The Economic Sociology of Responsibility Accounting:
A Field Study in a Chinese State-Owned Enterprise
ChunLei Yang
Sven Modell*
Manchester Business School
University of Manchester
*Corresponding author
Address:
Manchester Business School
University of Manchester
Crawford House
Booth Street West
Manchester M15 6PB
United Kingdom
E-mail: Sven.Modell@mbs.ac.uk
28 May, 2012
Acknowledgements: The research informing this paper was funded by the Swedish
Research Council. The paper was partly completed whilst the second author was a
Visiting Professor at the University of Sydney (2011). Earlier versions of the paper
were presented at research seminars at the Universities of Sydney, Southampton and
Cardiff and the 2012 MASOP workshop at London School of Economics. We thank
Chris Chapman, Silvia Jordan, Kari Lukka, David Marginson, Martin Messner, Yuval
Millo, Keith Robson, Will Seal, Wim van der Stede and Jason Xiao for their
comments on earlier drafts.
1
The Economic Sociology of Responsibility Accounting:
A Field Study in a Chinese State-Owned Enterprise
Abstract
Research on responsibility accounting has been dominated by functionalist
perspectives of which many subscribe to economics-based approaches, such as
agency theory. By contrast, little is known about the social and political dynamics
associated with the development of systems for this purpose and how the social gets
implicated in the economic as notions of responsibility accounting diffuse across
different socio-economic contexts. This paper addresses this knowledge gap through a
historically informed field study in a state-owned enterprise (SOE) in the People’s
Republic of China. In doing so, we mobilize an analytical framework grounded in
economic sociology and seek some rapprochement between diverse schools of
thought within this body of research. Insights from classical versions of economic
sociology emphasising the social embeddedness of economic behaviour are combined
with more recent advances concentrating on the performative, or strongly constitutive,
roles of accounting and the theories in which it is embedded. In contrast to much
accounting research in the latter vein, we demonstrate how the use of responsibility
accounting to frame economic behaviour became entangled with a broader range of
socially embedded contingencies and how the interplay between such contingencies
and emerging systems of responsibility accounting shaped the constitutive roles of the
latter. This addresses concerns that the performative tradition in economic sociology
might bracket the influence of the broader socio-economic environment in examining
the constitutive roles of accounting. We discuss the implications for future research
on responsibility accounting and how it is implicated in processes of organizational
change.
2
The Economic Sociology of Responsibility Accounting:
A Field Study in a Chinese State-Owned Enterprise
Introduction
The concept of responsibility accounting has long constituted the bedrock of
management control in hierarchically structured organizations and continues to attract
considerable research interest (e.g., Frow et al., 2005; Rowe et al., 2008; Simons,
2005). Research on this topic has been dominated by functionalist approaches of
which many subscribe to economics-based theorizing. Notable conceptual and
analytical advances have been made by agency theorists seeking optimal modes of
contracting (e.g., Antle and Demski, 1988; Baiman and Noel, 1985; Demski and
Sappington, 1989; Melumad et al., 1992). Empirical evidence supporting agency
theory postulates has also accumulated and sheds further light on the economics of
designing systems of responsibility accounting under specific structural and
environmental conditions (e.g., Bushman et al., 1995; Merchant, 1987, 1989; Ugras,
1994). Similar to much economics-based research on accounting, however, these
advances explicitly or implicitly assume a state of equilibrium and pay hardly any
attention to the social and political dynamics implicated in the process of changing
systems of responsibility accounting. Whilst recent research on the role of
responsibility accounting in processes of organizational change affirms its powerful
influence on economic behaviour, it also underlines the merits of widening the
examination of this topic to include insights from a broader range of social theories
(see Rowe et al., 2008). Yet much remains to know about how the social gets
implicated in the economic as notions of responsibility accounting diffuse across
different socio-economic contexts. Our understanding of how responsibility
accounting evolves and shapes economic behaviour beyond traditional capitalist
enterprises is especially limited and would seem to warrant a research perspective that
recognises the broader social premises influencing systems for this purpose (cf. Berry
et al., 1985; Bloomfield et al., 1992; Modell and Lee, 2001).
The present paper addresses this issue through a historically informed field study in a
state-owned enterprise (SOE) in the People’s Republic of China (PRC) and draws on
diverse strands within economic sociology to develop an explanatory framework.
