The dynamism of pre-decision controls in the appraisal of strategic investments

Huikku, Jari; Karjalainen, Jouko; Seppälä, Tomi

doi:10.1016/j.bar.2018.04.002

Cited by 11 publications

(26 citation statements)

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“…This pre-capital decision control advances the existing conclusion that non-financial considerations and objectives take precedence over technical accounting measures, such as the present value, especially in the aforementioned contexts, where political instability is being experienced (Elmassri et al , 2015, p. 151; Huikku et al , 2018). In reinforcing Alkaraan's (2016) findings, the Geo Committee screens and scans the potential implications of political and correlated issues, as documented in the committee’s agenda from 2015-2017, as follows: In 2015, the issues discussed during the year included emerging geopolitical issues that could impact BP’s business, developments in the Middle East and Latin America, the effects of migration in Europe and the 2016 US election (BP plc, 2015, p. 66). In 2016, the implications of the UK referendum on Brexit and the US presidential election were discussed at each meeting (BP plc, 2016, p. 78); and the impact of geopolitical events on BP’s interests in the Middle East and in Egypt, Russia and Turkey. In 2017, the key issues included the global economy, developments in the Middle East, political events in Latin America and the political and economic outlook in the USA, as well as the UK’s potential exit from the European Union (BP plc, 2017, p. 76). …”

Section: Case Study: British Petroleummentioning

confidence: 78%

Sustainability governance and legitimisation processes: Gulf of Mexico oil spill

Elsayed

Ammar

2020

SAMPJ

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Purpose The purpose of this paper is to explore the emergence of sustainability governance through the unfolding hybridisation process between corporate governance and corporate social responsibility and the implications of this for understanding patterns in sustainability reporting over time. Design/methodology/approach The Gulf of Mexico oil spill incident is an extreme case study undertaken to examine its implications on the organisational legitimacy of British Petroleum (BP) and the latter’s response to the incident and beyond. The paper draws on Suchman’s legitimacy framework (1995) to understand sustainability governance as an organisational practice that evolved post the Gulf of Mexico oil spill to manage BP’s legitimacy. It draws on archival records and documentation from 2008 to 2017, as key sources for data collection, using interrogation by NVivo software. Findings Sustainability governance is a sound practice that was socially constructed to manage the re-legitimatisation process following the Gulf of Mexico oil spill. It is characterised by broadness (the interplay between the corporate governance and corporate social responsibility disciplines), dynamic (developing the tactics to repair and maintain legitimacy), agility (conforming to the accountability for socially responsible investment and ensuring steps towards geopolitically responsible investment) and interdependence (reflecting composition and interactions). Practical implications This paper has practical implications for organisations, in terms of sustainability governance’s constitution, mechanism and characteristics. Social implications This paper has implications not only for organisations, in terms of sustainability governance’s characteristics, but also for policy-makers, regulators and accounting education. However, the present paper’s insights are achieved through an in-depth and longitudinal case study. Originality/value This paper has problematized the concept of sustainability governance and elaborated its evolution (the emergence, enactment, deployment and interplay) process. The sustainability governance showed an otherwise organisational response that moves our understanding of the deployment of disclosure for complex organisational change as a way to discredit events.

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Section: Case Study: British Petroleummentioning

confidence: 78%

Sustainability governance and legitimisation processes: Gulf of Mexico oil spill

Elsayed

Ammar

2020

SAMPJ

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“…The findings of their study highlight the role of agents' knowledgeability and position-practice relations in SIDM, aspects ignored by prior studies. Huikku, Karjalainen and Seppala (2018) examined the dynamism of pre-decision controls in SIDM practices in large Finnish manufacturing companies. Findings indicate how pre-decision control mechanisms are influenced by the changes of internal and external contextual factors, and how changes in management style may play a significant role in the adaptation process.…”

