Environmental performance as a fifth balanced scorecard ...mams.rmit.edu.au/dhpwgim0k0y7.pdfEnvironmental performance as a fifth balanced scorecard perspective: The judgemental effects

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Environmental performance as a fifth balanced scorecard perspective:

The judgemental effects of environmental concern, perception of

ecological risk and perception of financial risk1

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.

mailto:[email protected]

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categorising scorecard measures impacts on the strategic significance that is ascribed to them

(Cheng and Humphreys, 2012; Lipe and Salterio, 2002). It follows that a separate

environmental perspective may communicate an organisation’s commitment to

environmental performance and so authors, such as Hubbard (2009), have argued that

environmental performance measures can best be incorporated into the BSC format within a

separate perspective to communicate its strategic importance. Research has indicated,

however, that the effect of BSC format is complicated by the cognitive limitations of the

decision maker (Banker, et al., 2004; DeBusk, et al., 2003; Dilla and Steinbart, 2005; Epstein

and Widener, 2010; Kaplan and Wisner, 2009; Lipe and Salterio, 2000; Roberts, et al., 2004).

One of the purposes of the BSC is to identify the performance measures which are integral to

achieving the organisation’s strategy (Kaplan and Norton, 1992). Despite the relatively

limited number of performance measures in the BSC (usually 20-25), biases in its use have

been attributed to cognitive overload. For example, the common measures bias in which

individuals fail to recognise the strategic significance of unique performance measures

(Banker, et al., 2004; Libby, et al., 2004; Lipe and Salterio, 2000; Roberts, et al., 2004). The

general finding is that individuals are unable to process 20-25 measures simultaneously and

so need to simplify the process somehow. One coping mechanism is to focus on a subset of

measures. An important question is how individuals choose which measures they focus on.

Another coping mechanism is ‘Divide and Conquer’. Kaplan and Wisner (2009) find that

measures that are clustered into a fifth BSC category are discounted in performance-related

judgments. They attribute their results to the cognitive effects of combining measures into a

single category, that the individual significance of measures is diluted as they are combined

and perceived as a single perspective. An alternative explanation is that the profit-orientated

decision-makers in their study ignored the separate environmental perspective, but were

influenced by the environmental measures when they were presented in commonly

understood, and perceived to be more legitimate, traditional perspectives. It was only when

the environmental perspective was legitimised through managerial communication that the

evaluators attended to the measures in the environmental perspective.

In addition to managerial communications, the weighting placed on environmental

performance is likely to be heavily influenced by personal beliefs for two reasons. Firstly, the

link between sustainability and financial performance is unclear in the literature (Lee, et al.,

2009; Schreck, 2011), and perhaps even more tenuous in the minds of some individuals

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(Thomas, 2005). Since the relationship between environmental performance and financial

performance is often lagged and uncertain, a useful way to think about it is in terms of risk.

For example, poor environmental management may go without incident or notice for some

time but ultimately lead to significant financial impact. Recognising the financial risk

associated with poor environmental performance requires an understanding, and belief, in the

potential detrimental impact on financial performance. Secondly, environmental performance

can be perceived as an important organisational goal in its own right, based on moral values

that may be promoted by the organisation but which must reside in individuals (Tandon, et al.,

2011). For example, managers may recognise the importance of minimising the ecological

risk of operations even when there is no financial risk. Previous research has not considered

the effect of individual beliefs on the weightings placed on environmental performance in a

BSC.

The purpose of this study is to test whether personal concerns about the environment,

ecological risk and financial risk affect the importance that is placed on measures when they

are placed in an environmental perspective or a traditional, profit-connected perspective. The

contributions of this paper are threefold: Firstly, it contributes to our understanding of factors

that affect the reliance that will be placed on a fifth, non-traditional, scorecard perspective.

Secondly, this paper considers the effects of individual beliefs on the weightings placed on an

environmental performance measure by virtue of its scorecard classification. Finally,

financial and ecological risks are distinguished as separate criterion affecting the legitimacy

ascribed to environmental performance.

Literature Review and Hypothesis Development

In various streams of literature and thought, organisations have been called upon to measure,

manage, and report on their environmental, social and governance performance. In addition

to each being recognised as important in its own right, various studies have sought to identify

the links between corporate social performance and financial performance (Lee, et al., 2009;

Peloza, 2009). A challenge for proponents of these non-traditional dimensions of

performance has been to find ways to integrate them into existing performance measurement

regimes (Figge, et al., 2002). This is important because the way in which individuals are

measured and rewarded will impact on the decisions that they make. To the extent that

evaluation and reward are influenced by cognitive biases, alignment with the organisation’s

goals may be weakened.

