CHN DEU DNK ESP FIN FRA GBR GIB GRC HKG IRL ITA JPN NLD NOR NZL PRT SGP SWE USA Total

Country

Quantity of Companies

Australia Austria Belgium Bermuda Switzerland China Germany Denmark Spain Finland France United Kingdom Gibraltar Greece Hong Kong Ireland Italy Japan Netherlands Norway New Zealand Portugal Singapore Sweden United States

53 11 15 3 30 4 39 16 25 21 52 107 1 11 26 14 18 318 21 17 7 8 21 35 600 1473

51

Operating Characteristics of High Performance Companies

APPENDIX C: DISTRIBUTION OF HPC BY COUNTRY FOR EACH 10-YEAR PERIOD
MSCI WORLD Regular TSR Criteria for HPC Selection Country 1998
2007 1999
2008 2000
2009 2001
2010 2002
2011 AUS BEL CAN CHE DEU DNK ESP FIN FRA GBR GRC HKG IRL ITA JPN NLD SWE USA

5 1 3 3

1

2 1 1 2

1 83

Total

110

1 1 1 2 5 2 1

5 1 5 5 1 1 1 1 7 9

5 2 6 7 2 1 2

4 2 7 5 3

5 2 4 4 2 1

7 8 1 1 1

2 90

7 9 1 3 1 1 1 2 2 99

2 98

2 83

134

151

140

119

1 5 6 1 2 1 1

ENVIRONMENTAL MANAGEMENT CONTROL SYSTEMS IN SMES
AN IMPLEMENTATION SCHEDULE Pe´ter Horva´th, Sebastian Berlin and Judith M. Pu¨tter ABSTRACT Purpose
To integrate environmental management systems into daily operations, the environmental aspects of management control systems (MCS) are enhanced. Although different approaches and concepts for Environmental Management Control Systems (EMCS) have been developed, two main problems appear: First, insights into how to implement EMCS are rare. Second, concepts are constructed mainly for large companies rather than for SMEs. Methodology/approach
To close these research gaps, an implementation framework for SMEs is developed based on Epstein’s corporate sustainability framework. By using an action-oriented research approach, the implementation framework is analysed and tested on three Logistics Service Providers (LSPs). Findings
The framework worked well with two of the firms analysed and failed with the third firm. The case study results enable a first

Performance Measurement and Management Control: Behavioral Implications and Human Actions Studies in Managerial and Financial Accounting, Volume 28, 53
79 Copyright r 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1479-3512/doi:10.1108/S1479-351220140000028009

53

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PE´TER HORVA´TH ET AL.

evaluation of the implementation requirements that are essential for implementing EMCS in SMEs. Keywords: Environmental management control system; implementation schedule; SME; environmental performance; case study

INTRODUCTION Environmental management control systems (EMCS) refer to the management of environmental objectives, strategies and programmes in a comprehensive, systematic, planned and documented manner. It is essential for building accountability and responsibility within the organisation in terms of its environmental performance (cf. Henri & Journeault, 2010). Although different approaches and concepts for EMCS have been developed, most of them have been developed and tested, to a large extent thus far, for large companies (cf. Mari & Bernardini, 2008). However, the majority of firms in Europe are small and medium-sized enterprises (SME) (cf. European Commission, 2005) and therefore have a significant impact on the environment. The diffusion of EMCS through SMEs has been disappointing (cf. Hillary, 2004). Missing EMCS concepts for SMEs may be one cause of this sparse diffusion. As SMEs often lack financial resources and several other factors like formal processes for developing strategic targets and a dearth of knowledge concerning environmental performance, EMCS need to be adjusted to their special needs. In order to provide specific assistance for SMEs and to close these research gaps, the objectives of this chapter are twofold: Firstly, to develop and test an EMCS implementation schedule for SMEs. Based on Epstein’s Corporate Sustainability Model (cf. Epstein, 2008), we developed an EMCS implementation schedule for SMEs. Secondly, to provide a better understanding of implementation requirements of SMEs. Although diverse requirements on EMCS in SMEs have already been defined and analysed in previous literature (cf. Epstein, 2008; Iraldo, Testa, & Frey, 2010), no evidence exists concerning the relevance of each requirement in the implementation process. In testing the developed EMCS implementation schedule in three case studies, the relevance of each requirement was analysed. By using the action-oriented constructive research approach (CRA), the implementation framework is analysed and tested on three medium- and

55

Environmental Management Control Systems in SMEs

small-sized Logistics Service Providers (LSPs). LSPs in particular are under critical and public observation as they exert a great impact on the environment. The structure of this chapter follows the steps of the CRA: the following section presents the main idea of the CRA and each of its steps. The further sections delve deeper into each step of the CRA, and the implementation model of the EMCS concept for SMEs is presented. The final section draws conclusions and recommends topics for future research.

RESEARCH FRAMEWORK: CRA CRA, developed by Kasanen, Lukka, and Siitonen (1993), solves problems in a real-life organisational setting through the construction of a management system. The CRA is viewed as a form of case studies (cf. Jo¨nsson & Lukka, 2007), in which the researcher is deeply involved with the object of the study. Compared to alternative research approaches, not only is there a claim for the theoretical contribution but also the necessity for evaluating the practical consequences for the theoretical construct (cf. Labro & Tuomela, 2003). According to Kasanen et al. (1993) and Labro and Tuomela (2003), there are seven crucial steps in the CRA as illustrated in Fig. 1. The seven steps of the CRA can also be arranged into three phases:

Preparatory phase 1. Finding a theoretically and practically interesting problem 2. Examining the potential for research cooperation with the target organisations

Fieldwork phase

3. Obtaining a profound understanding of the prior theory and the practical knowledge of the topic 4. Developing a theoretically grounded solution construction 5. Implementing and testing the construct

Theorizing phase 6. Examining the scope of applicability of the construct 7. Analysing the theoretical contributions

Fig. 1.

Phases and Steps of the Constructive Research Approach (Labro & Tuomela, 2003).

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the preparatory phase, the fieldwork phase and the theorising phase (cf. Labro and Tuomela, 2003). Like other qualitative research approaches, CRA must pass different quality criteria in research design. The concepts embodied in these criteria include construct validity (‘whether the method of gathering data is appropriate for the methodology/underlying paradigm of the research’) (cf. Melrose, 2001) and external validity (‘whether the results and conclusions can be generalised or transferred in their utility to another community’) (cf. Melrose, 2001). ‘Internal credibility’ and ‘external credibility’ are specific quality measures for action-based research (cf. Greenwood & Levin, 2007; Reason & Bradbury, 2008). In our research design we regard all quality criteria named previously.

PREPARATORY PHASE Finding a Theoretically and Practically Interesting Problem According to Labro and Tuomela (2003), a research question should be relevant to managers or other decision makers and practitioners (cf. Lindholm, 2008). Additionally, the problem should pose a theoretically significant problem (cf. Kasanen et al., 1993). LSPs in particular, exert a great impact on the environment. In 2010, transportation was responsible for approximately 30 percent of primary energy consumption in Germany (cf. BMWi (Bundesministerium fu¨r Wirtschaft und Technologie), 2010). Road traffic and shipping cover approximately 90 percent of the specific energy consumption. As a consequence LSP are obliged to control their environmental behaviour. As their service is per se environmentally harmful, they are requested also from the public and from their customers to reduce their environmental impact as far as possible e.g. through ‘green logistics approaches’. During preparation for research in this field, several LSPs were interviewed with regard to their environmental management systems and activities. It became clear that some of the companies interviewed were engaged in several environmental activities. However, they had no systematic approach for implementing environmental activities. They did not measure or control their activities nor direct their employees to achieve a greater impact. As a consequence, environmental activities were undertaken without concrete directions and were sometimes even counterproductive. An extensive literature review revealed that the structure and implementation of EMCS is theoretically challenging. Most EMCS are designed for

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57

and implemented at large companies (e.g. Crutzen & Herzig, 2012). Previous research has shown that there can be considerable difficulties in implementing EMCS methods effectively, particularly at smaller firms (cf. Durden, 2008; McAdam, 2000; Perrini & Tencati, 2006). SMEs lack several resources that are essential to implementing EMCS, including sufficient funding, formal processes for developing strategic targets, lack of knowledge about environmental performance and a lack of formal processes for internal and external reporting of performance indicators (cf. Garengo, Biazzo, & Bititci, 2005; Internationaler Controller Verein, 2011; PerezSanchez, Barton, & Bower, 2003).

Examining the Potential for Research Cooperation with Target Organisations The second step in CRA is to examine possibilities for long-term cooperation with the case organisations (cf. Labro & Tuomela, 2003). We decided to look for case organisations in the logistic services branch. It was also evident that these companies would have benefitted from implementing the EMCS model. Within the interviews it became obvious that the LSPs, in particular, had no comprehensive EMCS in use. We decided to work with three typical LSPs with less than 100 million Euros in revenues. The decision to work with three (not 2 or 4) companies was based upon two aspects: Firstly, more case studies in a research design lead to a higher validity of the findings (cf. Yin, 2009). Secondly, CRA requires a wide cooperation with the case companies and thus a high effort per case study. Therefore, we decided pragmatically for three case studies as the validity should be high and the whole effort was manageable. Following Hudson-Smith and Smith (2007), the cases were compared using the SME characteristics of organisational environment, competitive environment and management practices. Table 1 summarises the results of the structural analysis of the available data of each company and demonstrates that the three case studies exhibit different significance of SME characteristics. We first evaluate the characteristics and subsequently discus them with the case study participants and modified them, if necessary. The following companies were used as case study participants (characterisation regarding environmental initiatives): Company A is a LSP with 700 employees and one site. It offers a wide range of logistic services like international and national transports, transport of piece goods, export
and customer formalities, premium products

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58

Table 1.

Characteristics of the Case Companies.

SME Characteristics Organisational environment Flat, loose structures Flexible, adaptable and innovative Lack of bureaucracy, with informal practices Visible, involved management Lack of resources Skills shortages Lack of management expertise Competitive environment Adapts to market chances Low understanding of markets Lack of parity with customers/suppliers Limited strategic planning Management practices Complete planner Critical point planning Opportunistic planning Reactive planning Routine/habit Intuitive/irrational management decisions

Company A

Company B

Company C

3 4 3 4 2 4 1

5 4 4 3 4 4 4

3 2 3 1 4 2 2

4 2 2 2

4 2 4 5

4 2 3 4

4 2 2 1 4 1

1 3 2 4 2 3

2 2 4 3 2 3

1 = low congruence to characteristic; 5 = high congruence to characteristic.

(night service) to mention a few. The organisational environment is characterised by high flexibility, adaptability and innovation, a visible, involved management and a shortage of environmental management skills. The competitive environment possesses a high degree of market adaptability and vast strategic planning capabilities. In terms of management practices, the company can be characterised by a high degree of a complete planning processes and a rational management. The company’s participation is based on the company’s effort to be recognised by customers and employees as a ‘green company’ by providing high quality services, and by being accountable and innovative. Therefore, the company’s current environmental actions should be more focused and controllable, and its outputs should be measurable and reportable. Company B is a LSP with 200 employees and three sites. Company B specialises in the logistics for new furniture. The organisational environment is characterised by flat structures, a lack of bureaucracy and resources, and fewer environmental management skills than Company A. The competitive

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environment possesses a high degree of market adaptability and limited strategic planning capabilities. In terms of management practices, the company can be characterised as a reactive planner with few planning processes. The main management decisions are made by the owner, who is also CEO of the company. Decisions are made under bounded rationality, as the rationality is limited by the information and the finite amount of time he has to make decisions. The company’s participation is motivated by the anticipation of ‘green initiatives’ launched by its key customer, so that it may be recognised as an accountable and innovative partner. The output of environmental action should therefore be more measurable and reportable. Company C is a LSP with 200 employees and one site. They also offer several logistic services focusing on health care
and industry solutions sectors. The organisational environment is characterised by top management that is not highly involved in the organisational environment and high environmental management skills. The competitive environment possesses a high degree of market adaptability and limited strategic planning capabilities. In terms of management practices, the company can be characterised as an opportunistic planner. The top management consists of members of the owner’s family, with bounded rationality. The company’s participation is based on its goal of extending and refocusing its environmental management by hiring a new environmental manager. Company C is the only company in which no high-level manager participated in the case study.

FIELDWORK PHASE Obtaining a Profound Understanding of Prior Theory and Practical Knowledge of the Topic Three aspects are fundamental to this study: EMCS, Epstein’s Corporate Sustainability Model, and the implementation requirements of EMCS in SMEs. These aspects are discussed in the following sections. Environmental Management Control Systems As previously mentioned, EMCS are necessary for building accountability and responsibility within an organisation. For use within EMCS, various types of traditional controls, such as results controls, action controls,

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personnel controls and cultural controls must be adapted (cf. Merchant & Van der Stede, 2007). Results controls focus on the performance of each employee, department and the organisation as a whole. In the context of EMCS, various types of results controls have been developed. The literature focuses on the definition of environmental performance dimensions, such as materials, energy and waste (e.g. Clemens & Bakstran, 2010; Ienciu & Napoca, 2009) and on measuring environmental performance (e.g. Busch & Hoffmann, 2011; Henri & Journeault, 2008). Less literature exists regarding the setting of environmental performance targets (e.g. Horva´th & Berlin, 2012; Kellner & Otto, 2012) and on providing rewards for environmental performance (e.g. Lothe & Myrtveit, 2003; Steg & Vlek, 2009). Action controls occur in different forms, such as behavioural constraints, pre-action reviews, action accountability, and redundancy. With regard to EMCS, action controls mainly appear as environmental risk management systems (e.g. Failing, Gregory, & Harstone, 2007; Liu, Wang, & Li, 2012) and environmental audits (e.g. Darnall, Seol, & Sarkis, 2009; Simon, Bernardo, Karapetrovic, & Casadesu´s, 2011). Personnel controls focus on the self-control of employees. In the area of EMCS, personnel controls support the pro-environmental behaviour of employees (e.g. Remmen & Lorentzen, 2000). Examples include the provision of energy awareness that causes a behavioural change (cf. Nisiforou, Poullis, & Charalambides, 2012) and environmental training (cf. Perron, Coˆte´, & Duffy, 2006). Cultural controls are designed to put group pressure on individual employees through corporate norms and values. Cultural control can also be applied to environmental matters and, further, there are several papers that address corporate environmental culture (e.g. Linnenluecke & Griffiths, 2010; Papagiannakis & Lioukas, 2012). Several approaches combine these control elements with EMCS. Next to Sustainability Balanced Scorecard approaches (e.g. Butler, Henderson, & Raiborn, 2011; Hubbard, 2009) and new EMCS approaches, such as DartBoard and Clover of Sustainability (e.g. Bonacchi & Rinaldi, 2006), traditional environmental management systems, such as ISO 14.001 and EMAS, have been developed with the expectation that they will foster environmental performance (e.g. Comoglio & Botta, 2012; Iraldo, Testa, & Frey, 2009; Nawrocka & Parker, 2009). However, EMCS approaches are

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often inappropriate for SMEs and traditional environmental management systems lack several control elements like results controls on employee level. With the Corporate Sustainability Model, Epstein (2008) developed a comprehensive approach that combines EMCS approaches with traditional environmental management systems. Epstein’s Corporate Sustainability Model Epstein’s Corporate Sustainability Model offers a blueprint for EMCS, focussing on (cf. Epstein & Buhovac, 2010) The role of various drivers in sustainability. The causal relationships among the various actions that can be taken. The impact of these actions on sustainability performance. The likely reactions of the corporation’s various stakeholders. The potential and actual impacts on financial performance. The model can be applied for controlling all sustainability performance (triple bottom line approach) or for controlling single issues as environmental performance. The model consists of four areas: inputs, processes, outputs and outcomes (Fig. 2). Inputs come from the external context (regulatory and geographical), the internal context (company mission, strategy, structure, and systems), the business context (industry sector, customers, and products) and the Processes

Inputs External context

Outputs

Outcomes

Sustainability strategy Sustainability performance

Internal context

Sustainability structure Leadership

Business context

Stakeholder reactions

Long-term corporate financial performance

Sustainability systems, programs and actions

Human and financial resources

Fig. 2.

(may be both an output and an outcome)

Feedback Loop

The Epstein Corporate Sustainability Model (Epstein, 2008; Epstein & Buhovac, 2010).

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human and financial resources available to the corporation for sustainability purposes (cf. Epstein & Buhovac, 2010). Processes contain leadership as their central element. Therefore, Epstein emphasises the significant role of leadership in implementing EMCS. Leadership stands for the main cultural control. Only if management sets employees an example of an environmentally friendly behaviour, the corporate culture can change. Additional process elements include sustainability strategy, sustainability structure and, sustainability systems, programmes and actions (SPA). With these elements, action controls and personnel controls can be realised. Outputs and outcomes emphasise the measurement of performance, which is an effect of the realised processes. Epstein differentiates between intermediate results (outputs) and long-term corporate financial performance (outcomes). Although all other elements of the framework must be measured, the above-mentioned elements comprise the main result controls of Epstein’s approach. The model includes feedback information through reporting processes. The reporting processes generate timely information on actual and potential social and environmental impacts, stakeholder reactions and their effects on financial performance. These processes often challenge assumptions and modify future sustainability strategy formulation and implementation. While input and output/outcome elements focus mainly on information gathering and reporting, the focus of process elements lies on information processing. Following that it is obvious that the adequate implementation of process elements is essential to achieve environmental performance targets. Any description of the implementation of Epstein’s model should reflect this. There are suggestions about implementation stages, but no detailed description of the implementation process of the model. Epstein proposes four major stages (T1
T4) (cf. Epstein & Buhovac, 2010): T1
carefully evaluating the inputs and their likely effects on sustainability and financial performance T2
leaders develop the appropriate processes (strategy, structure, SPA) to improve sustainability T3
managerial actions lead to sustainability performance and to stakeholder reactions and financial performance T4
feedback information challenges assumptions and modifies future sustainability strategy formulation and implementation Additional information concerning implementation is provided in the case study examples. However, the examples lack some details, such as firm

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characteristics and different implementation stages for SMEs. Furthermore, there is less advice for service companies. Questions regarding the implementation of process elements are answered in a rudimentary way. This leads us to the necessity of defining an implementation process of Epstein’s model for SMEs. We started by specifying implementation requirements of EMCS in SMEs.

Implementation Requirements of EMCS in SMEs Diverse barriers hinder the broad diffusion of EMCS approaches such as EMAS and ISO 14.001 through SMEs (cf. Heras & Arana, 2010; Hillary, 2004). For instance, the cost of implementation and maintenance, such as external consulting and verification costs, seems to be a relevant barrier for SMEs, where financial resources are scarce (cf. Ammenberg, Bo¨rjesson, & Hjelm, 1999; Biondi, Frey, & Iraldo, 2000). The implementation of an EMCS must consider specific implementation barriers as (cf. Ammenberg et al., 1999; Biondi et al., 2000; Heras & Arana, 2010; Hillary, 2004): (a) (b) (c) (d) (e) (f) (g)

Lack of management and/or staff time Inconsistent top management support Inadequate technical knowledge and skills Implementation as an interrupted and interruptible process Inability to see relevance in every stage Perception of high cost and Difficulties with environmental aspects/effects evaluation and the determination of significance

Following that the implementation of EMCS in SMEs need to fulfil different implementation requirements to overcome these barriers. The requirements are derived from the identified implementation barriers. The derivation process was twofold. First, we identified implementation requirements from literature and tried to match them with the implementation barriers. Second, we discussed our matching with case study partners and made corrections, if necessary. The result of this process shows five main implementation requirements that match all implementation barriers (Table 2). With regard to the high importance of the process elements we studied the implementation of Epstein’s model and found that it does not consider these requirements comprehensively until now. Following that the implementation along the proposed stages is complex and with uncertain results for SMEs. Therefore, in next stage of our research an advanced

5

4

3

2

1

No.

Staged implementation, so that interruptions can be prevented. Design and Integrate performance measures for all Implementation elements and stages to deliver transparency regarding the effectiveness of the implemented EMCS elements. Ensure a continuous information flow regarding the current implementation stage and the environmental targets and to prevent questions concerning the relevance of the implementation. Delegate implementation responsibility in an early stage of implementation to involve every employee and create environmental knowledge on a broad basis. Consider the scarce resources (financial, management/ staff time, specialist knowledge, etc.) of SMEs through scalable activities and EMCS elements. X

X

a

X

X

X

b

X

c X

d

X

X

e

X

X

f

g

X

X

Addressed Implementation Barrier(s)

Author(s)

Tsai and Chou (2009)

Campos (2012); Taylor, Barker, and Simpson (2003); Zorpas (2010)

Burke and Gaughran (2006)

Burke and Gaughran (2006); Zorpas (2010) Burke and Gaughran (2006); Campos (2012); Rao, O’Castillo, Intal, and Sajid (2006); Zorpas (2010)

Implementation Requirements of EMCS for SMEs.

Implementation Requirements

Table 2.

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Environmental Management Control Systems in SMEs

implementation schedule for SMEs based on the implementation requirements is developed.

Developing a Theoretically Grounded Solution Construction As several interviews and workshops revealed, further development of Epstein’s framework was necessary. Although all case study partners agreed on the importance of each element of Epstein’s framework, the implementation advice that is given within the framework’s description was not sufficient for a practical implementation within the SMEs. Therefore, we decided to further develop the implementation schedule derived from Epstein’s descriptions for SMEs. The development process was twofold: In the first phase, a basic schedule was developed and discussed with participating companies. In the second phase, we applied the schedule within the companies and gathered qualitative data mainly through discussions and workshops regarding the several implementation aspects. A final schedule was fixed on basis of the gathered data. The resulting implementation schedule is divided into eight stages (T0
T7) that build sequentially on each other (Fig. 3). Every stage focuses on another aspect of the implementation. Fundamental to the developed schedule is the differentiation between active and target elements. The differentiation between active and target elements is a result of scarce resources in SMEs. Active elements are elements that are at the centre of implementation activities in one stage. Target elements are subject to the activities of the active elements and T0

T1

T2

T3

T4

T5

T6

T7

Active Element

Input Elements

Leadership (Top Management)

Strategy

Leadership (Middle Management)

SPA (Design)

Structure

SPA (Execution)

Output/ Outcome Elements

Target Element

Leadership

Strategy

Leadership (Middle Management)

SPA (Definition/ Design)

SPA (Execution/ Monitoring)

Output/ Outcome Elements

Structure

Input Elements

SPA = Systems, Actions, Programs

Fig. 3.

EMCS Implementation Schedule for SMEs.

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are affected by those elements. The implementation process consists of a sequence of target elements that are ‘activated’ by active elements. Through the segregation into two types of elements, SMEs can focus on one specific aspect of implementation. It allows an activity-based description of the implementation process for different stages. In contrast to Epstein’s model, the developed implementation schedule for SMEs starts in T0. T0 is a ‘pre-stage’ with input elements that affect the firm’s management. The focus lies particularly on the long-term effects of stakeholder requirements on the firm’s management. T0 symbolises a longer time period within which the managers feel the urge to do ‘something’ around environmental requirements. Within this period, management decides to implement (or enhance) EMCS. Activities in T1 are similar to Epstein’s suggestions. Top managers evaluate input elements and their effects on sustainability and financial performance. Consequently, a mission statement and specific long-term environmental targets should be defined. Strategic targets are derived from the requirements of the different stakeholder groups. Aspects of an environmental competitive strategy should be considered. Several output and outcome performance measures are defined to measure the targets. Middle management is involved in T2. The mission statement and environmental targets that are defined by top management are communicated to middle management and discussed. The aim is to encourage middle management and discuss all negative aspects and barriers from their viewpoint. At the end of T2, it should be clear to all members of management that environmental targets play a significant role within the management control system of the company. In stage T3, middle managers and top managers define and design SPAs to achieve environmental targets from a department-specific viewpoint. These SPAs include communication activities that ensure continuous information flow within the company concerning the environmental performance status of each department. For each SPA, adequate performance measures are defined that describe the link to the output or outcome measure of the specific environmental target. Each manager must be part of this process to ensure a high degree of penetration of the environmental targets within the organisation. All defined SPAs are collected from one member of the top management, ensuring the creation of ‘serious’ SPAs for each middle manager. One important aspect of the designed activities is the definition of an adequate organisational structure in T4. Specifically, there must be an

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environmental manager. The environmental manager position is fundamental, as it acts as a knowledge carrier as well as a project manager for all environmental activities within the company. The position should report directly to only one member of the top management team. In addition to the staffing of the environmental management position, each member of the organisation must feel accountable for the environmental targets. To achieve a feeling of accountability, ‘accountable persons’ for each department or team can build an environmental work group. In T5, each member of the organisation is involved in achieving the environmental targets. All activities are monitored by the environmental manager. Additionally, the environmental work group periodically discusses actual and new approaches for achieving the environmental targets. Stage T6 describes the measurement of the outputs and outcomes of the SPAs. The execution of SPAs affects the performance measures linked to each environmental target. The environmental performance measures are part of the actual reporting system and are reported within the existing reporting processes. The extension of the reporting system itself is a part of the SPAs. T6 is the last operational stage while T7 is a ‘post-stage’ that describes the long-term feedback of the firms’ activities on the upstream input elements. Therefore, T7 symbolises a longer time period within which stakeholders in particular can change their view of the firm. T7 is connected to T0, symbolising the long-term effects that the changed view of the main stakeholders exert on management. The developed implementation schedule fulfils all of the identified implementation requirements (Table 3).

Implementing and Testing the Construct The implementation schedule was validated within the three sample companies. The validation had a twofold purpose: Firstly, a successful implementation meant that the research process was successful (at least with regard to the most critical factors) and that the construct is technically feasible. The implementation in company A was accompanied by the wish of management to position the organisation towards achieving its environmental targets. Before the implementation of EMCS, environmental targets had been formulated as a part of the corporate vision but not delineated

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Table 3. No. 1 2

3

4

5

Fulfilment of the Different Implementation Requirements.

Implementation Requirements

Regarded through …

• Eight implementation stages applied • Performance measures for all environmental targets are defined (T1) and implemented through adapted reporting processes (T6) • Development of further performance measures is not part of the implementation process (see ‘Conclusion’) Continuous information flow regarding the • Information regarding the current current implementation stage and implementation stage and the environmental targets environmental targets is gathered from the accountable member of top management and from the environmental manager (T3
T6) • Information distribution is part of communication actions
communication activities that ensure continuous information flow within the company concerning the current status of the environmental performance of each department (T3) Delegate implementation responsibility • Implementation responsibility is delegated to middle management (T3), an environmental manager, special ‘accountable persons’ (T4), and to each employee (T5) Scalable activities and EMCS elements • Intensity of each stage defines the extent of each activity and element Staged implementation Performance measures for all implementation elements and stages

into strategic aims. This research project was not the initial reason for Company A’s environmental engagement, but has improved its engagement by including all of the company’s stakeholders (‘inputs’ from the Epstein model) and managers (stages T2 and T3). In the context of the realisation of the implementation schedule, three out of five managing directors at Company A participated on the project team. One of the directors was appointed as the environmental manager during the project term. The participation of the environmental manager in all subsequent meetings with the top management (stages T2 and T3) signalled the company’s dedication to its environmental goals.

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At Company B, top management was convinced that the firm had already implemented a sufficient number of environmental initiatives. The analysis of the input parameters thereby resulted in a re-thinking. It became clear that management had no consistent or global answer to its strategic requirements. The research project thereby exerted an ‘activating’ function on Company B’s ‘pro-active’ environmental strategy. Company B’s experiences were similar to that of company A. The manager, who is responsible for the firm’s headquarters and also the son of the firm’s CEO, kept employees and management informed throughout the project. The employees’ feedback and ideas concerning the measures were continuously positive. In Company C, implementation was accompanied by the environmental managers with no participation from top managers. The effort to integrate top management was unsuccessful. With reference to the implementation barriers the project failed because of barriers a (lack of management and/or staff time), b (inconsistent top management support) and f (perception of high cost). Basically there were two main problems: First, the implementation initiative was limited to the environmental management department. The environmental manager who was involved in the implementation process was not able to make the control of environmental performance, a topic on the top management agenda (barrier b). Therefore, the leadership dimension of Epstein’s framework was not part of the implementation. Although the identified strategic objectives referred to the entire enterprise, short
and long-term actions were limited to the environmental management department. A ‘pro-active’ orientation of the environmental strategy was not possible because of the ‘thinking in cost-dimensions’ mentality, which dominated the company (barrier f). Therefore, the environmental targets only contained efficiency targets. The second reason for the failure of the implementation was the workload of the environmental manager. Beside the job as an environmental manager, the person concerned was also responsible for a new site building project of the company (barrier a). This long-term and very operational task prevented the execution of the implementation process by the environmental manager. The length of the implementation stages of the case studies ranged between 10 months (Case 2) and 16 months (Case 1) (Table 4). Stages T0 and T7 have unaccounted time lengths because stages partially describe the long-term effects of stakeholder requirements on the firm’s management and the effects of environmental management on stakeholder requirements.

2 (5%)

2




24 (38%) 24 (57%)

Comments

Implementation Time.

• Long-term effects of stakeholder requirements on the firm’s management. • Greatly based upon top management resources (active element). Managers’ attendance was often required for daily business decisions, so scheduled workshops had to be rescheduled. • Strategy formulation is a time-intensive activity. Much reflection on the part of all participants is required within and between workshops. • Actual values of (newly) defined performance measures had to be raised. • Workshops with all 11 middle managers took place within two days. Durations of the single workshops ranged between 45 minutes and 120 minutes. Within each workshop the environmental strategy was presented and each manager was asked his personal opinion, the specific targets for which he wanted to be responsible, specific measures for each of his targets, and for barriers that might hinder him from reaching those targets. • Middle managers were located in three different sites. Management meetings were held at each site with all managers. • Design of a new IT-integrated environmental performance measurement system and comprehensive actions for each department of the firm were time-consuming • Focussed on the definition and implementation of environmental performance measures. Firm renounced a drill-down of the top performance measures and used a basic reporting system, so that no additional implementation effort was necessary. • Management wanted to build an environmental work group consisting of members from all departments. Furthermore, the concrete job description of the environmental manager was designed. • One responsible person for each site was named within the workshops • The only effort accounted for was monitoring and reporting the initiated actions of managers by responsible persons in both firms. • In both cases, the time span for stage T6 was set at six months. After six months, in all systems, actions and programmes were reviewed on the basis of different output and outcome performance measures. • Long-term effects of environmental management on stakeholder requirements

Table 4.

