budgeting, the individual and the capital market: a case of fiscal stress

Accounting Forum 31 (2007) 384–397

Available online at www.sciencedirect.com

Budgeting, the individual and the capital market:A case of fiscal stress

Bill RyanSchool of Management, Royal Holloway, University of London, Egham, Surrey TW20 0EX, United Kingdom

Abstract

Budgetary control is a major aspect of management control. It has undergone major shifts of emphasis inboth the literature and practice in the later part of the 20th century. A significant influence on the changingpractices of this aspect of control has been the growth of and increased influence of the capital market. Thispaper draws on a detailed field study focusing on the problematic nature of budgetary control in a changingoperational environment that acknowledges both the importance, internally, of the organisation members andtheir contribution to continued growth—and externally the growing influence of shareholders on businessoperations. The focus of the paper is on the effects of the constant pressure of the share price on the caseunit of analysis and how that changed the use of the budgetary control system. This change is illustratedboth at a macro level of organisational accountability for predicted results and also as it is driven down theorganisation to the level of the individual.© 2007 Elsevier Ltd. All rights reserved.

Keywords: Capital market; Budgetary control; Management control; Accountability; Shareholders; The individual

1. Introduction

The objective of this paper is to explore the relationship between organisational budgetarycontrol and the capital market. The paper describes the changing relationship between the capitalmarket and corporations and focuses on the effects that this changing relationship has had on theoperation of organisation control through the use of a budgetary system.

The capital market is broadly defined here as the market, or markets, where investment productssuch as stocks and bonds are bought and sold and commonly referred to as the stock market.Historically firms have focused on the product market from where they derived their revenuethrough sales of their products or services. Although the two markets are theoretically separate,they have increasingly become mutually dependent with firms having to be successful in mediatingtheir position within both markets. In other words, firms have to be good at not only producing

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B. Ryan / Accounting Forum 31 (2007) 384–397 385

and selling goods and services but also at managing their relationship with their shareholders.Capital market investors demand returns measured by levels of increasing shareholder value.The field-study based case study described and analysed in this paper shows that the firm levelaccountability for increasing returns is moving increasingly down the organisation to the level ofthe individual by means of a changing control environment illustrated in this paper through theworkings of a budgetary control system.

The influence of the capital market on budget implementation is considered in this paper withina case study context of a particular organisation, referred to as Eurel. This is done by connectingthe world of the capital market with that of the organisation to show the changing influence onand changing practices of budgetary control. The paper is located within a discussion of key workon budgetary control particularly in the areas of participation, slack, performance measurement,time frames and bias (Argyris, 1952; Hofstede, 1968; Hopwood, 1972; Likert, 1961; Llewellyn,1998; Lowe & Shaw, 1968; Schiff & Lewin, 1970; Van der Stede, 2000). All of these issues wererelevant to Eurel and its organisation members.1

The capital market has impacted on corporations through changing expectations focussingespecially on expected performance and growth issues. In recent years, shortening product lifecycles and increased competition has meant that sales and profit growth has been difficult tomaintain often resulting in a shortfall between actual results versus those predicted. The demandfor organisational credibility in the attainment of results has been led especially by institutionalshareholders, who no longer show a loyalty to the companies in which they invest (Drucker, 1999;Handy, 1995; Rappaport, 1986).

The movement from individual ownership to larger fund management groups has lead tochanges in shareholder priorities (Handy, 1995). The growth in fund management has institu-tionalised share dealing and ownership (Froud, Johal, & Leaver, 2006). The traditional holdingof shares has increasingly been delegated to the fund management community who along withthe investment analysts (for example the Wall Street analysts), exercise major steering power andinfluence over organisations and their strategies. Much of this has been enabled by the ever moreremote separation of ownership and the growth in management of international share portfolios(Drucker, 1999; Handy, 2002). Institutional shareholders (pension funds, private equity funds,and so forth) have had an increasing policy of engaging in what has been described as the activemanagement of funds rather than the previously more common practice of long-term share own-ership. Rappaport (1986) notes that portfolio managers compete for best returns by moving in andout of individual stocks with the possible consequence that this is not necessarily based on a com-pany’s long-term future goals but on short-term return expectations for shareholders. Institutionalinvestors are increasingly willing to intervene in the affairs of organisations and can influence themanner in which managers carry out their duties. They can influence for example the expectationsas to what constitutes a fair return on funds invested and the time frame in which it is expected. His-torically, share ownership was more dispersed with the result that there were limits to the boundaryof impact that individual owners could make (Berle & Means, 1968; Froud et al., 2006).