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One such body of research has focused on the cognitive processes associated with the

presentation of a multidimensional performance measurement tool, such as the BSC (Banker,

et al., 2004; Dilla and Steinbart, 2005; Lipe and Salterio, 2000). Commencing with a study by

Lipe and Salterio (2000), a number of recent studies have considered the cognitive limitations

and biases that might explain the failure to effectively use the BSC (Cheng and Humphreys,

2012; de Waal, 2003; DeBusk, et al., 2003; Dilla and Steinbart, 2005; Kaplan, et al., 2008;

Kaplan, et al., 2012; Kaplan and Wisner, 2009; Libby, et al., 2004; Liedtka, et al., 2008;

Malina and Selto, 2001; Rich, 2007; Roberts, et al., 2004; Wong-On-Wing, et al., 2007). Lipe

and Salterio (2002 p.532) explain the impact of cognitive limitations as follows:

“The balanced scorecard with its large number of performance measures

presents a complex task to a manager asked to use the scorecard to evaluate a

division’s performance… Research in cognitive psychology has repeatedly

shown that humans are able to retain and use only a small number of items in

working memory (Baddeley, 1994; Miller, 1956)… Thus, the volume of data

in a balanced scorecard suggests that it may overload human decision makers

with information.”

A consistent finding is that evaluators rely more heavily on those measures that they

understand and accept the importance of. Unable to simultaneously process all of the

measures, evaluators must focus on a subset or find some other way to decrease the cognitive

complexity of the task, and this introduces bias. Subsequent research has sought to identify

ways to reduce this bias (e.g., Banker, et al., 2004; Roberts, et al., 2004) to avoid strategically

important measures being ignored. The biases identified in previous research, and other

biases, may be exacerbated by the introduction of an additional perspective to measure

environmental, social, or governance performance2.

An important aspect of BSC design that has emerged is that information is conveyed by the

categorisation of performance measures (Cheng and Humphreys, 2012). This has important

implications for the inclusion environmental measures. Figge et al. (2002) consider three

options for including environmental performance in a BSC format. The first is to integrate

measures into the existing four perspectives, the second is to develop a separate sustainability

scorecard, and the third is to add an additional, fifth perspective to the traditional BSC.

Kaplan and Wisner (2009) provide an empirical evaluation of the effects of including

environmental performance as a separate BSC perspective, or integrating those measures into

the traditional four perspectives. They find that providing a separate environmental

2 Consistent with most of the previous research, this study focusses on integrating environmental performance.

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perspective is not effective unless decision makers receive additional information about the

strategic importance of those environmental measures. A plausible explanation for their

results is that the environmental perspective was ignored unless legitimised by managerial

communications.

Thomas (2005) discusses the importance of perceived legitimacy in decision making.

Legitimacy is a particularly important issue in environmental management because personal

beliefs about the strategic importance of environmental performance, and the relative

importance of economic versus environmental outcomes, differ significantly between

individuals and are likely to influence decision making (Tandon, et al., 2011).

Indeed, it has been argued that any changes in the way businesses operate must come from a

change in attitudes – a recognition of the importance of social and environmental objectives

and an understanding of how those objectives can be achieved (Dunlap, et al., 2000; Kelly

and Alam, 2009; La Trobe and Acott, 2000). Previous research on the effect of BSC

presentation format has not considered the effect of individual attitudes and beliefs.

Ajzen’s (1985) psychological theory of planned behaviour suggests that attitudes are

influenced by personal beliefs about what is right, and by subjective norms. Those norms are

determined by the endorsement of the individual’s peers, and authorisation from an authority

figure. Applying this to Kaplan and Wisner’s (2009) study, it can be argued that the

managerial communication provides authorisation that influenced norms and hence the

weighting placed on the environmental performance that was presented in a fifth perspective.

In other words, evaluators only attended to measures included in the environmental

perspective when management communications legitimised the environmental perspective. It

is noteworthy that simply adding an environmental perspective to the BSC was not sufficient

legitimisation.

Legitimacy is also evaluated based on pragmatic, moral and cognitive criteria. The pragmatic

and moral criteria are the focus of this paper. The pragmatic criterion deals with the extent to

which the individual believes that the action will help the organisation to achieve its goals,

whereas a moral criterion relates to the ‘rightness’ of the action that is independent of the

pragmatic utility to the organisation.

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The influence of moral and pragmatic criteria on legitimacy, attitudes, and planned behaviour

leads to hypotheses about the weighting placed on specific environmental performance

measures as follows.