Length in weeks (share of total implementation time in percentage).

1/2

T7

a

1 2

0 (
)


2 1/2

T5

T6

2 (3%)

4 (10%)

2

1

24 (38%)

1

T4

T3

0.4 (1%)

1

T2


6 (10%) 12 (29%)

1/2 1 2

T0 T1

Length

Case

Stage

a

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Finally, it became clear that the implementation schedule worked well at Company A and Company B, while the implementation schedule failed at Company C. Preconditions for successful implementation were the fulfilment of the implementation requirements, top management support and the allowance of sufficient time to put the schedule in place.

THEORISING PHASE With our study we follow Jo¨nsson and Lukka (2007), which state that theory is more than delivering insights into causal relations between different entities, but also for closing the implementation gap that occurs with the appearance of new management control constructs (cf. Jo¨nsson & Lukka, 2007). So the theoretical contribution of our study addresses this gap with answering the question how to close the implementation gap in the field of EMCS.

Examining the Scope of Applicability of the Construct With regard to SMEs, comparing SME cases by using various SME characteristics, such as organisational environment, competitive environment and management practices demonstrated that the SME cases had typical SME profiles. The only constraint applied in selecting sample companies was the limit on revenues to 100 million Euros. Analysis of the implementation data revealed that the shares of necessary implementation time differed between Case 1 and Case 2 (Table 4). This difference may indicate a variation of the implementation schedule between SMEs of different sizes. This chapter also examined the highly competitive LSP industry. This industry is characterised by low revenue per order and low profit margins. The implementation of EMCS poses a resource burden across these types of companies. Although resources are scarce within LSPs, the implementation schedule worked well for the two sample companies. Company C’s failure was independent of industry characteristics. In conclusion, there were no indications that the industrial focus of this study was limited to LSPs.

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Analysing the Theoretical Contributions During the development of the implementation schedule, it became obvious that not all of the identified implementation requirements were equally relevant to implementation success. In testing the schedule in three case studies, the relevance of each implementation requirement was evaluated. The evaluation was twofold. As the implementation requirements were derived from the implementation barriers, the first step was to evaluate the relevance of these implementation barriers. The evaluation was realised through observations and discussions during the development of the schedule. Implementation barriers of high relevance are a ‘lack of management and/or staff time’ (barrier a), ‘inconsistent top management support’ (barrier b) and ‘difficulties with environmental aspects/effects evaluation and the determination of significance’ (barrier g). Case study C demonstrated that a lack support from management and insufficient engagement of the responsible staff condemned all implementation efforts to failure. However, Company A illustrates that overcoming such barriers leverages the success of the entire implementation project. All of the case studies presented difficulties with environmental aspects/ effects evaluation and the determination of significance (barrier g). These difficulties were perceivable in every implementation stage, particularly stages T1
T3 during the formulation of strategic targets, the communication of these targets and the design of necessary SPAs to achieve the environmental targets. Only the link between these stages and the environmental concerns of the stakeholders expressed through strategic targets allowed all of the implementation stages to be executed. Implementation barriers of mean relevance are represented by inadequate technical knowledge and skills (barrier c), the fact that implementation is an interrupted and interruptible process (barrier d) and that there is a perception of high cost (barrier f). Inadequate technical knowledge and skills represent mean relevance because they do not represent a barrier that can lead to a cancellation of the entire implementation project. Case An and Case B show that, although knowledge was scarce at the beginning of the implementation project, implementation as a whole was successful. However, Case C shows that existing knowledge and skills do not suffice to produce a successful implementation.

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The study cases have demonstrated that ‘implementation is an interrupted and interruptible process’ that is more an implementation constraint than a barrier. Nevertheless, it is of mean relevance for implementation because interruptions can cause a cancellation of the entire process, as Case C showed. The perception of high cost is also of mean relevance. While costs are commonly of high relevance in SMEs, the implementation costs of the EMCS were not because if the company decided to implement EMCS, the costs faded into the background. Cost itself was not a factor in the decision to implement EMCS in any of the case studies. The only implementation barrier of low relevance is the inability to see the relevance of all stages (barrier e). Both at the start of and during the implementation process, process questions about the relevance of single implementation stages did not emerge within the case studies. The evaluation results were aggregated for each requirement to potential benefits of the implementation requirements. The aggregation was based on the mapping between each requirement and the barriers to implementation (Table 5). The second step of the evaluation was the evaluation of the implementation effort regarding necessary staff time and skills for the implementation of each requirement. The realisation of a staged implementation caused low effort because it only required a canalisation of the implementation activities as realised within the implementation schedule. Performance measures for all of the implementation elements and stages and a continuous information flow need high effort because these requirements are realised through the definition and design of performance measures and reporting structures. The delegation of implementation responsibility also requires high effort. Every member of management must participate in individual discussions. Furthermore, specialised working groups and ‘responsible’ persons must be appointed and meetings held. Scalable activities and EMCS elements are associated with low effort. All activities and elements are designed in a scalable manner so that every company can decide for itself which effort to invest into each activity (Table 6). The two evaluation steps were combined as evaluation dimensions (Fig. 4). It becomes obvious that the requirement ‘delegate implementation responsibility’ (requirement 4) is the only requirement of high relevance. All other requirements have total ratings between a mean to a high relevance.

Performance measures for all implementation elements and stages Continuous information flow

Delegate implementation responsibility

Scalable activities and EMCS elements

2

4

5

X (h)

X (h)

a

(h) = high relevance, (m) = mean relevance, (l) = low relevance.

3

Staged implementation

Implementation Requirements

X (h) X (h)

X (h)

b

X (m)

c X (m)

d

X (l) X (l)

e

Implementation Barriers

X (m)

X (m)

f

Potential Benefit of Implementation Requirements.

1

No.

Table 5.

X (h) X (h)

g

High

High/Mean

Mean

Mean

High

Potential Benefit

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Table 6.

Implementation Effort of Implementation Requirements.

No. 1 2 3 4 5

Implementation Requirements

Implementation Effort

Staged implementation Performance measures for all implementation elements and stages Continuous information flow Delegate implementation responsibility Scalable activities and EMCS elements

High Relevance High

Implementation effort

2 3

Mean Relevance

Mean

Low

4

Low Relevance

Low

Low High High High Low

Implementation requirements 1

Staged implementation

2

Performance measures

3

Continuous information flow

4

Delegate implementation responsibility

5

Scalable activities and EMCS elements

1 5

Mean

High

Potential implementation benefit

Fig. 4.

Final Evaluation of all Implementation Requirements.

CONCLUSION This chapter illustrated the gap between different concepts of EMCS and their active implementation in SMEs. Epstein’s established and comprehensively validated Corporate Sustainability Model was used as the chapter’s starting point. Based on the elements of Epstein’s framework and additional implementation requirements, an implementation schedule was developed and tested. The study was based upon three sample companies. All three companies are SMEs and LSPs. The main results of the study delineate an implementation schedule for SMEs based on Epstein’s model. In addition, this chapter contributes to the implementation literature through the identification and evaluation of various implementation requirements. The scope of applicability of the

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developed schedule comprises SMEs as well as firms in other different industries. This chapter addressed aspects of implementation order for the first time in literature and, thus, builds a considerable base for further research. First, it is necessary to broaden the empirical basis of such research. While case studies provide a deep understanding of an entity, a broader research approach allows for the examination of whether the described phenomenon is of a significant meaning to SMEs. The data analysis points to differences between various SMEs regarding the shares of implementation time for different implementation stages. Further studies may examine this phenomenon to justify possibly the implementation schedule for different SMEs. A gap remains between the description of existing concepts and their implementation and use in SMEs. As environmental issues become more important, a better and deeper understanding of EMCS and implementation will become necessary. This chapter demonstrated the diversity of the difficulties of SMEs. Therefore, researchers must study this topic in greater depth.

ACKNOWLEDGEMENTS We are grateful to the German Federal Ministry of Economics and Technology for generous financial support (IGF-Nr. 17363 N/1 and IGF-Nr. 16993 N/1).

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MANAGEMENT ACCOUNTING TOOLS AS MEDIATORS OF A NEW ORGANISATIONAL CONSTRUCTION: A STUDY OF THE INTERACTION BETWEEN TOOLS AND ‘PHYSICIAN-MANAGERS’ IN A FRENCH PUBLIC HOSPITAL Isabelle Flache`re ABSTRACT Purpose
We utilise the actor-network theory (ANT)
based especially on Latour (2005)
to examine how management accounting tools affect physicians’ representations and new managerial practices in French public hospitals currently undergoing reform. Design/methodology/approach
We conducted a longitudinal case study
based on interviews and observations
in a large French public hospital in which dashboards are diffused to physicians and nurses dealing with both medical and managerial activities.

Performance Measurement and Management Control: Behavioral Implications and Human Actions Studies in Managerial and Financial Accounting, Volume 28, 81
103 Copyright r 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1479-3512/doi:10.1108/S1479-351220140000028010

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Findings
The case shows that head physicians and nurses are implicated in their new managerial tasks and spend time analysing dashboards. Management accounting tools thus play a role, as mediators, in organising new managerial practices, and dashboards are a means of materialising and giving structure to new managerial practices and enabling discussions and exchanges to take place between actors who were previously separated. Research implications
The case shows that management accounting tools are not necessarily useful because they help in decision-making or control
as in the dominant paradigm; rather, they are beneficial because they may help in changing representations and building a new collective organisation. Future research should therefore expand on the organisational and social roles of management accounting tools, especially in the healthcare field. Originality/value
Most ANT-inspired studies in management accounting focus on explaining changes in accounting practices, which are perceived as a consequence of an ANT process. This chapter, however, analyses the practices by which management accounting tools act as a vehicle to organisational change. Keywords: Management accounting tools; physician-managers; managerial practices; representations; organisational change; hospital

INTRODUCTION Current reforms to the French healthcare system have prompted public hospitals to implement substantial changes to their internal functioning, including the creation of large clinical units managed by head physicians (physicians who are involved in both medical and managerial activities) and the implementation of management accounting tools within these units. As a new domain of medical management is being created in healthcare organisations, the goal of this chapter is to examine how management accounting tools affect physicians’ managerial practices. The research is addressed through a longitudinal field study in a large French public hospital, based on semi-structured interviews and observations made in

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meetings. We utilise the actor-network theory (ANT), and draw especially on Latour (2005), in order to shed light on the role that management accounting tools may play, as mediators, in organising new managerial practices. Such a research is relevant in the current context of the increased implementation of management accounting tools within public organisations such as hospitals. Studying the uses and the effects thereof on managerial practices helps to evaluate the relevance and impact of reforms affecting public hospitals. Moreover, we aim at reversing the way ANT is usually used in management accounting research. Most ANT-inspired studies focus on explaining changes in accounting practices (Briers & Chua, 2001; Preston, Cooper, & Coombs, 1992; Robson, 1991) which are perceived as a consequence of an ANT process. This chapter, however, analyses the practices by which they are a vehicle of the evolution of actors’ representations. Finally, we wish to contribute to research on management accounting tools by focusing on the specific processes that make them acquire such a specific role, far from the traditional rational approach. Contrary to the dominant paradigm, we argue that they are not necessarily useful in helping decisionmaking or control; rather, they materialise and structure new managerial practices and enable discussions and exchanges between previously separated actors. The chapter is organised as follows. The first section provides a brief literature review of the controversial roles attributed to management accounting tools and physicians’ reactions to their implementation. We then present the ANT in its most recent version and explain the way we utilise it in our study. The third section examines the general context of the research and its methodology. In the empirical fourth section, we examine management accounting tools’ uses in the hospital studied. The chapter then moves to an analysis of the data case and a discussion about the role of management accounting tools as mediators and multiple entities. We conclude with a summary of limitations and implications for future research.

LITERATURE REVIEW We first present the main controversies about the role of management accounting tools within organisations. As the healthcare sector has encountered specific issues, the second part of the literature review focuses on their effects on physicians.

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The Controversial Role of Management Accounting Tools The role of management accounting tools is a major subject of debate. The dominant paradigm in this respect considers that they shape actions and thinking in a predictive and deterministic way (Hopwood, 1983; Lorino, 2002). Therefore, the tool is relevant only if it accounts accurately for the economic reality of an activity. Consequently, management accounting is generally considered to fulfil three main functions: firstly, it is the top management instrument from a strategic perspective (Kaplan & Norton, 2003), secondly, it enables decision optimisation and thirdly, management accounting is a way of driving organisational performance. However, other researchers place more importance on the role management accounting tools may play in organisational dynamics. Burchell et al.’s study (Burchell, Clubb, Hopwood, Hughes, & Nahapiet, 1980) is relevant in examining the way accounting is practiced concretely in its social and organisational contexts. According to the authors, accounting may play a role in dialogue, learning and creativity. Another example is given by Simons (1994), who studies the role of accounting systems in strategic change and reveals the interactive roles of management accounting tools. In France, studies such as Rabardel (1995) and Lorino (2002) have shown that management accounting tools can play other roles within the organisations, contrary to traditional uses. Moreover, Ferreira and Otley (2009) also suggest alternative roles such as facilitators and supporters of organisational learning and change. Although these studies shed light on the constitutive roles of management accounting tools within organisations, beyond the rational approach, they draw very general conclusions and do not allow us to understand their specific role and the concrete processes through which they acquire such a constitutive role.

Implementation of Management Accounting Tools in Hospitals, and the Medical Profession’s Response Current reforms have prompted the increasing implementation of management accounting tools within clinical units, characterised by a move from clan control (Ouchi, 1979) to financial control, where everything is traced and measured. Accordingly, ample attention has been paid to managers occupying dual professional and administrative roles (e.g. Ashburner, Ferlie, & FitzGerald, 1996; Button & Roberts, 1997; Fitzgerald & Ferlie, 2000). Studies examining the responses of physicians to the implementation

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of management accounting tools and the impact on practices provide very different conclusions. Most researchers suggest that there is a fundamental clash between accounting and medical cultures, so physicians are therefore resistant to the implementation of accounting practices (e.g. Bourn & Ezzamel, 1986; Doolin, 2001; Jacobs, 1995). Kurunma¨ki (2004), however, concludes with the ‘willing adoption’ of management accounting techniques by Finnish medical professionals, as accounting has become a fundamental part of being a doctor. Jacobs (2005) draws a less extreme conclusion and claims that the adoption of accounting technologies and practices concerns only a separate sub-group who have to manage financial and administrative responsibilities, while the rest of the profession remains unchanged. Therefore, the relationship between management accounting practices and medical staff needs further exploration. In order to examine the effects of management accounting on physicians, we need to distinguish between medical practices and managerial practices. In effect, while some physicians only deal in medical matters, other physicians have to manage financial and administrative responsibilities and thus use management accounting tools directly. Therefore, the aim of this chapter is to examine the effects of management accounting tools on physicians’ managerial practices, which will be achieved by utilising the ANT framework and particularly Latour (2005), as described in the next section.

ACTOR-NETWORK THEORY: MANAGEMENT ACCOUNTING TOOLS AS PARTICIPANTS IN THE ACTION We first present ANT, based on Latour (2005), and set out the main ideas of the theory. We then examine the way it is utilised in management accounting research and propose an alternative way to draw thereon.

The ANT Project: Reassembling the Social ANT examines how human and non-human actors connect with one another and form a collective. The ANT project proposes an alternative definition to what is commonly called ‘sociology’, whereby ‘sociology’ is not the study of the social as an aggregate above that would explain everything,

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but the tracing of associations between heterogeneous elements (human and non-human actors) that are not necessarily social (Latour, 2005). One of the many interesting points in Latour’s (2005) concept is the role attributed to objects. Accordingly, action is not the outcome of a unique force but the result of multiple agencies which come from different spaces and times, i.e. action is dislocated and distributed. In Latour’s action theory, objects also have agencies and explain the durability and the strength of social links. They are mediators that take part in the normal course of action, as they can modify a situation as well as humans. However, ‘this, of course, does not mean that these participants “determine” the action […], things might authorize, allow, forbid and so on. ANT is not the empty claim that objects do things ‘instead of’ human actors (…)’ (Latour, 2005, p. 72). Interestingly, Latour (2005) also presents the process of translation in a new way. Translation has long been understood as a ‘Machiavellian’ process (Star, 1991) in which a superior actor directs a process to persuade, enrol and mobilise actors to take part in his network. Latour (2005) suggests another approach in which actors are no longer at the centre but are rather connections between actors. Therefore, translation is a connection, a relation that transforms (and not simply transports) action. These transformations exist only if the means that produce the social are considered as mediators and not as intermediaries. Intermediaries only transport a unique cause towards an already known effect (input leads to a determined and predictable output). Mediators, however, transform and translate actions in unpredictable directions. Therefore, ‘there is not “society,” no social realm, and no social ties, but there exist translations between mediators that may generate traceable associations’ (Latour, 2005, p. 108). Therefore, neither the local nor the global are good units of analysis (as in the micro-macro and actor-system debates) but are instead connections and attachments. Consequently, the social is not made up of social ties already gathered in a specific place, but is rather the movement between non-social elements, a fluid which ‘circulates everywhere as a movement connecting non-social things’ (Latour, 2005, p. 107). In this definition, connections and attachments are more important than actors. Therefore, the word ‘actor’ has to be understood as ‘actor-network’: ‘So, an actor-network is what is made to act by a large-shaped way of mediators flowing in and out of it. It is made to exist by its many ties: attachments are first, actors are second […]. From now on, when we speak of actor we should always add the large network of attachments making its acts’ (Latour, 2005, p. 217).

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ANT and Management Accounting Tools: From Consequence to Cause of Change In management accounting research, most ANT-inspired studies deal with accounting change (Justesen & Mouritsen, 2011) as the outcome of historical contingent processes in which heterogeneous elements are linked together temporarily in new accounting constellations (Miller, 1991). The ‘actor-oriented’ concept of translation is used to understand what happens when an accounting object goes from one setting to another. One conclusion is that the accounting phenomenon is never simply diffused but is translated and partakes in a network of actors and thus acquires new properties when it travels from one setting to another. The aim is to account for the constructed nature and the process of fabricating accounting systems. (Justesen & Mouritsen, 2011). For example, Preston et al. (1992) utilise ANT in order to show that management budgeting is ‘fabricated’ and thus is a continuously rebuilt construction of ideas and technologies. Other researchers have examined the construction of ABC systems (e.g. Briers & Chua, 2001; Colwyn Jones & Dugdale, 2002), which are considered as complex translation processes involving numerous actors. Llewellyn and Northcott (2005) re-open the black box of the ‘hospital average cost’ to track the processes that led to its construction. The main thrust of these studies is to show that the accounting phenomena we tend to take for granted are actually fabricated and shaped by several actors who mobilise different strategies to persuade and enrol other actors. Although ANT has enabled recognising accounting objects’ materiality (Justesen & Mouritsen, 2011), they are the outcome of a construction process and not a means or a vehicle of change. The aim of our research is to offer a new line of inquiry, utilising the ANT framework not to examine the fabrication of a management accounting system as the outcome of a process but rather to study it as a vehicle and a cause of a changing process, in order to account for the role of relevant tools in the implementation of new managerial practices. The idea is to move away from the ‘deconstruction’ perspective and to focus on the multiple being of the accounting phenomenon. Therefore, the most recent ANT perspective should enable a better understanding of the power of management accounting objects, not because they are copies of the world but because they are made strong by the multiple attachments that constitute the accounting phenomenon (Justesen & Mouritsen, 2011).

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RESEARCH METHOD General Context Current French healthcare system reforms have led to public hospitals implementing substantial changes in their internal functioning. Particularly, the new governance method is based on two main principles: priority is given to ‘medico-economic’ management and a subsidiarity principle in which decisions have to be taken as closely as possible to the operational level. Fundamentally, it stems from the creation of large clinical units, which are much wider than the former very specialised departments. Some physicians have become head physicians and are accountable for these units and have management (e.g. financial and human resource) responsibilities. They are assisted by a head nurse and a management assistant, so that the top echelon of a clinical unit involves medical, nursing and administrative actors. The consequences of these organisational changes are substantial, especially in management accounting, which has become increasingly more local as these new ‘managers’ use new management accounting tools. The hospital we studied (Hospital A) is a large, general healthcare organisation (more than 1,000 beds). As a public hospital, it is subject to current reforms and is divided into seven clinical units, each managed by the aforementioned team. Each clinical unit is divided into specialised departments. Management accounting tools started to be implemented within the clinical units between 2010 and 2011. Today, head managers are used to being provided with dashboards which are, although perfectible, well-defined for each clinical unit. However, the interesting point is that clinical unit functions are still being deliberated, as the missions of each actor are still blurred and head physicians and head nurses have to deal with unprecedented managerial issues.

Methodology We conducted a real-time and longitudinal case study (Yin, 2009) in a French public hospital to examine the way clinical units’ dashboards were used within the units and by top management (May 2012 to May 2013). We employed an emergent research process (Ahrens & Dent, 1998), whereby the field study started without a theoretical framework or a

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pre-defined research question. The way we approached the field seems consistent with the ANT methodology, as the clinical units were still in their developmental infancy, which fits with Latour’s (1987) methodological advice to study things as they happen. While interviews allowed us to access multiple actors’ points of view and representations on current and past events, observations in meetings gave us access to real-time events. Moreover, Latour recommends ‘following the actors themselves’, and although we couldn’t follow all of them, we could follow one kind
the clinical unit’s dashboards. In particular, interviews were based on dashboards, and the meetings observed were those where dashboards were used. Twenty-two semi-directive interviews were conducted with heterogeneous actors, namely clinical unit managers (head physicians, head nurses, management assistants) and top management members (general director, management accountant, quality director, etc., see Appendix A). Some people were interviewed twice, in order to gather additional information on specific issues or about themes that had emerged. The interviews ranged between 45 and 80 minutes in length and were recorded and transcribed. The initial interviews, conducted by two researchers, focused on the management accounting system and tools as well as the actors’ uses and perceptions of the various dashboards. We tried as soon as possible to show actors dashboards so that they could react accordingly. As themes emerged from the data, a second round of interviews, conducted by one researcher, focused on investigating more specific issues, particularly evolutions perceived by the actors and relationships with top management. Our case study is also based on meeting observations. More than 25 hours were spent attending meetings in which clinical unit managers were confronted with managerial issues and dashboards inside the clinical unit or with top management. We observed two types of meeting (see Appendix B). At the hospital level, the meeting of all clinical unit managers allowed a better understanding of the general context of the hospital. At the clinical unit level, for example, we observed several clinical units’ biannual management reviews. Finally, a documentary analysis was carried out for triangulation purposes. Firstly, archival data was compiled, particularly the minutes of past meetings and activity reports. Secondly, other documents were given out during the interviews, such as specific dashboards, PowerPoint presentations and work charts.

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THE USES OF MANAGEMENT ACCOUNTING AT HOSPITAL A This section offers an account of the way management accounting tools are used and the responses of the different actors to these new managerial practices.

2007
2009: Clinical Units as Empty Shells Clinical units were created at Hospital A in 2007, following the 2005 reform concerning the new organisation of French public hospitals. Head physicians and head nurses became responsible for these units. At the head physician level, no resistance was encountered. Physicians became head physicians on a volunteer basis, and some even approved these changes, as stated by the Emergency head physician: I believed a lot in this clinical unit’s organisation, from the very start. To me, it made sense. I believe that professionals always have a lot of ideas [ … ]. When we have the chance to have regular places for exchanges, I think that it is from there that ideas should come … credible and relevant ideas for improving and optimising the organisation.

However, head physicians and head nurses all declared that this new organisation had no consequence and that the clinical units were just empty shells: Before the arrival of the new hospital director [2010], honestly … nothing happened; I think that from a cultural point of view it wasn’t easy, even at the top management level. There was mostly the wish to conform to the legislation, there was no real desire. (Emergency head physician)

Although some top managers believed that the creation of clinical units was an improvement, it was a non-delegation culture that dominated and the idea that head physicians were not able to manage their units: Four years ago, I made a proposition. Each year, we have a budget for medical furniture and there is a commission which examines the projects of the various departments and which decides. The idea was to say: enough with the hours of meeting with the commission, why don’t you give to each clinical unit a part of the budget and let them decide the medical furniture they want ? People said, ‘No, it’s too complicated, no, we are not going to give them that
they will misuse it’, etc. (General affairs director)

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The New Director Arrival: Dashboard Implementation and New Management Rules for Clinical Units The new director’s arrival in January 2010 was considered by all the actors as the moment where ‘the clinical units’ operation really was put in place’ (Head nurse General medicine 1), and the hospital was quickly engaged in many changes, especially in management accounting. The importance of management accounting issues was emphasises by the hospital director’s decision to take the part-time management accountant from the financial department and give her the full-time position of management accountant under the general director. Moreover, three management assistant jobs were created in order to help clinical unit managers with accounting and dashboards issues. Moreover, while management accounting tools existed only at the hospital level, dashboards were created and each clinical unit manager was given financial, activity and quality dashboards, detailing indicators for the whole unit and for each specialised department. They are diffused to clinical units four times a year. Income and expense indicators are gathered in ‘financial dashboards’ provided by the management accountant. The most important cost item for all clinical units is expenditure on medical and paramedical staff, as they account for around 70% of total outgoings. Other expenditures include drugs, medical supplies and more general expenses. Activity indicators include mainly numbers of admissions, average length of stay, rate of occupancy, percentage of coded diagnoses, etc., and are provided by the physician in charge of the medical information department (MID). As for quality, indicators relate to patient records, namely the keeping of patient records, pain scale traceability, detection of nutritional disorders, etc., and are provided by the Quality department. According to top management, the function of these dashboards is to make clinical unit managers pay attention to financial issues and be more sensitive to economic realities. In particular, the general affairs director wants clinical unit managers to ‘touch with their fingers a number of economic realities’. For the hospital director, the aim of implementing such dashboards is to ‘provoke questioning’ by clinical unit managers. The director has also established a new way of functioning for clinical units. Firstly, all the chiefs and head nurses of the clinical units will have to meet once a month with all the members of the top management in order to exchange about various and general issues. Secondly, managers of each clinical unit will have to meet top management twice a year in order to review clinical units’ management and define their new objectives.

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Gathering around Management Accounting Tools with Top Management: Focus on the Management Review Meeting of the General Medicine 2 Unit, April 2013 The managers of each unit meet twice a year with certain top hospital managers, the management accountant and the MID physician, in order to ‘report on the management of the year 2012, regarding financial, activity and quality aspects’ (General affairs director). The management review of the Surgery unit on 26 April 2013, is a typical example of these meetings. Financial, activity and quality dashboards are examined over two and a half hours. The meeting starts with a review by the MID physician of all the activity dashboard items. For each item, he focuses specifically on indicators that have improved or worsened compared to the previous year, indicators that need specific attention regarding issues met by the unit or indicators for improvement. The MID physician explains some of the anomalies, as well as the head physician and the head nurse. For example, several sub-units had experienced a decrease in activity (measured by indicators such as the number of patient admissions). The three protagonists explained this issue as being the result of medical staff shortages caused by retirements, resignations and subsequent recruitment problems. The general affairs director then takes over the meeting and moves to a review of the financial dashboard. He reviews all the items and indicators written in the document, for the whole unit and for each sub-unit. The financial director intervenes specifically to comment on income, as this relies on specific sources of finance (health insurance, regional funds, etc.) The meeting ends with the review of quality indicators, done by the quality director, who dwells on low indicators and gives advice to the unit managers on how to improve them. More generally, clinical unit managers, by justifying financial, activity or quality results to top management, help administrative members to understand operational realities and medical and care issues. The management accountant, financial director and MID physician take part in the discussion to clarify certain accounting or financial items or to explain how indicators are calculated. Head physicians often ask for explanations on matters they do not understand. It should be noted that these management review meetings are not perceived as a tool for controlling clinical unit results, as managers are not asked to do so and no decisions are taken after the meeting, regardless of whether the clinical unit has bad or good financial results:

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We have always explained that what is important is the financial equilibrium of the hospital and not of the clinical units, because the clinical unit division was done based on medical reasoning and not financial reasoning. (General affairs director)

Moreover, clinical unit dashboards are used by the clinical unit managers outside of their formal relationship with top management, as the management assistant and the head nurse regularly meet in order to ‘analyse’ the dashboards, i.e. to examine indicators, compare them with the previous period and try to explain any changes. They also meet regularly with the head physician (once a month to once a week, depending on the clinical units), in order to deal with clinical unit management issues. Dashboards seem to be looked at especially when something wrong has been detected and when dashboards have just been diffused. Therefore, inside clinical units, financial, activity and quality dashboards circulate between the three managers. In particular, by analysing the dashboards, these managers hypothesise about what could have causes such a change and share their own points of view. The management assistant offers her knowledge in management control and the design of dashboards, the head nurse has expertise in sub-unit operations and the head physician contributes his medical expertise and knowledge.

Head Physician’s ‘Managerialisation’ According to head physicians and head nurses, such dashboards are useful, as they provide accurate information about what they have to deal with and enable them ‘to know exactly where [they] are’ (Surgery head physician). Thus, the Emergency head physician declares: What is interesting today is that between 2010 and 2011, tools were established, that is to say financial tables, activity tables, etc. It is now well-organised for every unit and department and it has considerably changed things; it has given us visibility on what we were supposed to manage [ … ] and this habit to monitor things and to see what are the effects.

