1 Environmental performance as a fifth balanced scorecard perspective: The judgemental effects of environmental concern, perception of ecological risk and perception of financial risk 1 Monte Wynder University of the Sunshine Coast Maroochydore DC 4558 [email protected]+61 7 5430 1263 Abstract: Despite normative arguments for presenting environmental performance as a separate, fifth perspective in the balanced scorecard (BSC), empirical results have been mixed. Experimental studies that have focussed on cognitive explanations suggest that an environmental perspective, alone, may be insufficient to convey the importance of environmental performance. In addition to cognitive influences, environmental responsibility is an emotive issue and personal beliefs are also likely to affect the importance that is ascribed to measures included in an additional, environmental perspective. Personal values and beliefs have not been considered in previous research. This study contributes to our understanding by demonstrating that concern for the environment, perception of ecological risk, and assessment of financial risk, interact with scorecard classification to determine the weighting placed on environmental performance measures. Introduction and Motivation An important decision for organisations that recognise the strategic importance of their environmental impact is how to incorporate those goals into their strategic performance measurement systems (SPMS). Various authors have recommended a balanced scorecard (BSC) format (e.g., Figge, et al., 2002; Hubbard, 2009). The question remains, however, whether environmental performance should be presented as a separate perspective, or integrated into the traditional four BSC perspectives (Alewine and Stone, 2009; Kaplan and Wisner, 2009). In addition to being an important issue for performance evaluation and reward, the presentation of performance measures is also important in communicating strategic priorities (Kaplan and Norton, 2004; Malina and Selto, 2001). Various studies have demonstrated that 1 This research was gratefully supported by a grant from the University of the Sunshine Coast under the Open Learning and Teaching Grants Scheme. This is a first draft, please contact the author before quoting.
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Environmental performance as a fifth balanced scorecard perspective:
The judgemental effects of environmental concern, perception of
Table 8: Univariate Analysis of Variance for Performance Evaluation when Financial
Risk is High
Source Type III Sum of
Squares
df Mean Square F Sig.
Intercept Hypothesis 44.260 1 44.260 31.474 .112
Error 1.406 1 1.406
Format Hypothesis .486 1 .486 .094 .811
Error 5.180 1 5.180
Perception of Financial
Risk
Hypothesis 1.406 1 1.406 .271 .694
Error 5.180 1 5.180
Format * Perception of
Financial Risk
Hypothesis 5.180 1 5.180 6.916 .010
Error 64.419 86 .749
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Figure 9: Perception of Financial Risk and BSC Format on Evaluation when Financial
Risk is High
Figure 10: Perception of Financial Risk and BSC Format on Bonus when Financial Risk
is High
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Conclusions and Limitations
This study adds to a growing body of research which is identifying the effects of BSC design
choices. Specifically, environmental performance presents an interesting test of the
consequences of a 5th perspective that builds on and extends existing literature. For
organisations that recognise the strategic importance of environmental outcomes the choice
between a separate environmental perspective or integrating environmental measures into
traditional BSC perspectives is important. Furthermore, this study suggests that the effect of
classifying environmental outcomes will depend on the attitudes and values of the evaluators
regarding the terms used in the BSC classifications.
In this study, despite the legitimisation of environmental performance by presenting it as a
separate perspective, individual beliefs about environmental performance and ecological risk
were still important in determining the weighting placed on a positive ecological outcome.
Interestingly, evaluators with high environmental concern relative to their economic concern,
and those that perceived ecological risk to be high were less likely to attend to a positive
ecological outcome when it was presented in a traditional, profit-centric internal process
perspective. This research included participants from both business and non-business
backgrounds. With the increasing recognition of the importance of reporting to various
stakeholders, with different values, further research is warranted to investigate how
stakeholders differ in the importance that they place on the various perspectives. As
demonstrated in this study, if concern for environment is high relative to concern for
economic performance, attention to traditional, profit-centric perspectives may be reduced.
One the other hand, there is some support for the argument that when concern for the
environment and perception of environmental risk is relatively low, performance evaluations
(which drive decision making and resource allocation) will be more influenced by
environmental outcomes that are legitimised by their classification under pragmatic, i.e.,
profit-centric perspectives. This integration and legitimisation could be further enhanced by
explicating the causal links between environmental outcomes and financial performance
through a strategy map. This offers a fruitful avenue for research for those who wish to
increase commitment to environmental performance through carefully designed SPMS.
Related to the implication of a heterogeneous sample in this study is the important question
of using undergraduate and postgraduate students who may not have extensive experience in
the BSC and performance measurement. Students are convenient and experimentally
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accessible but may be homogenous, especially when drawn from business courses. This
practical consideration is important in determining the range of research questions that can be
addressed. Further research is, of course, necessary to test the generalisability of the insights
that are drawn from this research. It is encouraging that a significant literature is developing
around the use of the BSC and the consistent results indicate the pervasiveness of the biases
and cognitive effects that have been identified so far.
In this study individuals were told of the ecological risk and the dangers were further
emphasised by a picture and description of an ecologically sensitive area. This probably
heightened the demand effect as participants recognised the experiment’s emphasis on
environmental performance, which would increase sensitivity to the manipulated
environmental performance. This is reflected in the relatively high scores for concern for the
environment and perceived ecological risk. Despite this, responses to the alternative BSC
presentation formats still differed based on reported concern and perceived risk. Furthermore,
in this study managers differed in performance on a single performance measure. In this way
the ‘divide and conquer’ strategy, and consequence (Kaplan and Wisner, 2009; Lipe and
Salterio, 2002), was not applicable. This increases confidence that the observed effects can be
attributed to the scorecard classification.
The differences in the results for the two dependent variables, evaluation and bonus awarded,
is interesting and potentially important. It seems that the effect of environmental concern and
perception of ecological risk applied differently to these two decisions. Further research to
explore this difference is warranted to determine how information processing differed in
arriving at the two judgements. It may be that determining the bonus lent itself to a more
mathematical calculation. An interesting question for protocol analysis would be the extent to
which evaluator’s were aware of the weightings that they were placing on specific
performance measures.
Environmental performance may be pursued for either moral, i.e., it is the right thing to do
regardless of financial impact, and/or pragmatic reasons. The two environmental outcomes
manipulated in this study highlight the difference between these two motivations. For
environmental performance that can be clearly linked to financial performance (in this study,
risk of further fines and loss of reputation), presentation in a separate environmental
perspective was less effective than integration into the customer perspective, but only when
the evaluator recognised the financial risk associated with the poor performance.
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In summary, what is measured, and how outcomes are weighted in subjective performance
evaluation, drives performance. Personal values may subconsciously influence the perception
of the measures based on their BSC classification and this may mitigate the organisation’s
attempts to communicate the strategic importance of environmental outcomes.
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