Personal beliefs about concern for the environment will influence concern for environmental

performance, and hence the attention paid to outcomes that are included in a separate

perspective that is titled ‘environmental performance’. As an additional, non-traditional

perspective that is not linked to financial performance, only those individuals who strongly

believe that an organisation has a moral responsibility for its environmental performance will

pay attention to the measures that are included in an environmental perspective. For these

individuals, environmental performance is a valid organisational objective regardless of

financial impact. On the other hand, individuals that have low concern for the environment

will place less attention to measures that are categorised as environmental, and more attention

to those measures that are categorised according to traditional profit-centric perceptions of

organisational performance. For these individuals measures derive legitimacy from the

pragmatic criterion, i.e., the link to financial performance that is fundamental to the four

traditional BSC perspectives. This leads to the following prediction of an interaction effect in

H1.

H1: When environmental concern is high (low) and a performance measure

indicates that one manager dominates the performance of the other

manager on ecological performance but not on other measures, the

extent to which evaluators rely on the measure of ecological

performance will be greater when it is presented in a separate

environmental perspective (integrated with internal processes).

In addition to general concern for the environment, the attention directed to the

environmental perspective is likely to be influenced by beliefs about the ecological risk of the

organisation’s operations. Therefore, H2 predicts that those evaluators that perceive

ecological risk to be high will be more likely to look to the separate environmental

performance perspective and thereby place weight on the measure that captures ecological

impact. In contrast, those with less concern for the ecological risk of the plant’s operations

will be less likely to attend to the separate environmental perspective, and more likely to

attend to the traditional, profit-centric internal processes perspective. This leads to a

predication of the following interaction in H2.

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H2: When perceptions of ecological risk are high (low) and a performance

measure indicates that one manager dominates the performance of the

other manager on ecological performance but not on other measures,

the extent to which evaluators rely on the measure of ecological

performance will be greater when it is presented in a separate

environmental perspective (integrated with internal processes).

As noted, legitimacy can also be based on a pragmatic criterion. In the case of environmental

performance, a pragmatic criterion includes the recognition that environmental performance is

linked to financial performance. For example, poor environmental performance may lead to

negative financial consequences through, for example, fines, economic sanctions, negative

media exposure, and a backlash from consumers, suppliers, and government regulators. Often

the negative financial effects of poor environmental performance are lagged but they

nevertheless introduce a level of financial risk that is detrimental to the organisation. Moral-

driven concern for the environment is not necessary to justify the strategic importance of the

financial risk associated with poor environmental performance.

A focus on the pragmatic importance of environmental performance, e.g., financial risk, is

consistent with traditional scorecard perspectives wherein learning and growth, internal

processes and customer perspectives are all seen to be causally linked to financial

performance which is the ultimate objective for the profit-seeking organisation (Wynder,

2011). Integrating this measure into the customer perspective is consistent with this view of

financial risk whereas including financial risk in a separate environmental perspective

diminishes the pragmatic importance of the measure. Therefore, H3 predicts that integrating

an environmental measure that carries financial, but not ecological risk (e.g., Fines for Toxic

Emissions (air) when the emissions don’t cause environmental damage), into the customer

perspective will increase the weighting placed on that measure (a main effect for BSC format).

H3: When a performance measure indicates that one manager’s performance

is much worse than that of the other manager on the financial risk of

environmental performance but not on any other measures, the extent

to which evaluators rely on the measure will be higher when it is

presented in the customer perspective.

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Research Method

Experimental design overview

The hypotheses were tested in an experiment in which participants evaluated and issued

bonuses to managers based on their performance that was presented in a BSC format.

Beginning with Lipe and Salterio (2000), this approach has been used extensively in BSC

research which allows comparisons to be made between studies. A notable difference in this

study is that participants evaluated three pairs of managers, and the second and third pair of

managers differed significantly on only a single performance measure.

The first pair differed in performance across a series of traditional lead and lag performance

measures. This provided a chance for participants to understand and practice the task. It also

illustrated the strategic importance of the Customer, Internal Process, and Learning and

Growth perspectives. Environmental performance measures were then added, either within a

fifth, environmental perspective, or included in the traditional four perspectives.

In the second pair managers were substantially the same on all aspects of performance except

for a single measure of ecological impact. On the measure of Toxic Emissions (water) one

manager’s performance was significantly better than target, and the other manager.

Participants had been instructed that these toxic emissions created significant ecological

damage, but that there was little chance of financial penalties. This pair of managers was used

to test the effect of general concern for the environment and perception of ecological risk.