It seems that activity and financial indicators are the most closely examined pieces of information for head physicians, who seem to pay particularly more attention to expenses and activity volume indicators. During the interviews we conducted, head physicians were able to comment on financial dashboards and explain indicators. Meetings are also an opportunity to go over dashboards with clinical unit managers. For example, a formal presentation of the financial dashboard by the management

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accountant, during the May 2013 clinical unit managers’ council, raised some comments by head physicians. Concerning the management accountant’s presentation of the Emergency unit’s deficit decrease, the responsible head physician was able to explain very precisely and easily to the audience the sources of additional income and expense reductions: The Post-Emergency department is profit-making because we were able to add value to activities which took place in the corridors, and there is still scope for improvement. In the Imaging department, there are not enough physicians, and it is an issue, as they generate income. The only lever for action was expenses, and the physicians of the unit did not make a great effort in this respect. In the Intensive Care department, admissions cannot be controlled and the only solution was to better manage resources; this is what the department has done … (Emergency head physician)

Top Management Members: Towards a New Vision of Clinical Units Changes also concern top management members’ work, especially the way indirect costs are allocated to clinical units. From 2011 to 2012, the management accountant modified cost allocation bases for three kinds of indirect costs, clearly as a consequence of discussions between the management accountant and the head physician about the relevance of the allocation bases used. For example, the Surgery head physician detected, when analysing expenses in the financial dashboards, inconsistencies in the way operating room costs were allocated to the clinical units, so she decided to work with the management accountant in order to allocate it better: She [the management accountant] has worked here for at least six or seven years. I brought her with me to have a look in surgery, because she has units on her paper that she has never seen for real, where it is, how is the recovery room […] so she realised there was a gap between what she has on paper and the units for real. (Surgery head physician)

In the same way, the emergency head physician recognised a positive evolution with top management perceptions: Before 2010, until the new director’s arrival, there was a top management culture […] the director and the assistant directors were not educated in this […] it was difficult to them to think this way, simply think in terms of clinical units […]. But today we are making progress, from month to month, or from year to year, faster and faster, but it is not finished. (Emergency head physician)

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CASE ANALYSIS AND DISCUSSION Case Analysis: Dashboards to Organise New Managerial Practices The case we study shows that management accounting tools such as dashboards are not used either to help in decision-making or to control actors and clinical units’ activity. The use of dashboards is most often limited to observation rather than action or corrective behaviour, and top management do not use them to pressurise clinical units. Several explanations can be given for this state of affairs. Firstly, indicators which make up the dashboards may not be suitable for the specific clinical unit’s issues. In particular, they are criticised for not being operational. Secondly, clinical unit managers are asked to manage things they literally cannot manage. In the hospital we studied, most of the decisions related to the clinical units were the responsibility of top management departments. Dashboards can be used to manage, but only if the transfer of management responsibility takes place and if the clinical unit managers gain levers for action in their units, which is not the case. Nevertheless, this does not mean that dashboards are useless; on the contrary, they are used by not only top management, but also within the clinical units
outside of meetings with top management. All head physicians spend time on their own analysing dashboards, which shows that they are interested in them, but why do they spend time working with the dashboards, if they don’t help in managing the unit? Firstly, dashboards help chief physicians to have a better vision of their clinical unit and to know where the unit stands, compared to previous periods and to other units. Secondly, dashboards structure the way in which the clinical units are managed under current reforms. Although the new director’s arrival in 2010 was a key factor in the starting phase of clinical unit operations, dashboards and meetings have now taken over. The integration of dashboards into clinical units’ rules of operations has enabled the regular and routine use of these management accounting tools. The employment of dashboards, by top management and clinical unit managers, has brought a certain level of structure to the management of the clinical units, as they order and guide issues that need to be addressed. During management review meetings, dashboards shape the whole meeting and highlight what points need to be discussed and how they have to be discussed. While the clinical units were non-existent at the beginning of their implementation,

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dashboards have breathed life into the management of the units and new management practices have been set out and structured. Finally, a management dialogue based on unit dashboards has been established within the clinical units and with top management. With the arrival of the new director, the implementation of new management rules and dashboards, an ‘economic’ logic has infiltrated the clinical units. The dialogue taking place around the dashboards has allowed actors’ discourses to be compared. In particular, physician discourses have evolved towards a ‘managerialisation’, which is reflected in their discourse about their activities as head physicians. Moreover, some top management members have taken into account the medical perspective, which is particularly illustrated by the management accountant’s modification of allocation bases. Therefore, the use of management accounting tools within the hospital and between heterogeneous actors has enabled decompartmentalisation between medicinal and administrative logics. Head physicians have moved from a purely medical vision to a more ‘medico-economic vision’, while some top management members have moved from an ‘economic’ vision to a ‘medico-economic’ vision. In this way, head physician and top management representations have evolved towards a shared representation of clinical unit management
that of a ‘medico-economic’ representation. .

Discussion: Coming Back to ANT Management Accounting Tools as Mediators The dominant paradigm postulates that management accounting tools have in mind an optimisation goal and that they normalise behaviours and actions in a predictive and determinist way simply by their presence. However, we use ANT to show that management accounting tools may have other, unintentional effects. Building on Latour (2005), the clinical units’ dashboards appear to be mediators in hospital changes, as they are not artefacts that simply transport a pre-existing evolution but objects that have an impact on the way clinical units are managed and on actors’ representations. In this way, they appear to take part in the building of a collective vision about a new way of managing, in which the medical and the nursing corps are involved. Consequently, management accounting tools may play a role in the way heterogeneous actors gather into a ‘collective’, in Latour’s meaning of the term.

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Management Accounting Tools as Heterogeneous and Multiple Entities Nonetheless, such a role cannot be attributed purely to management accounting artefact, as dashboards on their own have little effect. It is their regular use in various meetings and situations, by heterogeneous individual actors and various groups of actors, which has structured managerial practices and allowed actors’ representations to evolve. Management accounting tools lead to changes because of their links to other entities. Therefore, the ANT perspective prompts us to recognise the multiplicity of management accounting tools. What is interesting is not only the artefact, but also its links with other actors. The management accounting tool is therefore a multiple entity composed of heterogeneous elements, as it affects things only when it is related to people, management structures, discourses, etc. Most studies on management accounting tools examine them either at the individual level (for example, how does an individual use a tool?) or at the organisational level (for example, the adoption of an ABC system by an organisation). The intermediary level, for instance the way in which a tool is used by several actors from a collective perspective, is much less studied. Yet, interactions between actors are the lifeblood of organisations, and several authors have shed light on the need to study management accounting tools in their social context (e.g. Hopwood, 1983). Literature about technical objects can thus be useful. Rabardel (1995) emphasises the social dimension of technical objects and considers that tools have a function of mediation in collective activities. According to him, tools allow their users to build different points of view and to look for forms of compromise. In management, researchers such as Derujinsky-Laguecir, Kern, and Lorino (2011) have shown the mediation function of management tools in collective activities. Another field in management accounting tool implementation tends to integrate designer and user perspectives. Although this research considers the ‘social’ dimension of management accounting tools, it is limited to the relationship between the tool, its users and designers. In our research, the ANT framework is a means of taking into account all actors
in the Latour (2005) sense of the term
related to management accounting tools. In Latour’s (2005) approach, an action or a change is made possible by the associations that are built between various entities, such as objects, humans, ideas, etc., and not only between designers or users. The case studied herein emphasises the many links constructed continuously between such heterogeneous entities. Dashboards are used by various human actors
in several places and at different times as well as

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in different meetings gathering different users
in various ways and for multiple purposes.

CONCLUSION We conducted a longitudinal case study in a French public hospital to investigate the way management accounting tools were used by ‘physicianmanagers’. We have shown that head physicians are implicated in the management of their units and spend a lot of time analysing dashboards. This case is interesting because it is an original example of physicians actively taking on and accepting management accounting tools, far from the resistance documented in the literature. However, these tools are not used for decision-making or control. We utilise the ideas of Latour (2005) to shed light on the other roles management accounting tools may play, as mediators, in organising new managerial practices. In the hospital we studied, it appears that clinical units’ dashboards are a means of materialising and structuring new managerial practices and that they enable discussions and exchanges between actors that may not have previously come into contact with one another. Therefore, management accounting tools are not necessarily useful because they help decision-making or control but rather because they may help in changing actors’ representations and building a new collective organisation. At a more conceptual level, we have shown that management accounting tools are both mediators and multiple entities. They are the former because they take part and play a role in changing processes, such as the implementation of new managerial practices, by structuring and allowing discussions. They are multiple entities because such a role exists only when management accounting tools are related to other entities
people, groups of people, meetings, discourses, etc. The results we have developed should be viewed in the light of our study’s limitations. Although we met heterogeneous actors, several other actors in the hospital were not taken into account. Using Latour’s words, we could say that the network we have traced was ‘not entire’. In particular, we were neither able to meet physicians not responsible for clinical units nor to observe their meetings at a more operational level. Therefore, we cannot speak about the impact of management accounting tools on these actors, and even more so since the people we did meet held controversial views physician behaviours and their implication in clinical unit

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management. It would thus be interesting to study the impact of management accounting tools on physicians’ medical practices. Moreover, we did not go beyond the borders of the organisation we studied. According to Latour (2005), such a dichotomy between an organisation and the outside is not relevant. Therefore, it would be interesting in future research to overcome such a border and to take into account ‘external actors’, for example members of regional health authorities. Lastly, case studies are not definitive examples of the extent to which any insights generated extend to other organisations. However, the intrusion of new management accounting tools into the medical corps is the daily reality for almost all healthcare organisations. More generally, the implementation of management accounting tools in a professional cohort formerly not involved in managerial issues is an issue dealt with by several organisations, so we believe there is some reasonable potential for the transferability of our findings to other healthcare and non-healthcare organisations.

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APPENDIX A: SEMI-DIRECTIVE INTERVIEWS Head Physicians Surgery General medicine 2 Emergency Gynaecology and obstetrics Head Nurses Surgery General medicine 1 General medicine 2 Emergency Geriatrics Gynaecology and obstetrics Management assistants Surgery/Gynaecology-Obstetrics General medicine 1/General medicine 2 Emergency/Geriatrics Top management Hospital director Management accountant Technical services director Quality director Medical affairs director Others President of the Medical Committee Medical Information department’s physician

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Clinical units’ managers Head physician Head nurse Management assistant

Clinical unit

Hospital

Management review of clinical units

Meeting of all the clinical unit managers

Top management members Hospital director General affairs director

Clinical unit managers All head physicians All head nurses

Other Medical information department’s physician

Top management members General Affairs director Financial department director Quality director Management accountant

Head nurse Management assistant

Participants

Clinical unit

Level

Work meeting

Meeting

8 a year

Biannual

From once a week to once a month

Frequency

Number of Meetings Observed 3h

Duration of Observation

12 h

11 h 5 (Surgery, Geriatric, General medicine 1, General medicine 2, Geriatric)

1 (Surgery)

4 ‘A place for exchange about clinical units’ life’ and ‘a decision making body about several issues’ (Hospital director)

Reviewing the management of the clinical unit of the past year and defining the clinical units’ objectives for the coming year

Dashboards analysis

Aim

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Other President of the medical committee Medical information department’s physician

Technical services director Financial department director Quality director Medical affairs director; Director of the nursing department Human resources director Management accountant

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CULTURE AS A RECOUPLING MECHANISM: RATIONALES FOR CONSTRUCTION OF BUDGETARY SLACK IN LOGISTICS Nadezda Nazarova ABSTRACT Purpose
To study the use of budgeting in the uncertain and unpredictable context of seasonal logistics in the Arctic. Specifically addresses the question of why and how budgeting turns out to be the main management control tool in an extremely unstable environment. Design/methodology/approach
Built on a case study of a Russian oil-producing company operating in The High North, this chapter reports on the rationales for use of budgetary slack by different divisions within the company. Findings
Inflexible budgeting better fits into the (natural/geographical) context than into the business process. In this respect, excessive budget detalization and informational update may be not facilitating the operational process but confusing. Decoupling demonstrated by a budgetary slack is the normal condition for stable organizational performance.

Performance Measurement and Management Control: Behavioral Implications and Human Actions Studies in Managerial and Financial Accounting, Volume 28, 105
126 Copyright r 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1479-3512/doi:10.1108/S1479-351220140000028011

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Practical implications
Instead of setting up fences between the divisions, budgeting may be considered a converging and an adjusting factor to assess collective performance. Social embeddedness of budgetary slack in contemporary organizations sets the scene for other types of budgeting games based on trust, norms of reciprocity and collective performance. Originality/value
The new
cultural
dimension introduces decoupling in a new perspective by demonstrating the integrating or coupling meaning of cultural practices. Keywords: Budgetary slack; decoupling; social embeddedness; Russia; oil production; logistics

INTRODUCTION Despite the fact that budgeting can be referred to as the main instrument in formal management control systems (Luft & Shields, 2003; Sivabalan, Booth, Malmi, & Brown, 2009), its applicability for contemporary organizations has been widely criticized (Hope & Fraser, 2003; Wallander, 1999). Budgeting is considered to be a fabricated black box (Preston, Cooper, & Coombs, 1992) setting the scene for various budget games (Christiansen & Skærbæk, 1997). One of the central critiques of budgeting is the creation of so-called “budgetary slack,” defined as “the difference between the budgeted resources and the resources required to efficiently achieve goals” (Kilfoyle & Richardson, 2011, p. 186). The agent-centered theories consider that the root of budgetary slack evil is created by individual agents who virtuously utilize such aspects as budget emphasis, budgetary participation and information asymmetry (Dunk, 1993; Hartmann & Maas, 2010; Merchant, 1985; Onsi, 1973) to perceive personal interests. However, during bad times “it’s worth depends on the manner of its utilization, since it provides a source of funds that may not otherwise be available or approved because of scarcity of resources” (Onsi, 1973, p. 535). Similarly, disregarding some attempts to study the degrees of propensity to budgetary slack between cultures (Douglas & Wier, 2005; Lau & Eggleton, 2004), behaviorists focus on the individual characteristics of actors (Church, Hannan, & Kuang, 2012; Hartmann & Maas, 2010; Onsi, 1973). They consider the budgetary slack problem from an ethical point of view as “the resource misallocation that results is detrimental to other organizational units and investors”

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(Douglas & Wier, 2000, p. 267). The justification of budgetary slack by an agent may depend on how often bad times happen and how long they last. However, considering budgetary slack as a stabilizing element neither secures it from dysfunctionality nor cleanses its ethical aspects. Hence, despite the anchored persistence of budgetary slack within organizations, the agent-centered theories a priori focus on individuals and have “recognized the need to better model the social embeddedness of actors” (Kilfoyle & Richardson, 2011, p. 196). The social realm in accounting research is the patrimony of institutional theory that aims to explain how agents (socially) construct meaning (Greenwood, Oliver, Suddaby, & Sahlin, 2008; Suddaby, 2010). In particular, by constructing the meanings, actors may not follow the rules and policies (Covaleski & Dirsmith, 1983; Meyer & Rowan, 1977). This is why various types of decoupling are considered a structural element of institutional social construction (Lawrence, Suddaby, & Leca, 2011) emphasizing the decoupling nature of social. At the same time, in some cases, social aspects may work to stick some things together (Ahrens & Mollona, 2007; Berry et al., 1985) while separating other things. Thus, does the social aspect have a decoupling or an integrating role in everyday practice of organizations? Moreover, is decoupling “an unsatisfactory condition that should be reversed” (Orton & Weick, 1990, p. 211)? Or indeed, is decoupling “the most functionally effective path in the face of constraints” (Bromley & Powell, 2012, p. 6)? Answering these questions may reveal the rationales the designers of the black box imply to justify the almost ubiquitous construction of budgetary slack. By means of a single case study of a Russian oil-producing company facing logistics challenges in severe Arctic conditions, the present study was motivated by a desire to understand how budgets can be used for flexibility purposes in a vulnerable environment in the pursuit of better performance. Hence, this chapter contributes to the emerging stream of accounting research literature demonstrating the good face of budgeting and budgetary slack (Davila & Wouters, 2005; Elmassri & Harris, 2011; Frow, Marginson, & Ogden, 2010).

LITERATURE REVIEW: BUDGETARY SLACK AS A FORM OF DECOUPLING Based on the “language of cost awareness” (Covaleski & Dirsmith, 1983, p. 324) or “the language of reason and relevance” (Czarniawska-Joerges & Jacobsson, 1989, p. 33), rationality prescribed to budgeting serves the

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purposes of legitimacy. At the same time, “various management accounting practices are seen to be sensible because of the values they sustain […], rather than the material resources that may be managed as a consequence of using technologies of the craft” (Czarniawska-Joerges & Jacobsson, 1989, p. 103). These different perspectives relate to different forms of decoupling addressed in the rest of this section as a potential explanation of the budgetary slack phenomenon.

Political Decoupling The legitimation of organizations is achieved by their demonstration of successful operations according to the goals set. However, there is an embedded inconsistency between politics and action in political organizations (Brunsson, 1985, p. 154). In order to be simultaneously strong with regard to both action and representation, organizations can differentiate between issues, kinds of environment, or separate politics and action organizationally (when some parts of the organization ought to take care of political issues and others take on action). For the organizations whose outputs are unclear, budgeting may be used as “a useful symbol for dramatizing technical rationality” (Covaleski & Dirsmith, 1983, p. 337). As a rule, the operational side of the process is blamed for any possible inconsistencies. The budget is expenditure oriented, and “is not only an enabling instrument, making it possible to produce something; it also imposes the sacrifice of something else” (Brunsson, 1989, p. 110). In the face of organizational crises the availability of resources distinguishes small problems from a potential crisis (Busco, Riccaboni, & Scapens, 2006). Hence, following the idea of budgeting as a policy tool (Wildavsky, 1986), the use of budgets should be considered as “a means for influencing the behavior of the budgeter by the budgetee” (Covaleski & Dirsmith, 1983, p. 324). However, even in the case of a high risk of not achieving the expected goals, the negative effects of an action are not easily observable; an individual will care about them depending on the extent of his or her responsibility for these negative effects. Responsibility can “be diluted by being shared among several individuals” (Brunsson, 1985, p. 51). Responsibility for a certain action appears when this action is seen to have taken place (Brunsson, 1989). Hence, making the action less obvious one may reduce the responsibility.

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Technical Decoupling There might exist situations in which the usefulness of management accounting practices can be challenged (Hedberg & Jo¨nsson, 1978). Bromley and Powell (2012) claim that in the contemporary world decoupling exists in two forms. Besides the traditional policy-practice decoupling, viewed as a failure of a policy implementation in practice (Suddaby, 2010), they introduce the concept of means-ends decoupling. This new type admits that “policies are thoroughly implemented but have a weak relationship to the core tasks of an organization” (Bromley & Powell, 2012, p. 3). In other words, organizations fail in resource allocation to reach their intended targets. Increasing fragmentation of external environments “generate conflicting demands within organizations” (ibid., p. 7). Remarkably, a clear indication of means-ends decoupling is expressed in simultaneous presence as of formal so of substantive rationales (Weber, 1921 [1968], 1930 [1992] in Bromley & Powell, 2012, p. 16), for example, rational goals being achieved by substantive means. Nor-Aziah and Scapens (2007) illustrate how the inherited contradictions of a wider institutional context
simultaneous calls for greater efficiency and better service
lead to the growing resistance of managers and social construction of loose coupling. After all, the breach of new accounting prescriptions does help defend the organization from external interventions, necessary to maintain stability and avoid possible disruptions to public services. In their case, the decoupling was initiated by individual actors sharing the necessity to take that action. Hence, the presence of “social” is again considered a trigger for decoupling between means and ends to take place. Davila and Wouters (2005) focus readers’ attention on the purposeful use of budgetary slack. The prerequisites for creation of budgetary slack may be inherited in the budget system and be utilized “when business processes face unexpected external events” (p. 606). Due to the mechanisms of self-regulation of the slack amount in particular circumstances, they conclude that “budgetary slack is not created indiscriminately, but only when attention to alternative goals demand it” (p. 607). Similarly, in their study of budget contingencies of a state-owned Egyptian petroleum company Elmassri and Harris (2011) suggest considering budgetary slack as a rational element of budget risk management as it “had become accepted as part of the culture, to build in this element of flexibility, within an allowed range” (p. 285).

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Cultural Aspects of Practice Accounting systems are concerned not merely with what must be controlled in everyday practice, but also why it should be done in this way. Hoffjan, Trapp, Endenich, and Boucoiran (2012) warn that standardization of management accounting techniques does not necessarily secure their proper implementation due to the limits of cultural convergence. There may exist cultural consequences of technology (Ahrens & Mollona, 2007) when the social realm may also help to sustain and explain decoupling in organizations. Hence, the propensity for budget slack creation may also be considered a cultural issue. Cultural research in accounting “carries social meaning about the role of productivity and profitability which goes beyond any individual business situation” (Mouritsen, 1989, p. 21). However, culture is not a ready-made management device. It is “in fundamental opposition of impersonal controls such as accounting systems” as it possesses the view “to rationally taking into regard people’s psychological and social needs” (Mouritsen, 1989, p. 43). Capps, Cooper, Hopper, Lowe, and Mouritsen (1989) emphasize the “fundamentally recursive character of social life” (p. 221). They show that “the structures of signification, legitimation and domination within management reflect the occupational culture of engineers, and the nature of the NCB [e.g. The National Coal Board] which enables them to reproduce the culture” (p. 223). Studying the same case of the NCB, Berry et al. (1985) demonstrate decoupling as a result of the conflict between the claim for financial control (closure of the least economically efficient pits) and social costs (avoided by the trade unions). Due to the insecure production process taking place underground, the significance of the technical core is without doubt and is part of the culture of those working in the coal production field. Due to an increasing pressure to demonstrate the rationality and efficiency of organization, concentrating on “absorbing the production uncertainties inherent in mining coal, and sheltering it from the fluctuations of finance and markets” (p. 24) was perceived as more stable strategy to behave than based on market fluctuations: … it is our belief that while this culture of “pit” is unconscious or subconscious, it is also quite deliberately kept alive and reinforced, as it provides an ongoing rationale for behavior. (p. 19)

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And though Berry et al. (1985) emphasize the domination of physical controls over financial ones in the study of the NCB, the crucial role of social fabric also encouraged such a domination: … deeper issues are involved, particularly the shared culture of dangerous physical conditions, and an extended set of shared battles against a hostile environment, especially government, customers and international competitors. There is […] a deep seam of a common social fabric which unites the managers and the men. Thus the managers sought to maintain the miners’ earnings rather than cut production and were uneasy about disturbing the social fabric through a more overt bargaining over output targets. (p. 14)

Hence, in their case, the social aspect illuminates the conflict between the two performance rationales, while at the same time providing them with the continuity of coexistence. Without these social rationale considerations, one of the practices would be squeezed out from the organizational process. Ahrens and Mollona (2007) introduce the notion of cultural practice. They show how different knowledge of the production process at the steel mill (with regard to its quality and costs) facilitated the construction of “them-and-us” subcultures, for example, “our” furnace operations against “management interference” (p. 320). However, “technical considerations did thus not function as arbiters of practice because they were themselves products of the different symbolic systems that organized the different organizational members’ practices and marked them as cultural” (p. 327). Summing up, “it is fruitless to repeat that budgeting practices do not reflect budgetary ideals” as “both reflect something else
crucial elements of the context in which they are embedded” (Czarniawska-Joerges & Jacobsson, 1989, p. 38). Hence, with regard to the construction of budgetary slack, is it decoupling or integrating “social” the organizational everyday practices supported by this socially embedded phenomenon are based on? To answer this question, this chapter examines the combination of factors lying behind the construction of budgetary slack. Studying structural patterns of collective interpretation involves “the attachment of meaning to events and the infusion of value into organizational processes and outcomes” (Suddaby, 2010, p. 18). One should consider organizations as sophisticated managers of symbolic resources in order to understand organizations in terms of integrated social behavior.

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METHODOLOGY The research of such an ambiguous and sensitive issue as budgetary slack in a real-life context requires openness from the interviewees. A qualitative case study was selected as the main method as it aims to present “inconvenient challenges and ‘truths’” (Parker, 2012, p. 56) and enables the researcher to “seek a holistic understanding and critique of lived experiences, social settings and behaviours, through researchers’ engagement with the everyday” (p. 55). A small-scale case study provided the opportunity for greater internal validity in that a more diversified group of interviewees was selected. The data collection process was arranged in several stages. The first round of telephone interviews helped to provide a general outline of the company’s structure and operations areas and outline the potential informants. The second round was arranged as a field trip to the company’s headquarters in Naryan-Mar in February, 2012 followed by the face-toface interview round with the commercial department which is located in Moscow. The engagement with actors in their context allowed a “nuanced understanding of the relationship between the principal and agent” (Kilfoyle & Richardson, 2011, p. 186). In total, 17 face-to-face in-depth interviews were conducted, including 2 group interviews, supported by documents study and participant observation of the everyday working process at the facilities. This allowed the researcher to “understand holistically and to experience the actors’ world,” in particular, “through direct engagement with the field, researchers can penetrate actors’ socially constructed worlds, their cultures, thinking, language and behavior” (Parker, 2012, p. 57). The respondents were asked to describe the specifics of their work with regard to contextual challenges and seasonal logistics. The notion of budgetary slack was not included in the interview guide in order to allow the respondents to talk about this when and if they wanted to. Those uninvolved in the budgeting process itself did not name budgetary slack as the main tool for guarding themselves against future uncertainties and risks, but could comment on their relationships with other divisions. All the interviews were conducted in the respondents’ mother tongue (Russian). Informants were selected in a fairly random manner, but determined mostly by way of their position in the company and them being physically available for an interview at that time. Focus was put on the specialists involved in logistics activities. The most illustrative direct quotes from the interviewees are provided in the empirical section. Other interview data facilitated an understanding of the broader picture and the context.

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The average age of the participants was below 45, and most of them held the same or a similar position in the company since starting at the company. A somewhat low percentage of females among the interviewees (3) can be explained by the specialized nature of the oil and gas industry. Missing details were carried out by way of telephone interviews and e-mail correspondence during the spring and autumn of 2012 and the spring of 2013.

THE EMPIRICAL SECTION This section describes the link between the contextual challenges for logistics operations in the case company and the creation of budgetary slack.

The RUSCO Case: Company and Production Process as a Context for Budgetary Slack Creation The oil and gas industry may serve to enrich the case due to several distinguishing features calling for good logistics planning. First of all, due to the complex technological process of oil production, it requires innovative products to function well (Fisher, 1997). This fact requires diversified logistics work and supply chain management due to the vulnerable demand for supply materials. Secondly, this is a financially and technologically intensive field, and additional expenses are not welcomed with regard to logistics and/or transportation. Thirdly, oil-and-gas production is nowadays characterized by stable demand. This means disregarding financial and oil market fluctuations, as soon as the oil is produced, has become the rule, and the oil is ready for direct delivery to the customer concerned. The special characteristics of the oil production process imply that, besides incidentally occurring construction and technological requirements, there is a constant need for various types of chemicals and materials to support the complex production process. A natural ambition in this context would be to place orders as late as possible and keep inventories at as low a level as possible. However, geological conditions result in an unstable oil production rate. The company needs to develop a clever combination of push
and pullproduction systems to provide an uninterrupted supply of necessary inventories, many of which have a short expiry date and, in case of non-usage, must be written off.