More specifically, we ask how changing systems of responsibility accounting interact
with their broader, socio-economic context and how this interplay shapes economic
behaviour. To address this research question we combine insights from classical
versions of economic sociology emphasising the social embeddedness of economic
behaviour (Granovetter, 1985; Polanyi, 1944; Zukin and DiMaggio, 1990) with more
recent advances concentrating on the performative, or strongly constitutive, roles of
calculative devices and the theories in which they are embedded (Callon, 1998a,
1998b). Whilst these perspectives have been positioned as alternative or competing
schools of thought within economic sociology (see Fligstein and Dauter, 2007;
Fourcade, 2007; Miller, 2002), we demonstrate how a novel system of responsibility
accounting partly inspired by agency theoretic rationales became entangled with
embedded governance and control practices and how this conditioned its constitutive
effects on economic behaviour. This leads us to elaborate on how insights from
classical economic sociology may enrich emerging accounting research situated
within the performative tradition and how such rapprochement may enhance our
3
understanding of how accounting is implicated in the shaping of economic behaviour.
As such, our study advances an alternative theorization of how responsibility
accounting affects economic behaviour to the economics-based perspective
permeating much research on the topic. We also contribute to the sparse literature on
how systems of responsibility accounting are implicated in processes of
organizational change.
The remainder of the paper is structured as follows. We start by introducing economic
sociology and offering a tentative discussion of how the different schools of thought
within this broad research tradition can be brought together in examining the notion of
responsibility accounting. We then introduce the research setting and describe the
methods employed. Our empirical analysis then traces the development of
responsibility accounting in Chinese SOEs in general as well as in our field study site
over a period of nearly 30 years. We close the paper with a concluding discussion
summarizing our key findings and contributions.
An Economic Sociology Perspective on Responsibility Accounting
Economic sociologists have long recognised the socially embedded nature of
behaviour in markets and other spheres of economic life (Granovetter, 1985; Polanyi,
1944).1 The sources of such embeddedness have variously been ascribed to structural,
political, cultural and cognitive mechanisms that evolve over time and imbue
economic behaviour with context-specific norms and meanings (Dacin et al., 1999;
Zukin and DiMaggio, 1990). Such a view of embeddedness is amply represented in
the accounting literature and is notably manifest in studies of how extant socioeconomic premises condition evolving accounting practices (e.g., Modell and Wiesel,
2008; Neu, 1992; Neu and Simmons, 1996). In contradistinction to this classical view
of embeddedness as a “naturally” occurring phenomenon in response to historical
contingencies, Callon (1998a) invoked a view of economic behaviour as constituted
by the very theories and calculative devices that economists employ. In other words,
economic theories and models do not only represent but also shape economic realities
and thus play important performative roles. This performative perspective has
inspired a burgeoning research programme centred on the idea of economization (see
Caliskan and Callon, 2009, 2010) which has gradually found its way into the
accounting literature (e.g., Christensen and Skærbæk, 2004; Millo and MacKenzie,
2009; Skærbæk and Tryggestad, 2010; Vollmer, 2007). Even though the insight that
calculative devices play an important constitutive role was long anticipated by
sociologically informed accounting scholars (Burchell et al., 1980; Miller, 1994,
2007), closer engagement with the performative tradition in economic sociology may
refine our understanding of how such devices shape specific types of economic
behaviour (Vollmer et al., 2009). We draw some inspiration from this research
programme but also seek some rapprochement with classical versions of economic
sociology in examining the evolution of responsibility accounting. Of particular
relevance for our analysis of the constitutive role of responsibility accounting is
Callon’s (1998b) discussion of framing and overflowing.
1
See Krippner and Alvarez (2007) for an extended discussion and comparison of Polanyian and
Granovetterian approaches to embeddedness.
4
Drawing on Goffman (1971), Callon (1998b) mobilised the notion of frames as a
metaphor for the boundaries established around social interactions in order to imbue
them with a temporary degree of stability and predictability. Such framing implies
that the world surrounding the focal interactions and relationships is momentarily
bracketed. Even though such bracketing does not sever the links between the framed
relationships and the larger social context in which they are embedded, it entails an
element of disentanglement whereby the influence of the broader context can be
controlled. This disentanglement is attributable to the strongly constitutive effects that
frames often exercise on human cognition and behaviour. By framing what counts as
effective or legitimate forms of behaviour some actors will assume the power to shape
social interactions and relationships such that these ideals are achieved. Calculative
devices such as those embedded in accounting arguably play a powerful role as
frames in that they render economic behaviour controllable and at least partly
disentangled from the wider socio-economic context that otherwise conditions it
(Callon, 1998a; Gill, 2008; Miller, 1998). However, as demonstrated by a growing
number of empirical studies accounting is not a panacea to this end and continuously
generates overflows that need to be managed through additional framing efforts (e.g.,
Christensen and Skærbæk, 2004; Skærbæk, 2009; Skærbæk and Tryggestad, 2010).