In the third pair managers were again similar in all aspects of performance except for a single

measure relating to financial risk. On the measure of Fines for Toxic Emissions (air) one

manager’s performance was much less than target and the other manager. Participants had

been instructed that these toxic emissions dispersed quickly and so did not cause ecological

damage but that they were heavily regulated. This pair of managers was used to test the effect

of perceptions of financial risk.

Participants

Participants were recruited through invitations made to lecture and tutorial groups and MBA

and EMBA Alumni. Participants received a movie voucher (value $10) in appreciation. The

participants were very heterogeneous. Fifty-one percent were male, age ranged from 17 to 60

years (mean = 32.5 years), managerial experience ranged from 0 (48 participants) to 40 years

(mean = 5.35 years), 11% were currently postgraduate students, 50% were currently

undergraduate students, 2% had not attended university and the remaining were graduates but

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not currently studying. Of those enrolled or graduated from an undergraduate degree, there

were accounting majors (45%), general business majors (28%), environmental science majors

(6.5%), and other (10%). Sixty-seven percent of participants had spent most of their life in

Australia, 9% in Germany, 5% in China, 3% in the United Kingdom, and 2% in Japan. The

remaining 14% were from thirteen other countries. An ANOVA revealed no significant

differences between BSC format on any of these demographic factors except for managerial

experience which was marginally significant (F=3.018, p=.086) 3. An ANOVA was also

conducted for each of the independent variables (environmental concern, perception of

ecological risk, and perception of financial risk) and no significant difference was found

between the two BSC formats.

The heterogeneity of the participants increased the potential for additional factors that would

influence decision-making. Further research, with a larger sample or focussed on particular

factors, is necessary to determine the possible effects of these differences. For the purposes of

this study the generalizability of the results is increased by the heterogeneous sample.

In the debriefing participants were asked to respond to three statements on a seven-point

Likert scale with 1 being Strongly Agree and 7 being Strongly Disagree: “The performance

evaluation task was easy to understand” (mean = 2.37), “The case was realistic” (mean =

2.25), and “I tried very hard to evaluate performance well” (mean = 1.80). An ANOVA

confirmed that there was no significant difference between BSC format treatments for any of

these three measures.

The Task

Overview of procedures.

Participants received initial instruction on the balanced scorecard on a CD ROM in the form

of an Adobe Presenter presentation (powerpoint slides with audio instruction). This included

background information on the scorecard, its structure and purpose. Only after completing the

twelve minutes of instruction could participants connect via the internet to the research

instrument. Participants were then introduced to their performance evaluation task and

provided with background information about the company as follows:

3 Participants who received the separate environmental perspective in the second pair of managers, and the

integrated BSC for the third pair of managers, had the higher level of managerial experience. Given the

interactions predicted for these hypotheses, it is unlikely that managerial experience affected the results. The

univariate analysis of variance was repeated with managerial experience included as a covariate but it was

insignificant and the pattern of means remained the same so it was excluded from the hypotheses testing.

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You have been appointed as the Chief Operating Officer with responsibility for evaluating the

performance of the various Chemico Plants.

Your Task

All of the Chemico plants face the same conditions and costs of production. You are, therefore,

to evaluate performance based on the data supplied. The better the performance of the

plant the higher the bonus that should be given to the Manager. You can award each

manager a bonus of up to, but not exceeding, $50,000.

Although all Chemico Plants face the same operating conditions, there are differences in the

structure of the Balanced Scorecards. Therefore, you will be evaluating the six managers in

pairs. Plants are, however, completely independent.

Negative performance against targets is shown as a negative (-) percentage and highlighted in

bold.

Background information and Chemico’s strategy

Chemico Inc. produces an innovative type of plastic that is replacing steel in the production of

cars. The industry is very competitive but Chemico has a very successful strategy focussed

on capturing market share by providing a high quality product while carefully managing

costs. The production process involves thousands of variables that must be monitored and

adjusted to determine yield (output compared with input). Highly trained and experienced

engineers are the key to ensuring that the process is efficient and that improvements are

continually identified.

In summary, Chemico’s strategy is to invest in training to improve the engineers’ innovation

and process management skills. Improvements from employee suggestions increase

product quality and process efficiency so market share increases while production costs

decrease. Increasing market share and decreasing production costs lead to higher profit

margins and return on equity. (emphasis in original)

All participants were then asked to complete an evaluation of two managers provided in a

balanced scorecard format. This task was based on the case study by Wynder (2011) in which

a traditional balanced scorecard (with four perspectives) is used to compare the performance

of two managers against the organisation’s targets. The managers differed in their relative

performance on lead and lagged performance measures.

