Can a beyond budgeting based management control system improve organizational justice perceptions and trust? indications from german cooperative banks

Resumen

Management control systems (MCS) are commonly applied in organizations to align employees’ behaviors with organizational objectives. They comprise all tools and mechanisms which help an organization “to ensure that behaviors and decisions of their employees are consistent with the organization’s objectives and strategies” (Merchant and Van der Stede, 2012, p. 6). Conventionally, the design of MCS contains monitoring mechanisms that connect employees’ goals with rewards (e.g. bonus payments) and punishments (e.g. denial of promotions) to secure the required alignment between top-down distributed goals and employees’ behaviors and decisions (Hopwood, 1974, p. 24; Otley, 1999, p. 364). This alignment of MCS is referred to as “command and control” and was widely considered as functioning well for decades until organizational environments became more dynamic. Researchers began to criticize this approach for being too slow, rigid and time-consuming and therefore not able to adapt quickly enough to changing environments (Hope and Fraser, 2003a; Johnson and Kaplan, 1987; Kaplan and Norton, 1996, p. 19). Today, many organizations find themselves situated within a dynamic, interlaced and knowledge-driven economy with increased need for collaboration between employees, departments and organizations (Carr and Walton, 2014, pp. 169ff; Coletti et al., 2005, p. 480; Kaarbøe et al., 2013, p. 1). Within this fast changing environment, new organizational key factors for competitiveness become relevant and MCS have to cope with these new factors and it is argued that the requirements for MCS basically change in this context (Kaarbøe et al., 2013, 1 ff; Sandalgaard, 2013, p. 46). One important key factor for competitiveness within the present dynamic environments is organizations’ ability to create trust (Ferrin and Dirks, 2002, p. 622; Hartmann and Slapničar, 2009, p. 722; Colquitt et al., 2007, p. 922). Beside various other positive outcomes (Rousseau et al., 1998, p. 387), trust has been found to be the primary determinant for the success of collaborations (Coletti et al., 2005, pp. 478ff.). Thus, trust is important for allowing knowledge workers to share their knowledge and develop new solutions that enable a quick adaption to fast-changing environments (Colquitt et al., 2007, p. 922; Rousseau et al., 1998, p.387). Trust also prevents employees from adapting unethical behaviors that might harm the organization and improves organizational capabilities to deal with uncertainties (Das and Teng, 2001, p. 255). Thus, researchers suggest that MCS characteristics should be designed in a way that allows them to support the creation of trust within the organization (Coletti et al., 2005, p. 497; Hartmann and Slapničar, 2009, p. 733; Vélez et al., 2008, 990 f.). However, little is known about how MCS characteristics can create trust and the relationship between MCS and trust is still a matter of intensive dispute in research (Coletti et al., 2005; Hartmann and Slapničar, 2009, pp. 722ff.; Langevin and Mendoza, 2013; Vélez et al., 2008, p. 968). Knights et al. (2001, pp. 31ff.), who examined researchers’ observations of the relationship between trust and control, show that research traditionally assesses trust and control as opposite mechanisms. This perspective is rooted in the idea that the development and implementation of formal control mechanisms already signals distrust (Argyris, 1953, p. 100; Malhotra and Murnighan, 2002, p. 556; Neu, 1991, pp. 245ff.). With regard to the function of MCS to ensure required behaviors, this would imply that there is a trade-off between control and trust and that MCS are unable to support the creation of trust (Vélez et al., 2008, p. 971). In contrast to these studies and positions, other studies showed that formal control mechanisms can support the development of interpersonal trust (Coletti et al., 2005; Das and Teng, 1998, p. 495). As research results of research studies on the impact of MCS on trust are mixed, it is important to understand the underlying effect mechanisms that connect these two constructs. Bearing this question in mind, recent studies suggest that MCS has a positive effect on trust which is mediated by organizational justice (OJ). More specifically, MCS can contribute to the creation of trust when MCS characteristics are perceived to be fair by employees (Hartmann and Slapničar, 2009, p. 733; Langevin and Mendoza, 2013, pp. 217f.; Maiga and Jacobs, 2007, pp. 45ff.). The positive effect of OJ on trust has been supported by various studies (Aryee et al., 2002, pp. 273ff.; Cohen-Charash and Spector, 2001, p. 300; Colquitt et al., 2001, p. 436; Li and Cropanzano, 2009, p. 796). But little is known as to which MCS characteristics influence organizational justice perceptions (OJP) (Langevin and Mendoza, 2013, pp. 217f.). Thus, it is not yet possible to construct or rely on MCS that systematically promote OJ and trust. In this context the emergence of Beyond Budgeting (BB) as a holistic MCS approach (Bogsnes, 2009, 2013; Hope and Fraser, 2003a; Hope et al., 2011) is of great interest as BB proponents claim that BB is able to create a high trust organization (Hope et al., 2011, pp. 121ff.). Unlike any other comprehensive approach toward MCS, BB basically excludes the use of budgets in the sense of fixed performance contracts (Hope and Fraser, 2003a, p. ix; Becker et al., pp. 2010, 11ff.). BB regards budgets as fixed performance contracts that quickly become outdated within a dynamic environment (Hope and Fraser, 2003a, pp. 7 f.). It has also been argued that budgets are not able to automatically adapt to changing environments and are therefore not achievable or not ambitious enough and therefore unable to align employees’ behaviors with organizational goals (Hartmann, 2000, p. 471; Samuelson, 1999, p. 13; Sandalgaard, 2013, p. 46; Sweeney, 2009, p. 13). Moreover, it is claimed that budgets ultimately have a negative effect on trust and drive unethical behaviors (Hopwood, 1974, p. 69; Argyris, 1953, pp. 98ff.; Merchant, 1989, p. 30; Umapathy, 1987, p. 30). Instead of relying on command and control management encouraged by budgets, BB claims to grant more autonomy to employees and demands accountability and a sense of responsibility in return by including social control mechanisms (Bogsnes, 2013, pp. 12ff.). However, as research on the effects of BB on organizations are mainly inductive and qualitative (Becker et al., 2010, p. 12), there seems to be no deductive and quantitative research assessing the exact impact of BB characteristics on OJP and trust. So, even if it seems logical that BB characteristics, which are designed to allow more autonomy and include environmental changes into their performance evaluation system, might be perceived to be fair by employees, the effects are unknown. The lack of knowledge of how BB characteristics can influence OJP and which OJ dimensions are best suited to enhance trust, can be regarded as a research gap. This thesis tries to contribute new knowledge into the exact effect mechanisms between BB characteristics, OJ and trust. Thus, this thesis poses the question as to whether BB characteristics can enhance OJP and which specific OJ dimensions lead to more trust within organizations.