2. Overview of the paper

The paper starts with a review of the essence of budgetary control with a focus on the issues ofparticipation, slack, measurement, time frames and bias. This section also signals and integrates

1 In some legal regimes the term ‘members’ refers to shareholders. Here it means the employees, managerial and other.

386 B. Ryan / Accounting Forum 31 (2007) 384–397

aspects of a changing business environment that includes the growing influence of shareholders.This is followed by a brief description of the research methodology. There is also an overview of thecase organisation and the two business units that provide the case detail. The fourth section includesthe discussion of the case-study data. The paper concludes with a summary that synthesises theresults and links to existing theory.

3. Literature review

3.1. The essence of budgetary control

Buckley and McKenna (1972) describe budgetary control as consisting of planning, control-ling, co-ordinating and motivation through money values and departments within an organisation.It is a plan, in quantitative terms, usually for 1 year. The essence of the budget process isthe influencing of management behaviour by setting agreed performance standards and con-trolling the attainment of those standards. The planning or budget function appears steepedin the notion of a stable environment aspiring as it does to having no surprises or at leastbeing able to adjust and get back on track as far as planned outcomes are concerned. Otley(2001) noted that although budgetary control is part of a complex organisation reality, itappears to “work reasonably satisfactorily in a relatively stable environment” (p. 257). How-ever, the current business context can be said to be anything but stable but one that is arguedfavours a shorter term perspective in an attempt to maximise the certainty of short-term plannedresults.

From an overall company control perspective, Otley (2001) also notes that the assumption ofbudgetary control is that it is the main integrative control method for most business enterprises.The assumption being that an organisation’s business plan can be represented financially by thebudget and that the budget can be used as a monitoring and controlling method for the complexissues of the business plan. This emphasis sees the budget linked to the overall attainment oforganisation performance targets.

However, while there is general agreement on the planning and control objectives of budgetarycontrol, its implementation – achieving those objectives – can be problematic (Hopwood, 1972;Llewellyn, 1998; Lowe & Shaw, 1968). There are historic and enduring reasons for such con-straints but social and economic changes have also altered the significance of those influences aswell as introducing new ones. To understand the reasons behind this process, we need to look notonly inside the organisation but also at the outside environment.

3.2. The environment of change and influence

Recent years have seen much change in organisational life and the research literature hascatalogued this (Drucker, 1988, 1999; Forrester, 1965; Giddens and Hutton, 2000; Handy, 1996).The notion of the fixed stable organisation has seemingly, been replaced by one that is everchanging, less predictable, dynamic and where the individual and his/her contribution ability isincreasingly recognised. This is a business environment where the individual and the resultingintellectual capital are fundamental to success. This is important as it is the summation of individualcontributions that leads to an organisations total budget and ultimately its actual performanceoutput. This theme is echoed by Simons (1995) and, who recognises the contribution of theindividual to the continued competitive advantage of the organisation. Simons seeks appropriatemeasures for the intangible aspects of risk and uncertainty while Guthrie who argues for more


meaningful measures for intellectual capital including that created by individuals. The issue ofrisk is also taken up by Collier and Berry (2002) who take the notion of uncertainty and the outsideenvironment and conceptualise it in terms of risk and attitudes towards that risk in budgeting. Theyargue that much of the previous work on risk in accounting exaggerates the predictive ability ofdecision tools such as probabilities and decision trees. Their study examines risk from the point ofview of the individual manager. McSweeney (2006) distinguishes between risk and uncertainty.He argues that uncertainty is unpredictable, and that the ability of techniques such as discountedcash-flow to effectively incorporate risk has been hugely over-stated.