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Policy versus Practice Budgeting is considered the main management control instrument in RUSCO. Due to the special characteristics of the oil market and the oil industry, the company uses revenue budgeting. The budgeting program for all divisions starts in April each year and must be defended latest in July
August of the same year. This is done in order to deliver all the necessary materials to the warehouse by December in order not to lose a single day of transportation when the ice-road, the cheapest of all the logistics options, is opened in January. Hence, during the process of developing the production program and the budget, negotiations, tenders, and purchase of materials all take place. Raw materials and goods are preordered, delivered within the open time slots, and then stored. With the planned sales volumes in mind, proceeding from top-down production targets and other mandatory performance indicators (such as, for example, the associated gas utilization ratio), geologists determine how many and what types of wells have to be drilled based on the geological model and conditions. As soon as all departments have their production programs approved by the committee consisting of The General Director and The Chief Engineer, the logistics department may commence its budgeting process. They have to budget transportation and processing costs on a quarterly basis. By December of the planned year the plan must have been fulfilled by all divisions, without exception. Based on the oil balance at the end of each month, operations programs for all departments are correlated. This particularly applies for the logistics department which is also governed by their budget. As the price range for the oil to be sold is calculated based on the budgeted transportation and procurement costs (RUSCO keeps this at about 32% generally speaking; with the level in the northern region amounting to 40% on average), and export duty of around 55%, there is usually around 15% of the sales price left for the company to fight for. In this respect, the planners have to use sophisticated systems for addressing short
and long-term production needs by foreseeing all kinds of underlying potential dangers related to optimization of the value chain. For us the budget is more important than the rolling forecast. We have to plan our costs in order to wheedle enough money for the whole year. This is a big challenge. If we had no seasonality factor, we would just purchase at any time and deliver necessary materials for standard prices. (Logistics manager)

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Contracts with subcontractors related to the construction of ice-roads are signed for three years. The reason for this is that due to the high price of construction (1 km costs approximately Euro 5,000), the selection of a subcontractor is conducted using the tendering procedure starting in September every year. Otherwise, there is a risk of not being ready with the ice-road in time, or of having an ice road of poor quality. Other departments, such as the geological or commercial departments, widely utilize rolling forecasts. The difference here lies in the ability of the latter two departments to do their business all the year round, while logistics needs can be economically satisfied only within the available time slots for ice-roads in the winter and for navigation in the summer. Due to no roads existing between May and January, unexpected costs occurring in between the logistics “windows” may prove too high to be accepted. Moreover, the budget in this case follows the order of nature, that is, the change of the seasons. The new budget campaign follows the end of winter delivery by way of ice roads in April. In this respect, specialists have a chance to realize what they have managed to deliver in time, and what else needs to be delivered urgently before the ice melts entirely. The budget ends in December, right before the new ice road delivery is started in January. Hence, the synchronization of budgeting and calendar years enables managers dealing with logistics challenges to catch their breath before the new transportation period begins. While our budget programme is available to all other divisions because everybody works with us, we do not have access to their operational programmes. As a result, we are usually informed about any changes post factum. Remarkably, even expensive transport modes have restrictions on cargo parameters and weight. And if you do not fit them, you have to wait one more year when an appropriate option
ice road, navigation or helicopter
opens up again. (Logistics manager)

Means versus Ends There is an established collective reward system in the company. Depending on the fulfillment of several indicators such as oil produced volume, associated gas utilization ration, and the budget (e.g., ends), the top management make a decision if the annual bonus is to be paid out or not. Hence, the all or none principle of annual bonus distribution is practiced every year. Individual bonuses may be provided only in the form of

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honorable mention or a place on the honorary board, the board with the pictures of the Best Employees of the Year. While the idea of achieving the desired outcomes is expressed in the budgeting policy, the means implied for those purposes is a very detailed classification of expected costs. The intention is better to monitor budget execution within the departments. For example, the use of motor transport differentiates between “inbound of general cargo,” “outbound of illiquid assets,” etc. The OPEX part of logistics costs is controlled with special care
cargo monitoring, cargo execution, rigger services, fuel and lubricants supply, transport between warehouses, etc. Formally, some changes can be made in the budget, as long as these stay within the budgeted amount. However, precisely this task actually turns out to be the main challenge. As soon as the annual budget has been accepted, target control is considered the main area of concern during the implementation stage: It takes time to get any budget adjustment approval from central management. But we do not have the time to wait. So, we have to search for flexibility ourselves, by fixing time in the budget, instead. (Manager of commercial department)

Due to departmental interdependences, communicational and relational issues are crucial to ensure a smooth operation process. In this respect, the logistics specialists are now invited to The Technical Committee when supply and delivery issues may be involved. When you have defended your budget programme, to strive for efficiency and savings means to break established and well-tuned work and create disturbances. In our work we cannot save without looking back to others. This is wrong in terms of planning as you may save on summer transportation, but they may face helicopter delivery in winter. (Engineer of I category, oil-and-gas treatment department)

In terms of organizational structure, there is a clear distinction between direct\value added services (production, oil-and-gas conditioning and transportation of oil, geological service) and supplement\non-value added services. This structure is explained by the necessity to physically separate production from logistics: Production people always need something. They are specialists in making decisions where to build a pipeline, but they rarely realize how much time it may take to buy and deliver something, especially in a large company. This is Russian specifics, in case of urgent need, you would be kindly asked to do everything, just to solve the problem as soon as possible. (Procurement manager)

This fact demonstrates the role of relations between the employees: in a situation when urgent action is needed, formal procedures make room for

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informal ones. Hence, social ties should be somehow regulated in order for them not to harm business order and processes. The social responsibility of the employees for one another is surprisingly high. For most of them the reputational and social risks are the most embarrassing ones. The worst is to stand other people up. Everybody here really tries to do his job as well as possible. And least of all do I want to be the reason for them not to get their salaries or bonuses which they absolutely deserve. (Engineer on organisation and norm setting of labour)

Therefore, many consider it problematical from a technical point of view to have a smooth production process. However, other, nontechnical things also play an important role and function as motivators for better performance. Remarkably, the employees express a clear distinction between those who understand our challenges and those who care about other stuff: Everybody knows that it is not my fault when a big-diameter pipe supplier has delayed the delivery to the central warehouse due to the meteoric impact which destroyed their infrastructure. However, if I try to explain it, I would hear something like “Well, hurry up! You are sitting here just to be in time!” […] Analysts are only interested in numbers: you must not spend more than you are given. So, if we have just several days left for the ice road delivery, I better spend the reserved money for fast delivery now instead of spending even more lately. […] Nobody ever searches for the devil in the details. We live and work in Russia … (Logistics manager)

Hence, there is a deep understanding of the context
the Russian, the Arctic, the social
which makes people accept the rules of the game and stay ready to take on some degree of blame in order to save themselves and those who understand later on. Several of the interviewees involved in logistics work mentioned that they lack the transport block in their SAP system which would essentially facilitate the better monitoring of available trucks and, as a result, facilitate more operative decision-making in case of delivery urgencies. Any variation in the budget must be linked with a certain change in the production program and must be explained in the monthly report. The case of a net economic saving (when planned work is managed with less than the budgeted resources), may sometimes provide some extra resources to cover the budget gaps. However, this cannot be done so easily; as in the case of overexpenditure so in the case of excess budgeting, as this must also be reported and explained to the Planning
and Economic Department (PED): For example, it was planned to drill 5 holes in order to achieve the required sales volume, but they managed the required sales volume with 3 or, the opposite, 7. In the

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former case, they have two options. They can report this and then the excess money will go to head office. Or they can put the saved amount on hold and use it to cover their overspenditures later on. (Head of planning and economic department)

However, net economic savings are not enough to feel secure with regard to potential overexpenditure: the savings may not take occur, may not be used flexibly, and may not be enough. Consequently, the employees need to find other sources of insurance. Beside the fixed slack for inflation stipulated to around 1.5%, they create budgetary slack for other matters: From year to year we hide a certain amount of money where nobody except ourselves will be able to find it. For example, I can budget processing and storage costs for half a year, even though I know that two months may be enough. The saved amount could be transferred to those lines in the budget where we need them. This is necessary in order to give yourself more space for maneuver as we always defend our budget last in the queue, and they start cutting it godlessly. (Logistics manager)

Similarly, one may budget some unnecessary operations, such as the number of processing operations expressed in loading and delivery. Remarkably, this internal risk management is implemented in various departments whose work depends on seasonality. For example, maintenance of the pipelines heating system is also limited by the physical ability to get to the pipelines. In this respect, it is crucial to fulfill all necessary procedures when the ice roads are actually in place. The common acceptance of budgetary slack as a way to secure oneself from extra expenses, for one or another reason, can be explained by the fact that none of the emerging logistics costs not initially budgeted can be placed in the logistics department. Instead, they must be covered from the budget of the division needing extra materials, chemicals, people, or equipment. It is impossible to predict and foresee everything. When an urgent production need does not fall into the main delivery period, we have to pay for a helicopter. This is why we need some reserves in the budget. To avoid this would require changing the whole management control system which seems unreal. (Group supervisor on inventories)

Thus, certain types of uncertainties are not captured by the planning system. There must be other things at stake because the technical part of their means seems to be unable to count for everything. Consequently, for the actors, it is easier to accept and implement budgeting policy in practice, in that the means they are given require continual contextual adjustment. They do this via the construction of budgetary slack for certain cost categories. The amount of budgetary slack is determined by way of trial and error. However, despite from the securing from disruption function of

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the budgetary slack, its creation is also associated with potential problems. Underexpenditure is easier to explain than any overexpenditure, too many unused budgeted means may negatively affect the managers’ reputation as good planners. This is exactly where social links and values come into play. In cases where we have saved some money, we can share with a department from the same direction as ours if they have overspent. We can share with the transportation department by closing their route sheets in our budget, so that these become our expenditures. (Logistics manager)

Hence, it is considered better to share the saved resources with other managers than to demonstrate the efficiency of only a single department to top managers. Otherwise, nobody will “save” you later on. Therefore, budgetary slack in this case functions as a mutually securing system: The goal is to stay within the budget and to reach the targets set for the whole company, not just for your particular department. We are all here in the same boat. Today you help somebody, tomorrow somebody helps you. Otherwise, nobody receives anything at the end. Therefore, I plan budgetary slack for everybody’s sake. (Specialist of I category on inventories group)

What is more, in case of close relationships between the one who has access to financial resources and the one who needs them, the issue may be solved even without direct manager involvement. The closer the relationships the faster an issue at stake can be solved. With regard to infrastructural and seasonal challenges, the more operatively an action can be taken, the more company money can be saved, in case of extra deliveries.

DISCUSSION The findings illustrate the presence of various forms of decoupling. While the policy requirement of security of supply or stability of production is accepted and shared by all divisions within the company, the production function uses loose coupling of means-ends with regard to its logistics operations. Remarkably, the social or cultural aspects of decoupling may not be induced into a separate practice, but instead occupy a significant part in the two other forms. In particular, social culture seems to influence both forms of decoupling: how actors follow the production plan fulfillment policy and how they utilize the budgeted means they are given to reach the outcomes set for them. In particular, through this process of

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influence the sociocultural aspects act to recouple the other two forms (Fig. 1). The remaining of this section explains this finding.

Policy-Practice Recoupling The political implications of the employees’ actions are present as they “achieve legitimacy by representation, by reflecting different values, beliefs and interests prevailing in their environment” and which “should be exposed to external observers” (Brunsson, 1985, p. 150); for example, “we have to show that we can control [at least] something.” The achievement of annual KPIs (Key Performance Indicators) is considered to be done through strict cost control expressed in the annual budgets of various units. According to the literature, this fact is rather surprising as the more uncertain the environment, the greater the challenge to stay within the budget limits is (Wallander, 1999). However, in this case budgeting follows the TECHNOLOGY

POLICY

DECOUPLING (POLITICAL)

PRACTICE

MEANS

(RE)COUPLING

DECOUPLING (TECHNICAL)

(RE)COUPLING

CULTURE

Fig. 1.

Culture as a Recoupling Mechanism.

ENDS

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order of nature and makes business processes comply with it too. The four budgeting quarters follow the four seasons, two of which are entirely devoted to hard transportation work, and other two for planning. Similarly, budgeting ends before the new time slots open up for logistics in the January
March period. Hence, the notion of traditional budgeting (Covaleski & Dirsmith, 1983) is adjusted to the peculiarities of logistics practices in the Arctic region. Due to the seasonal character of operations shaped by short and inflexible time slots all these disadvantages related to budgeting inflexibility accelerate. All potential sources of disruption
change in the production program, reduced transportation/navigation period or external/suppliers’ changes
may lead to production disturbances considered to be the main enemy for company performance. Hence, budgeting faces the same inflexibility challenges or even bigger ones as fluctuations in the market may not happen or may not prove as influential as, for instance, an early spring in The High North region. At the same time, spring will come and the road will melt, and they will have to adjust their delivery schedules and budgets. Simply speaking, it is all about a common understanding of the contextual challenges and a tacit (social) collusion which makes the budgetees accept the policy and be open for its constant “violations” through making adjustments. According to Hope and Fraser (2003) regular updates of the budget system increase the validity of information and, as a result, facilitate practice. Therefore, instead of the budget they suggest rolling forecasts to be updated each month. However, in the case of RUSCO, while (maybe) facilitating financial services, more budget updates make no point from the point of view of logistics practices. In contrast, it makes more confusion due to the fixed available time horizons for operations. Hence, the information you can rely on does not make the budget more reliable in this case. There are only two alternatives for doing their work
namely, before the ice road has been built and after it melts away. Hence, the concern about detalization of budgeting proclaimed by the literature does not make much sense in the case of seasonal logistics.

Means-Ends Recoupling Being aware of “causal indeterminacy” (Bromley & Powell, 2012) characterizing logistics operations in the area, for example, that budget numbers would not survive a single spring, the construction of budgetary slack has

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been considered a reasonable solution. In this respect, the detailed budgeting of standard costs creates a kind of grey zone which facilitates the problem of asymmetry of information. On the other hand, any of the changes caused in-between the transportation periods doom the budget to undergoing significant deviations. The efficiency of logistics designed to be achieved through a rigorous budget, can in fact only be achieved by means of strong social ties between the units. Echoing the case of coal repackaging (Berry et al., 1985) and the case of oil price hedging via budgetary slack (Elmassri & Harris, 2011), there is a common understanding of the physical that allows the social to take place. In contrast to Berry et al.’s case, no trade union aims to take care of the social aspects of implemented policy. Those exposed to physical (in terms of logistics) and financial pressure, have to consider the social aspects themselves. In this respect, the collective reward system unites the afflicted. Hence, budgetary slack can be considered to function as a kind of universal insurance and investment
as this money can be used more flexibly. In this particular context, the weather will change tomorrow and this is what is known. In other words, people dealing with logistics know what bad things can happen and may prepare themselves for these small crises by building in a certain budgetary slack. Hence, the construction of budgetary slack may be explained by a combination of several factors. In contrast to Mouritsen and Bekke (1999) who describe how space can be arranged in order to optimize time use, the extra money built into the budget in the case of RUSCO allows for more actions to be carried out in order to deliver materials by utilizing seasonally restricted space. In other words, they create time for space, for example, they reserve money allowing more time for operations to be conducted during the ice-road or navigation periods. This approach echoes the role of managers to create conditions for good performance (Mouritsen, 2005). Even though corporate culture does not save itself from accounting problems, it may well help during good times (Mouritsen, 1989). In the case of RUSCO this helps to solve the problems which otherwise would not have been solved. The findings show that the resources hidden in the budgetary slack(s), in fact, are available to other units. Moreover, they are implicitly created for other units. Properly speaking, due to strong social links and trustful relationships between the actors exposed to similar contextual challenges, the traditionally criticized phenomenon of a budgetary slack can be seen in a new light in this case and does in fact serve other purposes. In this case trust is not a counterpart for an established practice but is the condition for making this practice

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efficient; actors can cheat (e.g., create budgetary slack) because they are trusted by their colleagues, and not the opposite. Hence, it is not budgeting which is an evil (Wallander, 1999), as decoupling correspondingly may not necessarily be a deviation from the (budgeted) ideal. Indeed, it may be the situation where the production function is so complex and the gap between means and ends is so significant, that may need another element to bridge the gap. Under otherwise equal conditions, collective responsibility and shared production culture may facilitate the recoupling, for example, the construction of a bridge between means and ends. In other words, the coupling may come through the social beside the technical; the social may repair the technical. A common understanding of physical can be viewed as a “common ideological platform from which they could make common analyses” (Brunsson, 1985, p. 113). In Berry et al.’s case (1985) the meaning was inherited in the production of coal. In the case of RUSCO the meaning is centered on the production of oil. Ideologies are often reinforced by recruitment process as manned by experts in specific fields; “as a result of their training, experts tend to have conclusive, consistent and complex ideologies in connection with their professional area” (Brunsson, 1985, p. 166). In the case of RUSCO, the construction of budgetary slack turns out to be a normal cultural practice (Ahrens & Mollona, 2007). This budget game is repeated every year. However, it is not the same type of budget game as described by Christiansen and Skærbæk (1997). For them budgetary games are purely political; when an individual or a group of individuals decide how they can gain something to the detriment of others. What is more, with regard to the budgetary slack game, the case of RUSCO differs significantly as there are no losers in this game. Extra resources reserved in budgetary slack are used to do extra necessary work in order to fulfill the superior’s goals with least possible deviations. Summing up, the coupling may well come through the social instead of the technical or the political. The ability of the social or cultural dimension to fix technical decoupling seems to have a greater implication due to the inability of the latter to fix itself over time; the policy-practice form of decoupling is known to be more self-regulating as time passes (Bromley & Powell, 2012). Consequently, decoupling turns out to be a different thing and to have a different meaning than the conventional literature suggests. The new
cultural
dimension of decoupling introduces coupling in a new perspective. Instead of being considered and assessed as a local practice
either in its political or technical form
decoupling should be analyzed in a broader organizational picture. In other words, rational and

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substantive (Weber, 1921 [1968], 1930 [1992] in Bromley & Powell, 2012) may not necessarily be part of the same task, but instead should be addressed at different levels: where the technical and/or the political may ignore the social, the social may be constructed to repair the technical.

CONCLUSIONS Mainstream research on budgeting suggests that the more unstable the environment, the less reasonable the use of budgets clutches is. Similarly, more dysfunctionality and misbalancing with regard to company performance may be the effects of budgetary slack. However, this literature focuses mostly on market disturbances, for example, external enemies, while the “home front” is assumed to be well tuned and under control. The case presented in this chapter shows that with a rather stable market for oil, contextual challenges related to seasonal logistics operations are understood and shared by the employees, and as a result may justify the use of budgets in these extremely unstable conditions. It is not the order of business the company should follow, but it is the order of nature the budgeting is based on. In other words, inflexible budgeting better fits into the (natural/geographical) context than into the business process. Remarkably, due to close relationships between employees combined by a collective reward system, the socially accepted phenomenon of budgetary slack is cured of its dysfunctional condition. Excess budgeting and non-used resources may be transferred to other units in order that common performance goals can be achieved. Hence, by constantly repairing the technical, the social makes the decoupling practice less serious and less obvious. As a result, this may become not the exception, but indeed the normal condition for stable organizational performance.

REFERENCES Ahrens, T., & Mollona, M. (2007). Organisational control as cultural practice
A shop floor ethnography of a Sheffield steel mill. Accounting, Organizations and Society, 32(4/5), 305
331. Berry, A. J., Capps, T., Cooper, D., Ferguson, P., Hopper, T., & Lowe, E. A. (1985). Management control in an area of the NCB: Rationales of accounting practices in a public enterprise. Accounting, Organizations and Society, 10(1), 3
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PERFORMANCE EFFECTS OF PERFORMANCE MEASUREMENT SYSTEMS
EVIDENCE FROM A TRANSITION ECONOMY Biljana Pesalj ABSTRACT Purpose
The current study aims to advance the understanding of the role of performance measurement systems (PMS) in the improvement of companies’ performance, as well to contribute to the limited knowledge of this issue in transition economies. In order to do so, performance effects of PMS are examined, testing both dominant approaches: the performance measurement diversity view and performance measurement alignment view. Methodology
A survey using questionnaire was conducted on a sample of large- and medium-sized manufacturing companies in Serbia. Findings
The results of the research support the performance measurement diversity view, as we found evidence that a broader scope PMS is positively associated with performance. However, we also found partial support for the influence of the strategy
PMS alignment on performance.

Performance Measurement and Management Control: Behavioral Implications and Human Actions Studies in Managerial and Financial Accounting, Volume 28, 127
151 Copyright r 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1479-3512/doi:10.1108/S1479-351220140000028012

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Originality/value of chapter
This study investigates the complex mechanism of PMS effect on performance in a particular context
the transition economy. Moreover, this study represents a pioneering attempt to evaluate the state of performance measurement practice in Serbia and is one of the rare studies of this type on transition economies. Keywords: Performance measurement diversity view; performance measurement alignment view; transition economy; survey

INTRODUCTION It is widely accepted that management control systems (MCS), with performance measurement systems (PMS) as an integral part, are one of the main factors of successful strategy implementation, and consequently contribute to better firm performance (Cunningham, 1992; Govindarajan & Fisher, 1990; Hong, 1996; Langfield-Smith, 1997; Simons, 1999). Despite the vast scientific and practical interest in understanding the complex mechanisms of this influence, there are no completely clear theoretical explanations or unambiguous empirical results. Therefore this important field continues to be fruitful for future research (Bouwens & Abernethy, 2000; Chenhall, 2003; Henri, 2006; Ittner, Larcker, & Randall, 2003; Langfield-Smith, 1997). There are two main approaches in the understanding of the mechanism of MCS (PMS) influence on performance. These approaches are founded on different theoretical backgrounds and arguments. Both of those approaches are presented, discussed and empirically tested. The first approach
the performance measurement diversity view
suggests that characteristics of PMS, per se, influence the level of firm performance. This group of studies (Banker, Potter, & Srinivasan, 2000; Hoque & James, 2000; Lingle & Scheimann, 1996) proposes that PMS that are more sophisticated, more extensive and more diverse (using both financial and non-financial measures) lead to higher performance, regardless of the strategy type. Empirical research conducted within this approach has been based more on the descriptive statistical tools (Lingle & Scheimann, 1996) and on observing only one characteristic of the PMS design: the type of indicators used (financial vs. non-financial). Therefore more research is needed in order to provide more statistically reliable results and to explore PMS more comprehensively
including other important elements of its design. The performance measurement alignment view is founded on the contingency-based theory, and suggests that different contingency factors

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influence the performance effects of MCS. According to this approach it is the alignment (fit) between the strategy and PMS that determines the level of company performance. However, despite the clear theoretical indications of ‘fit’ (Miles & Snow, 1978; Porter, 1986; Simons, 1991) previous empirical research has delivered incoherent results (Chenhall, 2003; Govindarajan & Fisher, 1990; Gupta & Govindarajan, 1991; Langfield-Smith, 1997). These results could be improved by introducing additional contingency variables, refining the selection of the sample, and better determining the notion of ‘fit’ (Gerdin & Greve, 2004). Furthermore the majority of research within this approach is focused on the influence of the MCS
strategy ‘fit’ on performance. There is a limited number of studies focused on the performance effects of the PMS
strategy relationship, such as Abernethy and Guthrie (1994), Bouwens and Abernethy (2000), Van der Stede, Chow, and Lin (2006) and Henri (2006). The intention of this chapter is to contribute to this research stream and to focus on PMS, by refining the research instruments and the sample. Research hypotheses are empirically tested using a large sample of firms in the manufacturing industry in Serbia. Since the research is conducted in a transition economy we aim to contribute to the scarce empirical evidence in this specific context. Our results provide evidence in favour of the performance measurement diversity view and improve previous research using more rigorous statistical instruments. Further, we received partial affirmation of the performance measurement alignment view, and in our discussion we relate it to the particularities of the context. The chapter is organised as follows. The following section builds on the literature review in order to propose hypotheses. In the continuation, information on the conduct of the empirical research, method, sample and operationalisation are provided. This section is followed by the presentation of findings, while the final segment discusses the results obtained and the study’s limitations, as well as possible improvements and lines of future research.

THEORETICAL BACKGROUND AND STATEMENT OF HYPOTHESIS The review of the literature revealed two different approaches in the understanding of the performance effects of PMS: the performance measurement diversity view and the performance measurement alignment view. We are

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interested in discussing and empirically testing both approaches to the performance effects of PMS. The theoretical reasoning of the performance measurement diversity approach is found in the agency theory. It is expected that a larger number of indicators in the PMS would help focus the attention of managers on the performance dimensions that provide the realisation of the owners’ interests. If PMS contains non-financial indicators that offer principals some additional information on managers’ actions that are not revealed in financial measures, they will provide more effective control, and, on the basis of the incentive system, motivate managers to improve performance. Theoretical contributions, however, have been ambiguous, and limited empirical results lead us to further investigate this issue. The widely cited study of Lingle and Scheimann (1996) reported the results of a national study in the United States aimed at understanding the practice of performance measurement. The study showed the existence of a clear positive relationship between type of indicators used within the PMS and level of financial success. Authors concluded that more successful companies calculate a much broader range of indicators and report them more frequently than less successful companies, especially in the domain of customer satisfaction, employee satisfaction, and community and environmental issues. In line with these findings, Banker et al. (2000) find that the presence of non-financial indicators in the PMS is positively associated with future financial company performance, because they help managers to focus on the long-term aspects of their actions. This is similar to the conclusions of Ittner and Larcker (1997, 1998) and Hoque and James (2000). On the basis of the findings of these previous studies, we establish our first hypothesis: H1: The scope (broadness) of PMS is positively associated with performance. However, there are several shortcomings to the presented approach. The studies are mainly focused on the type of indicators used, as the main feature of the PMS design. Therefore, we will try to refine the empirical research within this approach by offering a more comprehensive operationalisation of PMS design. Furthermore, the authors research only the influence of the PMS type (design) on the level of performance, separately from the influence and importance of the strategy and other factors that have been found to crucially determine both performance (Cunningham, 1992; Govindarajan, 1988; Gupta & Govindarajan, 1991; Merchant, 1981; Snow & Hrebiniak, 1980) and characteristics of MCS and PMS. For this

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reason, the study will also use performance measurement alignment approach, in order to evaluate and compare its explanatory power in regard to the PMS performance effect. Contingency-based theory provides a theoretical background to the alternative approach. According to the performance measurement alignment view different contingency factors need to be aligned with PMS in order to reach superior performance. Previous research found that the implementation of the cost reduction strategy type is effectively supported by the dominance of the output control in the control process (Abernethy & Guthrie, 1994; Henri, 2006; Van der Stede et al., 2006). Output control requires performance measurement to be based on quantitative measures
financial and operational indicators. When managers are faced with a relatively stable business environment it is usually enough to rely on internal information in the decision-making process. As the market is stable, historical information (based on past results) can provide a good basis for prediction and planning activities. Therefore traditional accounting systems are particularly well suited to this strategy type. Successful implementation of the differentiation strategy type requires the PMS to provide a large range of different information on a regular basis. Therefore, apart from financial and operating indicators the PMS need to also include non-financial indicators in order to be able to contribute to the achievement of higher performance. Non-financial indicators give early signals that indicate if expected end results are likely to be achieved or if corrective action is necessary. Since the differentiation strategy type is applied by proactive firms that are constantly looking for new products and new markets, an effective decision-making process requires broader scope PMS. It should provide monitoring of different processes in the organisation and also in its environment. The monitoring of the business environment necessitates the use of external and future-oriented information in order to appraise future opportunities and threats. The empirical research of Abernethy and Guthrie (1994) supported the hypothesis that broad scope information has a more positive effect on performance in Prospector type firms (using differentiation strategy) than in Defender type firms (using cost reduction strategy). The research was performed on a relatively small non-random sample, of 49 SBU of two large companies located in Australia. Because of constraints related to the sample more testing is necessary to provide more generalisable conclusions. The study of Abernethy and Lillis (1995) found empirical support for the reliance on traditional financial indicators being positively associated with the performance of firms that implement non-flexible manufacturing

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strategies, and negatively with the performance of firms implementing flexible manufacturing strategies. Both Chenhall and Langfield-Smith (1998) and Baines and Langfield-Smith (2003) found greater use of advanced management accounting practices (using a broader scope of financial and non-financial indicators) in firms that placed a strong emphasis on product differentiation strategies; and this ultimately resulted in higher performance. Contingency-based research in the ‘strategy
measurement
performance’ field raised awareness of the importance of the alignment between strategy and PMS design. Since it delivered diverse empirical results, we intend to contribute to this body of literature by providing further evidence. Our second hypothesis is as follows: H2: Companies that place more emphasis on the differentiation strategy will reach higher performance, only when they use broader scope PMS. The graphical representation of the research model is shown in Fig. 1. The use of the moderation model for the exploration of the strategy
PMS fit signifies that the influence of the strategy type (as independent variable) on firm performance (dependent variable) is restrained by PMS as the moderating variable. If this research model is applied, then a moderated regression analysis (regression analysis with the interaction term) is the appropriate statistical tool to empirically test the theoretical construct (according to Gerdin & Greve, 2004). Some authors, such as Van der Stede et al. (2006) and Ittner et al. (2003), allowed the examination of hypotheses based on both measurement diversity and measurement alignment views. Van der Stede et al. (2006) found support for the suggestion that diversity of performance measures, per se, influence performance positively, independent of strategy type. Their results showed that increasing performance measurement diversity,

Business performance

Business strategy

PMS scope

Fig. 1.

Research Model. Source: Adapted According to Gerdin and Greve (2004).

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especially by including non-financial measures, provides performance benefits. The hypothesis based on the performance measurement alignment view was not completely supported. This is in line with finding of Ittner et al. (2003). These authors found that more extensive performance measurement practices in a group of firms with similar strategies was associated with higher financial performance, but less extensive measurement was not associated with performance. This study will also test both approaches.

METHODOLOGY The survey method using a questionnaire is applied within the conclusive (causal) research design type, since the aim is to understand the relationship between strategy and PMS and their influence on company performance. The research population consists of large- and medium-sized manufacturing companies in Serbia. We focus on the manufacturing industry in Serbia because it accounts for the largest part of the Serbian economy in terms of number of employees and revenues. Large- and medium-sized companies are selected as research units because we can expect to find formal PMS in place in these companies, whereas small companies usually do not have formal PMS. The units of our analysis are legal entities, independent companies and their dependent organisational units. The level of analysis applied in the cases of holding, concern, or business groups was at the level of daughter companies instead of headquarters. The Serbian economy is still in transition and is characterised by many particularities and distortions in comparison to developed market economies. Therefore we will briefly present some elements important to the current research.

The Context of the Research Serbia belongs to the group of countries in which there used to be a socialist (communist) economic and social system. The command (planned) economic system of the economies of the Eastern, South-eastern and Central European countries1 demonstrated an inability to provide growth and development in the long run and was accompanied by an undemocratic communist (socialist) political system that disallowed numerous civil

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liberties. Transition relates to the process of shifting from the command economy to a more efficient market economy. Privatisation is only one of the processes of transition: in order to secure a successful transition it needs to be aligned with other elements, such as macroeconomic stabilisation, price liberalisation and institution building. The process of privatisation and transition in Serbia commenced in 1989 and is still not completed. This period of more than twenty years can be divided into two phases, significantly different in terms of the speed and intensity of privatisation, political determination, support and will to conduct the transition, methods used, and position and role of different social groups in the distribution of privatisation effects (Zec, 2007, p. 66). The first phase relates to the period 1989
2001, which was characterised by insider privatisation, based on the free distribution of ownership rights to employees. An opaque privatisation process, realised outside the institutions, provided the social redistribution of wealth. Socially owned assets (companies) became the private property of a privileged group of people close to the source of political power. Actual reforms did not begin until 2000
relatively late in comparison to other Central and Eastern European countries, but similarly to other countries of the west Balkans. The change of government and political orientation on 5 October 2000 provided the political will to (re)start the transition process to a democratic and economically more efficient system. Serbia entered into actual reforms after a period that had devastated its performance, with a deleterious effect on its starting position and capacity to successfully carry out the reforms. Serbia is presently at the level of 80% of the gross domestic product and 50% of the industrial production that it had in 1990. The second phase of privatisation started with the Privatisation Law, adopted in 2001, which represents firmly entering into a faster and more intensive privatisation process. In 2009 the National Privatisation Agency announced tenders and auctions for all the remaining socially owned companies. Processes of bankruptcy or liquidation were initiated for all companies in which there was no interest. Different methodologies have been developed in order to track the progress of transition economies in the reform process. The methodology developed by the EBRD is one of the most often used. This methodology employs nine indicators to measure the progress of transition economies against the standard of developed market economies. According to these indicators, until 2003 reforms were fast in Serbia, but then came a period of slowdown. Presently Serbia is progressing very slowly and in comparison to other transition economies is decreasing the gap at a very modest pace

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(Cerovic, 2009). It can be concluded that the unsatisfactory results and pace of the transition process in Serbia are due to the inadequate structure and coordination of different reforms (especially development of market competitiveness and institution building) needed to support privatisation.