Callon (1998b) offered the notion of overflows as a sociological revision of the
economist’s concept of externalities, or the tendency of economic orders to produce
negative and positive consequences that go beyond the intended functions of
particular contractual arrangements. In distinguishing the notion of overflows from
that of externalities, however, Callon (1998b) departs from a view of such
consequences as accidental and exceptional circumstances and argues that they should
rather be viewed as constituted by the very attempts to frame economic behaviour. In
other words, overflows are an unavoidable consequence of any framing of economic
behaviour. Frames are always imperfect social arrangements and often require
substantial investments to be maintained. As overflows occur, interactions and
relationships need to be re-framed to establish new social orders within which they
can be contained. Framing is thus a recursive process fuelled by the overflows that it
generates. However, radical re-framing is only likely to take place in specific
situations which Callon (1998b, p. 260) labels “hot”. In “hot” situations extant frames
become strongly contested as diverse actors draw attention to overflows as a means of
questioning prevailing social arrangements. But overflows can also persist over
extended periods of time without triggering radical re-framing if situations remain
“cold”. In “cold” situations framing is a less contested endeavour and is swiftly
achieved as actors reach some agreement on the adequate means of ordering
interactions and relationships and bracketing them from the surrounding environment.
Callon’s (1998b) discussion of framing and overflowing provides a powerful
analytical lens for examining how tendencies towards socio-economic order and
disorder are in constant interaction and create an intricate web of change dynamics.
Nevertheless, it has been criticised for under-playing the extent to which the broader
socio-economic environment influences attempts to frame economic behaviour. A
particularly forceful critique was provided by Miller (2002) who charged that Callon
presents an overly sanguine view of the possibilities of disentangling particular
interactions and relationships from the surrounding world. Economic transactions and
contracting, he argues, are always conditioned by a broader set of historically
contingent relationships and norms than those contained within the frame. This, in
5
turn, requires us to pay more careful attention to the historical processes causing
particular forms of behaviour to be entangled with their broader, socio-economic
context and how such entanglements contribute to perpetuate overflows rather than
assuming that they may be momentarily controlled through some framing efforts. To
further our understanding of such entanglements Miller (2002) called for a return to
classical economic sociology based on Polanyi’s (1944) view of markets and other
spheres of economic life as embedded in a much broader social system than that
envisaged by Callon. However, other commentators have moderated this critique and
have cautioned against over-stating the differences between classical economic
sociology and the performative tradition (e.g., Fligstein and Dauter, 2007; Fourcade,
2007; MacKenzie, 2006; MacKenzie and Millo, 2003). Similarly, in the accounting
literature, Vollmer et al. (2009) called for some rapprochement between the
performative view and extant research into accounting as a socially embedded
practice.