Despite the acknowledgement of the growing importance of individual contribution to organ-isations and the direct relationship it has with intellectual capital, a numbers of issues arise inthe area of budget operation. These include a business context that is becoming increasinglyuncertain as well as the increasing influence on organisation control by the outside investmentcommunity (Drucker, 1999; Froud et al., 2006; Power, 2007). While, this undoubtedly affects thelevel of budget participation and ultimate accountability, the process of establishing and imple-menting budget aspirations cannot be completed without the major contribution of individualorganisation members. This appears to be especially true in the accountability for results wherein both the public and private sectors, accountability is increasingly being driven down the organ-isation to the level of the individual (Beck, 2000; Llewellyn, 1998; McSweeney, 1994; Roberts,1996; Townley, 1995, 1996). A major challenge for budgetary control is how to achieve organi-zational control in an environment where there are changing patterns both inside and outside theorganisation.

What are the drivers of change of the external context of organizations and how are theyeffecting the organisation and the individuals within? A key driver in this context is the capitalmarket.

3.3. The influences of the capital market

For corporations, there is a growing requirement to interact with not only the product mar-ket but also increasingly, the capital market (Froud et al., 2006). There is little doubt that thebusiness environment is characterised by intensified competitiveness, where technologies andprocesses have become transferable and more easily copied (Teece, 2000, chap. 1). This hasalso led to a situation of diminishing profit margins for many companies including the case-study company Eurel. The demand for credibility in the attainment of budgeted results hasbeen led by the shareholders who as noted earlier, no longer have long-term loyalty to thoseorganisations (Drucker, 1999; Froud et al., 2006; Handy, 1995; Rappaport, 1986). This chang-ing pattern of shareholder loyalty along with the intensity of competition and lowering profitmargins has led to growing pressure on organisations in their attempts to achieve planned oper-ating results. This is exemplified by the power of ‘Wall Street’ and other analyst communitieswho exercise major influence over corporate strategy by their buy, sell, or hold recommenda-tions to fund managers. Eurel along with other major corporations give quarterly briefings tothe analyst community as to their expected results for the upcoming periods. This discourages along, even a medium, term time horizon in reporting corporations. The pressure is for immediateresults to meet the on-going three monthly reporting requirements (Riley, 2000). The connect-ing mechanism between the organisation and the capital market in terms of communicationof planned and actual results is the budget. In this respect it is an enabler of accountabil-ity.


3.4. Accountability for results

Llewellyn (1998) describes accountability as a relatively recent phenomenon and in doingso provides some useful ground rules on the elements of accountability. Llewellyn argues thatthe process of budgetary control acts as a responsibility allocating agent that can enable anenvironment of accountability but that accountabilities cannot be invoked unless responsibilitieshave been assigned. Therefore responsibility ascription defines who is accountable. Responsibilityin this case is an “a priori” to accountability. Llewellyn goes on to discuss the connection betweenresponsibility and authority. This concept comes from the old idea of “Auctor” or one whoproduces, invents or causes (Benn & Peters, 1959, in Llewellyn, 1998). Llewellyn argues thatwhere authority resides in an individual then that person is the originator of action and can beheld responsible for consequences. In this way he/she can be held to account. This notion of theoriginator linked to responsibility and accountability is an important one striking as it does tothe core of control within the budget system especially in a business context that increasinglydepends on individual contributions to organisational performance.