The Sample The units of research are large- and medium-sized companies in the Serbian manufacturing industry. Out of 1,342 largest companies, ranked according to their operation revenue in 2007, first 800 were selected for the sample. In order to explore the proposed hypotheses we intended to focus on profit-oriented companies in private ownership. Therefore we eliminated from the sample all public companies and cooperatives, as well as all companies with a considerable share of state or social capital and those that are presently in the process of restructuring, privatisation, or waiting for a strategic partner (a total number of 101 companies out of 800 initial companies). These elements and specific factors were found to disrupt the regular functioning of the business and to strongly influence the practice of performance evaluation and reporting, as well as performance itself. Companies (699 of them) were contacted by phone. This was in order to pre-notify the companies, to check postal addresses, to determine the most appropriate respondents for the questionnaire on PMS and to confirm e-mail addresses. Phone contacting resulted in a sample of 684 companies available for research. The questionnaire is provided in two forms: the printed version sent by ordinary mail and an online questionnaire. Furthermore it was provided in two languages, Serbian and English. The questionnaire consists of four parts of structured questions concerning: strategy; PMS design, role and existing practice; evaluation of performance; and general information concerning the company and the respondent. The survey was launched in September 2009. After the initial mailing two follow-ups were organised, and two months after the initial mailing the data collection period was closed. The number of 160 answers was received in total (out of 684 sent). There are 90 questionnaires received by ordinary mail and 70 filled out online. Since two companies completed the questionnaire in both forms there were 158 answers entered in the database, giving a response rate of 23.1%. This response rate is in the range of 15
25%, which is similar to that of recent research of this type (Baines & LangfieldSmith, 2003; Henri, 2006; Ittner et al., 2003).

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A set of tests were performed to investigate if there are statistically significant differences between respondents and non-respondents. This comparison was performed in terms of operating revenue in 2007, size and legal form. Using the student t-test and Mann
Whitney U test no statistically significant difference was found between respondents and non-respondents, indicating that the sample does not manifest differences in comparison to the rest of the population. The sum of the operating income of companies in the research sample (158 companies) represents 19.88% of the operating revenue of the population (800 largest companies in the manufacturing industry). The representativeness of the sample is further determined by the competence of the respondents. The t-test was performed to verify the significance of difference (in means) in answers between respondents of desirable competence (top and middle management) and a group of operational managers and staff. No significant difference was found. On the basis of the presented arguments we suggest that the sample is representative. The sample is composed of 107 (68%) companies in limited liability and 51 (32%) joint stock companies. There are 78 medium-sized companies and 79 large-sized, so the distribution by size is almost equal. In the following text we present the measurement of the construct, and further data analysis and results obtained.

Measurement of the Construct The questionnaire employed already developed instruments from previous research. Special attention was given to the adjustment of some questions and wording, taking into account the particular context. Bipolar Likert five-point interval response scales were predominantly used. After the questionnaire was developed it was sent for pre-testing by two different groups: a group of academics and a group of managers, which contributed considerably to its improvement. The instrument used to operationalise the business strategy is the one offered by Miller, De Mayer, and Nakane (1992) and used in similar research such as Chenhall and Langfield-Smith (1998), Baines and LangfieldSmith (2003) and Cauvin and Bescos (2005). This instrument provides an assessment of the strategy type (cost reduction or differentiation) on the basis of the importance attributed to 11 defined strategic priorities. Respondents are asked to evaluate the importance given to each strategic priority in the past three years on a five-point Likert scale. The strategy construct requires reduction from 11 items used to describe strategic priorities to several factors

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(themes) that could be used to differentiate strategies on differentiation and cost reduction according to Porter (1986). The method of Principal Component Analysis is used and after rotating the factors (varimax method was used) and requiring that Eigenvalues were higher than 1, the analysis delivered three main factors. The first factor explains 36.2% of the variance in original items, and the three factors together explain 58.7% of the variance. The first factor can be labelled ‘Flexibility/product’ since it loads highly onto initial variables related to the companies’ ability to undertake changes and to adapt, and also onto variables related to the features of the product, client support and services. Therefore variable Flexibility/product strongly reflects the differentiation strategy of the company. The second factor loads highly onto two items: fast deliveries and dependable delivery promises, so it can be termed ‘Delivery’. The third factor, named ‘Low cost/ price’, is related to low cost and low price as dominant strategic priorities, since it loads onto these two initial items. These results are similar to previous research (Cauvin & Bescos, 2005; Chenhall & Langfield-Smith, 1998; Ittner et al., 2003). Following Chenhall and Langfield-Smith (1998) we transformed the identified factors into new variables by calculating the average evaluation (rating) of initial strategy items grouped in each of the factors. The instrument used to measure PMS scope was developed by Chenhall and Morris (1986), and used by Abernethy and Guthrie (1994), Agbejule (2005) and Tillema (2005). The scope of the PMS is determined and measured on the basis of three characteristics (dimensions, aspects) of PMS: focus (internal information vs. external information); extent of quantification (financial indicators vs. non-financial indicators) and time horizon (past vs. future-oriented). The ‘focus of information’ describes the usefulness and importance of information obtained from measuring the efficiency of processes inside the organisation, versus the information related to the organisation’s environment. The ‘extent of quantification’ is a criterion that distinguishes between financial indicators calculated on the basis of financial statements and nonfinancial indicators expressed in operational terms and calculated on a basis of information obtained outside the financial accounting information system. The aspect ‘time horizon’ provides the possibility of distinguishing information (indicators) that is oriented to measure past events (ex post) or future events (ex ante). Managers are asked to rate the usefulness of a set of information items (two items for each PMS characteristic) for carrying out the manager’s tasks. The five-point Likert scale is offered ranging from ‘not useful at all’ to ‘most useful’. This instrument was chosen because it offers the possibility to measure three characteristics of PMS in comparison

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Table 1.

Cronbach’s Alpha for the Instruments Used.

Construct Strategy PMS scope Performance index
performance evaluation Performance index
dimension evaluation

Number of Items

Cronbach’s Alpha

11 6 10 10

0.812 0.826 0.909 0.883

to the majority of research in this field, which has been mainly focused on measuring only one aspect of PMS. The scope of the PMS in the sample (as the average of ratings of each type of information) ranges from 1.67 to 5 with the average value for the sample equal to 3.75. Business performance as the dependent variable in the proposed model is measured by the performance index proposed by Gupta and Govindarajan (1984) and extensively used by other authors such as Govindarajan and Fisher (1990), Abernethy and Guthrie (1994), Baines and Langfield-Smith (2003), Gerdin (2005), Subramaniam and Watson (2006). This is the method of subjective evaluation of firm performance by managers. The performance index (PI) is calculated on the basis of the manager’s evaluation of two elements: the company’s success in 10 performance dimensions and the degree of importance of each dimension for the company’s overall performance evaluation. Managers are asked to evaluate performance in the form of comparison between actual performance and corporate standards (a priori expectations). The performance (effectiveness) index was calculated as a weighted average of ratings of firm performance using the importance of each performance dimension as the weight. For our sample the calculated performance index ranged from 1 to 5, with the average at 3.41. Cronbach’s alpha is calculated for all variables used in the inferential statistics, and they are presented in Table 1. Since all Cronbach’s alpha are higher than 0.8 they show strong internal reliability; so the proposed constructs can be further used in the analysis. Cronbach’s alpha for the new strategy construct that consists of three variables, Flexibility/product, Delivery and Low cost/price, is respectively 0.832, 0.677 and 0.418.

DATA ANALYSIS AND RESULTS OBTAINED Data analysis included: cluster analysis; correlation analysis and linear regression analysis (simple and multiple).

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Cluster Analysis Cluster analysis is performed in order to evaluate the relationships between level of performance and the scope of PMS for groups of companies with similar strategic priorities. This kind of analysis, considered as more descriptive, can give some important insights into the relationships we are interested in observing, before we proceed to more rigorous and rigid methods in order to test the proposed hypotheses. Since we are interested in observing groups of companies following a similar strategic orientation, clusters are formed according to the scores on variables measuring strategic priorities. Cluster analysis followed the algorithm of hierarchical agglomeration in order to deliver non-overlapping clusters. This procedure is applied since the real clustering structure is not known in advance. Ward’s method was applied in order to minimise variance within clusters and squared Euclidean distance is calculated as the proximity measure. In deciding on the number of clusters we mainly used the graphical method of Dendrogram and the four-cluster solution2 was chosen. First, we give the correlation matrix for the mentioned variables for the whole sample (Table 2). On the basis of the correlation matrix3 we can observe that for the whole sample the variable Flexibility/product is positively and significantly (at the level 0.01) correlated with PMS scope and performance index. The same is valid for the Delivery strategy variable. The average values of performance, PMS scope and strategic priorities are calculated for each of the four clusters in the solution. Clusters are sorted by the level of performance and presented in Table 3. The relative position of the cluster in terms of each observed variable is given in brackets. The value represented in grey indicates that it is equal to or lower than the average value of that variable for the whole sample. Table 2. Correlation Matrix (Spearman’s Rho) Presenting the Relationship between Strategic Orientation, PMS Scope, and PI.

Flexibility/product Delivery Low cost/prices PMS PI

Flexibility/Product

Delivery

Low Cost/Price

PMS

PI

1 0.449** 0.077 0.439** 0.455**

1 0.154 0.374** 0.255**

1 0.147 −0.109

1 0.278**

1

**Correlation significant at the level 0.01.

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Average Values for the Selected Variables in a Four-Cluster Solution.

PI PMS scope Flexibility/product Delivery Low costs/price Number (%) of companies

Cluster 1

Cluster 2

Cluster 3

Cluster 4

Sample Average

3.8 (1) 3.74 (2) 4.4 (2) 4.6 (2) 3.0 (4) 29 (18%)

3.7 (2) 4.16 (1) 4.7 (1) 5.0 (1) 4.1 (2) 43 (28%)

3.4 (3) 3.72 (3) 4.0 (3) 4.5 (3) 4.3 (1) 54 (35%)

2.7 (4) 3.27 (4) 3.1 (4) 3.9 (4) 3.6 (3) 30 (19%)

3.4 3.75 4.1 4.5 3.9 156 (100%)

The first two clusters
C1 and C2
are the best performing and achieve values of performance index, PMS scope, score on Flexibility/product and Delivery (indicating the importance of the differentiation strategy) that are over the average for the sample (except the score of C1 in PMS scope). On the other hand two other clusters
C3 and C4
are characterised by performance index, PMS scope, score on Flexibility/product and Delivery that are equal to or lower than the average for the sample. It is interesting to observe that the latter two clusters place lower emphasis (in comparison to the sample average) on almost all of the three strategic priorities. On the basis of this analysis we can confirm that the relationship between strategic orientation, PI and PMS scope registered at the level of the whole sample persists and remains evident in the given clustering solution. So we can observe that a higher focus on differentiation strategy is related to broader PMS scope and superior performance.4 On the level of clusters C3 and C4 we observed stronger focus on cost reduction strategy together with narrow PMS scope and low performance. We performed the One-Way ANOVA to test the statistical significance of differences in performance and PMS scope between clusters (grouped according to strategic orientation). Tukey’s test is used since variances of variables among clusters are equal. This analysis proves that there are statistically significant differences between clusters, formed according to their strategic orientation, in terms of performance [F (3.150) = 17.304, p < 0.05] and in terms of their PMS scope [F (3.152) = 10.630, p < 0.05]. Cluster C4 manifests the highest statistically significant difference in performance in comparison to all other clusters. In regard to differences in PMS scope between clusters, it was observed that clusters C1 and C4 demonstrate statistically significant differences in comparison to all other clusters.

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Using cluster analysis we obtained some more information on the relationship between variables. It is clear that PMS scope is related to performance and strategy, but the applied statistical tool does not enable us to observe if the influence of strategy and PMS scope is separate, or if there is some kind of fit that affects the level of performance. More information can be provided using regression analysis. We are interested in testing both approaches to PMS performance effects. We first pay attention to the performance measurement diversity view, according to which broader PMS provides benefits for performance, no matter what strategy type. Simple Linear Regression Analysis For the sample companies it was found that the relationship between performance measured by performance index (PI) and PMS scope is linear and direct. The Pearson correlation coefficient equals 0.278, statistically significant at the 0.01 level, which indicates that the broader (diversified) PMS is related to higher company performance. Further, regression analysis was performed to investigate if the PMS scope represents an important factor of company performance, per se, and independently from the strategy. The simple linear regression of the following form was used: PI = β0 þ β1 PMS þ ɛ

ð1Þ

In Eq. (1) PI stands for the performance index that measures the level of performance and PMS stands for PMS scope measuring the broadness (scope) of PMS. The results are summarised in Table 4. The linear regression analysis shows that the regression coefficient, representing the influence of PMS scope on performance is positive, equal Table 4.

Regression Coefficients for the Measurement Diversity Model.

Model

1 (Constant) PMS

Unstandardised Coefficients

Standardised Coefficients

B

Standard error

Beta

2.264 0.306

0.325 0.085

0.278

t

Significance

6.975 3.597

0.000 0.000

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Table 5. Modelb 1 a

Summary for the Measurement Diversity Model.

R

R2

Adjusted R2

Standard Error of the Estimate

Durbin
Watson

0.278a

0.078

0.072

0.76184

2.183

Predictors: (constant), PMS scope. Dependent variable: PI.

b

to 0.306 and significant at the level 0.01. Standard coefficients show the reliability of the analysis (Table 5). According to the indicator R2 the model explains 7.8% of the variance of performance, which is relatively modest. The analysis of residuals (error term) showed their normal distribution, constant variance against predicted value of the dependent variable and random pattern of error distribution against independent variable. Thus evidence is provided of the robustness and appropriateness of the model.

Multiple Linear Regression Analysis In order to test the alternative approach
performance measurement alignment model
we used the multiple linear regression equation with the interaction term (moderated regression analysis) of the general form: Y = β 0 þ β 1 X1 þ β 2 X2 þ β 3 X 1 X2 þ ɛ

ð2Þ

In our case the estimated function is: PI = β0 þ β1 Flex þ β2 PMS þ β3 Flex PMS þ ɛ

ð3Þ

In Eq. (3) ‘Flex’ stands for Flexibility/product for the purpose of simplicity in writing the equation. The proposed form of multiple regression function allows us to capture the performance effect of independent variables taking into consideration their interaction. The interaction term measures the extent to which the relationship between Flexibility and Performance is moderated (changed) by the PMS scope included in the model. If there were an interaction between strategy and PMS as independent variables, then the relationship between Performance and Flexibility would depend on the PMS scope, and so it would differ across different values of the PMS scope.

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This form of the multiple regression equation allows us to assume that the level of Performance increases when the score on Flexibility/product increases along with the interaction between Flexibility and PMS scope. Furthermore the interaction is assumed to be stronger when the value of PMS scope is higher than when it is lower. If the regression coefficient β3 in Eq. (3) were to appear significant, then it would signify that two independent variables have an interactive effect over the outcome variable. The model needs to contain the interaction term, but also both independent variables involved in the interaction (DeCoster, 2004; Wooldridge, 2006). The independent variables used to create the interaction term need to be previously centred (Wooldridge, 2006), to reduce the collinearity between the independent variables and the interaction term and to ensure their interpretability (DeCoster, 2004; Gerdin, 2005). Eq. (3) thus becomes: PI = β0 þ β1 Flex þ β2 PMS þ β3 ðFlex
Mean ValueÞðPMS − Mean ValueÞ þ ɛ ð4Þ The proxy used for strategy is the construct Flexibility/product, and it is expected that this variable will be a good representation of the differentiation strategy. We introduced the logarithm of total assets in 2008 as the proxy for company size. The conducted regression analysis delivered the results shown in Tables 6 and 7. The interpretation of regression coefficients for the moderated regression model is slightly different than usual, since the interaction term is involved. For our estimated model we can see that each unit increase in Flexibility/ product results in a 0.551 unit increase in performance, but this effect is Table 6. Model

Regression Coefficients of the Moderated Regression Model.

a

Unstandardised Coefficients B

1 (Constant) 3.414 PMS 0.072 Flexibility 0.551 Centred flexibility* −0.207 centred PMS LogAssets08 0.007 a

Dependent variable: PI.

Standard error

Standardised Coefficients

t

Significance

Beta

Collinearity Statistics Tolerance

VIF

0.651 0.084 0.091 0.103

0.066 0.467 −0.142

5.246 0.856 6.031 −2.000

0.000 0.393 0.000 0.047

0.796 0.791 0.948

1.256 1.264 1.054

0.109

0.005

0.067

0.947

0.971

1.029

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Table 7. Model 1 a

Summary for the Moderated Regression Model.

R

R2

Adjusted R2

Standard Error of the Estimate

0.549a

0.302

0.283

0.67246

Predictors: (Constant), LogAssets08, CentredFlex*CentredPMS, PMS, Flex.

moderated by the interaction between Flexibility/product and PMS scope. Performance is increased by 0.551 for the unit increase in Flexibility/ product at the average level of PMS scope. Further, the effect of Flexibility on expected Performance is stronger when the level of PMS scope is lower (since the regression coefficient of the interaction term is negative). This result is somewhat unexpected. The analysis of residuals showed that these results are not completely reliable. The distribution of the residuals does not strictly follow the normal distribution (although the distortion is not large), indicating that there are some other factors, not included in the model, exhibiting a systematic influence over performance. The negative sign of the interaction term is intriguing. Therefore it was further investigated. Following Ittner et al. (2003) and Van der Stede et al. (2006) the analysis further focused on the performance effect of the deviations from the pairs of strategy
PMS fit. Namely, each deviation from the ideal alignment should result in a decrease of performance. This analysis requires an ideal model of alignment between the strategy type and PMS to be set. Assuming that companies are striving to establish an optimal model
alignment between PMS scope and strategy that would provide the achievement of higher performance, we formed a benchmark model. This model is revealed when regressing PMS scope in the strategy construct. We formed three regression equations for each strategic construct and regressed PMS scope (Y) in Flexibility/product, Delivery and Costs (X). Following the suggestion of the aforementioned authors, and the theoretical background for the systems approach to the exploration of fit given by Drazin and Van de Ven (1985), we set the optimal models of measurement practice in our sample: PMS scope = β0 þ β1 Flexibility=product þ ɛ1

ð5Þ

PMS scope = β0 þ β1 Delivery þ ɛ 2

ð6Þ

PMS scope = β0 þ β1 Low cost=price þ ɛ3

ð7Þ

Standard residuals from these three regression models are used as proxies for the deviation from the optimal model. The average of these

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three groups of residuals are calculated, and they represent the deviation from the strategy
PMS alignment. Each deviation, both positive and negative, is expected to be negatively associated with performance. We observed two separate variables (positive deviations and negative deviations) from the standardised residuals of each optimal model. On the scatter plot we checked visually that the relationship between performance and both average positive and average negative residuals might be linear, so the linear regression function could be used. Two regression equations were run in order to observe independently the performance effects of positive and negative deviations of the optimal strategy
PMS fit: PI = β0 þ β1 ðPositive residualsÞ þ ɛ

ð8Þ

PI = β00 þ β2 ðNegative residualsÞ þ ɛ

ð9Þ

The regression analysis gave the results, for positive residuals, as shown in Tables 8 and 9. Standardised residuals from this regression equation show normal distribution and constant variance to the predicted dependent variable. Association between negative deviations and performance was not found to be significant (Table 10). Table 8. Regression Coefficients of the Regression Model with Positive Residuals. Model

Unstandardised Coefficients B

Standard error

Beta

0.132 0.164

0.267

1 (Constant) 3.169 Positive residuals
average 0.443

Table 9. b

Model 1 a

t

Significance

23.987 2,696

0.000 0.008

Summary of the Regression Model with Positive Residuals.

R a

0.267

R2

Adjusted R2

Standard Error of the Estimate

Durbin
Watson

0.071

0.061

0.73828

2.052

Predictors: (constant), positive residuals
average. Dependent variable: PI.

b

Standardised Coefficients

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Table 10.

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Regression Coefficients of the Regression Model with Negative Residuals.

Modela

1 (Constant) Negative residuals
average a

Unstandardised Coefficients B

Standard error

3.312 −0.039

0.134 0.137

Standardised Coefficients

t

Significance

24.659 −0.280

0.000 0.780

Beta

−0.030

Dependent variable: PI.

Despite expectations we found that positive deviations from the optimal model contribute to higher performance. In a way, the obtained results could be considered as complementary to the findings on the measurement diversity view. Positive deviations from the optimal model are found to have a positive effect on performance, which is in accordance with the previous conclusion that broader PMS contributes to performance. Summarising the findings based on both performance measurement views, we can conclude that our study found evidence that broader PMS scope contributes to higher performance, no matter what the strategy. However for the whole sample cluster analysis registered a certain relationship between differentiation as strategic orientation, PMS scope and performance. Furthermore this relationship persists when the sample is divided into clusters, according to the strategic orientation. Therefore we are not inclined to reject the propositions of the measurement alignment view, but are interested in researching in more detail possible explanations for the obtained results. We suggest that they might be found in a better understanding of the relationship between PMS and strategy and in particularities of transition economies. The final section of the chapter is devoted to a discussion of the obtained results and lines of future research.

CONCLUSION, DISCUSSION AND FUTURE RESEARCH The findings from empirical research are not straightforward. Research hypotheses were tested using a large and unique data set. Multiple statistical methods were used in order to explore the research problem and verify the suggested hypotheses.

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Applying the cluster analysis we found a strong relationship between differentiation strategy, PMS scope and performance. The group of companies with superior performance was characterised by a higher score in the elements of differentiation strategy (flexibility, product, delivery) and a higher score in the PMS scope. The simple linear regression model was used to test the performance measurement diversity view. The results from this model proved that there is a positive association between performance and PMS scope. This means that larger PMS scope contributes to higher company performance. In this way we found evidence that supports the performance measurement diversity view, using more sophisticated and improved measurement instruments than Lingle and Scheimann (1996), for example. Furthermore, unlike the majority of authors using this approach, focusing mainly on the evaluation of the use of non-financial indicators only, we use complex constructs for PMS scope, observing its multiple aspects (focus, extent of quantification and time horizon). The multiple linear regression model enabled us to test the performance measurement alignment view. We were interested in the interaction between PMS and strategy and the effect of this interaction on performance. Conducting the moderated regression analysis we received some proof of the performance effects of the interaction between PMS and strategy. Apart from the boundary robustness of the results, the negative sign of the interaction term induced some scruple, and consequently invoked more analysis. The obtained findings are in contrast to those of Abernethy and Guthrie (1994) but in line with the conclusions of Cauvin and Bescos (2005). Also, following the procedure proposed by Ittner et al. (2003), we examined whether the deviation from the optimal strategy
PMS fit affects performance. We found evidence that in the case of positive deviations (PMS scope larger than average) from the strategy
PMS fit, there are positive performance effects. In this way we found more evidence in favour of the performance measurement diversity view, in line with previous research using this method (Ittner et al., 2003; Van der Stede et al., 2006). In order to relate our findings to previous research, we turn to recent similar studies. The conventional wisdom (see, for example, Govindarajan, 1986) as well as recent studies, argue that broader (more sophisticated) management accounting systems (MAS) have been designed to support new management processes and deal with challenges imposed by global competition (Abdel-Kader & Luther, 2008; Gerdin, 2005). However Tillema (2005) reports that many organisations have not adopted these sophisticated systems. The investigation of Abdel-Kader and Luther (2008) showed no

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significant difference between the groups of companies applying a different scope (sophistication) of MAS, relative to their competitive strategies. These authors found that the majority of companies in the sample used the same scope of information, no matter what the strategy. The obtained results may be due to the transition context of the research. It might be that Serbian companies are at present in a period of adapting to new business and competitive conditions. Extensive direct and indirect contacts with foreign competitors and partners provide insight into their business practices (including control and measurement). As we are dealing with the largest Serbian manufacturing companies it can be supposed that they are the most proactive and dynamic companies and are willing to adapt and improve by introducing new management tools to improve performance. This might be a process in which companies cannot count presently on the balance between strategy and PMS, since PMS (MCS) could be used as tools leading the organisational change, as suggested by Moilanen (2007). It might be because of these arguments that we detected the importance of PMS scope for firm performance, but found weak evidence of the performance effects of the strategy
PMS fit. Therefore we can conclude that particularities of the transition context deserve more attention and investigation in regard to PMS performance effects. On the other hand it might be that the adopted theoretical background (contingency approach) does not permit the observation of the complex relationship between strategy and PMS. Thus some other approach might be more appropriate. Henri (2006) suggested resource-based research and the introduction of strategic capabilities as the mediating variable between strategy and PMS. However we suggest that the current research opens up some new aspects and outlines future research on these issues, about which not enough is known. Our results need to be considered in the light of some limitations that can be seen in the theoretical field, conducted empirical research and interaction between these two fields. The contingency theory to management accounting has been the subject of much criticism (Chenhall, 2003). Our study suffers from the usual limitations associated with the questionnaire survey method and selection of the non-random sample. Limitations can also be found in the field of the operationalisation of variables, since they are very complex. However on the theoretical level the present study contributes to our understanding of the complex strategy
PMS
performance relationship, and to the ongoing debate between two conflicting performance measurement views. The practical value of the study lies in the fact that it represents a pioneering attempt to evaluate the state of performance measurement

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practice in Serbia and is one of the rare studies of this type on transition economies. The appraisal of PMS scope, roles and design presents a good basis for future research and longitudinal studies in this field. The results of the study may give valuable indications to managers, directing their choices in the introduction and development of MCS in companies operating in transition economies. Future lines of research could be follow-up studies that monitor the development of PMS practices in Serbia. Furthermore, as indicated, the application of resource-based theory could allow better investigation of the relationship between PMS and strategy, which it was not possible to sufficiently explore in the present research.

NOTES 1. An excellent description of command economies can be found in Djankov and Murrell (2002). 2. In order to assess the chosen solution of four clusters we applied some criteria that are indicated as important in the partitions’ validation, such as interpretability, stability, external validity (Schaeper, 2006). Additionally, some of the objective measures like internal indices
measures of association (Gamma and C-index) are calculated. On the basis of these methods and indicators, we can suggest that the four-cluster solution is a good representation of the real structure of the sample. 3. Spearman’s rho was used as the PMS variable does not follow normal distribution. 4. In making these conclusions we need to take into account that companies’ performances are considerably determined by the type of the industry.

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PART III BEHAVIORAL IMPLICATIONS OF PERFORMANCE MEASUREMENT AND MANAGEMENT CONTROL

THE EFFECTS OF INTERACTIVE CONTROL SYSTEM AND TEAM IDENTITY ON TEAM PERFORMANCE: AN EXPERIMENTAL STUDY Laura Go´mez-Ruiz and David Naranjo-Gil ABSTRACT Purpose
Team performance frequently is not reached because of motivation losses. The individual identified motivation best fits in team contexts. However, management control systems research has mainly focused on the external motivation. This chapter analyses how identified motivation and team performance can be enhanced through the interactive use of management control systems and the team identity. Methodology
An experimental study is conducted among 144 postgraduate students. We manipulate the interactive use of management control systems and the team identity. We controlled its effects on team members’ motivation and performance.

