Performance management: will Kaplan and Norton's much-discussed balanced scorecard turn out to be another passing management fad, or will it yet take organisations to the promised land of performance measurement?

AuthorSteven, Grahame
PositionPaper P2

The seminal Harvard Business Review article by Robert Kaplan and David Norton, "The balanced scorecard: measures that drive performance", was published in 1992, but that was not the start of the story. Kaplan had written an HBR piece in 1984, entitled "Yesterday's accounting undermines production", that considered the impact of financial accounting methods on corporate performance. He revisited the theme in his 1987 book with Thomas Johnson, Relevance Lost: The Rise and Fall of Management Accounting. So why can the basic principles of accounting have a dysfunctional impact on decisionmaking and performance evaluation? Until the end of the 19th century, the need to keep shareholders informed was not a big problem for many limited companies, because the people who owned these firms also ran them. While some information was issued to external shareholders who weren't involved in management, there were few statutory requirements governing what material should be provided and when it should be disclosed. Although the UK Joint Stock Companies Act 1844 required directors to provide shareholders with an annual balance sheet and give an auditor access to the firm's records, the provision for compulsory audits was repealed in 1856. But, as companies raised increasing amounts of money from the capital markets, they came under pressure to give their shareholders more and better information. As ownership became increasingly divorced from managership, external shareholders became concerned about the quality of the financial information they were being given, since they were relying on t his to make their investment decisions. Then, as now, financial scandals also created pressure for change. After considerable debate, Parliament passed the Companies Act 1900, laying the foundations for modern financial accounting.

Financial accounting has a different perspective from that of management accounting on information provision, since its main function is to meet investors' needs. External shareholders need to have confidence in the accounts, because they have no other management data to hand. The main way to nurture their confidence is to have the accounts approved by a third party. But this approach has important implications for the preparation of accounts, since auditors are legally liable for their opinions. Auditors prefer conservative accounting practices, based on objective and verifiable historical transactions, since these reduce their chances of...

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