The earlier discussion on diminishing shareholder loyalty and their demand for results outlinedthe changed relationship between corporations and the outside investor community. Historically,Eurel were able to control, to a great extent, its relationship with the shareholders. For example,they used their dividend policy to ensure that shareholders received increasing dividends everyyear for more than 25 years. However, demands of the capital market on companies like Eurelis not necessarily for dividends, but rather the issue is credibility of results and growing futureearnings potential and how this might impact on share prices. Miller and Modigliani (1961), Miller(1982), Baker, Farrelly, and Edelman (1985), Brennan and Thakor (1990) describe the purposeand use of dividends and argue that there is no long-term relationship that is without problemsbetween a firm’s dividend policy and the value of its shares. The value of shares are ultimatelyruled by expectations of earnings ability. The issue for the case company is not its dividendpolicy, important as that is, but rather how it can continue to encourage the spirit of innovationand individual member contribution that historically rewarded it with a constant flow of newproducts and associated financial returns. The issue is importantly about a time horizon wheresuccess is necessary in both longer-term innovation as well as mediating a positional relationshipwith shareholders and their expectations within the short term. This means that there can be aconflict within the firm and capital market relationship in terms of the timing of those expectations.Shareholders and the capital market are increasingly focusing on the short term with consequentpossible negative effects on the organisations efforts at longer-term developments. Organisationcontrol is one way of managing the dilemma of short and longer-term expectations of performanceand is the way in which the organisation responds internally to the outside driver of this changingcontext of expectations. The case company uses its budgetary control system as both a methodof control as well as a communicative means of linking to the capital market. This is done bysharing budget details such as future plans with the Wall Street analysts representing the capitalmarket. As noted earlier, these meetings with the analysts are increasingly important. Companyexpectations are signalled to the financial market analyst community. This has become a standardrequirement particularly, of U.S. corporations including Eurel who know that the penalty forfailure to deliver is a possible downgrade in the analysts’ buy/sell/hold recommendations to theshareholding community. This constant pressure on the share price has changed the company’suse of the budgetary control system. At a macro level, the company is held accountable fordelivering quarterly financial results and at a micro level; this accountability is being driven downthe organisation with a changing use and intensity of budgeting as a control mechanism.


3.5. Budget performance, participation, time frame and measurement

Studies by Lowe and Shaw (1968) and Dunk and Perera (1997) highlighted the issue ofparticipation and measurement issues within the budget time frame. They found that there wasinfluence from head office to the extent that realistic forecasts were considered to mean realismtempered by expediency. This led to unrealistically high forecasts. There was also evidence thatforecasts were linked to what superiors wished to hear and personal self-interest in terms ofremuneration and promotional possibilities. Lowe and Shaw conclude that there was evidence ofboth individual and company biasing but that it was difficult to assess the extent due to time lagsof information between forecasts.

Van der Stede (2000) also studies recent changes in the budget process and focuses on aspects ofbias (slack) and short-term orientation. In doing so, he notes that the literature has been influencedgreatly by the seminal work of Hopwood (1972, 1974) in attempting to understand the possibleeffects of differing budget control styles. Van der Stede notes that it is generally maintained thatthere is a relationship between dysfunctional behaviour such as bias and the incidence of rigidityof budgetary control.

The notion of slack/bias is an important one for the case company Eurel and its business unitsas they are increasingly dependent on knowledge influenced product output where the maximisingof individual productive capability is very important in the on-going struggle to meet shareholderexpectations. The collective total contribution as characterised by sales revenue is argued in thisresearch to be very dependent on the participation of the organisation members especially in theenvironment where sales and profit growth are becoming more difficult to attain in the short-termcontext.

Merchant (1990) describes the side effects of the pressure to meet short-term results. He foundevidence to show that this pressure encouraged a short-term orientation as well as an environmentof data manipulation. Merchant and Manzoni (1989) also came to a similar conclusion. Theyargued that managers faced the prospect of losing resources, bonuses and ultimately, possibly,their jobs if they did not focus on attaining results in the short term. Allen (1998) also describesthe rapid changes in the business environment of today and argues that these changes makeobsolete a rigid approach to budgetary control. It is no longer helpful, in his opinion, to compareactual results to that forecasted anything up to 15 months previously. He argues that amongst therequirements of a more appropriate system, would be the building in of accountability to explainthe differences between actual and planned performance. This demands a more immediate timeframe of information reporting. The short-term time frame can be related to the earlier discussionon the changing demands of the shareholding community that is argued to be steering a short-termperspective by the organisation.