After evaluating the first pair of managers participants were then told that “Chemico believes

that social and environmental performance are important in achieving their strategy“ and that

additional measures have been included in the performance evaluation tool. The definition of

three additional performance measures was then presented to participants (See figure 1).

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Figure 1: Environmental performance measures

Toxic Emissions (Air): These emissions become harmless as soon as they are released but are,

nevertheless, subject to strict environmental regulation and fines when discovered by the

government’s environmental protection agency. Fines are imposed for emissions that exceed

prescribed limits. Furthermore, the media often reports on the firms that have large emissions and

this can have a significant impact on the firm’s reputation. Reducing the fines imposed per year is

favourable.

Donations to WWF: Chemico has a policy of donating a percentage of each sale to a local charity

that is chosen by the customer. Then, each Christmas, the customer receives a Christmas card in

which they are informed of the total contributions made. The plant manager determines the

percentage of sales that will be donated. Making larger donations than the target is favourable.

Toxic Emissions (Water): Toxic waste material that is released into the local river system, measured

in tonnes per annum. These emissions are difficult to determine but are estimated by the quantity of

toxic material that is captured before release. The toxins build up in the soil and have been linked to

cancer and birth defects, although nothing has yet been proven. Achieving lower emissions than the

target is favourable.

Participants were asked to rate the financial risk of emissions into the air, the importance of

donations to local charities, and the ecological risk of emissions into the water. Participants

were then provided with maps showing the locations of two more Chemico plants, either in

Kerala, India or Queensland, Australia4.

The scorecards for each pair of managers were presented in either an integrated format (Toxic

Emissions (water) in the Internal Process Perspective; Fines for Toxic Emissions (air) in the

Customer Perspective; Donations to the WWF in the Financial Perspective), or with the

environmental performance measures combined into a separate scorecard perspective labelled

Environmental Perspective. Figure 2 shows scorecards for a pair of managers in the separate

format. Participants who received an integrated scorecard for the second pair of managers

received a separate perspective for the third pair of managers (and vice versa).

4 These locations were chosen to address a research question that is not dealt with in this paper. Namely, the

effect of proximity on concern for the environment. The results from those whose documents referred to India

were compared with those whose documents referred to Australia and, for the purposes of the analysis in this

study, no significant differences were found and so the data were combined.

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Figure 2: Balanced Scorecard with Separate Environmental Perspective, Positive

Ecological Performance

After evaluating and determining bonuses for the third pair of managers participants were

asked to provide demographic information and answer questions relating to their attitudes

about an organisation’s environmental responsibility. The following section provides further

explanation of the manipulation for ecological and financial risk and the dependent and

independent variables.

Operationalising Ecological and Financial Risk

Evaluation Two – Ecological Risk (second pair of managers)

For the second pair of managers being evaluated the manipulation involved the Fines for

Toxic Emissions (water). The first manager’s performance was significantly better than target,

indicating that less toxic emissions had been released into the local river, thereby decreasing

the ecological risk of the plant’s operations. The picture and description was included to

increase the salience of the ecological impact5 (see figure 3).

5 Recall that some participants were told the plant was in Queensland, Australia. Although the map differed, the

picture and wording were the same and there was no significant difference in responses between the Australian

and the Indian locations.

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Figure 3: Plant Location for Positive Ecological Impact

Evaluation Three – Financial Risk (third pair of managers)

For the third pair of managers the manipulation involved the measure: Fines for Toxic

Emissions (Air). In the briefing participants had been told that these emissions “become

harmless as soon as they are released” but are subject to “strict environmental regulation and

fines”. Furthermore, media attention “can have a significant impact on a firm’s reputation.”

This manipulation is designed to focus on the immediate and potential financial impact of

poor environmental performance. Furthermore, the explanation for Fines for Toxic Emissions

(Air), and the description and picture for the plant’s location (see figure 4) were designed to

minimise the perceived ecological impact of this performance measure. When asked on a

five-point scale “How would you rate the ecological risk of these Chemico plants?”, the

average response was 2.75 (with 1 being very low and 5 being very high). This is

significantly different (t=14.909, p<.000) to the average response of 4.61 for the second pair

of managers.