Performance Measurement and Management Control: Behavioral Implications and Human Actions Studies in Managerial and Financial Accounting, Volume 28, 155
176 Copyright r 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1479-3512/doi:10.1108/S1479-351220140000028014

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Findings
The results show an indirect effect of the interactive control systems on team performance via team members’ identified motivation. Furthermore, the effect of team identity on team performance is also mediated by the identified motivation. Practical implications
Managers can increase employees’ motivation by using the control information interactively. Controls focused on socialisation processes and shared values best fit with collaborative environments. Originality/value of chapter
The results provide empirical support for the recent calls about the effect of interactive control systems at individual levels. Despite the considerable attention to the relation between the design of management control systems and team performance, this chapter provides empirical evidence of the positive relation between the style of use of management control systems and individual behaviour in team-based settings. Keywords: Interactive control system; identified motivation; social identity; team performance; experiments

INTRODUCTION One of the main purposes of management control systems is to motivate individuals towards the appropriate goals. However, the question on how to encourage individuals’ motivation in team contexts is still unclear (Adler & Chen, 2011; Birnberg, 2011; Birnberg, Luft, & Shields, 2007; Libby & Thorne, 2009; Roma´n, 2009). For example, group incentives increase team performance, but also they can result in collusion and freeriding behaviours. Control reduces performance in group contexts, but it also produces positive effects by inducing trust and cooperation (Coletti, Sedatole, & Towry, 2005; Libby & Thorne, 2009; Rowe, Birnberg, & Shields, 2008). The relation between management control systems and team performance can be clarified by incorporating mediating variables in the models (Adler & Chen, 2011; Birnberg, 2011; Birnberg et al., 2007, p. 116; Coletti et al., 2005). Individual motivation represents a mediating variable in team-based settings, but it has traditionally been analysed as onedimensional variable focused on external motivation in management accounting literature (Adler & Chen, 2011; Wong-On-Wing, Guo, & Lui,

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2010). Among the different types of motivations, the identified motivation is the one that related to work group support and team performance (Adler & Chen, 2011; Gagne´ & Deci, 2005). The present study is focused on analysing how different control practices affect to the identified motivation of individuals, and then to the team performance. Identified motivation is captured by reasons involving acting from one’s own values or goals, and it typically takes the form of ‘I want’ (Adler & Chen, 2011; Gagne´ & Deci, 2005). Organisational and individual features can act as antecedents of the individuals’ identified motivation (Deci & Ryan, 1985; Gagne´ & Deci, 2005). On one hand, the control systems that encourage communication, participation and involvement have been positively related to the identified motivation of individuals, since they promote the internalisation of collective values and goals (Adler & Chen, 2011; Kunz & Linder, 2012; Meyer, Becker, & Vandenberghe, 2004). These involvement processes have been related to socialisation forms of control, such as interactive control systems (Adler & Chen, 2011; Kominis & Dudau, 2012; Simons, 1995, 2000). Even when the interactive control systems have traditionally been analysed at organisational level, we posit that issues of motivation at team level can be successfully addressed through an interactive use of the control information (Adler & Chen, 2011; Henri, 2006; Kominis & Dudau, 2012). The interactive use encourages an affective state between the teammates which pushes their identified motivation towards the group goals and values (Adler & Chen, 2011; Meyer et al., 2004; Meyer & Herscovitch, 2001). Therefore, we expect that the interactive use of management control systems will increase the team performance by inducing the team members’ identified motivation. On the other hand, the identified motivation is also supported by individual dispositions and traits (Deci & Ryan, 1985; Gagne´ & Deci, 2005). The important cue is the individual’s willingness to internalise collective goals (Gagne´ & Deci, 2005). Social identity represents an individual orientation towards collective goals (Haslam, 2001; Tajfel & Turner, 1986). Individuals can identify themselves with different social categories, such as organisation, profession or work team. Team identity represents the extent to which individuals perceive a sense of ‘oneness’ with a particular organisational team (Haslam, 2001; Somech, Desivilya, & Lidogoster, 2009). Psychology researchers stress that team members with strong team identity perceive group values and group goals as more important than their personal goals. These team members are willing to exert more effort on the group tasks in order to increase team performance (Haslam, 2001; Van Dick, Stellmacher, Wagner, Lemmer, & Tissington, 2009; Van Knippenberg,

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2000). Nevertheless, some researchers did not find a positive relation between team identity and team performance (e.g. Lount & Phillips, 2007; Towry, 2003; Van Dick et al., 2009). A plausible explanation is that the relation between the team identity and team performance is not direct but mediated by the identified motivation of team members (Adler & Chen, 2011; Van Knippenberg, 2000). In this chapter, we posit that the team identity facilitates the internalisation of collective values, which is positively related to the identified motivation. Therefore, team performance is supported by the identified motivation of team members. The present study analyses the indirect effect of the interactive use of management control systems on team performance throughout the team members’ identified motivation. The indirect effect of the team identity on the team performance is also analysed. These objectives were tested with an experiment conducted among 144 postgraduate students at Pablo Olavide University. We have manipulated the interactive use of control systems and the team identity. The identified motivation of the team members was measured as a mediating variable. The results of the experiment support our hypotheses. First, the interactive use of control systems increases team performance by inducing individuals’ identified motivation. Secondly, team identity influences team performance throughout team members’ identified motivation. The present study contributes to the literature in three ways. Firstly, it analyses the relation between management control systems use and team performance, despite the considerable attention to the design of management control systems in team-based studies (Adler & Chen, 2011; Kominis & Dudau, 2012). Secondly, it provides a more comprehensive knowledge about the relation between management control systems and team performance, by examining an intervening variable, the identified motivation (Birnberg et al., 2007; Mathieu, Maynard, Rapp, & Gilson, 2008). Management accounting literature has traditionally focused on the external motivation of individuals, but other type of motivations should be taken into account on team-based contexts (Kunz & Linder, 2012; Malmi & Brown, 2008; Wong-On-Wing et al., 2010). Thirdly, this study sheds some light on the relation between social identity and team performance. Although researchers mainly focus on a direct relation, our results suggest that this relation is mediated by the team members’ motivation (Somech et al., 2009; Van Knippenberg, 2000). The remainder of this chapter is organised as follows: In the hypotheses development section, we review the literature and develop the hypotheses related to individual motivation, interactive control system, team identity

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and team performance. In the experiment design section, we describe the experimental methodology. Then, the results are shown. Finally we present the discussion and conclusions of our study.

THEORY AND HYPOTHESES Psychology research distinguishes intrinsic from extrinsic motivations (Deci & Ryan, 1985; Gagne´ & Deci, 2005; Ryan & Deci, 2000). On the one hand, a person is intrinsically motivated if he or she performs an activity for its own sake and the pleasure of participating in that activity. On the other hand, a person is extrinsically motivated when performing an activity as a means to an end. This extrinsically motivated behaviour can take different forms, such as external and identified (Ryan & Deci, 2000). External reasons are those where behaviour is explained by reference to the external authority, fear of punishment, or rule compliance, and it is associated with feelings of being controlled (e.g. rewards or the presence of an auditor). Identified regulation is captured by reasons involving acting from one’s own values or goals, and it takes the form of ‘I want’. This motivation is experienced as somewhat internal or self-determined (Adler & Chen, 2011; Gagne´ & Deci, 2005; Wong-On-Wing et al., 2010). External regulation has negatively been associated with individual behaviour in collaborative contexts, including lower task satisfaction or lower effort (Kunz & Linder, 2012; Malmi & Brown, 2008; Meyer et al., 2004; Ryan & Deci, 2000). The reason is that the external motivation is associated with hierarchical and vertical relationships, while collaborative contexts represent horizontal relationships. On the contrary, the identified motivation has positively been related to work group behaviours, such as positive affect, commitment, autonomy and positive work climates (Adler & Chen, 2011; Kunz & Linder, 2012; Meyer et al., 2004). Organisational features which promote involvement and participation processes and individual dispositions to collective goals may support the identified motivation (Adler & Chen, 2011; Meyer & Herscovitch, 2001). An interactive use of management control systems is characterised by involvement processes (Henri, 2006; Kominis & Dudau, 2012). The definition of interactive control systems differentiates two dimensions: the focus on strategy uncertainty and the level of intensity by superiors and by organisational members (Bisbe, Batista-Foguet, & Chenhall, 2007; Ferreira & Otley, 2009; Tessier & Otley, 2012). We have identified two important cues

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related to individual motivation in previous research of Simons’ framework (Abernethy & Brownell, 1999; Bisbe et al., 2007; Henri, 2006; Mundy, 2010; Naranjo-Gil & Hartmann, 2007; Tessier & Otley, 2012; Widener, 2007). Firstly, the intensity dimension is related to participation and involvement processes. Secondly, individuals have positive responses to these processes, which cause positive attitudes and behaviours at individual levels (Tessier & Otley, 2012). Involvement means that employees spend time together discussing and debating control information (Adler & Chen, 2011; Henri, 2006). The intensity of the involvement process tends to be timeconsuming. Thus, the more time team members spend together, the closer they feel (Henri, 2006; Mundy, 2010). This closer relationship encourages affection between teammates, which is related to affective commitment, a component of the identified motivation (Den Hartog & Belschak, 2007; Latane´, 1981; Meyer et al., 2004). This affective state contributes to the internalisation of goals (Fisher, 2002; Lau & Moser, 2008; Wegge, van Dick, Fisher, West, & Dawson, 2006; Weiss & Cropanzano, 1996). This means that the individual feels more freedom and volition for performing the group task (‘he/she wants’) due to the internalisation of the group goals (Meyer & Herscovitch, 2001). Therefore, we can expect that team performance will be increased if team members are willing to exert more effort for the group task. Following this reasoning, we posit that the identified motivation represents an affective state that mediates the relation between the interactive control system and the team performance (Adler & Chen, 2011; Mathieu et al., 2008). In this line, previous accounting researchers have also analysed motivational and affective states as intervening variables (Lau & Moser, 2008; Wong-On-Wing et al., 2010). For example, Guymon, Balakrishnan, and Tubbs (2008) find that commitment mediates the relation between the incentive contract and performance, at group level. Therefore, we formulate the following hypothesis: H1: An intensive use of interactive management control systems increases team performance by inducing team members’ identified motivation. The identified motivation can result from individual’s disposition to internalise collective goals (Adler & Chen, 2011, p. 68; Haslam, 2001; Van Knippenberg, 2000). Team identity represents the level of identification that an individual develops to a particular organisationally based team (Somech et al., 2009). If an individual identifies him/herself with his/her work team, thus, the team will become part of the individual, and the individual will be motivated by the team goals instead of his/her individual goals. Social identity researchers point to team identity for increasing team

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performance (Ellemers, de Gilder, & Haslam, 2004; Haslam, 2001), but mixed results may be found (Towry, 2003; Van Dick et al., 2009). For example, Van Dick et al. (2009, p. 616) did not find a direct relation between social identity and team performance. They suggested that team identity may only lead to an increased performance when achievement motivation is increased as well (Van Dick et al., 2009; Van Knippenberg, 2000). Therefore, we suggest that the influence of team identity on team members’ behaviour is not direct, but mediated by team members’ identified motivation (Meyer & Herscovitch, 2001; Van Knippenberg, 2000). Social identity involves two fundamental sub-processes: categorisation and depersonalisation (O’Fallon & Butterfield, 2012). Categorisation is a cognitive process which allows individuals to classify themselves into a social category (e.g. race, gender, work team, organisation) with regard to the social environment (Haslam, 2001; Tajfel & Turner, 1986). Depersonalisation occurs when the individual feels a positive emotion towards his/ her social category (e.g. work team), thus the team psychologically turns into a part of the self (Haslam et al., 2006; Van Dick et al., 2009; Van Knippenberg, 2000). At this point, the individual internalises the group goals, norms and values. We posit that the depersonalisation process encourages the identified motivation of team members. That is, when depersonalisation occurs the individual is willing to exert more effort to achieve team goals and performance (Ellemers et al., 2004; Van Dick et al., 2009). In sum, we formulate the following hypothesis: H2: Team identity increases team performance by inducing team members’ identified motivation.

EXPERIMENT DESIGN Experiments are useful mechanisms for studying cause
effect relations between accounting practices and individuals’ behaviour. They also allow examining different mediating variables (Coletti et al., 2005; Rowe, 2004; Towry, 2003). We designed an experiment combining two tasks: a group decision task (Haslam et al., 2006) and a brainstorming task (Van Dick et al., 2009). The experiment used a 2 × 2 between-subjects factorial design (Interactive Use × Team Identity). We added a control condition where the interactive control system and the team identity were not

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manipulated. This control condition allowed us to analyse individual motivation in the absence of the two independent variables (Van Dick et al., 2009).

Participants and Procedure The experiment was programmed and conducted in a laboratory using the z-Tree software (Fischbacher, 2007). The participants were 144 postgraduate students from Pablo de Olavide University at Seville. No specific knowledge or skills were required to participate. The mean age of the participants was 24 years. The 45.83% were male and the 54.17% were female. A show up fee of 5 euros was used as a fix incentive.1 Moreover, a completely random lottery of 200 euros was drawn among all the participants. The participation in the experiment took about 50 minutes on average. The participants were randomly assigned to teams of three members. It was formed 10 teams for each of the four conditions except in the control condition where 24 students participated working alone. The experimenter explained to the participants that they were taking part in two group activities: a group decision task and a brainstorming task. Firstly, groups had to select the level of investment in the construction of a childcare centre in their city (Haslam et al., 2006). This activity had three phases. At each phase groups were presented with control information and general information about the progress of the childcare centre (e.g. budgets, letters of the CEO of the construction company). After reading it, team members could debate and discuss this control information.2 At each phase, groups were given more negative information than in the previous one (e.g. a budget report with a 10% increase in total costs; a letter of the CEO explaining that a contaminant material had appeared in the children’s sandpit). Despite none of these problems were fatal for the project’s viability, their existence made clear that the project was in difficulty. After each phase, each team, through all its members, had to decide the level of investment on the project.3,4 At the end of the group decision task, the participants should answer a questionnaire, which measured their level of attitudinal commitment to the project (Appendix B). Secondly, the participants initiated the brainstorming task (Van Dick et al., 2009). Team members were asked to brainstorm the ideas about activities that could be done in a Childcare centre in their personal computers.5 Typical brainstorming instructions were provided. For example, they were asked to use only verbs to describe the activity, they were

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informed that there were no wrong answers and that they should write down any possible idea irrespectively of their personal preferences6 (Van Dick et al., 2009).

Manipulation and Measures The intensity of use of interactive control systems was manipulated by the time that the team members spent in the debate and discussion. The team members were allowed to discuss and debate control information during 10 minutes (in each phase), in high interactive use condition, and only during 1½ minutes in low interactive use condition The experimenter controlled the debate only focusing on the project control information, and not on personal issues. Team identity was manipulated through the salience of the group identity (Towry, 2003; Van Dick et al., 2009). Salience is the relevance of a social category for the individual at a certain moment, and it is pushed by the context. Two procedures were combined: colour T-shirts and group name. First, the use of the colour increased the salience of groups because it promoted self-categorisation (Towry, 2003). Secondly, the meaning of the in-group could be increased by reinforcing the group identity with symbols and messages (Haslam et al., 2006). In the high team identity condition, each team wore the same colour T-shirts and was asked to generate a codename for their group. Participants should fill their group name in each of their responses. On the contrary, in the low team identity condition, participants wore their own clothes and should fill their individual names in each of their responses.7 We follow Haslam et al. (2006) for measuring the level of team identification at the end of the task (Rowe, 2004; see Appendix A). The identified motivation was measured with a questionnaire at the end of the group decision task, and before the participants performed the brainstorming task. We measured an affective and motivational state of team members through their attitudinal commitment towards the group project (Haslam et al., 2006; Meyer et al., 2004) (see Appendix B). The team performance was measured with the number of ideas reached by the group in the brainstorming task. That is, the group performance was the sum of the number of ideas of each team member (Van Dick et al., 2009). Upon completion of the group decision task, participants answered a questionnaire to assess manipulation checks and some demographic information (see Appendix C).

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RESULTS Table 1 presents the descriptive statistics of the dependent variable
performance, and the intervening variable
identified motivation, at an individual level. The performance is measured with the number of ideas reached by each individual. Identified motivation is measured with the mean of the four items of the questionnaire (see Appendix B).8 Results show a satisfactory manipulation check.9 We have analysed the first hypothesis by using two tests: a mean difference test between conditions and a variance-based approach for the estimation of the mediating model. Table 2 presents the descriptive statistics of the dependent variable
performance, and the intervening variable
identified motivation, for the two interactive use conditions (high vs. low) and the control condition. The Kruskal
Wallis non-parametric test was used for the identified motivation variable. We have found that the model was significant (p < 0.10), that is, the identified motivation was different through the three conditions (see Table 3). We have also done the Mann
Whitney nonparametric test between the two use conditions (high vs. low interactive), and the model was also significant (p < 0.05), that is, the team members’ identified motivation differed through the two interactive use conditions (see Table 4). These results suggest that the intensity of the interactive use of management control systems increases team members’ identified motivation. The highest level of identified motivation is showed in teams where the control information was used more intensely (see Table 2). The Mann
Whitney non-parametric test was also used for analysing the difference between the two use conditions related to the dependent variable
performance. The model was not significant (p > 0.10) (see Table 5). In sum, significant differences related to team members’ identified motivation between the two interactive use conditions have been found (high vs. low) (see Table 4), but no related to performance (see Table 5). The first hypothesis predicts that the relation between the interactive control system and the team performance is mediated by the team members’ identified motivation. The mediating model was tested at group level, comparing group behaviour across the two interactive conditions (Somech et al., 2009; Towry, 2003; Van Dick et al., 2009). We used the partial least squares (PLS) technique (Chin, 1998; Wold, 1982). PLS is a variance-based approach for the estimation of path models involving latent constructs that

Dependent variable: identified motivation; interactive use conditions and the control condition (N: 144).

9.290 2.000 0.010

Identified Motivation

Kruskal
Wallis Test.

Chi-square df Asymptotic Significance

Table 3.

7.06 0.79

Performance Identified motivation

17.40 3.85

17.37 3.76 17.43 3.93 10.92 3.32

6.95 0.82 7.28 0.77 3.40 0.74

S.E. Performance Identified motivation (N = 30) Performance Identified motivation (N = 30)

16.88 3.49

5.54 0.93

S.E.

Dependent variable: identified motivation; interactive use conditions (N: 120).

1390.500 −2.161 0.031

Identified Motivation

Mann
Whitney Test.

U de Mann
Whitney Z Asymptotic Significance

Table 4.

Performance Identified motivation

Low Interactive Use (N: 60) Mean

5.81 1.06 5.34 0.79

S.E.

10.92 3.32

3.40 0.74

Dependent variable: performance; interactive use conditions (N: 120).

1733.000 −0.352 0.725

Performance

Mann
Whitney Test.

U de Mann
Whitney Z Asymptotic Significance

Table 5.

Performance Identified motivation

Individual Control Condition (N: 24) Mean S.E.

17.23 3.46 16.53 3.53

Low Interactive Use (N: 60) Mean

Descriptive Statistics at Individual Level (Three Conditions, N: 144).

S.E.

Table 2.

Performance Identified motivation (N = 30) Performance Identified motivation (N = 30) Performance Identified motivation (N = 24)

High Interactive Use (N: 60) Mean

Descriptive Statistics at Individual Level (Five Conditions, N: 144).

High Interactive Use (N: 60) Mean

High team identity (N: 60) Low team identity (N: 60) Individual condition (N: 24)

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166

are indirectly measured using multiple indicators. PLS can estimate models with small sample sizes and does not make distributional assumptions about the data used for modelling (Chin, 1998). The independent variable is a dummy variable (0, low interactive use; 1, high interactive use). The four items of the identified motivation are used as indicator of the latent mediating variable10 (see Appendix B). The dependent variable, team performance, is measured with the number of ideas reached at group level. Fig. 1 displays the results from the test of the full model. It contains the detailed output statistics of the analysis of path coefficients in the structural model and reports on the significance of the standardised βs that resulted from this analysis, based on a bootstrapping procedure that used 500 samples with replacement. The results of the previous model suggest that the effect of the interactive control system on team performance is inducing by the team members’ identified motivation (the total effect is: 0.262 × 0.363 = 0,095) (see Fig. 1). We analyse the second hypothesis by using two tests: a mean difference test between conditions and a variance-based approach for the estimation of the mediating model. Table 6 presents the descriptive statistics of the dependent variable
performance, and the intervening variable
identified motivation, for the two team identity conditions (high vs. low) and the control condition. The Kruskal
Wallis non-parametric test was used for the identified motivation variable across the three conditions. We found that the model was significant (p < 0.10), that is, the identified motivation differed across conditions (see Table 7). However, when we compared the level of identified motivation between the two team identity conditions (high vs. low) the model was not significant (Mann
Whitney non-parametric test; p > 0.10) (see Table 8). The results of Table 8 are in line with Van Dick et al. (2009) results. These authors suggest that the salience of the team identity was not directly related to the team outcomes, but the level of identification of the group

Interactive control system

0.262b

Team members′ identified motivation

0.363a

Team performance

Fig. 1. The Structural Model: Interactive Control System, Identified Motivation and Team Performance (N: 40). aSignificant at 0.001 level, bSignificant at 0.01 level (R2 0.132).13

4.654 2.000 0.098

Identified Motivation

Kruskal
Wallis Test.

Performance Identified motivation

Table 8.

6.34 0.80

S.E.

10.92 3.32

3.40 0.74

1696.000 −0.549 0.583

Identified Motivation

Mann
Whitney Test.

Performance Identified motivation

Individual Control Condition (N: 24) Mean S.E.

Dependent variable: identified motivation; team identity conditions (N: 120).

U de Mann
Whitney Z Asymptotic Significance

16.98 3.73

Low Team Identity (N: 60) Mean

Dependent variable: identified motivation; team identity conditions and the control condition (N: 144).

Chi-square df Asymptotic Sig

Table 7.

6.34 0.95

Performance Identified motivation

17.30 3.61

S.E.

Descriptive Statistics at Individual Level (Three Conditions, N: 144).

High Team Identity (N: 60) Mean

Table 6.

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might be.11 Based on the psychology research (Haslam et al., 2006; Van Dick et al., 2009), we tested the expected relation between team identity and individual motivation through the team identification variable (see Appendix A). Psychology research also posits that salience moderates the effect of team identification on team outcomes. That is, the higher the salience, the stronger the effect of team identification on team outcomes (Haslam, 2001; Van Dick et al., 2009; Van Knippenberg, 2000). We did a correlation analysis to test the relation between team identification and team members’ identified motivation. We used the PLS technique (Chin, 1998; Wold, 1982) and we compared regression coefficients between high team identity groups and low team identity groups (Baron & Kenny, 1986). Figs. 2 and 3 display the results from the test of the full model. It contains the detailed output statistics of the analysis of path coefficients in the structural model, and reports on the significance of the standardised βs. These results show that team identity is positively related to motivation. They also show that salience moderates this relation. Thus, the higher the salience of team the stronger effect of team identity on team members’ motivation. Finally, we also tested the mediating model between team identity and team performance using the PLS technique (Chin, 1998). The four items of team identification (see Appendix A) are used as indicator of the latent variable of team identity.12 Fig. 4 displays the results from the test

Fig.2 : High team identity condition (N: 20) Team identity

0.529a

Identified motivation

Fig.3 : Low team identity condition (N:20) Team identity

0.487b

Identified motivation

Figs. 2 and 3. Correlation Coefficients Between Team Identification and Team Members’ Identified Motivation. aSignificant at 0.001 level; (R2 0.280). bSignificant at 0.001 level; (R2 0.237)

Team identity

0.410a

Team members′ identified motivation

0.341b

Team performance

Fig. 4. The Structural Model: Team Identity, Identified Motivation and Team Performance (N: 40). aSignificant at 0.001 Level, bSignificant at 0.01 Level (R2 0.116).14

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of the full model. It contains the detailed output statistics of the analysis of path coefficients in the structural model, and reports on the significance of the standardised βs. These results show team identity increases team performance by inducing the team members’ identified motivation (the total effect is: 0.410 × 0.341 = 0.139) (see Fig. 4).

DISCUSSION AND CONCLUSIONS This chapter analyses the effect of the use of interactive control systems and team identity on team performance. The results provide evidence that the use of interactive control systems increases team members’ performance by inducing team members’ identified motivation. Furthermore, the team identity also influences team performance via the identified motivation of team members. This research provides useful insights for both theory and practice. Firstly, this study stresses the importance of the style of use of the control information to influence employees’ behaviour in collaborative contexts. Organisations have moved from vertical to horizontal structures, where collaborative contexts are mainly present. In these contexts, control and regulation processes should coexist with cooperation and coordination processes. Elements related to communication, socialisation and involvement are important for supporting these opposite processes (Adler & Chen, 2011; Berry, Coad, Harris, Otley, & Stringer, 2009). We used the revised framework of Simons Levers of Control at individual levels (see Tessier & Otley, 2012). This revised framework is an opportunity for future researchers’ to analyse the effect of other dimensions of the interactive control system on individual behaviour. Secondly, this chapter sheds some light on the role of control system on individuals’ motivation. Although, management accounting researchers have focused on controlled motivation, such as the extrinsic motivation related to rewards and punishments, our results show that control systems can influence other type of individual motivation, such as the identified motivation. This motivation best fits in collaborative contexts (Adler & Chen, 2011; Gagne´ & Deci, 2005). Thus, researchers should take into account the type of motivation which works better in a given situation for analysing the design and use of management control systems that fit better to this situation.

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Thirdly, this study introduces a mediation model in management accounting research focused on team performance (Birnberg et al., 2007; Mathieu et al., 2008). Mediating models can help us to better understand the processes by which organisational variables, such as control systems, and individual features, such as social identity, influence group performance. The key is to identify mediating variables that work as motivational and affective states in team contexts (Birnberg et al., 2007; Mathieu et al., 2008). We present a mediating model that can be applied to other features of control systems, such as belief system, enabling bureaucracy or cultural controls (Adler & Chen, 2011; Malmi & Brown, 2008). Moreover, we present a mediating model where team members’ identified motivation is the mediating variable between social identity and team performance (Van Knippenberg, 2000). We suggest that besides the cognitive process of team identity, also emotion and affect are needed for influencing individual behaviour. There are some limitations in our study. The first limitation is related to the manipulation of the interactive control system. We have focused on one dimension of the interactive use, the intensity of the involvement process, which was manipulated by using the time-consuming (Abernethy & Brownell, 1999; Henri, 2006; Kominis & Dudau, 2012; Mundy, 2010). However, the interactive use of management control systems is also characterised by other features, such as face-to-face meetings (Henri, 2006). Following Social Impact Theory (Latane´, 1981), individual motivation in team-based settings also depends on distance between team members, which can be physical (e.g. individuals working in different physical spaces) or psychological (e.g. individuals with different goals). Therefore, future research could analyse the impact of other features of the interactive control system, such as face-to-face relations, on individual motivation. Limitations may also be found on the type of task used for measuring team performance. Van Dick et al. (2009) suggest that the type of task moderates the effect of team identity on team performance. Team identity influences team performance when certain behaviours (e.g. help others and taking others’ interest into consideration) are key processes for performance, instead of the level of skills and abilities of team members. We suggest that the important feature is not the type of task, but if the task represents a really collaborative situation where team members can gain benefits of cooperation (Libby & Thorne, 2009). Nevertheless, we cannot demonstrate this suggestion with the design of our experiment as we used a task where cooperation was not allowed. Future research can analyse other type of group tasks. In sum, this study stressed the importance of following

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an input
mediator
outcome framework of teamwork in management accounting research (Birnberg et al., 2007; Mathieu et al., 2008).

NOTES 1. This study used a 5 euro fixed incentive, instead of an incentive linked to a performance, in order to avoid the effect of external rewards or controls on individual behaviour. 2. The same control information was given to the participants in the control condition, but they could not debate because they were playing an individual decision task. 3. Participants respond individually because we analyse a motivational problem, not a group decision problem (Haslam et al., 2006). 4. Team members’ discussion and team members’ decision were in different rooms. Team members debate in Groups room (each team in a different table). The decision was made in the Computers room, where individuals sit in individual cubicles. 5. Participants in the control condition played the same brainstorming task but at an individual level. 6. The previous experience and knowledge of participants in the childcare centre activities were controlled (see Appendix C). 7. We checked that team members did not know each other (e.g. friends or colleagues), in order to avoid other types of social identification. 8. Cronbach Alpha of identified motivation variable is 0.761. 9. Manipulation was checked with the Kruskal
Wallis test through five conditions, as the data did not represent a normal distribution (Kolmogorov
Smirnov test; p < 0.05). 10. Composite reliability: 0.905; Average variance extracted: 0.705. 11. The group identification refers to the individual defining him- or herself in terms of this group membership (i.e. the group becomes an important aspect of one’s self-concept). Salience describes the extent to which a specific social category is relevant for one’s thinking, feeling or behaviour (Van Dick et al., 2009). 12. Composite reliability: 0.816; Average variance extracted: 0.537. 13. We have analysed the direct path between the interactive use and the team performance, but it was not significant (p > 0.10). 14. We have analysed the direct path between the team identity and the team performance, but it was not significant (p > 0.10).

ACKNOWLEDGEMENTS We acknowledge the many comments from the participants of the 34th European Accounting Association Annual Congress, the 7th International

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Meeting on Experimental and Behavioral Economics, the European Accounting Association 28th Doctoral Colloquium in Accounting and the 7th Conference on Performance Measurement and Management Control. This chapter was supported from the Andalusia Regional Government (project SEJ-4124) and the Spanish Ministry of Education and Science (project ECO2011-24613).

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APPENDIX A Team identification questionnaire (instrument adapted from Haslam et al. (2006)) Please answer the following questions by using a five-point Likert-type scale, ranging from 1 (nothing) to 5 (totally): (a) (b) (c) (d)

I see myself as a member of my team (self-categorised). I am pleased to be a member of my team (pleased). I feel strong ties with other members of my team (tied). I identify myself with other members of my team (identified).

APPENDIX B Attitudinal commitment questionnaire (instrument adapted from Haslam et al. (2006)) Please answer the following questions by using a five-point Likert-type scale, ranging from 1 (nothing) to 5 (totally): (a) How sensible do you thing the original idea for the childcare centre was? (good idea) (b) How sensible is to proceed with the childcare centre? (should proceed) (c) How likely is it that any problems with the childcare centre can be overcome? (problems temporary) (d) How disappointed will the community be if the childcare centre does not proceed? (Community disappointed)

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APPENDIX C Manipulation check questionnaire Please, in order to end up with the activity, range from 1 to 5 your satisfaction with the following questions (1 = completely disagree; 5 = completely agree): (a) Regarding the childcare centre’s budget, my group has made the following task: 1 (Making the budget) 5 (Interpreting the budget) (b) It was mandatory that every member in my group reached an agreement on the investment to select in each phase. (c) In the brainstorming task what mattered was the originality of the activities. (d) I have children, brothers or sisters who currently attend day care or are in early childhood education. (e) I have worked in a nursery or childcare centre. (f) In every phase of the activity the members of my team have discussed only about the childcare centre’s project. (g) I had a good time when discussing the information with my colleagues. (h) In the brainstorming task what mattered was my performance not that of my teammates. (i) When taking part in the activity, I felt that the three of us set up a team. (j) The three members of my team, we all participated in the debate of the information of the childcare centre. (k) In my team, there was a member who acted as a leader. (l) I haven’t changed my first opinion during the discussion with the other members of my team. (m) During the discussion, I have tried to convince more than learn from other opinions.