A similar argument comes from Kaplan and Norton (1996) as they discuss the Balanced Score-card approach and in doing so; link it to the budget process and the notion of a connection betweenshort-term operational and longer-term strategy requirements. They argue that the Balanced Score-card breaks overall company strategy down to operational levels and encourages measurement ofoperational areas. In making operational, the longer-term strategic focus of the organisation, theyargue that business units can relate their operational drivers of change to longer-term corporatestrategy. Kaplan and Norton also argue that employee buy-in and acceptance of these measuresbrings a longer-term focus to this shorter-term budgetary process.

However, the issue of performance and its measurement can be problematic. The issue is thatperformance can include facets of work that are not easily measured especially in an individualknowledge based environment. There are aspects of work performance and individual contri-


bution that are not easily categorised and/or measured and the danger is that the emphasis onthe short term ignores the output possibilities of the futureisation of aspects of present workperformance. If the emphasis continues to focus on a unidirectional short time frame aspect ofoutput measurement then this could lead to a situation where future output of time related organ-isational member contributions may become problematic or at least not within the boundary ofcontrol.

The findings of this research follow other empirical work, which suggests that there is apositive relationship between the process and setting of targets and managers commitment to them(Brownell, 1982; Rhodes & Steers, 1981). These studies are primarily focused on the relationshipbetween participative styles and organisational commitment. Nouri and Parker (1998) also takeup the theme of participation and commitment. They continue the quest for understanding inthe relationship between participation and job performance. While a number of researchers haveproposed that this relationship exists (Argyris, 1952; Becker & Green, 1962, cited in Nouri &Parker, 1998), they also note that there are additional variables that need to be acknowledgedin the relationship such as organisational commitment and the adequacy of budget expectations.The issue of adequacy of expectations and commitment is not only related to participation but issubject to increasing levels of accountability both on the organisation as a whole as well as beingdriven down the organisation to the level of the individual.

Before going on to discuss the empirical findings of the field-work, the research methodologyis first considered.

4. Methodology: the notion of discourse

The relationship between the case company and the capital market can be seen in terms ofdiscourse engagement. The work of Habermas (1984) provides a framework for understandingand critiquing the changing nature of those relationships.

Discourse about discourse is almost commonplace and results in a wide variation of the meaningof the word which on a continuum ranges from an emphasis on a single utterance to a notion thatdiscourse is synonymous with the entire social system constituting as it does the social world(Derrida, 1978; Kelly, 1988).

Senge (1990) makes a distinction between two forms of discourse-discussion and dialogue.With discussion, differing points of view struggle in an almost competitive way against oneanother with the aim being to win. Dialogue on the other hand goes beyond any of our individ-ual understanding where there is a free flow of contribution between the parties with meaningemerging from the process and where there is recognition of the wider relationship with others.It could be argued that within Eurel – the case organisation – that the previous practice of payingincreasing dividends was a mediating factor in the firm and capital market dialogue relation-ship. However, as this paper will show, if we introduce the notion of power and influence, it isdifficult to see dialogue as pure enough to negate the hierarchical influence on organisationalobjectives particularly within the wider societal discourse of the case unit and the investmentcommunity.

The processes of discourse are idealising in that they direct those taking part towards an idealof rationality. But Habermas also recognises that even if unfulfilled, it is nonetheless worthy ofpursuit. Taking this point of unfulfilled aspirations, this paper uses this Habermasian understand-ing of discourse. The argument is around the contradictory nature of organisation performancecontrol illustrated by the budgetary process and its part in the discursive relationship between theorganisation and the investment community.


5. The case study

The Eurel Company has worldwide sales of approximately $16 billion and there are about72,000 employees in total and locations throughout the world. The period under study spans theearly through to the late 1990s, a period of increasing emphasis on the capital market and shareprices. Eurel is a global leader in industrial, consumer, office, health care, safety and other markets.It draws on much organisational strength including a rich pool of technology and innovativeproducts as well as a history of emphasising the value, encouragement and contribution of itsorganisation members.