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Figure 4: Plant Location for Negative Financial Risk

Dependent Variables

Consistent with previous research (e.g.,Kaplan and Wisner, 2009) participants evaluated

managers’ performance on a 13 point scale from 0, “Reassign: sufficient improvement

unlikely” to 12, “Excellent: far beyond expectations, manager excels”. Additional anchors

included 2, Very Poor; 4, Poor; 6, Average; 8, Good; and 10, Very Good. Participants also

allocated a bonus to each manager (to a maximum of $50,000). Performance across the range

of measures was contrived so that the managers were substantially equivalent on all but a

single measure of performance. This can be distinguished from Kaplan and Wisner (2009)

where the managers differed on all of the environmental outcomes. The dependent variables

were calculated as the difference between the evaluation or bonus for each pair of managers.

The greater the difference, the more weighting was placed on the environmental measure.

The second pair of managers differed in their toxic emissions (water) with one manager being

significantly better than target (20%). Recall that the instruction to participants indicated that

toxic emissions (water) carried significant ecological risk but little chance of financial risk

because detection was difficult. The third pair of managers differed in the measure of

financial risk. Fines for Toxic Emissions (air) were significantly worse for one manager.

Fines for Toxic emissions (air) did not cause ecological damage but did create the risk of

further fines and negative media attention.

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Independent Variables

Balanced Scorecard Format

As previously noted, environmental measures were either presented separately or integrated

with the traditional four perspectives.

Attitudes to environmental responsibility

Participants responded to a series of nine Likert questions from a modified NEP/ DSP

environmental attitudes scale (La Trobe and Acott, 2000) to ascertain their general attitude

toward the importance of environmental versus economic outcomes. Responses were on a

seven-point scale with anchors for Strongly Agree (1) and Strongly Disagree (7). Factor

analysis identified three factors. The factor that loaded most heavily included the following

questions:

Humans have the right to alter nature to satisfy wants and desires

Maintaining economic growth is more important than protecting the natural

environment.

Humans have the right to reduce the number of species on earth in order to

promote economic development

Humans DO NOT have the right to subdue and control the rest of nature

(reverse coded).

Scores for these four questions were combined to form the variable ‘Environmental Concern’

– a measure of the emphasis on environmental versus economic performance. Reliability

testing indicated a Cronbach Alpha of 0.672. Scores for this variable ranged from 11 to 28.

The mean score was 22.24 and the standard deviation was 4.11. A lower score indicates

greater weighting on economic performance and less regard for environmental impact.

Therefore, the average score indicates a moderately high environmental concern (compared

to a maximum possible score of 28). Participants were ranked based on their relative score

and separated into three groups: low, moderate, and high environmental concern.

Perception of Ecological Risk and Financial Risk

After receiving the information about the environmental performance measures individuals

were asked to rate the ecological risk of toxic emissions (water) on a five-point scale from 1

(Very Low) to 5 (Very High). This measure captures the participant’s perception about the

likely environmental impact if the plant has toxic water emissions. Then, immediately prior

to evaluating the first pair of managers, participants were given a brief description of the area

and a picture showing ecologically sensitive wetlands (see figure 3) and asked to respond on

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a 5-point scale from 1 (Very Low) to 5 (Very High) to the question “How would you rate the

ecological risk of these Chemico Plants?” This measure captured the participant’s perception

of the ecological sensitivity of the particular location. These two factors were used to

determine a combined measure of perception of ecological risk relating to toxic emissions

(water). Participants were then split into three groups on the basis of this measure and

labelled low, moderate, and high perceived ecological risk.

Hypothesis Tests

H1 considered the effect of personal beliefs about the relative importance of environmental

and economic performance. An interaction was predicted with a separate environmental

perspective only increasing attention when environmental concern was high. The pattern of

means is as predicted for the performance evaluation (see Figure 5), but not for the bonus

awarded (see Figure 6). A Univariate Analysis of Variance was performed with BSC Format

and Environmental Concern included as Fixed Factors. Participants that were ‘moderate’

were excluded to leave those with a high and low level of concern for the environment. The

analysis was repeated for the two dependent variables, performance evaluation and bonus

awarded. The results of the Univariate Analysis of Variance can be seen in Table 1 and Table

2. The results indicate a significant interaction for performance evaluation (F63 =5.534,

p=.022) but not for the bonus awarded (F63 =1.849, p=.179), therefore H1 is partially

supported. The means are compared in the further analysis and discussion section.

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Figure 5: The Effects of Environmental Concern and BSC Format on Evaluation of

Positive Ecological Performance

Figure 6: The Effects of Environmental Concern and BSC Format on the Bonus for


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Table 1: The Effects of Environmental Concern and BSC Format on the Bonus for


Source Type III Sum of

Squares

df Mean Square F Sig.