With respect to responsibility accounting, such rapprochement may be accomplished
by re-interpreting the design of concomitant performance contracts as an attempt to
frame financial obligations whilst examining how the broader socio-economic context
continuously conditions such framing efforts. Traditional notions of responsibility
accounting refer to the structuring of organizations into hierarchies of financial
responsibility centres with varying degrees of autonomy with the ultimate objective of
aligning the interests of owners and managers. The design of systems for this purpose
is often conceived of as a matter of matching the comprehensiveness of performance
contracts with adequate delegation of decision-making rights through a degree of
decentralization (McNally, 1980; Modell and Lee, 2001). Contract
comprehensiveness refers to the range of performance aspects included in the
responsibility assigned to managers. Highly aggregate, financial performance
measures, such as various profit metrics, are more comprehensive than less aggregate
revenue and cost measures, but are also more sensitive to a broader range of
uncontrollable factors attributable to environmental disturbances which may reduce
managerial motivation and performance (Merchant, 2006). To enhance controllability
and reduce the risk of such dysfunctional effects comprehensive performance
contracts often need to be accompanied by a significant degree of decentralization
(McNally, 1980; Modell and Lee, 2001; Simons, 2005). From a framing perspective,
such matching of contract comprehensiveness and decentralization may be seen as an
attempt to contain overflows (ie. dysfunctional effects) and is notably captured by the
emphasis traditionally placed on the controllability principle, or the notion that
managers should only be held responsible for events and financial line items that they
can control. Adherence to the controllability principle may be interpreted as an
attempt to disentangle performance contracts from their wider socio-economic context
by isolating responsibility centres from environmental disturbances and thereby
enhance the predictability of economic behaviour (cf. Kilmann, 1983). This may
explain its persistence as a normative ideal for the design of systems of responsibility
accounting (see Ugras, 1994) despite the emergence of theoretical and empirical work
qualifying this view (e.g., Burkert et al., 2011; Choudhury, 1986; Merchant, 1987,
1989; Giraud et al,, 2008) and long-standing evidence of the difficulties in applying it
in complex organizations (e.g., McNally, 1980; Otley, 1990; Vancil, 1979). However,
the existence of such evidence casts doubt on the very idea that performance contracts
can be disentangled from their socio-economic context (cf. Miller, 2002) and prompts
us to explore the change dynamics resulting from the interactions between
6
environmental disturbances and the overflows generated by particular performance
contracts in greater detail.
As noted in the introductory section of this paper, the literature on responsibility
accounting offers few insights into such change dynamics (see Rowe et al., 2008).
Consistent with the performative tradition in economic sociology, however, we need
to consider how theoretical rationales for responsibility accounting become implicated
in the process of change through their capacity to frame economic behaviour. Of
particular relevance to our analysis is the frame provided by agency theorists for
resolving the issue of aligning the interests of owners and managers. Agency theorists
typically conceive of this as a matter of designing systems that mitigate agency
problems, or the propensity of self-interested agents (managers) to exploit private
information and shirk their responsibilities (see Baiman, 1990; Eisenhardt, 1989).
Similar to the view of responsibility accounting outlined in the foregoing, this can
arguably be accomplished by making some trade-offs between reliance on (1)
relatively comprehensive performance contracts that incentivize the agent to take
adequate, decentralized actions and (2) less comprehensive contracts within a more
centralized structure that facilitates performance monitoring (see e.g., Moers, 2006).
Contrary to the emphasis traditionally placed on the controllability principle,
however, agency theorists have relaxed this ideal by arguing that inclusion of
uncontrollable line items in more comprehensive performance contracts may address
specific agency problems, such as excessive risk aversion (Demski, 1976), lacking
attention to long-term capacity costs (Baiman and Noel, 1985), collusion among
agents (Suh, 1987) and inefficient coordination of intra-organizational
interdependencies (Bushman et al., 1995; Suh, 1988). Such arguments may fill an
important constitutive role in so far as agency theory is invoked to frame the notion of
responsibility accounting. The constitutive influence of agency theory on especially
Anglo-American discourses on corporate governance and control is widely
documented (see e.g., Roberts, 2001; Seal, 2006; Shapiro, 2005) and has arguably
been salient in reforms in transitional economies such as the PRC (see e.g., Clarke,
2003; Lau et al., 2007; Wong, 2005). It would thus seem appropriate to take such
discourses as a point of departure for our analysis of responsibility accounting whilst
recognising how they interact with the broader, socio-economic context in which
Chinese SOEs are embedded.
Research Setting and Methods
State-owned enterprises in the PRC have been subject to a series of governance
reforms as part of the country’s transition towards a socialist market economy since
1978. The history of such reforms is relatively well-documented (e.g., Hassard et al.,
1999, 2007; Hussain and Zhuang, 1997; Steinfeld, 1998) as is the concomitant
adoption of management accounting techniques (e.g., Chow et al., 2007; Firth, 1996;
O’Connor et al., 2004; Wu et al., 2007). However, there is still a dearth of deeper,
theoretically informed case studies exploring the evolution of management accounting
practices in individual SOEs (see Duh et al., 2008). The present study takes advantage
of prior research on SOE reforms whilst deepening the analysis of the development of
responsibility accounting through a historically informed field study in MetalCo (a
pseudonym); a leading company in the non-ferrous mining and metal manufacturing
7
industry. The choice of such a research approach is consistent with the need to
examine the how the interplay between emerging notions of responsibility accounting
and their broader, socio-economic context shapes economic behaviour over time (cf.
