Organizational Determinants of Budgetary Influence and Involvement

Noah P. Barsky

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781135698539
• Edition: 1
• Topic: Business
• Subtopic: Business generale
• Index: Business

Drawing on network theory from the organizational sociology literature, this book examines issues related to which organizational factors determine how employees influence the budgeting process. Data were collected from managers who participate in the budgeting process at a major apparel manufacturer. Social network analysis was employed to measure how the structure of the network of managers affects the budgeting process. The results show that budgetary influence is structurally determined and resides with managers holding central positions in the organizational network. Thus, while formal procedures determine which employees are involved in budgeting activities, only centrally positioned managers actually influence budgetary outcomes.The findings indicate that influence, not involvement, is the key to empowerment in the budgeting process. This research suggests that researchers and practitioners should be aware of an organization's social structure when examining a participative budgeting process. The difference between formal designs and actual influence is indicative of a "rhetoric-reality gap" which can impair the effectiveness of management control systems.

Chapter 1
Introduction

Power is given to you by others. It is not yours; it is trust with you and it is a great responsibility. Power is to be used for the benefit for those whose trustee you are.

— Mahatma Gandhi

In the current hyper-competitive business environment, many questions have arisen about the nature of organizational structures and intra-firm labor markets. According to Drucker (1992; 1995), many firms appear to be abandoning hierarchies in favor of flatter network structures. In recent years, virtually every CEO letter to shareholders and company-generated public report make some reference to a growing reliance on human and intellectual capital, increased commitment to teamwork and workplaces based upon mutual trust. Yet, the prevalence of trends such as downsizing acts to increase employee dependency on top management and strengthen corporate hierarchies. The apparent paradox of these trends presents many research opportunities.

Management control systems offer a context in which to examine whether substantive support exists for the reported shift away from traditional hierarchical control toward the flatter, trust-based organization. Such changes require companies to design systems that simultaneously promote employee empowerment, yet maintain adequate management control. For example, many firms have adopted “bottom-up” budgeting processes to elicit employee input, communicate corporate objectives and enable performance control. Ghoshal and Bartlett (1997) report that while many organizations have adopted various empowerment tools, satisfaction with these programs remains low. Considering the considerable amount of time and resources invested annually in participative processes, understanding such practices gains heightened importance.

Most of the research on budget participation has reported the results of experiments and has focused on the individual level of analysis¹ (Brownell 1982; Ferreira and Merchant 1994). This literature suggests that participation provides three primary benefits to firms: (1) reduced information asymmetries (Holmstrom 1982), (2) increased employee motivation and job satisfaction (Brownell and Mclnnes 1986), and (3) improved information about particular operating issues (Young 1992). However, few studies have examined how and if the results achieved with individual managers in laboratory conditions actually affect organizational performance² (Birnberg, et al. 1990). Shields and Young (1993) argue that the budget participation literature “has not produced a coherent nor unified definition” of both the determinants and consequences of budget participation³.

This book uses an empirical field study to examine the unresolved question of which factors determine how employees influence the budgeting process. Prior research has shown that formalized budget participation procedures define the nature and extent of employee involvement in the budgeting process. Yet, O’Connor (1995) notes that employee involvement (timewise) in budgeting activities does not necessarily equate to influence. Most managers would readily acknowledge that the way work actually gets done in organizations often differs dramatically from formally designed procedures.

This research has been designed to fill a gap in the budget participation literature by examining the organizational determinants and consequences of budget participation (Williams, et al.1990; Macintosh and Williams 1992). Specifically, Hofstede (1968) defined budgetary influence as the ability of managers to intentionally affect the actions or choices of other workers. In general, power and influence in organizations stem from three primary sources. First, managers may derive influence from formal attributes, such as rank or departmental membership. Second, managers may be influential due to personal sources of power, such as age, education and professional experience. Third, according to network theory⁴, managers may derive power from their central positions within social networks. This research focuses on how the third source of power impacts the budgeting process.

According to network theory, central positions within the organization’s “underlying” social structure provide unique access to critical information. Such access often translates into power and influence for the persons occupying these positions in the network. For example, in firms where information is centralized through the finance function, accountants act as information brokers or gatekeepers. In such organizations where information is centralized through the finance function, accountants (and functional managers with close relationships with them) can direct organizational decisions.