MEASURING REFLECTIVENESS AS INNOVATION POTENTIAL
DO WE EVER STOP TO THINK AROUND HERE? Sanna Hilde´n, Sanna Pekkola and Johanna Ra¨mo¨ ABSTRACT Purpose
The aim of this chapter is to highlight the role of organizational reflectiveness as a possible enabler for innovation. In order to support the process of innovation, we need to understand organizational learning on a more detailed level, including reflection as an elemental sub-process in experiential, transformational, and action learning. Findings
We present a tool and preliminary empirical findings for measuring an organization’s level of reflectiveness. We also provide some preliminary empirical results regarding whether reflectivity results in the generation of new innovations relating to work practices and processes. Value
The chapter fills two research gaps, and in doing so contributes to measuring and controlling organizational learning and innovation activities. First, we complement the existing conceptualization of reflective practice by utilizing the management control system (MCS) (Malmi & Brown, 2008) in the analysis of reflectiveness on the organization level. Finally, in

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the conclusion, we present reflective practice as a potential concept and practical tool for enhancing the interactive use of MCS. The interactive use of MCS has been recognized for its potential in boosting learning, creativity, and innovations in certain contexts (Davila, Foster, & Oyon, 2009), but so far the definitions for interactive use remain descriptive and varied among management accounting theorists. Approach
The approach in this study is predominantly conceptual, with empirical and exploratory findings derived from measuring the level of reflectiveness in three organizations. The study enhances the understanding of management control based on the theoretical notion of multilevel reflection on a practice-based level. Empirically, reflective practices are often studied as a learning phenomenon on the individual and collective levels. However, such an approach generally does not incorporate managerial pragmatism regarding the causes of institutionalized learning or the means of managerial control for enabling reflection and, in consequence, innovations. Keywords: Reflection; organizational learning; innovation capability; management control systems

INTRODUCTION How can I know what I think till I see what I say? (Weick, 1979, p. 5)

The success and survival of today’s organizations are acutely based on creativity, innovation, and discovery. This poses challenges to all members of organizations, as the productivity of work relies increasingly on the capability to sustain human motivation, commitment, and collective and individual renewal. Consequently, organizations are responsible for constructing environments that foster creativity. Therefore, the critical question is as follows: how do we encourage individuals to break from ineffective routines and look at things from a new perspective? The question of how to enable innovation has been addressed in the management literature (Albaladejo & Romijn, 2000). However, as Davila, Foster, and Li (2009, p. 297) point out, there is still relatively little research on how companies structure the intelligence gathering required for the innovation process. This includes making sense of the changes in

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the external environment and ensuring collective information-sharing. This means that there still is a clear need for practice-based research on the innovation process, scrutinizing what kind of working practices and arrangements trigger the kind of interaction that produces new understanding and innovative ideas. The innovation process can be rightly approached as a phenomenon which encompasses individual creativity (Zhou, 2007), collective learning processes (Crossan, Lane, & White, 1999), sense-making (Daft & Weick, 1984), adaptive change, and/or re-institutionalization (Busco & Riccaboni, 2010). In this chapter, we argue that regardless of the theoretical approach, the critical factor in the innovation process is reflection. In recent research on management and organizational learning, the notion of reflection is seen as a core process of learning (e.g., Boud, Keogh, & Walker, 1985; Gherardi & Nicholini, 2001; Hoyrup, 2004; Vince, 2002). In essence, reflection can be seen as becoming aware of one’s own (or collective) hidden assumptions and critically questioning existing mental models. It is the mental tool for transforming experience into new thinking and acting (Mezirow, 2009). Though the significance of reflection is broadly acknowledged, it is absent in the innovation literature. More specifically, there is very little research examining how reflection potentially links to the requirements of innovativeness. Also, relatively little is known about an organization’s means to actively develop and manage reflective practices as an integral part of everyday work, as reflection-in-action (Jordan, 2010). This study contributes to a more systematic analysis of an organizationlevel reflective practice by utilizing the framework of management control system (MCS). In addition, we answer the call for studies on organizing reflectivity, instead of the traditional focus on individual reflectivity (Reynolds, 1998; Vince, 2002). On the other hand, the management control and performance measurement research (Chenhall & Morris, 1993; Wouters & Roijmans, 2011; Wouters & Wilderom, 2008) benefits from this study through the increased understanding of how systematic measurement and evaluation of reflective practice may significantly enhance organizational learning. In practice, this chapter presents a practical questionnaire tool to evaluate and measure (1) how well the MCSs support reflective practices, (2) the current stage of reflectiveness, and consequently (3) where to focus within MCS when trying to improve the reflectiveness. The questionnaire is based on a review of the literature on reflection, reflective practices, and the management control package defined by Malmi and Brown (2008). The tool has been tested and preliminarily validated in three case organizations.

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The chapter is divided into five sections. After the Introduction, section Sources of Innovation Potential summarizes previous research on reflection and reflective practices, MCSs, and innovation literature to the extent that it implicitly incorporates the requirement for reflection. The following section (Research Design) explains the methodology used in the data collection and analysis, and some preliminary results are outlined in section Measuring Reflective Practice
Preliminary Results. Finally, section Discussion and Conclusions concludes the chapter with recommendations for practice and further research.

SOURCES OF INNOVATION POTENTIAL Innovation Capability One way to increase the innovativeness of an organization is to develop and enhance organizational innovation capability. Innovation capability can be seen as a theoretical framework describing the actions that can improve the success of innovation activities. Today, when organizations operate in very challenging and turbulent environments, developing their innovation capability is vital (Alasoini, Heikkila, Ramstad, & Ylo¨stalo, 2007; Albaladejo & Romijn, 2000). Organizations that manage to develop their innovation capability have better prospects to succeed in the future (Saunila & Ukko, 2012). Hence, an organization’s competitiveness will be even more dependent on its ability to produce innovations in the future as it will affect the organization’s performance. Innovation is a concept that is understood in many different ways, partly because innovation research is conducted within a number of research traditions (technological innovation, organizational research, strategic renewal, etc.) and partly because those defining the concept have sought to emphasize different factors (Laforet, 2011; Lawson & Samson, 2001). Innovation can only occur if an organization has the capability to innovate (Laforet, 2011). Lawson and Samson (2001) emphasized that innovation capability is composed of the main processes within the organization and cannot be separated from other practices and processes of the organization. Existing research (Lawson & Samson, 2001; Neely, Filippini, Forza, Vinelli, & Hii, 2001; Rangone, 1999; Saunila & Ukko, 2012) defines innovation capability in a variety of ways. For example, Neely et al. (2001) define the innovation capability of an organization as the potential to

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generate innovative outputs. According to Yliherva (2004), innovation capability consists of an organization’s intangible assets and the ability to exploit these assets in such a way that the organization is able to produce new innovation continually. Saunila and Ukko (2012) defined innovation capability as consisting of the following elements which influence an organization’s capability to manage innovation: • Innovation potential consists of factors that affect the present state of innovation capability. The factors (leadership and decision-making processes; organizational structures and communication; collaboration and external links; organizational culture and climate; and individual creativity and know-how (Saunila & Ukko, 2012)) reflect the potential that organizations have to produce innovations. • Innovation processes are systems and activities that assist organizations in utilizing their innovation potential and therefore enable innovations. They are the way systems and activities are carried out. The innovation processes of the firm help the innovation potential to become a firm asset. For the innovation process to be successful, the exploitation of innovation potential has to be successful. Therefore, the subcategories of innovation capability can be either enablers of or obstacles to innovation processes. • The results of innovation activities are, for example, product/service innovations and process innovations. Generally, successful innovation process activities are expected to have some outcomes, such as innovations which create value for the organization or its stakeholders. Saunila and Ukko’s (2012) definition thus demonstrates the various elements of innovation capability that can have an effect on performance. Innovation capability can also appear as a capability that has already been realized. Nonaka and Takeuchi (1995) stated that innovations are based on factors such as the ability to interact and learn collectively. They also argued that an important factor behind the organization’s innovation capability is organizational learning. Crossan et al. (1999, p. 525) describe organizational learning at three levels (individual, group, organization) as a dynamic process involving four elements. Briefly, the model describes how individuals collect and assimilate information and experiences that are then interpreted through discussion, idea generation, and evaluation at the group level. New knowledge is adopted at the organizational level by combining shared views, and with the help of interactive systems, is established as a permanent practice through, for instance, instructions and routines. The concept of innovation capability can be considered more widely than

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presented above; however, in this study, innovation capability refers to the factors that make it possible for the organization to create innovations. Bringing innovation to every workstation requires practical tools, processes, and mechanisms that the employees can use day-to-day to turn innovation into the organization’s capability (Skarzynski & Gibson, 2008). The current literature presents numerous methods and practices from different perspectives that facilitate organizational innovation capabilities. However, less attention has been paid to indicating the actual effects of these methods on different dimensions of innovation capability (Hansen & Birkinshaw, 2007). In this study, the basic idea is that reflectiveness enabled by MCSs has a boosting effect to create learning, creativity, and innovations. The study presents a reflective practice as a potential concept and practical tool for enhancing the interactive use of MCSs and further facilitating the innovation capability of the organization and its employees.

Reflection and the Three Levels of Reflective Practice According to broadly established learning theory frameworks (e.g., Boud, et al., 1985; Hoyrup, 2004; Kolb, 1984), reflection represents the necessary link between experience and goal-oriented learning. In other words, no experience leads automatically to learning, unless we reflect it against our existing understanding and assumptions. Therefore, reflection is needed to change routine thinking and behavior
for innovations and renewal (Hilden, Tikkama¨ki, & Suomala, 2012). Reflection is about questioning one’s intuitive understandings, conducting on-the-spot experiments, and engaging in thoughtful dialogue about the situation with others (Scho¨n, 1983). Though reflection is widely accepted as a theoretical construct, relatively few studies have investigated how reflection materializes in real-life organizations or its requirements at all necessary levels. Consequently, there is no research on how to evaluate or measure the realization of this critical process in order to determine how good an organization is in activating reflection. This chapter employs the practice-based approach and reflection is investigated through reflective practices. The study defines reflective practice as the actual ways that reflection is manifested through individual and collective action within the organizational realm. Reflective practice allows the members of the organization to slow down not only to critically evaluate their own thinking, but also to investigate the shared, collective assumptions and expectations as well as the institutionalized rules and routines. It captures the idea of a

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style of working, thus reflecting both on action and in action (Jordan, Messner, & Becker, 2009). Evaluating the reflective practice of an organization involves analyzing three distinct yet intertwined levels: reflective practice on the individual, group (collective), and organizational levels. These levels are broadly accepted as critical levels of analysis regarding organizational learning processes (Crossan et al., 1999). First, this involves individual willingness and capacity to engage in critical self-evaluation, perhaps leading to unexpected outcomes, even uncomfortable realizations. A practical challenge on the individual level is whether people have the actual chance, that is, time and space, to reflect on their whirl of activity (Yanow & Tsoukas, 2009) or to become skilled in thinking on their feet (Scho¨n, 1991; Weick, 2002). This first stage describes how good people are as “reflective practitioners” (see Scho¨n, 1983), that is, the individual level of reflective practice. The second level, though closely connected to the first, is the level of collective reflective practices. No learning occurs in social isolation (Lave & Wenger, 1991). Recent research on reflection emphasizes the interindividual practices that allow collective sense-making; close scrutiny of the organizational dynamics; the collective processes through which people create and maintain their intersubjective world (Balogun & Johnson, 2004); and the nature and consequences of social power relations (Gherardi & Nicholini, 2001; Raelin, 2001; Reynolds, 1998; Vince, 2002). Collective reflection is a way to make visible and investigate the intersubjective mental models and shared frames of reference. The benefit in doing so stems from realizing the tensions between the subgroups and communities inside an organization. Collective reflection helps make the traditionally hidden processes of sociopolitical adaptation and negotiation within organizations both visible and manageable (Tikkama¨ki & Hilden, 2013). In other words, the second, collective level of reflective practice describes how good we are as teams, groups, and communities in engaging in dialogue, sharing assumptions, and altering them when needed. To understand the third level of reflective practice, it is necessary to see that collective reflection, processes of interaction, sharing interpretations, and experimentation are strongly affected by social, cultural, and political factors (Reynolds, 1998) and supported by organizational routines and practices (Elkjaer, 2001, 2004; Korthagen, 2005). In existing research, the line between collective and organizational reflection remains unclear. For example, Raelin (2001) refers to a learning dialogue (public reflection) as constitutive of organizational reflection. A reflective culture is defined as one which allows voicing criticism without a fear of retaliation. In this chapter, the

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analysis is posited closer to the concept of a “structure that reflects” presented by Nicolini, Hartley, Stansfield, and Hurcombe (2011), that is, practices that mobilize dialogue. However, the chapter draws a distinction between steady organizational practices and separate “reflective exercises,” that is, role analysis groups, one-off communities, or training sessions. The chapter agrees with Jordan et al. (2009) that research has focused greatly on reflective training sessions and meetings (focusing on reflection-on-action), and neglected the routines that take place within ordinary, ongoing operations. Finally, it can be conceived that a reflective organization is one that possesses the individual, collective, and structural ability to be suspicious of its own suppositions; that is to say, to reflect on its reflections (Isaacs, 1993; Schein, 1993). There is very little research so far that investigates how financial metrics, reward systems, and all the other management control elements systematically enable or disable individual and collective reflection. In order to investigate and evaluate an organization’s reflective practices, including a comprehensive view of the organizational level, there is a need for a structured analysis regarding those managerial systems that represent the structural aspects, rules, and routines in organizations. The typology presented in the next section by Malmi and Brown (2008) is utilized for understanding the variety of managerial tools and systems that may or may not induce reflective practices.

Management Controls as a Package Management control and MCSs have various definitions (see e.g., Anthony, 1965; Merchant & Van der Stede, 2007; Outchi, 1979; Simons, 1995). Some view MCSs as the means used by senior managers to implement their intended strategies successfully (Simons, 1995), while others accentuate the role of management accounting and its systematic use together with other forms of control to achieve goals (Chenhall, 2003). This chapter relies on the definitions developed by Malmi and Brown (2008) who also accentuate the importance of studying organizations’ MCSs as “packages” (Otley, 1980). According to Malmi and Brown, management control can be understood as systems, rules, practices, values, and other activities that company management puts in place in order to direct employee behavior. When these controls form a complete system instead of a single rule, they are called MCSs (Malmi & Brown, 2008). There are usually a number of MCSs in operation in a single company. Because different organizational actors have introduced these systems at

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different times, they do not form a single coherent MCS but a collection or a “package” of separate yet often interrelated systems. Malmi and Brown (2008) suggest a conceptual typology describing a broad model of an MCS package. The five types of controls in their typology are administrative, planning, cybernetic, reward and compensation, and cultural controls. These controls and their relations are discussed below. Planning Directs the employees’ effort and behavior through setting out goals. It provides the standards to be achieved in relation to the goals set and clarifies the level of effort and behavior expected from organizational members. Planning may also facilitate coordination between groups and individuals by aligning their individual goals and ensuring that they are also in line with the desired organizational outcomes. Tactical planning concentrates on goals and action in the near future. While in strategic planning, goals and actions are set for the medium or long term. Cybernetic Control Green and Welsh (1988) define cybernetic control as a process containing the following five characteristics: measures enabling quantification of a phenomenon, activity, or system; standards of performance or targets to be met; a feedback process enabling comparison of the outcome with the standard; and finally the ability to modify the behavior or underlying activities of the system. The typology provided by Malmi and Brown includes the following four basic types of cybernetic controls: budgets, financial measures, nonfinancial measures, and hybrids containing both financial and nonfinancial measures (e.g., balanced scorecard). Rewards and Compensation The role of reward and compensation control is to motivate and increase the performance of individuals and groups by creating congruence between the goals of the employees and the company. Monetary-based reward systems, in particular, are often linked to cybernetic control, but organizations can provide rewards and compensation for other reasons as well, such as retaining key employees or encouraging group culture. Cultural Control According to Flamholtz, Das, and Tsui, (1985), organizational culture can be defined as the set of values, beliefs and social norms which tend to be

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shared by its members and, in turn, influence their thoughts and actions. The three components of cultural control in Malmi and Brown’s typology are clans, values, and symbols. Clans refer to various subcultures or individual groups formed according to professions, such as doctors and nurses. The organizational values that managers hope their employees will adopt are expressed in mission and vision statements, credos, and statements of purpose, among others (see Simons, 1995). Finally, symbol-based controls denote visible expressions of culture, such as buildings, workplace designs, and dress codes. The effects of cultural controls are broad yet subtle. They are slow to change, thus providing a contextual frame for other controls. Although management can deliberately use culture to regulate employee behavior, it is at least partially beyond the control of the managers. Administrative Control Administrative control systems include organizational design and structure, governance structures, and procedures and policies. Management uses these control systems to organize individuals and groups, monitor their behavior, and make them accountable for their performance. Administrative control also defines how tasks and behaviors should or should not be performed. For example, using a specific organizational design, management can encourage certain types of employee contacts and relationships. Administrative controls create the structure in which planning, cybernetic, and reward controls are operated (Malmi & Brown, 2008).

Management Control Systems and Learning Traditionally, formal MCSs have been seen as mechanisms for minimizing deviations from expected performance and implementing standardization (Anthony, 1965) in organizations. This is also why MCSs have often been perceived as more of a hindrance than a support for innovation and change (Amabile, Conti, Coon, Lazenby, & Herron, 1996; Outchi, 1979; Tushman & O’Reilly, 1997). However, there is an emerging line of research, or a paradigm, that has started to question these traditional views. It argues that MCSs that are flexible and dynamic enough to adapt to change, yet stable enough to structure cognitive models, communication, and actions, can actually support innovations (Davila, Foster, & Oyon, 2009). The concepts of enabling and coercive bureaucracy (Adler & Borys, 1996) have become popular tools for describing the design characteristics of MCSs that can either support or undermine learning and innovation

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(see e.g., Ahrens & Chapman, 2004). In enabling bureaucracies, managers are seen as active users of MCSs. Enabling MCSs are considered useful tools for the attainment of mangers’ objectives
the systems are means rather than ends in themselves. Adler and Borys (1996) argue that an enabling MCS allows the user to repair itself in case of a breakdown or problem. In practice, this means that managers have the permission, for example, to modify performance measurement, if they consider this necessary (Wouters & Wilderom, 2008). A design characteristic of internal transparency permits the users to see through and understand the logic of the control system. A system designed to be globally transparent also allows its users to monitor and understand the up
and downstream implications of their work. Enabling systems also permit some flexibility in terms of how they are used (Adler & Borys, 1996). When an MCS has been designed as enabling, it improves the users’ capabilities and utilizes their skills and intelligence. These systems do not restrain performance variation but instead support the learning that derives from examining
or reflecting
the causes of this variation (Davila et al., 2009). Simons’ concept of interactive control systems describes the style of use of formal MCSs. Interactive control systems also support learning in organizations by providing the information-based infrastructure that may engage organizational members in the communication pattern required to address strategic uncertainties (Davila, 2005). Enabling and interactive controls can be seen as organizational learning mechanisms, which can be defined as the various institutionalized structural and procedural arrangements that assist the actual learning process (Lipshitz & Oz, 1996). These mechanisms enable organizations to collect, analyze, store, disseminate, and use information that has been found to be relevant for their organization. They also enable the experiences of individual organizational members to be analyzed and shared with other organizational members. Through the distribution of lessons learned in relevant units and through changes in operating procedures, the individual experiences also eventually become the property of the whole organization (Lipshitz & Popper, 2000)

RESEARCH DESIGN This chapter presents a questionnaire tool for measuring the reflective practices of an organization. The tool has been developed by examining and matching the existing literature on reflection and reflective practices, the

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concept of MCS, and knowledge maturity development. The questionnaire framework and propositions have been developed as part of the REFINNO1 research project, and thus, as a construct, it has been developed jointly with seven researchers with knowledge and background in reflection and reflective practices, MCSs, performance measurement, and innovation capability. The first phase of the research was to form an understanding of the concept of reflection and reflective practices to define what exactly is being measured and evaluated. Precisely defined concepts are essential for scientific research, especially when the measurement of a phenomenon is carried out (Olkkonen, 1994). This understanding was combined with the framework provided by Malmi and Brown (2008) regarding the typology of management control tools in organizations. Next, a questionnaire for evaluating reflective practices was designed. Jabareen (2009) has defined a conceptual framework as a network of interlinked concepts that together provide a comprehensive understanding of a phenomenon or phenomena. The concepts that constitute a conceptual framework support one another, articulate their respective phenomena, and establish a framework-specific philosophy. In this case, it is represented by the matrix between three factors of reflectivity and elements of management control that enable the three forms of reflection. In the second phase, the questionnaire was tested and validated by utilizing respondents from case organizations. The empirical evidence was collected during 2011
2012 in three Finnish organizations. The case organizations represent different fields of operation. Case 1 is a local outlet of a consumer retail chain. The case outlet is part of a large parent company operating in construction, decoration, and gardening. The case outlet has approximately 50 employees. Case 2 is an affiliate of a large, global pharmaceutical company employing 150 employees. Case 3 is a nonprofit healthcare organization with 160 employees. For the preliminary evaluation of the framework, and its ability to measure reflectivity, the data was analyzed with the SPSS Statistics program. The number of responses was 254 (out of 316), representing a response rate of 80.4%. The preliminary analysis presented in this chapter represents the test phase for the questionnaire tool, and the goal is not to provide statistical evidence for possible correlations between reflectivity and innovation potential. In this test phase, innovation potential was examined through three questions, which do not capture the full prism of innovation potential. However, the analysis and basic correlations will feed the process for further framework development.

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MEASURING REFLECTIVE PRACTICE
PRELIMINARY RESULTS The Questionnaire Tool A questionnaire2 was constructed based on Table 1, where the columns are formed according to learning processes on the following three levels: individual, group, and organization (Crossan et al., 1999). The rows capture the tools of management control defined by Malmi and Brown (2008): cultural, planning, cybernetic, reward and compensation, and administrative controls. The table was filled with propositions capturing the idea of how a certain control tool supports reflection on a selected level. For example, regarding values and reflective practice on the individual level, the proposition was “I think it is valuable to take time to think critically and creatively about my work.” On a group level, the proposition for values and reflective practice was: “In our organization it is considered valuable to regularly take time for critical and creative discussions and thinking.” Similarly, on an organization level, the proposition was as follows: “Critical and creative thinking, individually or collectively, is valued in our organization.” The reflectivity propositions were tied to normal daily work and were formulated in colloquial language. The scale of responses was as follows: 1 = I strongly agree, 2 = I agree, 3 = neutral, 4 = I disagree, and 5 = I strongly disagree. The reliability analysis supports the selection of propositions at the three levels of the individual, group, and organization. The Cronbach’s alphas that describe the survey’s internal consistency for the three levels were 0.680 (reflective practice on an individual level), 0.725 (reflective practice on a group level), and 0.741 (reflective practice on an organizational level). Since the recommended limit for reliability is >0.60, one can argue that the three sets of propositions are measuring the same selected thing.

Management Control Supporting Reflectivity As described in section Management Control Systems and Learning, an MCS can be designed as an enabler, that is, it can help to improve the users’ capabilities, utilize their skills and intelligence, and engage organizational members in the communication pattern required to address

Reflective Practice on Individual Level (Within Intuiting and Interpreting Processes)

The performance metrics (financial and/or nonfinancial) are developed based on new ideas and improvements we have made, for example, to work processes. My company rewards us for developing new ideas and improving work practices.

The strategic goals of our organization encourage sharing thoughts and creative thinking.

Critical and creative thinking, individually or collectively, is valued in our organization.

Reflective Practice on Organizational Level (Within Integrating and Institutionalizing Processes)

We regularly work together to review The ideas and improvement and evaluate our work and the ways suggestions we have developed, we work. individually or collectively, change the processes and ways we work in my company. In our working community we discuss Our organization utilizes the initiatives and develop new ideas. and ideas put forward by personnel.

In our organization it is considered valuable to regularly take time for critical and creative discussions and thinking. In order to achieve our work objectives we regularly need to think critically and creatively about our work and working methods. We use financial and nonfinancial performance metrics when searching for explanations or new ideas together with others (e.g., in teams/ working groups). We regularly take time to discuss critically and creatively with others about our work because we are rewarded for it.

Reflective Practice on Group Level (Within Interpreting and Integrating Processes)

The Questionnaire for Reflective Practice Reflected Against Management Control and WorkRelated Ideas.

Cultural controls: values, beliefs, I think it is valuable to take social norms, mission time to think critically and statements, workspace design, creatively about my work. dress codes, clans, rituals Planning controls: strategic and In order to achieve my work action plans objectives I regularly have to think critically and creatively about my work. Cybernetic controls: budgets, I use financial and financial measures, nonfinancial performance nonfinancial measures metrics in my work when I search for explanations and/or new ideas. Reward and compensation I regularly take time to think controls: reward systems, critically and creatively incentives about my work because my organization rewards me for it. Administrative controls: I regularly review and organizational design, evaluate my work and the governance structures, ways I work. procedures, policies, work organizing, accountability Ideas I’m good at developing new ideas related to my work.

Reflective Practice

Table 1. 190 SANNA HILDE´N ET AL.

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strategic uncertainties. Though there are many possible examples of how, for example, administrative controls can support reflectivity, the questionnaire picked out descriptive examples for each control element. This means that the results do not try to capture a holistic view of reflectivity, but rather present a structured method for analyzing an MCS and reflectivity in parallel. Looking at the preliminary results, the following graphs present the control elements and their challenges on three levels: first as individuals (Fig. 1); second as teams (Fig. 2); and third as an organization (Fig. 3). It

5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0

Case 1 Case 2

in is co tra nt tive ro ls

m Ad

R co ew nt ard ro ls

yb co ern nt eti ro c ls

C

Pl co ann nt ing ro ls

C co ultu nt ra ro l ls

Case 3

Fig. 1.

Reflectivity and Challenges: The Level of the Individual.

5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0

Case 1 Case 2

in is co tra nt tive ro ls

m Ad

R co ew nt ard ro ls

yb co ern nt eti ro c ls

C

Pl co ann nt ing ro ls

C co ultu nt ra ro l ls

Case 3

Fig. 2.

Reflectivity and Challenges: The Level of the Group.

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5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0

Case 1 Case 2

in is co tra nt tive ro ls

m Ad

R co ew nt ard ro ls

yb co ern nt eti ro c ls

C

Pl co ann nt ing ro ls

C co ultu nt ra ro l ls

Case 3

Fig. 3.

Reflectivity and Challenges: The Level of the Organization.

can be noted that the three organizations (Cases 1
3) produce fairly similar results regarding their reflectiveness (Figs. 1
3). The most challenging element of control (regarding reflectiveness) relates to reward controls. This implies that people feel that they are fairly active in using reflection at work, but they are not rewarded for it. On the group level (Fig. 2), the respondents perceive slightly more challenges, though the average remains on the positive side (below 3 = neutral). Also on this level, the three case organizations give rather similar averages regarding the reflective practices in relation to management control elements. Fig. 3 shows that when respondents consider the structures and how they support reflectiveness at work, more challenges are identified. Similarly, rewarding and cybernetic controls are slightly less supportive of reflection than other forms of control, according to the selected questions. In general, we must keep in mind that the results are exploratory and do not cover the MCS in a comprehensive way. In this chapter, the focus is on presenting and augmenting the idea of measuring the effects of MCS for reflectiveness as a source of innovation and creative ideas. A more detailed analysis of the gathered data, for example, in terms of background variables (position, education, age, earlier reflectivity training, etc.) offers many potential avenues for further research. However, the next section takes on a separate set of questions for analysis, reflecting the possible connection between reflectivity and new ideas.

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This will show that a more detailed analysis allows more meaningful insight into each case organization and their specific challenges.

Reflectivity and Ideas and Initiatives Though the questionnaire only covered three propositions regarding workrelated ideas, one can test how the three elements of reflectivity correlate with generating ideas at work. Based on the three reflectivity levels, three new scale variables were formed as a sum of each column’s variables. These were called “individual reflectiveness,” “group reflectiveness,” and “organizational reflectiveness.” The correlations with Spearman’s Rho are presented in Table 2. Most significant correlations in all three case organizations can be found between organizational reflectivity and collective idea generation (question 2) and utilization of ideas (question 3). This could imply that though reflectiveness is often considered as an individual trait, in-built reflectiveness (i.e., processes and practices that allow reflection) is just as valuable for idea generation and efficient utilization in organizational contexts. Individual ability to use reflection at work correlates with questions 1
3 in Case 1, but not in Cases 2 and 3. This might confirm the idea that individual capability and willingness for critical reflection is not enough to produce ideas and more emphasis needs to be put to investigate the role of collective reflection. Table 3 presents how the individual responses were distributed between the statements. This is most useful for the three case organizations, but also points to the variance which might be a source for the development of ideas for the questionnaire. Based on Table 3, it can be seen that people feel that they themselves are good at developing new ideas. When examining the collective level of producing ideas together, or institutionalizing such ideas, the potential for ideas and their utilization decreases. On average, one quarter of respondents feel that their personal ideas are not utilized in the organization. The situation is fairly similar in all three organizations. The result depicts a scenario in which people as individuals are reflective and have the potential to create ideas. For some reason, however, both of these areas become significantly weaker as a collective practice, and the organizational structures do not seem to support reflective idea generation very well. Is this a question of how employees perceive the reality, or themselves? What are the boundaries that make reflectiveness mostly an individual-level practice?

Correlation coefficient Significance (two-tailed) N

Correlation coefficient Significance (two-tailed) N

2. In our working community we discuss and develop new ideas.

3. Our organization utilizes the initiatives and ideas put forward by personnel.

0.155 0.154 86

0.000 91

104

97 0.375**

0.052

0.029

100

98 0.191

0.000

0.005

0.222*

0.368**

0.280**

*Correlation is significant at the 0.05 level (2-tailed). **Correlation is significant at the 0.01 level (2-tailed).

Correlation coefficient Significance (two-tailed) N

Case 2

Case 3

54

0.091

0.232

55

0.445

0.105

56

0.086

0.231

Individual Reflectiveness

Case 1

Individual Reflectivity Case 2

Case 3

91

0.001

0.340**

97

0.002

0.309**

98

0.158

0.144

86

0.001

0.359**

104

0.000

0.411**

100

0.389

0.087

54

0.001

0.439**

54

0.068

0.250

55

0.626

0.067

Group Reflectiveness

Case 1

Group Reflectivity Case 2

Case 3

97

0.000

0.485**

95

0.000

0.384**

96

0.128

0.157

86

0.000

0.413**

102

0.001

0.321**

98

1.24

−0.156

55

0.004

0.389**

54

0.001

0.433**

55

0.678

0.057

Structural Reflectiveness

Case 1

Organizational Reflectivity

Correlation Test between Reflectiveness and Ideas (Spearman’s Rho).