Dacin et al., 1999).
The field study in MetalCo was part of a larger, ongoing research programme
entailing data collection at multiple levels of analysis in the Chinese SOE sector (see
Appendix). The present paper primarily builds on data solicited from the corporate
headquarters of MetalCo in BeiJing and its main production unit (HN). MetalCo was
formed in 2001 as part of the broader movement of consolidating Chinese SOEs into
larger, internationally competitive entities (cf. Hassard et al., 2010) and incorporates
six, previously independent production units (henceforth referred to as “branches”).
Since its inception, it has been part-privatised through listings on Chinese and
overseas stock markets although central government has retained a controlling
ownership stake. The HN branch was formed in 1958 and is the largest and oldest
production unit. Its production facilities are located in central China and are structured
into seventeen sub-units of which ten are operational and seven administrative
departments. Figure 1 provides an overview of its internal structure at the time of our
field research.
[Insert Figure 1 here]
Access to HN and MetalCo headquarters was negotiated through personal contacts of
the principal investigator who is a native Chinese. The decision to primarily focus on
the relationship between these entities rather than broadening the study to other
branches was prompted by the opportunity to collect rich, longitudinal data for a
historically informed analysis that both precedes and follows the formation of
MetalCo. Doing so was deemed necessary to develop a thorough understanding of
how organization-specific as well as more general, historical contingencies have
shaped the interplay between embedded control practices and emerging notions of
responsibility accounting over time. Yet, despite this trade-off with the breadth of data
collection, important insights into the more general incidence of certain types of
economic behaviour emanating from this interplay were derived from the data
obtained from corporate headquarters.
The field study comprised four annual site visits between 2008 and 2011, each lasting
several weeks, during which the principal investigator conducted a series of formal
interviews at both corporate headquarters and in HN and engaged in extensive
informal conversations and observations. In between the site visits, we maintained
regular contacts with key informants (mostly via electronic mail) to validate emerging
interpretations and follow ongoing developments. In total, over 80 semi-structured
interviews and extended conversations with a broad range of mostly managerial staff
were conducted during the site visits (see Appendix). The majority of the interviewees
had spent their entire careers with HN and/or MetalCo. Key informants in HN, such
as the Party Secretary-General, the Assistant Director and the Head and Deputy Head
of the Accounting Department had served the branch for over two decades. Interviews
were initially relatively open-ended to gain thorough insights into the development of
broader control practices over time, but became increasingly focused on issues
pertaining to responsibility accounting in the subsequent phases of the field work.
Given the sensitivity of many issues covered in the interviews (e.g, the propensity for
8
various types of illicit behaviour) we refrained from tape recording them and rather
documented them by taking extensive notes which were transcribed as soon as
possible after each interview occasion. Interview data were subject to open-ended and
thematic coding throughout the process of data collection and emerging patterns were
systematically contrasted with other data sources. Periodic informal sessions with key
informants were also organised to validate emerging interpretations.
The more specific analysis informing the present paper primarily relies on a
combination of oral histories extracted from our interviews and archival data
documenting the history of HN and MetalCo. The latter data source included over
sixty semi-official company records, hundreds of internal memos and more than
twenty internal research reports documenting company-specific developments as well
as broader industry trends. Oral histories have the advantage of adding candour to
archival data, but entail potential reliability and validity threats associated with the
fallibility of human memory (Hoffman, 1974). We sought to address such threats
through repeated interviews with several informants, selection of interviewees
representing diverse perspectives and systematic comparisons with archival data
(Collins and Bloom, 1991; Hoffman, 1974). Repeated interviews were used as a
means of checking the consistency of interviewee accounts as well as deepening the
analysis of themes emerging as particularly significant in earlier interviews. We also
sought to contrast the views of individuals representing different managerial
perspectives within HN and corporate headquarters. As far as possible, we crosschecked our analysis of interview data with archival data for consistency and
relevance whilst probing into patterns emerging in one or the other data source as data
collection progressed. Whilst the case narrative does not aspire to providing a
complete or “objective” representation of developments within HN and MetalCo (cf.
Hammond and Sikka, 1996), we believe that these analytical procedures at least
reduce the risk of bias associated with mainly relying on one, dominant data source in
historically informed field research.
