The Future of Management Control Is Fair : A New Perspective on Beyond Budgeting As Promoter of Trust and Ethical Behavior

The design of Management Control Systems (MCS) in the context of financial institutions should be reconsidered with regards to their ability to improve organizational justice perceptions. Promoting organizational justice can help banks to build significantly more trust and influence employees' behaviors in the best interest of the organization. Especially the design of Beyond Budgeting as a MCS that emphasizes social control mechanisms and facilitates autonomous working appears to be a promising concept for the design of future MCS in the context of financial institutions. Contents The Impact of MCS on Organizational Justice and Respective Outcomes Interrelation between MCS Design, Organizational Justice, Trust and Employees' Behaviour Beyond Budgeting's Impact on Organizational Justice, Trust and Behaviour Implications for the Future Design of MCS in Financial Institutions Target Groups Scientists and students in the field of banking, controlling, strategy, management, business psychology and business ethics Bank managers of cooperative and saving banks, controller at financial institutions, sales managers at banks and in sustainable banking About the Author Dr. Sven Olaf Schmitz has more than ten years of banking experience with a focus on digital transformation. In his current position he supports banks in developing new digital propositions and identify new collaboration areas. Sven Olaf's research projects aim to explore the potentials of Beyond Budgeting for managing banks in the 21st century Foreword 6 Preface by the Editors 8 Acknowledgement 10 Table of Contents 11 Explanatory Note 15 List of Figures 16 List of Tables 17 List of Abbrevations 19 1 Introduction 21 1.1 Research Problem 21 1.2 Research Questions 23 1.3 Research Object 26 1.4 Theoretical and Practical Contribution of this Thesis 27 1.5 Subsquent Approach of this Thesis 29 2 Budgetary Control – the Backbone of MCS 32 2.1 Definition and Purposes of Budgeting 32 2.2 The Use of Budgets in Governments 35 2.3 The Use of Budgets in Business 36 2.4 Characteristics of MCS Based on Classical Budgetary Control 42 2.5 Patterns of Control 45 3 Critics on Budgeting and its Effects on Behavior 49 3.1 Budget Related Unethical Behaviors 49 3.2 Uncertainty and Market Demands 57 3.3 Connection Between Budgeting and Strategy 60 3.4 MCS Between Autonomy and Control 62 3.5 Control and Motivation 66 4 The Impact of MCS on Organizational Justice and Trust 69 4.1 Definition of Trust and its Relation to MCS 69 4.2 Organizational Justice 71 4.3 Outcomes of Organizational Justice Perceptions 74 4.4 The Influence of MCS on Organizational Justice 78 4.4.1 Participation 79 4.4.2 Use of Multiple Performance Measurements 81 4.4.3 Quality of Performance Feedback 83 4.4.4 Application of the Controllability Principle 84 4.4.5 Transformational Leadership Style 85 4.4.6 Power Distance Orientation 88 4.4.7 Level of Empowerment 89 4.4.8 Psychological Contract Fulfillment 90 4.4.9 Communication 92 4.5 Interim Conclusion 93 5 Theory Y Based MCS Impact on Trust and Behavior 96 5.1 Beyond Budgeting 96 5.1.1 Beyond Budgeting: The Evolution of a New MCS 98 5.1.2 The 12 Principles 104 5.2 How Beyond Budgeting Organizations Shape their MCS Towards Theory Y 128 5.2.1 Drawing from Best Practice Studies: the Case of Svenska Handelsbanken 128 5.2.2 Svenska Handelsbanken and Organizational Justice 146 5.3 Derivation of Hypotheses and Causal Chain 155 5.3.1 BB Characteristics Influence on Organizational Justice 158 5.3.2 Organizational Justice Perceptions’ Influence on Trust 164 5.3.3 Behavior as a Consequence of Trust and Control 168 5.3.4 Hypotheses System and Overall Causal Chain 170 6 Methodology 173 6.1 Research Design 173 6.2 Methodical Aspects of Structural Equation Models 176 6.3 Factor Analysis 180 6.4 Path Model 185 6.4.1 The Structural Model 185 6.4.2 The Measurement Model 187 6.4.3 Creation of the Path Diagram 191 6.5 Covariance Based Approach 198 6.5.1 Identifiability of the SEM 199 6.5.2 Estimation Algorithms within the Covariance-based Approach 200 6.6 Variance-based Approach 201 6.6.1 The PLS Estimation Algorithm 202 6.6.2 Statistical Properties of PLS-SEM 207 6.7 Comparision and Choice Between Covariance-based and Variance-based Approach 209 6.8 Quality Assessment 213 6.8.1 Quality Assessment of the Reflective Measurement Models 215 6.8.1.1 First Generation Assessment (Pretest) 215 6.8.1.2 Second Generation Assessment (Main Study) 220 6.8.2 Quality Assessment of the Structural Model 222 6.8.3 Mediation Analysis 231 7 Study Design 233 7.1 Target Group of the Survey 233 7.2 Survey Design and Data Collection Concept 235 7.3 Operationalization of Constructs 239 7.3.1 Specification of the Measurement Models 252 7.3.2 Determination of Measurement Scales 254 7.4 Questionnaire Design 256 8 Results 259 8.1 Pretest Study 259 8.1.1 Data Collection 259 8.1.2 Pretest Study Results 261 8.2 Main Study 269 8.2.1 Data Preparation and Cleansing 271 8.2.2 Characterization of the Sample 276 8.3 Main Study Results 283 8.3.1 Evaluation of the Measurement Models 283 8.3.2 Evaluation of the Structural Model 288 8.3.3 Mediation analysis 295 8.4 Overview and Discussion of Empirical Findings 297 9 Conclusion 305 9.1 Summary and Conclusions 305 9.2 Theoretical and Practical Implications 310 9.3 Limitations and Further Research Suggestions 312 9.4 Outlook 315 References 317 Appendices 351 Appendix A: Inviation Letter and Introduction to the Prestest 351 Appendix B: Prestest Items 355 Appendix C: Invitation Letter and Introduction to the Main Study 367 Appendix D: Items Main Study 374 Appendix E: Boxplots for Outlier Analysis 384 Appendix F: Original Online Questionnaire Pretsest 389 Appendix G: Original Online Questionnaire Main Study 399 Front Matter ....Pages I-XXII Introduction (Sven Olaf Schmitz)....Pages 1-11 Budgetary Control – the Backbone of MCS (Sven Olaf Schmitz)....Pages 13-29 Critics on Budgeting and its Effects on Behavior (Sven Olaf Schmitz)....Pages 31-50 The Impact of MCS on Organizational Justice and Trust (Sven Olaf Schmitz)....Pages 51-77 Theory Y Based MCS Impact on Trust and Behavior (Sven Olaf Schmitz)....Pages 79-155 Methodology (Sven Olaf Schmitz)....Pages 157-216 Study Design (Sven Olaf Schmitz)....Pages 217-242 Results (Sven Olaf Schmitz)....Pages 243-288 Conclusion (Sven Olaf Schmitz)....Pages 289-300 Back Matter ....Pages 301-391