About 50% of Eurel sales came from Europe, where, with its disparate countries and structurehad increasingly been a high overhead cost area compared to its U.S. parent country with theadvantage of one land mass with consequent benefits of a borderless market and economies ofscale. The European companies continued to under-perform their US counterparts and regularlyfailed to meet their budgeted sales and profits growth. This lack of achievement in plannedattainment of European results meant that the total corporate performance was dragged downwith the consequent negative reaction from the capital market.

Total company sales were flat and net income was also difficult to grow. Analysts and investorswere losing patience with the company as it continued to miss many of its projections on earnings.Its share price was falling or stagnant during the research time frame.

As the company struggled to re-establish itself in the eyes of the shareholding community,there was an increasing impatience with the European operations where significant investmentand change had not delivered the results predicted through the budgeting process. This lack ofconsistency in projections continued to be a major problem particularly in the relationship betweenthe corporation and the shareholding community.

The empirical data is drawn from two divisions of the company with contrasting histories andcurrent issues. They offer contrasting contexts in which to study the effects of changing controlsystems. In doing so, they represent the company as it strived to regularise its attainment ofplanned results. Both of the groups had undergone major change initiatives such as downsizing orhad been involved in acquisitions. They operated in different markets. One was a star performerfor the corporation, operating in markets where profits were high and the market relatively stable.

The other division was in a market where the expectation was for pricing to continuouslyfall and where their product range was becoming increasingly commodified. From a strategicsense, they were attempting to move from a reliance on a traditional product range, which waseasily copied by competitors, to one that is was more customer-specific and based more on coretechnologies. This was a major change for the group and one that was based more closely on theknowledge ability of the individual members. In this way, they hoped to have a more sustainablefuture product range and increased profitability. Both of the business groups operated on a Europewide basis as European business units.

The groups offer an opportunity to study the effects of a changing budgetary control systemin differing operating environments.

5.1. Control and the budgeting system

Historically the company had a budget system that was based on a relatively stable environment.The forecasting process spanned a period each year of about 8 months and tended to include asignificant top-down influence. The main difficulty was with the time taken to complete theforecast with information being increasingly out of date by time of its completion. The demand


was for a more dynamic immediate system, one that was integrated more fully into the maincompany systems. This led to the introduction of the Continuous Improvement Plan (C.I.P.).This system was more iterative and emphasised the continuous nature of the process. It was, inessence a continuous rolling budget system. The system moved the focus to quarterly estimatesthat importantly tied in with the demands of the investment community for updates on resultsachieved and future expectations. These quarterly updates became a barometer of share valuein the current financialised environment. In the search for corporate shareholder credibility theC.I.P. had taken a very immediate role as a mechanism for change and control. It attempted to bethe system that facilitated the return to consistency as far as corporate performance and resultswere concerned. However, the manner in which this happened appears to be in conflict both inits idealistic aspirations as well as its operation. The case results show that management hadbecome more concerned with the short-term attainment of quarterly estimates, than with longer-term strategic issues of the company. While this may be pragmatically in line with shareholderexpectations, it also brought up issues for management. Results show that these included both ashort-term perspective and a growing negative reaction from organisational members.

The budgeting system was also designed to be more flexible, in theory building as it didprimarily, from the bottom up by means of individual commitments. This was an area that becameincreasingly problematic (see interview data). The other advantage is that it emphasised summaryinformation and meant to avoid the detailed financial soul searching that the previous systemspent so much time on and consequently could, theoretically, be completed in a matter of weeksrather than months as in the previous system. Despite its laudable intentions, the aspiration of theC.I.P., as it operationally interacts with the organisation members was strained.

6. Discussion of the empirical data

6.1. Introduction

The empirical data for this study came from 38 semi-structured interviews of a range oforganisational members drawn from both business groups that covered issues of the changingorganisation control environment as characterised by the budget system and as seen through theeyes of the organisation members.

6.2. The emphasis on results: changing influences, outside and inside the organisation

In the search for shareholder credibility the C.I.P. took an immediate role as a mechanismfor change in the company’s efforts to improve its relationship with the capital market. It wastherefore a powerful tool of internal control in coping with financially required shorter timeframes. Company members noted:

“The search for corporate credibility led to many requests for estimates. This ties in withthe C.I.P. quarterly focus” (Sales Europe Division 1).