Corrected Model 5.625a 3 1.875 1.861 .145

Intercept 6.764 1 6.764 6.713 .012

Format .043 1 .043 .043 .837

Environmental Concern .001 1 .001 .001 .975

Format * Environmental

Concern

5.577 1 5.577 5.534 .022

Error 63.480 63 1.008

Total 77.000 67

Corrected Total 69.104 66

a. R Squared = .081 (Adjusted R Squared = .038)

Table 2: Univariate Analysis of Variance for Bonus Awarded when Ecological

Performance is Positive


Squares



Intercept 209.765 1 209.765 2.973 .090

Format 727.811 1 727.811 10.314 .002

Environmental Concern 84.770 1 84.770 1.201 .277

Format * Environmental

Concern

130.501 1 130.501 1.849 .179

Error 4445.820 63 70.569

Total 5638.000 67



H2 considered the effect of perceived ecological risk. Again, an interaction was predicted in

which participants who believed that ecological risk was high would pay greater attention to

the measure of ecological risk when it was presented in a separate environmental perspective.

One the other hand, participants who perceived ecological risk to be low were predicted to

pay greater attention to the measure of ecological risk when it was presented in the internal

process perspective. The pattern of means can be seen in Figure 7 and Figure 8. As predicted,

the separate environmental perspective increased the weighting on the positive environmental

outcome only when the perception of ecological risk was high. Positive univariate analysis of

19

variance revealed a significant interaction for the performance evaluation (F65=4.307, p=.042,

see Table 3) however the interaction for the bonus awarded was not significant (F65 =.967,

p=.329, see Table 4). Therefore H2 is partially supported and further analysis of the means is

presented in the following section.

Figure 7: Ecological Risk and BSC Format on the Evaluation of Positive Ecological

Performance

Figure 8: Ecological Risk and BSC Format on the Bonus for Positive Ecological

Performance

20

Table 3: Univariate Analysis of Variance for Evaluation for Positive Ecological

Performance


Squares



Intercept 1.103 1 1.103 1.216 .274

BSC Format .283 1 .283 .312 .578

Perceived Ecological Risk 6.224 1 6.224 6.862 .011

Format * Ecological Risk 3.907 1 3.907 4.307 .042

Error 58.964 65 .907

Total 73.000 69



Table 4: Univariate Analysis of Variance for Bonus for Positive Ecological Performance


Squares



Intercept 207.231 1 207.231 3.606 .062

BSC Format 462.873 1 462.873 8.055 .006

Perceived Ecological Risk 123.638 1 123.638 2.152 .147

Format * Ecological Risk 55.575 1 55.575 .967 .329

Error 3735.074 65 57.463

Total 4805.000 69



H3 considered the effect of BSC format for the presentation of a measure of environmental

performance with financial risk but no ecological impact. A main effect for BSC format was

predicted with integration into the customer perspective expected to lead to a greater

weighting on the measure of financial risk. An ANOVA was performed however the main

effect was not significant for either the performance evaluation or the bonus awarded.

Therefore, H3 is not supported. Further analysis of these findings is presented in the

following section.

21

Further Analysis and Discussion

It was predicted that the effect of BSC format would depend on the beliefs of the evaluator.

The predicted interaction in H1 and H2, which was supported by the performance evaluations,

comprised two predictions. The first was that when environmental concern was low, a

positive ecological outcome would be more heavily weighted when presented in a traditional

BSC category (Internal Process Perspective). Comparisons of means (see Table 5) provides

mixed results relating to this argument. Performance evaluation was marginally higher

(t=1.567, p=.064, one tailed) when individuals with low concern received the ecological

outcome in the Internal Process Perspective rather than a separate Environmental Perspective.

The bonus, however, was higher when the positive ecological performance was presented in

the separate environmental perspective. For those who perceived ecological risk to be low

(see Table 6), there were no significant difference between the BSC formats.

The second argument underlying H1 and H2’s predicted interaction effects is that evaluators

with high concern for the environment (H1) and who perceived ecological risk to be high (H2)

would weight a positive ecological outcome more heavily if it were presented in a separate

environmental perspective. Comparisons of means (see Table 6) provide support for this

argument. Evaluators with high environmental concern weighted the positive ecological

outcome more heavily in their performance evaluation (t=1.753, p=.045 one tailed) and bonus

(t=2.993, p=.004) when it was presented in a separate environmental perspective. Those

evaluators who perceived ecological risk (H2) to be high also weighted the positive

ecological outcome more heavily in their performance evaluation (t=1.990, p=.027 one tailed)

and bonus (t=3.133, p=.002 one tailed) when it was presented in a separate environmental

perspective. One interpretation of these results is that a positive ecological outcome

presented in a traditional, profit-orientated perspective, may be ignored by individuals who

have a high concern for the environment and who perceive ecological risk to be high.