Network theory has been instrumental in explaining many issues related to organizational decision making. For example, Chapman (1998) used network theory to show how the role of accountants in cross-functional communication varies across companies in the UK textile industry. In the organizations literature, network research has provided empirical explanations for questions related to career advancement (Ibarra 1995), the success of strategic alliances (Barley, et al. 1992), and cross-national management of joint ventures (Salk and Brennan 1997).

Network theory can be applied to specific research questions by using social network analysis. Social network analysis is an empirical sociological method that allows researchers to measure and map an organization’s (group’s) underlying social structure. Just as an organization chart describes a company’s formal structure, social network analysis can be used to define and map an organization’s underlying social network. In addition to the structural data, social network analysis also provides quantitative data about the relationships amongst group managers. These empirical data complement rich qualitative data about the organizational context.

In this research, social network analysis is employed to illustrate how formal and informal organizational structures interact to impact the budgeting process. Budgeting is a highly-visible, widely-used organizational activity which readily affects resource allocation and performance evaluation. Participative budgeting also involves communication across organization levels and functions. This book presents and tests a model to explain the organizational factors that affect substantive budget participation.

In this book, the model predicts that, in addition to formal and personal sources of power, a manager’s position within the social network will be a critical determinant of budgetary influence. Burt (1992) defines this ability to derive influence from network position as network centrality. That is, network centrality is a quantitative value that expresses the degree to which a manager is central amongst communications relative to all other organization members. Importantly, central position in a network is necessary, but not sufficient, to confer power. For example, a department secretary may be highly central, but lacks the appropriate hierarchical position in the network to take action.

Centrality is predicted to confer power when it enables managers to derive power from the information asymmetries between others. Burt (1992) uses the term “structural holes” to define “gaps or disconnects” in a communication network through which a central member may hold power. In this book, the network of relationships amongst managers at a major corporation is examined and centrality is of interest as it may confer power and determine influence in the budgeting process.

Brass (1992) and Krackhardt (1990) show that the degree of a manager’s network centrality directly affects organizational decision making. Hence, considering the important role of networks in organizational action, simply documenting formal procedures would be inadequate to understand the organizational consequences of budget participation. Since budgeting is such a high profile control system that affects all corporate members (namely, resource allocation and performance objective determination), managers exhibit high interest in outcomes and exercise bases of power to direct those outcomes. Hence, the budgeting process provides an appropriate context to study how network structures impact organizational decision making.

For this book, data were collected from (and about) all 51 managers who participate in the budgeting process at Apparel Company (APCO),⁵ a major, New York Stock Exchange (NYSE) listed sports apparel designer and manufacturer. Interviews and company documents provided descriptive data about APCO’s operations and budgeting process. A sociometric questionnaire asked participants about formal and personal sources of power, workplace networks and co-workers’ budgetary influence.

The results show that budgetary influence is, indeed, structurally determined and resides with managers holding central positions in the organizational network. At APCO, the formal budgeting process involves many managers, lasts several months and appears to rely on bottom-up participation. However, responses to the questionnaire indicate that only a few executives and top financial managers actually influence APCO’s budget.

In this case, the surface “rhetoric” of bottom-up budgeting and employee involvement differs from the “reality” of top-down management control and strong information asymmetries. These findings indicate that influence, not simply involvement, is the key to true empowerment in the budgeting process. Thus, adopting participative processes without substantive commitment may be detrimental to employee morale, organizational commitment and management credibility. Semi-structured, follow-up interviews with several APCO managers across functions indicate that “pseudo-participation” is less desirable than the certainty of strict, top-down hierarchical control.

This research offers two primary contributions to the academic and practitioner budget participation literature. First, this book provides empirical evidence from the field about the organizational determinants of budgetary influence and involvement. The data support a model that suggests that the underlying organizational network is a critical element to consider when designing management control systems. That is, the results suggest explanations for the dissatisfaction with management control processes that do not match a firm’s underlying social structure. Second, this book demonstrates that social network analysis can be a valuable methodology for researching issues related to the role of accounting processes and practices within the organizational setting.