“At a macro level, the company has objectives to meet for its shareholders. It is reasonablyfair. The issue is that we have been conditioned to not meeting targets and to using theforecast to justify structure” (Sales Domestic Division 2).

Within the organisation and its business units there appeared to be an increased emphasison the financial numbers. This was related to the immediacy of the financialised environment


and the demand for an improvement in the credibility of results. This focus on immediacy andfinancial credibility appeared to be affecting the organisation members and was a recurring themethroughout the interviews and analysis.

“Quarterly targets are important. It all hinges around the share price. We must hit ourquarterly number” (Finance Division 2).

While pragmatically, the corporation needed to stabilise the credibility of its results achieve-ment, in doing so, there appeared to be a change in the organisation environment. Where onceit was “forgiving” as exemplified, perhaps in the stretching longer term nature of the old budgetregime, it became more accountably punitive, immediately critical and according to the businessunit members, increasingly individualised. This punitive atmosphere could be argued to havemoved down from the corporate level as a reaction to shareholder pressure and impacted uponthe implementation of control systems such as the C.I.P.

“The new C.E.O. is on record as saying he doesn’t believe that we don’t have any poorperformers and wants to know what we are doing about it” (Business Development Division2).

The perceptions and visibility of who is in control, is an issue within the business groups. Thisillustrated a different approach to control, as shown in many of the interviews.

“I think that there has been a shift in the emphasis as to who runs the company. We haderas of marketing and manufacturing. Now, it seems to me, that we are rapidly being runby accountants and shareholders” (Marketing Division 1).

“The Shareholders are more important than the employees” (Logistics Division 2).

These references to the changing influence of the shareholders signalled a change in the per-ceptions of the organisation members, as to who is in control of the company. Historically, asnoted above, the culture of the company was characterised by the old forecast system that had abuilt in review at corporate level for new ideas, projects or investments and was longer term bynature as well as being visibly encouraging/forgiving of individual effort. Employees do not seethis emphasis of the longer-term environment in the current control environment as observed bythe operation of the C.I.P.

“The new CEO is saying the right things about the future but the future talk is then backedup by an emphasis on current profits” (Market Development Division 2).

So far, the discussion has noted the outside influence of the capital market on the organisation.Inside the organisation, operationally, the system appeared well regarded for its technical andenabling abilities. It is difficult to argue with its operational method and objectives. Intervieweesacknowledged its power as an enabler of accountability that seemed appropriate to the short-term and longer-term environment. It was also a mechanism of control integrating all operationalaspects from communications through manufacturing and sales. Many of the interviewees spokeabout its positive role in areas such as communications.

“I see the C.I.P. as providing a relationship between our jobs and the shareholders. This iswhat we plan (C.I.P.) and this is what is then communicated to the shareholders as to whatwe plan” (Business Development Division 2).


In this way the C.I.P. shifted the boundary of accountability from the company through thebusiness groups to the individual. The link to the shareholders and the quest for consistent andcredible results are common objectives of the system.

“When the new CEO came in, he talked down the C.I.P. and asked management to reducetheir commitment by about 4%. This was unusual for the company and for a CEO to do.I guess he was trying to establish credible actual results especially with the stock market”(European Management Division 1).

However somewhere between the conception, objectives and implementation of the C.I.P,attitudes changed and its negative effects on both individuals and their associated business groupsappeared almost universal.

“The C.I.P. is a nightmare. It has inherent opposing forces. It wants certainty but alsoshooting for the stars” (European Management Division 2).

“I don’t want to add to the already unanimous condemnation of it other than to say it wasan attempt to acknowledge that the previous system took too long” (European ManagementDivision 1).

The C.I.P. process included a new personalised focus as well as a more penal vocabulary suchas credibility and personal credibility.

“The forecasting language included terms such as personal credibility as well asgroup/business credibility” (European Management Division 2).

The focus was on meeting targets for the short-term with the emphasis on the shareholdersand their requirement for credible results. This is also tied to the ability of the C.I.P. to estimatequarterly results.