22

Table 5: Means and T-Tests for performance evaluation and bonus awarded for low

and high environmental concern

Group Statistics

Environmental

Concern

Dependent

Variable

Format N Mean Std.

Deviation

T-test

Low

Performance

Evaluation

Separate

Environmental

Perspective

17 .0588 .96635 t-test =-

1.567

p=.127

df=32 Integrated with

Internal Process

17 0.5882 1.00367

Bonus

Separate

Environmental

Perspective

17 4.8235 9.50155 t-test =1.424

p=.164

df=32

Integrated with

Internal Process

17 1.0000 5.67891

High

Performance

Evaluation

Separate

Environmental

Perspective

19 .6316 1.06513 t-test =1.753

p=.045*

df=31

Integrated with

Internal Process

14 .0000 .96077

Bonus

Separate

Environmental

Perspective

19 5.3684 8.19356 t-test =

2.993

p=.004*

df=31 Integrated with

Internal Process

14 -4.0714 9.91087

* One-tailed tests of the predicted relationship

23

Table 6: Means and T-Tests for Performance Evaluation and Bonus when Ecological

Risk was Perceived to be High or Low

Ecological

Risk

Dependent

Variables

Format for Ecological

Performance

N Mean Std.

Deviation

T-test

Low

Evaluation for

Positive

Ecological

Performance

Separate Environmental

Perspective

11 -.3636 .6742 t=-1.222

p=.234

df=23 Ecological Risk in Internal

Process

14 .0000 .7844

Bonus for

Positive

Ecological

Performance


Perspective

11 2.181

8

10.3616 t=1.198

p=.243


Process

14 -

1.357

1

3.5433

High

Evaluation for

Positive

Ecological

Performance


Perspective

21 .7619 1.0442 t=1.990

p=.027*


Process

23 .1304 1.0576

Bonus for

Positive

Ecological

Performance


Perspective

21 6.857

1

7.6569 t=3.133

p=.002*


Process

23 -.4348 7.7625

* One-tailed tests in the predicted direction

H3 predicted a main effect for BSC format when participants evaluated a manager who

performed poorly on an environmental measure that indicated financial risk, but not

ecological risk. The main effect was not significant. Further analysis, however, revealed that

BSC format was important for those participants who perceived financial risk from Toxic

Emissions (air) to be very high (see Figure 9 and Figure 10). Participants had rated the

financial risk of toxic emissions (air) on a five point Likert scale from 1 (Very Low) to 5

(Very High). Thirty-four participants rated financial risk as Very High. Fifty-six participants

rated financial risk less than Very High and were combined into a single group for

comparison to those that reported Very High. Tables 7 and 8 show a moderately significant

interaction effect for the bonus awarded (F86 = 3.617, p=.061) and a significant interaction for

the performance evaluation (F86 =6.916, p=.010).

From Figure 9 and Figure 10 it can be seen that the effect of the perceived financial risk is

greatest when the measure of risk was presented in the customer perspective. Post hoc

comparisons of means (Tukey HSD) revealed that the effect of providing a poor

24

environmental risk outcome in the separate environmental perspective depended on the

perception of financial risk. When presented in a separate environmental perspective,

evaluators who perceived financial risk to be very high weighted the poor outcome

significantly more, and hence lowered their evaluation and bonus, compared to those that did

not rate the financial risk as being very high (p=.032 for evaluation and p=.087 for bonus). I

conjecture that when presented in a separate environmental perspective the emphasis was

taken off the financial risk associated with the detrimental impact on reputation. Presenting

this measure of risk in the customer perspective made evaluators more sensitive to the

potential impact on financial performance through the cause-effect relationships of the

traditional BSC perspectives, but only if they recognised the financial risk

Table 7: Univariate Analysis of Variance for Bonus Awarded when Financial Risk is

High


Squares


Intercept Hypothesis 2292.911 1 2292.911 19.766 .141

Error 116.000 1 116.000

Format Hypothesis 21.499 1 21.499 .118 .789

Error 181.530 1 181.530

Perception of Financial

Risk

Hypothesis 116.000 1 116.000 .639 .571

Error 181.530 1 181.530

Format * Perception of

Financial Risk

Hypothesis 181.530 1 181.530 3.617 .061

Error 4315.846 86 50.184

Table 8: Univariate Analysis of Variance for Performance Evaluation when Financial

Risk is High


Squares


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

25

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

26

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

27

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.

28

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.

29

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