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confidence: 99%

Strategic investment decision-making practices in large manufacturing companies

Alkaraan

2020

MEDAR

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Purpose This paper aims to examine the adoption of conventional and emergent analysis techniques in Strategic Investment Decision-Making (SIDM) practices in large UK manufacturing companies. It aims to update the current knowledge on SIDM practices in large manufacturing companies. The research question underlying this study: Are recently developed analysis techniques (i.e. those that aim to integrate strategic and financial analyses) being used to evaluate strategic investment projects? Design/methodology/approach The research evidence underpinning this study was made up of primary and secondary data, quantitative and qualitative. Firstly, a survey consisting of a mailed formal standard questionnaire was conducted where each respondent is required to answer the same questions based on the same system of coded responses. Secondly, qualitative data was collected using the annual reports of selected companies. Disclosures were used as supplementary source of information using the explanatory notes and parenthetical disclosures accompanying companies’ financial reporting. Sources for these disclosures included management discussions, analyses of company strategy and risk and forward-looking reports regarding future performance and growth opportunities (such as mergers and acquisitions activities). Accordingly, companies’ disclosures were used in this study as an alternative method to semi-structured interviews to collect qualitative data. More recently, companies such as Rio Tinto have prepared strategic annual reports for 2017 against the UK Corporate Governance Code (version 2016). Findings The choice and use of financial analysis techniques and risk analysis techniques depend on the type of project being evaluated. Decision makers in large UK companies do not appear to use emergent analysis techniques widely. Pre-decision control mechanisms have significant influence on SIDM practices. This includes the changes of internal and external contextual factors, including organisational culture, organisational strategies, financial consideration, comprising formal approval governance mechanisms, regulatory and other compliance policies interact with companies’ internal control systems. Companies incorporate non-financial factors alongside quantitative analysis of strategic investments opportunities. Energy efficiency and carbon reduction are key imperatives of companies’ environmental management. These factors viewed by decision makers as significant factors relevant for compliance with legislation as well as maintaining companies’ legitimacy issues, sustainable business, experience with new technology and improved company image. Research limitations/implications High risk, ambiguity and complexity are key characteristics embedded in SIDM processes. Macroeconomic issues remain crucial factors in scanning and screening investment opportunities, as reported by this study. The early stage of SIDM processes requires modelling under macroeconomic scenarios and assumptions of both internal and external parameters. Key assumptions include: projections of economic growth; commodity prices and exchange rates, introduction of technological and productivity advancements; cost and supply parameters for major inputs. SIDM practices rooted on comprehensive knowledge and experience of the industry and markets to draw subjective judgements about the riskiness of prospective projects, but these are rarely formalized into their SIDM processes. Findings of this study, however, remain within the context of UK companies. This study has its own limitations due to its time, location, respondents and sample selection, the size and the sector of the selected companies and questions addressed. Findings of this study raise a call for future research to examine SIDM processes in different settings to explore the relative impact of various organisational control mechanisms on SIDM practices. Also, to examine the influence of contextual factors (such as national culture, political, legal and social factors) on organisational control mechanisms. SIDM practices and processes have received significant attention from researchers, yet there is a lack of evidence in the literature about how companies approach strategic decision-making regarding divestments of some of their strategic investments. This type of strategic decision-making is not less important than other types of SIDM practices. Practical implications SIDM practices reflect the art and science of steering and controlling organisational resources to achieve a desired strategy. To understand the factors that shape SIDM practices and align them to organisational strategy, more attention is required to the choice and design of pre-decision controls and to the important role of strategic management accounting tools over the more traditional financial analysis techniques that have formed the focus of much prior empirical research. Social implications Key environmental issues viewed by decision makers as significant factors relevant for compliance with legislation as well as maintaining companies’ legitimacy issues and company image. Originality/value Despite their perceived importance in this study, quantitative accounting controls may fail to connect with the kind of investment decision-making required to bring strategic success. Indeed, it has been widely noted that financial evaluation techniques are inadequate for assessing strategic investment proposals; they can only function as a guideline, as SIDM practices involve so many uncertainties, risks and judgements. A key insight from this study is that the achievement of integration between the firm’s strategic investment projects and the overall organizational strategy forms a critical pre-decision control on managerial behaviour at an early stage in SIDM practices. As many strategic investment decisions are one-off, non-repeatable decisions, the information needed to support their evaluation is likely to be similarly unique. Sound SIDM practices require the support of a large amount of varied information, a significant proportion of which is collected and analysed prior to potential capital investment projects being considered, such as information related to strategic goal setting, risk-adjusted hurdle rates and the design of appropriate organisational decision hierarchies.

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“…A third avenue for future research relates to the revision and adaptation of controls, such as activities and procedures. Huikku et al [33] studied the adaptation of controls as a response to a period of increased financial pressure. In a sustainability context, a relevant application would be research which explores the adaption of controls in response to a change in sustainability strategy.…”

Section: Discussionmentioning

confidence: 99%

“…By examining the structural context in which investment decisions are taken [27], and the predefined and formal procedures investments are subject to [23], this paper seeks to contribute with insights for sustainability-related investments and how they may be more widely implemented. The position taken in this paper entails an inquiry where the steps of the process and the involvement of multiple managers are acknowledged [2,24,27,31,32], and the internal pre-decision controls such as manuals and policies [29,33] and management control activities such as planning, coordination, and evaluation [34] are addressed. Hence, three main concepts can be delineated that will be the focus of this paper: Activities, i.e., what takes place in the investment process; procedures, i.e., through which it is stipulated how and by whom; and information, i.e., input.…”

Section: Introductionmentioning

confidence: 99%

“…Hence, on one hand, the activities and procedures provide guidance for alignment with strategic goals. On the other hand, the same activities and procedures may instead limit the development and introduction of new processes and hamper necessary adaptations due to, for instance, changes in the company's financial or organizational conditions, such as regulations [33]. This ambiguity raises the question of how the structural context influences the investment process for investments that do not easily fit these predefined activities and procedures, such as energy efficiency investments and other sustainability-related investments.…”

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

The Role of Structural Context in Making Business Sense of Investments for Sustainability–A Case Study

Rasmussen

2020

Sustainability

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Energy efficiency is an important means for sustainable manufacturing. One action for manufacturing companies to improve energy efficiency is through investments. While these investments often are profitable, opportunities remain unexploited. This paper explores the structural context of the investment decision-making process by examining the associated activities, procedures, and the role of information. While the structural context may limit complex investments that do not fit predefined rules and controls, such as energy efficiency and other sustainability-related investments, it remains a scarcely studied aspect of investment decision-making for energy efficiency investments. Method-wise, the paper is based on a case study of a major investment at a pulp and paper company, motivated and justified based on productivity, strategic, energy, and sustainability rationales. The paper contributes with illustrating how configurations of internal investment activities and procedures may be crucial for sustainability-related investments to pass through the investment process. Moreover, the configuration of activities and procedures is also indicated as influential for the way in which an investment is executed. Hence, for energy efficiency and other sustainability-related investments to make business sense constitutes more than achieving desirable payback periods; the structural context should be considered.

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The dynamism of pre-decision controls in the appraisal of strategic investments

Cited by 11 publications

References 108 publications

Sustainability governance and legitimisation processes: Gulf of Mexico oil spill

Sustainability governance and legitimisation processes: Gulf of Mexico oil spill

Strategic investment decision-making practices in large manufacturing companies

The Role of Structural Context in Making Business Sense of Investments for Sustainability–A Case Study

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