We divide the ensuing empirical analysis into two main parts with slightly different
foci. To enhance our understanding of how embedded control practices and specific
forms of economic behaviour have conditioned the evolution of systems of
responsibility accounting, we first describe the historical development of such
systems in Chinese SOEs and HN prior to the formation of MetalCo. This is followed
by an examination of more recent reforms and the system of responsibility accounting
emerging after the formation of MetalCo across three analytically distinct phases.
Embedded Control Practices and Early Reforms of Chinese SOEs
From the Work Unit System to the Contract Responsibility System
The emergence of notions of responsibility accounting in Chinese SOEs occurred in a
socio-economic context that was long averse to Western accounting concepts as a
result of the Maoist ideology dominating the country after 1949 and exercising a
lingering influence after the initiation of market-orientated reforms in 1978 (Ezzamel
et al., 2007). Prior to 1978, SOEs were primarily governed through the so-called work
unit system which was a product of Soviet central planning and entailed a
combination of highly centralized decision-making and relatively weak and
9
incomprehensive financial performance contracts. The system functioned through
administrative commands whereby resources and information flowed hierarchically
between central planners and SOEs. The former controlled key decisions pertaining to
pricing, personnel issues, resource allocation and investments and intervened
extensively in operational decision-making (Hassard et al., 2007; Steinfeld, 1998)
whilst the economic responsibility of SOEs was largely confined to meeting nonfinancial production targets (Chow et al., 2007). Notions of economic efficiency were
rather inconsequential as surpluses were remitted to the State and losses were
absorbed into the state budget (Hassard et al., 2007; Skousen and Yang, 1988). Whilst
some experiments with more elaborate systems for resource and cost allocation within
SOEs were initiated in the early 1960s, they did not have much of a lasting impact as
a result of being overtaken by the turmoil of the Cultural Revolution from 1966
(Chow et al., 2007; Scapens and Hou, 1995). Hence for an extended period of time
SOEs largely operated without any real sense of having a financial bottom line or any
clear notion of delegating financial responsibilities for management control.
Instead, governance and control practices growing firmly embedded between 1949
and 1978 mainly relied on the so-called mass-line principle, which evolved into a key
vehicle of furthering economic progress whilst ensuring ideological and political
conformity. At one level, the mass-line principle required government officials to stay
in touch with the popular sentiment of the masses through regular inspection of work
places. At another level, it called for voluntarism on the part of the masses, urging
them to exercise will power to overcome material odds and further economic
progress. The mass-line principle left a distinct imprint on SOE management and
enabled centralized decision-making and authoritarian leadership to be combined with
mass mobilization aimed at energizing radical political activities (Lieberthal, 2004).
Such mobilization was also underpinned by the practice of “political learning”
exercised through seminars to study official documents, engage in organized selfcriticism and criticism of colleagues (Unger and Chan 2007). Conforming to such
practices was pivotal for SOE management to gain recognition and furthering career
progression through the nurturing of political connections. In addition, the standing of
management was contingent on other, socially embedded ideals, such as the deeply
ingrained Confucian notion of mutual dependence between superiors and subordinates
requiring managers to possess high moral standards and take people’s interests to
heart to command the respect of the masses (Shi, 2009). Consistent with such notions
of reciprocity, the work unit system was based on the premise that organizational
performance relies more on individuals fulfilling their moral obligations vis-à-vis one
another than on formal financial incentives (Yang, 2008; Yang and Zhou, 1999).
The incentives of SOE management under work-unit governance thus became
entangled with a complex mix of social mechanisms although enhanced economic
performance was expected to accrue from such mechanisms. The mass-line principle
prompted SOEs to equate financial goals and production targets with actions
undertaken in the name of revolutionary ideology (Mitter, 2004). Mandates for cost
reduction were typically based on moral and political appeals to “saving for the
nation” rather than explicit financial incentives. However, the efficacy of the framing
of economic incentives within such social mechanisms gradually diminished as the
masses became increasingly accustomed and indifferent to periodic campaigns. This
produced persistent overflows, such as waste, data manipulation, pilfering and a
widespread lack of attention to economic efficiency, collectively referred to the “SOE
10
illness”. The centralized decision-making structures and frequent political
interventions proved largely ineffective in containing such overflows as they did not
eliminate the private information of SOEs regarding investment needs and production
capacity (Steinfeld, 1998). The ever-increasing production targets incorporated in
central plans fostered the managerial “wisdom” of inflating investment requests and
keeping slack resources in reserve instead of putting them to productive use. Such
data manipulation and other forms of “irregular behaviour”2, such as asset stripping,
were reinforced by the mutual dependence culture as resources were channeled into
so-called “private treasuries” to fund unofficial pay-rises and staff benefits to
strengthen the social ties between superiors and subordinates (see Hassard et al.,
2007; Steinfeld 1998). The economic efficiency of SOEs also suffered from their
extensive obligations to cater for their work force as well as local communities “from
the cradle to the grave” by providing a broad range of social services in addition to
their core operations (Hassard et al., 1999, 2007).