1. I’m good at developing new ideas related to my work.

Table 2.

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Table 3. Idea Generation and Utilization (Three Levels). I’m Good at Developing New Ideas Related to my Work.

Valid 1 (I strongly agree) 2 3 4 5 (I strongly disagree)

Case 1 (valid percent)

Case 2 (valid percent)

Case 3 (valid percent)

Average

14.3

12.0

12.5

12.9

51.0 26.5 8.2 0

43.0 40.0 5.0 0

51.8 28.6 7.1 0

48.6 31.7 6.8 0

In Our Working Community We Discuss and Develop New Ideas.

Valid 1 (I strongly agree) 2 3 4 5 (I strongly disagree)

Case 1 (valid percent)

Case 2 (valid percent)

Case 3 (valid percent)

Average

14.3

6.7

12.7

11.2

51.0 26.5 8.2 0

50.0 26.0 14.4 2.9

60.0 16.4 7.3 3.6

53.7 23.0 10.0 2.2

Our Organization Utilizes the Initiatives and Ideas Put Forward by Personnel.

Valid 1 (I strongly agree) 2 3 4 5 (I strongly disagree)

Case 1 (valid percent)

Case 2 (valid percent)

Case 3 (valid percent)

Average

4.4

0

7.4

3.9

40.7 30.8 18.7 5.5

22.1 44.2 27.9 5.8

53.7 16.7 20.4 1.9

38.8 30.6 22.3 4.4

DISCUSSION AND CONCLUSIONS The study contributes to existing conceptualizations of reflective practices by utilizing the framework of MCS for a more systematic analysis of an organization-level reflective practice. This study presents a questionnaire tool for the measurement of reflective practices, which has been tested by utilizing the empirical data from three case organizations.

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The data on the preliminary evaluation of the framework, and its ability to measure reflectivity, was analyzed with the SPSS Statistics program. This chapter represents the test phase for the questionnaire tool; the goal is not to provide statistical evidence for possible correlations between reflectivity and innovation potential. In this test phase, innovation capability was examined through three questions which do not capture the full prism of what innovativeness is and how it manifests itself in organizations. However, the analysis and basic correlations will feed the process for further framework development. During the test phase, the chapter had two primary aims. The first aim of the study was to examine how well the elements of MCS support reflective practices. The second aim of the study was to explore if the reflective practices enhance idea generation and utilization of those ideas. Davila et al. (2009) state that a flexible and dynamic MCS increases communication and supports innovations. Davila et al. (2009) highlight the research gap related to how organizations structure intelligence gathering required for innovation processes that reflect changes in the external environment and the means to ensure collective information-sharing and sense-making. The results of the analysis reveal that the most challenging element of control (regarding reflectiveness) relates to reward controls. People feel that they are fairly active in using reflection at work, but they are not rewarded for it. However, the linkage of reward systems to reflection is an important and fairly difficult assignment for the organization. The big question faced by all organizations is whether and how to link their formal compensation system to reflection. The reward system sends powerful signals to employees about what is important. This is why it is important to understand both the organization’s objectives and strategies, and the employees’ role in the organization when designing systems (Kaplan & Atkinson, 1998). The other slightly less supportive control relates to cybernetic controls, meaning that the financial and nonfinancial measures do not support reflection. This can be caused by the manner in which these measures are used and the fact that real success lies in people’s behavior when using performance management information (Bititci et al., 2011). Many studies indicate that the main reason why performance measurement is short-lived is because of people’s behavior when using the information (Bititci et al., 2011). It is becoming increasingly apparent that performance measurement is a social phenomenon where behaviors (organizational and individual) are shaped by the values and perceptions of the individuals and the communities within which the individual operates.

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The results also reveal that the most significant correlations can be found between organizational reflectivity and collective idea generation and utilization of ideas. This could imply that though reflectiveness is often considered as an individual trait, in the organizational context the in-built reflectiveness, that is, the processes and practices that allow reflection, are just as valuable for idea generation and efficient utilization. The study might confirm the idea that individual capability and willingness for critical reflection are not enough to produce ideas and more emphasis needs to be put to investigate the role of collective reflection Nevertheless, based on the preliminary results, it appears that when an MCS supports reflection and reflective practices, it enhances idea generation and the utilization of ideas. This study has some limitations which should be acknowledged. The qualitative data has been gathered from only three case organizations and the questionnaire only covered three propositions regarding work-related ideas. While one can test how the three elements of reflectivity correlate between generating ideas at work, the results are not generalizable. However, the analysis and basic correlations feed the process of further framework development. Based on these preliminary results, more comprehensive research is needed to capture the linkage between reflection and innovation capability in detail. Also, it could be interesting to examine how the MCS package and its different parts can support, in practice, reflection and reflective practices, especially from the perspectives of cybernetic, reward, and compensation controls. The findings of this chapter support the idea that reflection and its systematic measuring holds a significant potential in understanding and organizing learning and innovation potential in organizations. More particularly, the three levels and their distinct prerequisites regarding reflection need to be further investigated as there is very little descriptive empirical research on those processes in which reflection “happens” in practice. In addition, more knowledge is still needed regarding what reflection produces and how to identify and capture the learning and ideas created though reflection. Both of these viewpoints would allow the further development of the measurement tools. The concrete contribution of this chapter is the first development version of a three-level tool to measure reflective practice within the MCS framework. It allows investigating, evaluating, and developing reflectivity and comparing the results to the organizations’ other qualities, such as innovativeness and other performance variables. We also wish to make a point that the

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generally desirable qualities, such as inspiration, motivation, commitment, and creativity, are essentially results of taking time to stop and reflect. They all demand something meaningful and valuable that guides action. As in life more generally, people also search for meaningfulness (consciously or unconsciously) in organizations, reflecting on their experiences against their hopes, dreams, and goals. As performance is not merely efficiency, but increasingly stems from creativity, we need a more in-depth understanding of individual, collective, and organizational processes that construct motivation and learning. While research has pointed out that the potential of human brainpower is perhaps underutilized in organizations (Davila, 2010), it should be understood that the problem may not be due to the lack of information and interaction. People need time to think, reflect on contradictions, and actively search for new ideas. As we have already learned, experience and information do not automatically produce creative ideas. The old ways of thinking need to be shaken off, and this calls for very practical and down-to-earth solutions that enable reflectivity in an individual, collective, and organizational context.

NOTES 1. REFINNO (Reflection improving innovativeness and performance) investigates the potential for organizational reflectivity in terms of business performance. The program is a joint venture between its funders Tekes (the Finnish funding agency for technology and innovation), four Finnish universities and the participating companies. 2. The questionnaire framework and propositions have been developed as part of the REFINNO project; thus, as a construct, it has been developed jointly by Hilden, S., Pekkola, S., Ra¨mo¨, J., Tikkama¨ki, K., Ukko, J., Saunila, M., and Vauranoja, S.

ACKNOWLEDGMENTS The authors are grateful to the REFINNO research team, Prof. Petri Suomala, D.Ed., Kati Tikkama¨ki, MSc., Minna Saunila, PhD., Juhani Ukko, and Sanna Vauranoja for the insightful and constructive academic discussions and joint efforts in the case interventions. They have enabled the multidisciplinary development of the interpretation of reflective practice, combined with ideas of management control. We are also grateful for the valuable feedback from the 7th Conference on Performance Measurement

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and Management Control in Barcelona. Moreover, funding by the Finnish Agency for Technology has enabled the research project underlying this publication.

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THE RELATIONSHIPS BETWEEN PERFORMANCE MEASURES AND EMPLOYEE OUTCOMES: THE MEDIATING ROLES OF PROCEDURAL FAIRNESS AND TRUST Debbie P. S. Chia, Chong M. Lau and Sharon L. C. Tan ABSTRACT Purpose
The widespread adoption of the Balanced Scorecard has led to a need to understand how performance measures affect employees’ attitudes and behaviors. Despite the growing trend in the implementation of the Balanced Scorecard, there is little research evidence available on the behavioral outcomes resulting from the use of nonfinancial performance measures. This study seeks to address this gap by examining several behavioral outcomes, including job satisfaction, organizational commitment and managerial performance, resulting from the use of financial and nonfinancial performance measures.

Performance Measurement and Management Control: Behavioral Implications and Human Actions Studies in Managerial and Financial Accounting, Volume 28, 203
232 Copyright r 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1479-3512/doi:10.1108/S1479-351220140000028016

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Methodology
Data were collected using a mailed questionnaire survey to manufacturing organizations in Singapore. Path analysis technique was employed in this study to investigate the relationships. Findings
The results of the study show that behavioral outcomes are indifferent regardless of the nature and type of performance measures used. However, the relationships between performance measures and behavioral outcomes are indirect through procedural fairness and trust in supervisor. Research limitations
Survey questionnaire method was used in this study and there are limitations associated with survey questionnaire method. As our sample was selected from large organizations, it is unclear if our results are generalizable to small organizations. Also, as our sample was selected from the manufacturing sector, generalizing our results to the nonmanufacturing sectors should be made with caution. Practical implications
This study highlights the need for organizations to pay attention to issues pertaining to procedural fairness and interpersonal trust in the design and implementation of performance measurement systems. Keywords: Nonfinancial measures; financial measures; procedural fairness; trust in supervisor

INTRODUCTION Over the past decade, the adoption of the Balance Scorecard as a performance measurement tool has been one of the most controversial topics in management accounting literature. Kaplan and Norton (1992, 1996) argued that the use of financial performance measures should be reviewed in today’s fast changing competitive business environment. They propose that nonfinancial performance measures should be used to complement financial measures in the performance evaluation systems. The literature relating to the Balanced Scorecard tends to indicate the success of such performance measurement systems. However, there is little evidence available on employees’ reactions when the scorecard is used to evaluate their performance. Employees often have their compensation and

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rewards linked to their performance. It is likely that employees are concerned with the performance evaluation process, especially the types of measures used. Motivated by the seminal papers of Hopwood (1972) and Otley (1978), some studies have demonstrated the effects of performance measures on employees’ behavior (Brownell & Dunk, 1991; Lau, Low, & Eggleton, 1995). This suggests that the reactions of employees to the performance evaluation system may play a crucial role in determining the success of performance measurement systems. The purpose of this study is to investigate the effects of the use of financial and nonfinancial measures for performance evaluation on employees’ work-related attitudes. A study by Lau and Sholihin (2005) found that employees’ job satisfaction was not affected by the use of financial and nonfinancial performance measures. Both financial and nonfinancial measures were significantly related to employees’ job satisfaction through procedural fairness and interpersonal trust. Our study seeks to extend Lau and Sholihin (2005) by ascertaining if similar results would be found on other important behavioral outcomes, namely, organizational commitment and managerial performance using a survey on Singaporean managers. Fig. 1 presents the model used in this study. It indicates that the effects on the use performance measures on behavioral outcome are indirect through (1) procedural fairness and (2) trust in supervisor. The next section discusses the theory development and hypothesis formulation. This is followed by the method, results, discussion, conclusions and limitations of the study.

Procedural Fairness

C

B F

Performance Measures (financial / nonfinancial)

D

Trust in supervisor

E

Behavioral Outcomes (Job-satisfaction, / organizational commitment / managerial performance)

A

Fig. 1.

The Relationship Between Performance Measures, Procedural Fairness, Trust in Supervisor, and Behavioral Effects.

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THEORY DEVELOPMENT AND HYPOTHESES FORMULATION Performance Measures and Job Satisfaction (See “A” in Fig. 1) Traditionally, most organizations adopt only financial measures in their performance evaluation systems. However, empirical evidence has highlighted many limitations of financial measures due to their historical, myopic and non-value added nature. This leads to the suggestion that nonfinancial measures should also be used for performance evaluation. Nonfinancial measures are likely to be more subjective and flexible in nature and thus may help direct employees’ attention on the long-term effects of their actions (Banker, Potter, & Srinivasan, 2000). While financial measures are only able to reflect the firm’s current and past performance, nonfinancial measures, such as customer satisfaction, employees’ morale and internal process improvements provide employees with information on how their actions contribute to the achievement of the organization’s strategic goals (Ittner & Larcker, 2003). It has been suggested that nonfinancial measures can be easily understood by employees and thus are more appropriate criteria to be used for performance evaluation (Kaplan & Norton, 1992). For the purpose of this study, financial measures refer to the financial perspective of the Balanced Scorecard which measures the firm’s ability to improve its profitability via its strategy, implementation and execution. Nonfinancial measures refer to the three other perspectives of the Balanced Scorecard, namely learning and growth, customer and internal business process. These perspectives measure performance in terms of quality, customer or employee satisfaction and innovation. Since the 1980s, empirical evidence has shown that the use of performance measures have a significant association with employee job satisfaction. Brownell (1982) found job satisfaction to be positively associated with budgetary (financial) measures in performance evaluation. The use of financial measures, which are narrow in scope, may not be sufficient to enhance satisfaction among employees. Kaplan (1994) suggest that the use of multiple performance measures is likely to improve the motivation of employees. Gibbs, Merchant, Van der Stede, and Vargus (2004) found that the degree of subjectivity in nonfinancial performance measures increases the level of satisfaction among managers. Given the qualitative and flexible nature of such measures, it is likely that employees would have a clearer vision of the

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relationship between their efforts and the attainment of what is expected from them, thus increasing their job satisfaction. From the above discussion, it is probable that the use of performance measures, both financial and nonfinancial, is likely to affect employee job satisfaction in a positive manner.

Performance Measures and Organizational Commitment (See “A” in Fig. 1) Prior studies have shown that committed employees are less likely to engage in dysfunctional activities and therefore it is important to maintain positive levels of employees’ commitment to the organization. Kaplan and Norton (1992) have criticized financial measures for being outdated and tend to focus only on short-term outcomes. As such, it does not help to motivate employees to be more involved in the organization. This study therefore posits that financial measures are unlikely to affect organizational commitment. The use of nonfinancial measures in performance evaluations has been commended as being more flexible, comprehensive and hence easier for the employees to associate with. More importantly, nonfinancial measures are able to capture the long-term performance of employees’ actions. Hence employees are more likely to perceive a long-term perspective of the position in the organization if these nonfinancial measures are used to evaluate their performance. This study therefore posits that nonfinancial measures will lead to increased organizational commitment.

Performance Measures and Managerial Performance (See “A” in Fig. 1) Several prior studies have suggested a significant relationship between financial measures and managerial performance (Brownell & Dunk, 1991; Harrison, 1992; Lau & Buckland, 2001). Financial measures provide specific goals for employees to work toward them. As such, it is reasonable to assume a positive association between financial measures and managerial performance. Prior studies have also suggested that the use of nonfinancial performance measures is likely to motivate employees and improve employees’ performance. Thus, in a study of UK manufacturing organizations, Lau and Moser (2008) found that nonfinancial measures, as employee performance evaluation criteria, are positively related to employee job

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performance. Their results indicate that nonfinancial measures improve employee job performance because the use of nonfinancial measures is perceived by employees as fair. They also indicate that nonfinancial measures improve employee job performance because such measures improve employee organizational commitment.

Performance Measures and Procedural Fairness (See “B” in Fig. 1) Prior studies suggest that performance evaluation is perceived to be fair when the procedures and performance criteria used for performance evaluation are perceived by employees as accurate (Alexander & Ruderman, 1987). Financial measures may be perceived as objective and hence more accurate. When financial measures are complemented by participation and feedback, employees would perceive the procedure as fair due to their ability to express their views and opinions. With nonfinancial measures, they are less technical than financial measures. As they are both broad and flexible, they may be customized to fit the individualized situations of employees. Such measures are hence easier for employees to understand. When employees are able to understand the performance measures used to evaluate their performance, they are in a better position to participate in the target setting processes, seek explanation and feedback, and rectify unfair performance evaluation decisions. They are more confident and in better control of their work situations. Consequently, they are likely to perceive the use of nonfinancial measures as performance evaluation criteria as fair performance evaluation procedures. Based on the above discussion, it is reasonable to conclude that both financial and nonfinancial performance measures may be associated with procedural fairness.

Performance Measures, Procedural Fairness, and Job Satisfaction (See “B” and “C” in Fig. 1) Prior studies have shown that procedural fairness may have consequential effects on employees’ attitudes and behavior (Alexander & Ruderman, 1987; Welbourne, Balkin, & Gomez-Mejia, 1995). People generally prefer fair procedures to unfair ones. Poor perceptions of fairness are likely to stimulate poor relationships causing adverse effects on job satisfaction. It is therefore reasonable to conclude that perceptions of procedural fairness have a positive association with employees’ job satisfaction. As discussed

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earlier, the use of performance measures is likely to affect job satisfaction as well. Therefore, it is posited that the relationship between performance measures and job satisfaction is indirect through procedural fairness. Accordingly, the following hypotheses are tested: H1a: The effect of financial measures and job satisfaction is indirect through procedural fairness. H1b: The effect of nonfinancial measures and job satisfaction is indirect through procedural fairness.

Performance Measures, Procedural Fairness, and Organizational Commitment (See “B” and “C” in Fig. 1) When management is perceived as fair, employees are likely to respond with an increased level of commitment toward the organization. When employees perceive there is fairness in the performance evaluation system, they would feel that the organization values their contributions and is concerned about their well-being. When employees feel they are subjected to unfair treatment, they tend to develop negative thoughts about their positions in the organization and would not commit wholeheartedly to the organization. Malatesta and Byrne (1997) found procedural fairness to be positively related to organizational commitment. A more recent study by Lau and Moser (2008) similarly found that procedural fairness is positively related to employee organizational commitment. Hence, this study proposes an association between procedural fairness and organizational commitment. This association acts as an indirect link between performance measures and organizational commitment. Accordingly, the following hypotheses are tested: H2a: The effect of financial measures and organizational commitment is indirect through procedural fairness. H2b: The effect of nonfinancial measures and organizational commitment is indirect through procedural fairness.

Performance Measures, Procedural Fairness, and Managerial Performance (See “B” and “C” in Fig. 1) When employees perceive their performance evaluations as fair, they are more likely to share their knowledge voluntarily, which is critical to the

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performance of the firm. Also, to enhance performance at both the organizational and individual levels, employees must be willing to cooperate voluntarily with each other. The presence of voluntary cooperation is likely to enhance managerial performance. However, employees are more likely to do so only when their perceptions of fairness are high. The discussion therefore suggests that employee perceptions of fairness are associated with performance. As posited above, there is an association between performance measures and managerial performance. It is likely that this association between performance measures and managerial performance is mediated by procedural fairness. Accordingly, the following hypotheses are tested: H3a: The effect of financial measures and managerial performance is indirect through procedural fairness. H3b: The effect of nonfinancial measures and managerial performance is indirect through procedural fairness.

Performance Measures and Trust in Supervisor (See “D” in Fig. 1) Prior studies have highlighted significant association between performance measures and interpersonal trust. Cummings (1983) found a positive relationship between trust in supervisor and performance evaluative styles, and suggested that a climate of distrust can potentially alter a firm’s performance and success. Albrecht (2002) concluded that employees are more receptive to changes when they trust management. Hence, it is posited that there is a positive association between performance measures and trust in supervisor.

Performance Measures, Trust in Supervisor, and Job Satisfaction (See “D” and “E” in Fig. 1) In an environment of distrust, employees are likely to be wary of their coworkers and would be unwilling to show openness to each other. These negative feelings may, in turn, cultivate unhappiness among employees. It is therefore unlikely for employees to feel satisfied toward both their jobs and the organization. Interpersonal trust within the organization promotes a more friendly, predictable, satisfying and less stressful work environment (Child & Faulkner, 1998). Employees under such situations are likely to

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exhibit greater levels of job satisfaction. From this discussion, a positive relationship between trust in supervisor and job satisfaction is proposed. Therefore, it is posited that the relationship between performance measures and job satisfaction is indirect through trust in supervisor. Accordingly, the following hypotheses are tested: H4a: The effect of financial measures and job satisfaction is indirect through trust in supervisor. H4b: The effect of nonfinancial measures and job satisfaction is indirect through trust in supervisor. Performance Measures, Trust in Supervisor, and Organizational Commitment (See “D” and “E” in Fig. 1) A lack of trust in the work environment can lead to employees withdrawing from open communication with both their colleagues and their superiors. The lack of openness is likely to stir up dysfunctional feelings among employees, making them less loyal to the organization. When a strong climate of trust is present in the organization, employees are motivated to develop a sense of identification toward the organization’s goals and values. More importantly, prior studies have shown that employees are likely to be more loyal and committed when trust is embedded in their work environment (Vigoda, 2002). The evidence suggests a positive relationship between trust in supervisor and organizational commitment. Hence, this study proposes that the association between performance measures and organizational commitment is indirect through the presence of trust in supervisor. Accordingly, the following hypotheses are tested: H5a: The effect of financial measures and organizational commitment is indirect through trust in supervisor. H5b: The effect of nonfinancial measures and organizational commitment is indirect through trust in supervisor. Performance Measures, Trust in Supervisor, and Managerial Performance (See “D” and “E” in Fig. 1) In an environment filled with interpersonal trust and in particular trust in superiors, employees are likely to possess positive feelings toward their

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coworkers and management. Such positive feelings may induce improvement in performance and success. Zand (1997) found that the element of trust, in particular, enhances the ability of individuals to solve problems. Although trust in supervisor does not play the main role in affecting performance, it indirectly influences performance by channeling employees’ energy toward reaching alternative goals. Accordingly, this study proposes an indirect relationship between performance measures and managerial performance through trust in supervisor. Accordingly, the following hypotheses are tested: H6a: The effect of financial measures and managerial performance is indirect through trust in supervisor. H6b: The effect of nonfinancial measures and managerial performance is indirect through trust in supervisor.

Procedural Fairness, Trust in Supervisor, and Behavioral Outcomes (See “F” and “E” in Fig. 1) When employees harvest trust in their superiors, it is probable that they would in turn trust the organization and exhibit favorable behavior. Studies have shown that procedural fairness may be an antecedent to trust and that trust mediates the association between procedural fairness and behavior outcomes. For employees to trust their superiors and in turn the organization, it is essential for the organization to demonstrate fairness in procedures. Hence, it can be posited that if employees perceive the procedures used to evaluate their performance as fair, it is likely that they would infer it as signs of trustworthiness. From the above discussion, it is posited that trust in superior mediates the association between procedural fairness and behavior outcomes. Accordingly, the following hypotheses are tested: H7: The effect of procedural fairness and job satisfaction is indirect through trust in supervisor. H8: The effect of procedural fairness and organizational commitment is indirect through trust in supervisor. H9: The effect of procedural fairness and managerial performance is indirect through trust in supervisor.

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METHOD Data for this study were collected using a mailed questionnaire survey. The sample was randomly selected from the list of manufacturing organizations in Kompass Singapore (2002) business directory with more than 100 employees. An initial telephone call to each of the selected organizations was made to obtain the names of employees who were heads of a functional area such as manufacturing, marketing or sales. This was to provide some degree of control over the level of management and also to ensure that the questionnaire could be mailed directly to the intended respondents. To minimize the possibility of our sample being biased by the control of any one organization, a maximum of four managers were obtained from any one organization. A total of 300 names of functional heads were obtained. Included in each questionnaire that was mailed to each of these 300 functional heads was a covering letter explaining the objectives of the research and assuring confidentiality in the response provided together with a selfaddressed prepaid return envelope. Reminder letters were sent three weeks after the initial mailing and follow-up telephone calls were made to those functional heads who had not responded to the reminder letters after two weeks. From the 300 questionnaires that were mailed out, a total of 136 (45%) questionnaires were returned, of which 6 were incomplete and were excluded from the study. Therefore, the final sample comprised 130 (43%) questionnaires. Nonresponse bias tests as suggested by Oppenheim (1992) were undertaken. These involved splitting the sample into two halves based on the dates the response were received and carrying out a t-test for each of the variables used in the study to ensure that there were no systematic differences between the early and late responses. No significant differences were found for any of the variables which indicate that nonresponse bias was not a significant issue in our sample. The mean age of the respondents was 45 years and they had held their current positions for an average of 10.5 years. They were responsible for an average of 113 employees. Most of them (95%) had either tertiary or professional qualifications. The data suggest that the respondents were relatively senior, experienced and well qualified managers in their respective organizations.

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MEASUREMENT INSTRUMENTS Performance Measurements The financial and nonfinancial measures variables were measured with an instrument similar to that developed by Hoque, Mia, and Alam (2001) and used by Hoque and James (2000). The original instrument which was derived from Kaplan and Norton’s (1992) four dimensions of the Balanced Scorecard comprises 20 items of which 3 are financial and 17 are nonfinancial. The questionnaire which was originally developed to measure organizational performance has to be modified because our study is concerned with evaluation of managerial performance; we therefore, amended the wordings of the questionnaire in order to be consistent with those of Hopwood (1972). The instrument asked each respondent to indicate on a 7-point scale, how much importance his or her superior attached to each of (i) the 4 financial items and (ii) the 15 nonfinancial items when evaluating the respondent’s individual performance. The 15 nonfinancial items were organized into three perspectives of customer, internal business process, and learning and growth. A factor analysis was undertaken for all the 19 items. The four financial measures loaded satisfactorily on a single factor with an eigenvalue of 3.15 and explaining 78.69% of the variance. The learning and growth, internal business process and customer measures loaded on three factors with an eigenvalue of 3.59, 3.95, and 3.36 respectively. All performance indicators possessed a highly acceptable Cronbach alpha coefficient, for the financial measures it is 0.91, while for the summary of nonfinancial measures it is 0.89. The learning and growth, internal business process and customer process each have an acceptable Cronbach alpha efficient of 0.90, 0.93, and 0.87 respectively. To obtain the score for financial measures, the mean of each respondent’s scores for the four items referring to financial performance measures is calculated. As for the nonfinancial measures, the scores were derived from calculating for each respondent, the mean score under each perspective and then the average of the means form the three different perspectives. These approaches are similar to those adopted by Lau and Sholihin (2005). The use of the mean score is preferred over the summation of scores as it was the preferred approach used by the developers of this instrument (Hoque et al., 2001).

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Job Satisfaction Job satisfaction was measured by a two-item instrument developed by Dewar and Werbel (1979). This instrument has been used by prior accounting studies (Abernethy & Lillis, 1995; Chong, Eggleton, & Leong, 2005). The results of a factor analysis revealed satisfactorily construct validity (Kerlinger & Lee, 2000). The two items were loaded satisfactorily on a single factor, eigenvalue value was 1.843 and the variance explained was 92.13%. The Cronbach alpha was 0.92 which indicates satisfactory internal reliability for the scale.

Organizational Commitment This construct was measured using the nine-item short-form version of Organizational Commitment Questionnaire (OCQ) developed by Mowday, Steers, and Porter (1979). The Cronbach alpha of 0.93 obtained in our study indicates the high internal consistency of the nine items in the instrument. A factor analysis was undertaken for the nine items. All items loaded satisfactorily on a single factor (Eigenvalue = 6.005; variance explained = 66.719%).

Managerial Performance A nine dimensional, seven point, self-rating instrument developed by Mahoney, Jerdee, and Carrol (1963) was used to assess the performance of individual senior manager. The instrument which was used in many prior studies reported high levels of Cronabach alphas (Brownell, 1982; Brownell & Dunk, 1991; Chong & Chong, 2002). This measurement consists of a single overall performance rating and ratings on eight other dimensions of managerial activities. The results from the regression analysis indicate that the eight sub dimensions explained 61.3% (R2 = 61.3%) of the overall performance rating. This shows that the overall performance measure was able to capture the multidimensional feature of performance and support the use of the overall performance measure in this study.

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Procedural Fairness The four-item instrument developed by McFarlin and Sweeney (1992) was employed to measure subordinates’ perceptions of fairness in performance evaluation procedures. The instrument asked respondents to rate the fairness of the procedures used by their superiors to evaluate their performance, communicate their performance feedback, determine their promotion and pay increases. An overall measure of procedural fairness was obtained by summing the scores of the four items. A factor analysis was undertaken. The factor analysis results indicate the one-dimensional nature of the instrument as all four items loaded satisfactorily on a single factor (Eigenvalue = 3.027; total variance explained = 75.67%). A Cronbach alpha of 0.89 obtained for this instrument in our study indicates the high internal consistency of the four items.

Trust in Supervisor Read (1992) developed a four-items, five point instrument to measure the level of trust subordinates harness toward their superior. This measure has proven to be successful in measuring trust in supervisor and it has been used by several studies (Hopwood, 1972; Otley, 1978). A factor analysis was undertaken, with all items obtaining factor loadings of greater than 0.5. The eigenvalue of 2.98 with a total of 69.94% of variance explained support the validity of this construct. Reliability analysis revealed that this variable possesses a Cronbach alpha coefficient of 0.85. Descriptive statistics for the variable investigated in this study are presented in Table 1.

RESULTS This study investigates the relationship between performance measures and behavioral consequences, specifically the indirect associations through procedural fairness and trust in supervisors. Path analysis technique was employed in this study to investigate such relationships. Testing for the normality of residual, homogeneity of variance of residuals and the appropriateness of the linear models were undertaken to assess the adequacy of the regression models (Cohen & Cohen, 1983).

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Table 1. Variables

Financial measures Nonfinancial measures Procedural fairness Trust in supervisor Job satisfaction Organizational commitment Managerial performance

Mean

Description Statistics. Standard Deviation

5.42 5.09 13.15 13.76 10.76 47.22 5.64

1.09 1.00 2.73 3.18 2.20 8.80 0.90

Theoretical Range

Actual Range

Min

Max

Min

Max

1 1 4 4 2 9 1

7 7 20 20 14 63 7

2 2 7 4 4 27 3

7 7 20 20 14 63 7

Financial Performance Measures Model
Test of Hypothesis H1a, H4a, and H7: Job Satisfaction Outcome Model Table 2 present the correlation matrix among the variables investigated. The results indicate a significant relationship between financial measures and job satisfaction (est = 0.383, p