Academic journal article Australasian Accounting Business & Finance Journal

An Analytical Framework to Examine Changes in Performance Measurement Systems within the Banking Sector

Academic journal article Australasian Accounting Business & Finance Journal

An Analytical Framework to Examine Changes in Performance Measurement Systems within the Banking Sector

Article excerpt

Abstract

Drawing on institutional theory, more specifically DiMaggio & Powell's (1983) notion of institutional isomorphism, and Oliver's (1991) typology of strategic responses to institutional pressures, this paper develops an analytical framework to examine the factors that influence organisations to change their performance measurement systems, and the responses to consequential change efforts within the context of the banking industry. The paper suggests that various macro-level environmental factors which affect the functioning of banks (e.g. economic conditions, technological innovations, socio-cultural and political factors) exert pressure (coercive, mimetic and normative) to change their performance measurement practices. The paper proposes that rather than passively conforming to such pressure, banks respond strategically, with the strategic responses taking various forms including non-compliance. The proposed framework could be used by managers and researchers to examine and understand changes in performance measurement systems in banks and to facilitate the effective adoption and implementation of performance measurement systems.

Keywords: Change in performance measurement systems, institutional theory, banking sector, strategic responses

JEL Classification: G21, M4

1. INTRODUCTION

The banking industry has experienced major changes in recent times due to the impact of deregulation, advances in information systems and technologies, globalization, and more recently the global financial crisis triggered by the subprime turmoil in the United States (Kahveci & Sayilgan 2006; Lapavitsas & Santos 2008; Wignall & Atkinson 2010; World Bank 2005). Businesses that were regarded in the past as profitable and safe have come to be seen as uneconomical and reckless (Erturk & Solari 2007; PriceWaterhouseCoopers 2009). The speed and intensity with which the banking industry has changed, has led to phenomenal growth in international transactions, expansion of banking operations across borders, and the restructuring and consolidation of banks. Such growth in turn has prompted banks to seek new sources of income, use complex tools for risk assessment and mitigation, and have greater awareness of their costs and the productivity gains to be realised from work reorganisation and financial innovations (Bank for International Settlements 2006; Helliar, Cobb & Innes 2002; PriceWaterhouseCoopers 2009). Accordingly, in addition to the traditional banking products, banks have become more involved in volatile investment activities and financial instruments such as junk bonds, leveraged buyouts, commercial papers, mutual funds, derivatives and assets securitisation (Citigroup Annual Report 2000; Frei, Harker & Hunter 1998; World Bank 2008).

Banks have increasingly become subject to immense pressure from their stakeholders to improve performance, forcing them to re-examine their traditional management control approaches and technologies, strengthen their capital base, reduce their non-performing and toxic assets, bring down operational costs, enhance corporate governance and sharpen their customer centric initiatives (Frei et al. 1998; Helliar et al. 2002; Lapavitsas & Santos 2008). Moreover, the recent financial crisis which started in mid-2007 has forced banking institutions worldwide to grapple with reduced public confidence, heightened shareholder scrutiny and increased regulatory insight (Wignall & Atkinson 2010). Additionally, the introduction of risk-adjusted performance measurement guidelines by the Bank for International Settlements, the Basel Accords2 and stringent supervisory control frameworks such as CAMELS3 and CAEL4, have resulted in the significant transformation of banks in respect to organisational structures, systems and strategies (Geyfman 2005; World Bank 2005).

In an attempt to support such changes, many banks have adopted technologically sound and sophisticated management practices (Bank of England 2003). …

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