The emergence of market-orientated SOE reforms from the early 1980s entailed a
gradual re-framing of financial responsibilities and managerial incentives within
increasingly comprehensive performance contracts without eliminating many of the
performance problems outlined in the foregoing. This development started with the
launch of the Contract Responsibility System (CRS), which transformed SOEs into
“profit centres” and allowed them to retain a share of their surplus for discretionary
investments and incentivization of staff to engage in more “entrepreneurial”
behaviour aimed at improving financial performance (Scapens and Hou, 1995;
Skousen and Yang, 1988). The CRS also entailed emerging notions of responsibility
accounting as financial performance targets were cascaded to operating units forming
the basis for hierarchies of cost and profit centres (Chow et al., 2007; Scapens and
Hou, 1995). The reform marked a first step towards transforming SOEs into
independent legal entities in an attempt to support emerging efforts to decentralize
decision-making authority. However, the implementation of the reform followed a
cautious and incremental path, partly as a result of lingering concerns with the risk of
jeopardizing achievement of the broader, social objectives of SOEs. The extensive
social welfare obligations of many SOEs remained intact. Central government and the
Chinese Communist Party (CCP) were also reluctant to relinquish control over major
personnel-related decisions, such as staffing levels, to ensure that efficiencyenhancing measures were not pursued at the expense of social order and stability. The
possibilities of SOEs to improve financial performance through lay-offs were thus
limited and central government continued to intervene in a broad range of operatinglevel decisions (Chen et al., 1997; Hassard et al., 1999; Hussain and Zhuang, 1997).
The managerial incentives to improve financial performance were also limited by
“soft” budgetary constraints and the effective bankruptcy protection still enjoyed by
many SOEs (Hussain and Zhuang, 1997; Scapens and Meng, 1993; Skousen and
Yang, 1988).
The incentives of SOE managers under the CRS regime thus continued to be
entangled with a complex mix of social mechanisms constraining their ability to
prioritise financial performance improvements over achievement of wider, social and
political objectives. The CRS reform also failed to contain many of the overflows
occurring during the pre-reform era. Indeed, the decentralization of decision-making
2
A direct translation of a Chinese term signifying non-compliance with the goals of higher authorities.
11
authority increased the opportunities for SOE management to engage in “irregular
behaviour” (Hussain and Jian, 1999; Lee, 1993) and resulted in widespread
prioritization of staff benefits over investments in new production technology
(Cheung and Xing, 1994; Hassard et al., 1999). In the long run, this cemented a state
of under-investment and loss of competitiveness. To conceal the full economic
implications of under-investment some SOEs were able to negotiate favourable profit
contracts by cultivating political contacts. This reduced the transparency of the
contracting process (Hassard et al., 1999; 2007; Steinfeld, 1998) and fostered
widespread manipulation of accounting data (Cheung and Xing, 1994). Such practices
were also facilitated by a general lack of transparency of SOE accounts and the
proclivity of central government officials to accept falsification of accounts to conceal
losses (Chen et al., 1997; Steinfeld, 1998). This weakened the incentives to prioritize
financial performance improvements and contributed to a gradual decline in the
aggregate performance of SOEs. Although there is some evidence of productivity
gains in the 1980s these were unevenly distributed across SOEs (Groves et al., 1994;
Shirley and Xu, 2001) and did not translate into sustainable improvements in
profitability. From the late 1980s, SOE losses increased (Hussain and Zhuang, 1997;
Nee, 1992) and by the mid-1990s the sector had grown heavily dependent on state
loans (Lee, 2001).