“There is an almost psychotic search for credibility. Unfortunately it leads to conservatismin forecasting. There are no best guesses because you will get beaten up if you don’t meetit” (Sales Division 1).

The evidence discussed above shows that the emphasis on the changing nature of controlthrough the budget process appears to be linked to the newer harder company attitude towardsresults and the changing discourse and influence of the shareholder community.

7. Conclusions

Conceptually the C.I.P. was a bottom-up system that for a specific time frame attempted toconnect the aspirations of the shareholders, the organisation and its members. It was a steeringmechanism (control system) used by the company to guide the behaviour of its members. Asan ideal organisation budget control system, the unit members rationally accepted the C.I.P. asa legitimate steering mechanism. Its purpose, mode and means appeared to be in keeping withboth the expectations of the corporation and the outside world of the shareholders. However asthe discussion has outlined, its implementation proved to be problematic.

In contrast to the previous less flexible forecast system, the C.I.P. was conceptually viewed asmuch more relevant and acceptable to the company’s aims. The process built from the bottom-up and attempted to shift the boundary of accountability from the company down through theorganisation to the level of the individual. This reflected the reality of the wider organisational


context including the penetrating influence of the shareholding community and the emphasisplaced internally on the importance of the individual.

In the case of the C.I.P., the rationally agreed targets should have acted as a discursive guideto organisation behaviour/action. Organisation members acknowledged the pragmatic need forattainment of budget results but at the same time had difficulty in accepting accountability fortargets that appeared manipulated and where the intensity of the control environment began tointrude on member’s ability to contribute.

As noted earlier, somewhere between its conception and objectives, the implementation ofthe C.I.P. had become tainted. Examples of continuous tinkering with budget inputs created anatmosphere of distrust and made it difficult to gain acceptance for commitments that were dubiousin their agreement. Organisation members felt that the process itself lacked the credibility that itsought to attain.

The research findings show a conflicting control arena where both idealistic and pragmaticneeds for accountability and credibility of results achieved was acknowledged by the organi-zation members. At the same time, there was also recognition of a mismatch in the manner inwhich the control systems were used to achieve that accountability. Issues such as interferencewithin the C.I.P. process diminished individual member’s willingness to contribute. This is turnmoved substantially along the continuum of discourse from the more naturally mediating dialoguethrough to the more power influenced steering of behaviour. This was in danger of creating a workenvironment where “What you measure is what you get”, meaning the imposition of a contextof intensive measurement that was in danger of changing historical work behaviour to a moreindividually self protective approach to organisational contribution. As members noted, there wasan atmosphere of caution developing within the forecasting process. This was part of the needto achieve forecasted results. However, if the C.I.P. system continues to negatively influence thewillingness to contribute, then it should not be surprising that organisation members start playingthe game by only forecasting that which they know to be acceptably achievable rather than whatmight be achievable.

The empirical data shows a discourse with the capital market that included a pressure forresults. This was more in keeping with the discussion end of the discourse continuum as notedearlier (Senge, 1990, p. 15) with the investment community winning the competitive argument.Their influence on corporate credibility resulted in the exertion of pressure that changed the orderof things. Rather than there being the natural or previously accepted dialogue and mediation overtime, the relationship appeared to change to the extent that the history of mutually mediated spacewas replaced by the imposition of the controlled use of steering mechanisms such as the budgetarycontrol system. In Habermasian terms, the idealising aspirations of the budget system fell shortin its role of mediator in accepted rationality between the organisation, the individual membersand the capital market. In this sense the steering media had begun to constitute or force a modeof behaviour on individual members that appeared to be historically unnatural. For the individualwithin Eurel there was a developing sense of a short-term outlook that had started to show itselfin a restrained contribution to the organisation with possible consequences for the future flow ofnew products and associated earnings.

Acknowledgements

The author would like to thank Brendan McSweeney and two anonymous reviewers for theirencouragement and assistance in bringing this paper to publication. Their comments have helpedenormously in developing the paper.


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