This book is organized as follows. Chapter 2 reviews the budget participation literature and integrates network theory to develop a set of testable hypotheses. Chapter 3 details the social network analysis methodology, the research design and data collection. Chapter 4 presents the analysis of results. Chapter 5 presents the results of the Management Communication and Control Systems Diagnostic Questionnaire, a second research instrument employed to measure the underlying financial management culture at APCO and serve as a validation of the results of the budgeting questionnaire. Chapter 6 discusses the key findings, implications and limitations of this research.

Notes

1. Research on budget participation can be classified into two primary groups: either experimental (i.e. individual managerial motivation, action or performance) (Brownell 1981; Brownell and Mclnnes 1986; Hirst 1987; Macintosh and Williams 1992) or general examinations of cross-sectional differences across strategies (Merchant 1981; Shank and Govindarajan 1993; Simons 1987). Early accounting research developed out of the organizational management literature (Cyert and March 1963) and primarily focused on the performance benefits of participation (Swieringa and Moncur 1975). Given the predominance of the traditional bureaucratic hierarchies, those studies evidenced the benefits of bottom-up employee involvement in budget setting. Yet, to date, little is known about the consequences of budget participation processes in practice.

2. Ferreira and Merchant (1994) show that no field studies about budget participation were published between 1984 and 1992. Keating (1995), however, suggests a framework for the design and interpretation of future case research in management accounting. O’Connor (1995) differentiates the importance of “involvement” and “influence” in the definition of budget participation and suggests that analysis of participation processes should consider the prevailing organizational culture.

3. Shields and Shields (1998) review 47 published accounting studies on participative budgeting and report results of a survey about why managers believe that firms use participative budgeting. The authors conclude that the primary purposes ascribed to participation in the accounting literature are to either increase motivation or reduce information asymmetries. These authors suggest that future research on participative budgeting should attempt to examine how the role of budget participation may change as organizations shift from vertical structures to a greater reliance on self-managed, cross-functional teams.

4. Network theory has been developed and tested extensively in the organizational behavior and sociology literature (Nohria and Eccles 1992).

5. The actual company name has been concealed for confidentiality purposes. More detail about APCO is provided in the Research Methods section (Chapter 3.) of this book.

Chapter 2
Literature Review and Development of Hypotheses

The goal of education is the advancement of knowledge and the dissemination of truth.

— John Fitzgerald Kennedy

This chapter reviews prior research on participative budgeting. Most research has relied on experiments that focused on the individual level of analysis. A series of organizational level issues remain unresolved. Network theory from the organizational sociology literature is employed to develop a theoretical model and set of testable hypotheses. This review and model development provided a foundation for data collection.

The chapter is organized as follows. Section 2.1 reviews the budget participation literature. Section 2.2 identifies organizational issues associated with budgeting that remain unresolved in the literature. Section 2.3 reviews the network theory as it applies to organizations. Section 2.4 outlines a theoretical model and the set of testable hypotheses. Section 2.5 provides a brief chapter summary.

2.1: Review of Budget Participation Literature

The budgeting literature dates back nearly five decades (i.e. Argyris 1952). Early accounting research developed out of the organizational theory literature (Cyert and March 1963) and primarily focused on the organizational performance benefits of budget participation (Swieringa and Moncur 1975). Brownell (1982) divided the budget participation literature into two distinct parts: antecedents and consequences. Antecedent studies include cross-sectional contingent models of strategy and systems relationships (Merchant 1981; Shank and Govindarajan 1993; Simons 1987) and descriptive studies of particular aspects of budgeting systems (Bruns and Waterhouse 1975; Macintosh and Williams 1992). Consequence studies have primarily reported results of experiments focused on individual managerial budget-related behaviors (BRBs) (Brownell and Mclnnes 1986; Merchant 1984; Swieringa and Moncur 1975; Williams, et al. 1990).

This book addresses the organizational consequences of budget participation. A review of the budgeting literature will show that this issue has only been previously addressed on a limited basis. Network theory from the organizational sociology literature is then reviewed to develop an integrated set of testable hypotheses.

2.1.1: Role of Budgets in Organizational C...