Developments in the HN Branch Prior to 2001
Developments in HN throughout the 1980s and 90s mirrored the development of
emerging SOE reforms relatively closely. In the mid-1980s, the branch introduced a
formal system of responsibility accounting which remained largely intact until the
formation of MetalCo in 2001. The government-sanctioned profit sharing scheme,
allowing the company to retain ten per cent of its profit, was disaggregated into profit
targets for each individual member of staff and production units were transformed
into cost centres. This was accompanied by extensive delegation of decision-making
rights from central government affording the company considerable discretion in
pricing, supply chain management, determination of wages, recruitment and
investments as well as less constrained access to the market.3 Decentralization was
also carried further within the organization as 22 categories of operational decisions
were delegated to the managers of refinery lines whilst functions such as sales,
finance and personnel remained centralized. The CRS reform also allowed the
company to abolish life-time employment in the early 1990s and initiate some lay-offs
and streamlining of production processes. Similar to many other SOEs, however,
these measures did not lead to any sustained improvements in financial performance.4
According to the former Finance Director, HN was a heavy loss-maker throughout
most of the 1980s and 90s (although official company accounts might show a
different picture) and it was only in 1998 that the company was turned around to
become genuinely profitable.
Important reasons for these lingering performance problems were the extensive social
welfare obligations of HN and a strongly embedded mutual dependence culture being
reinforced by its location in a remote, rural part of China where few alternative
3 The implementation of a dual-track price system allowed SOEs to sell their outputs above the
planned quota at market prices.
4
Although no reliable quantitative performance data for HN could be found in company archives, our
informants recollected a history of perpetual neglect of financial performance.
12
employment opportunities have traditionally been available. Being “cut out from all
civilization”5 staff and local residents developed a strong sense of community and
solidarity. To strengthen social ties and comply with the expectations of nurturing
mutual dependence managers engaged in extensive “irregular behaviour” to create
resources for unauthorized pay rises and staff benefits. Whilst company archives show
that senior management repeatedly condemned such practices, our interviewees did
not shy away from discussing how they were entangled with the politically embedded
incentives of managers to maintain social stability. For instance, the Deputy Head of
the Office of HN explained:
“Private treasury is more or less a historical constant… In the same way that the
objective of SOEs is not straightforward profit creation, our managers are not singleminded economic actors. For an economic decision to be executed, it must first be
politically correct. No matter what reforms say, there are people to be fed. You can’t
just ignore them, can you? Especially for a company of this kind of size having a
harmonious and unified work force has tremendous social and political impact. If
they are unhappy, they can cause a great deal of social unrest which would reflect
extremely badly on the managerial board. Our bosses all have political ambitions of
one kind or another. They certainly can’t afford to make such political mistakes.” (
interview with the deputy Head of Office of HN, 2008)
For similar reasons, control practices within the branch continued to be characterized
by a pronounced “average culture” entailing systematic efforts to smooth out
subordinates’ performance evaluation scores to avoid social conflict and
embarrassment. The system of responsibility accounting also proved largely
ineffectual as a means of enhancing cost control and curbing tendencies towards
“irregular behaviour”. The lack of cost awareness was notably manifest in the
“adjustments” of financial results routinely undertaken in conjunction with
performance evaluation. According to several of our informants, such adjustments and
overspending of departmental budgets could easily be explained away with reference
to external, uncontrollable circumstances. Consequently, financial control practices
were seen as little more than paper work with hardly any binding effects on
departmental spending decisions. According to the former Head of Accounting and
Finance:
“Throughout the 1990s, the fundamental control mechanism was never one based on
accounting numbers, but on the personal likings and disliking of the head of the
company…the [accounting] targets were soft and negotiable… meeting or missing the
cost targets was merely a side issue that no one took seriously”. (interview with the
former Head of Accounting and Finance of HN, 2010)
Similar to many other SOEs, managers also took the decentralization of decisionmaking rights embedded in the CRS as a “golden opportunity” for providing
unauthorized staff benefits. For instance, the Assistant Director recalled the 1990s as a
period when:
“Irregular behaviour was blown out of all proportion thanks to the freedom. Data
manipulation, in particular, was so rampant that God knows how many books were
5
Interview with the Party-Secretary General of HN, 2010.
13
kept. The opportunities for corruption, as you can imagine, were plentiful…people
were busy getting rich, few really cared about company performance.”(interview with
the Assistant Director of HN, 2008)
The chief editor of the official company history between 1988 and 2008, the Head of
the Office, agreed that that the practice of manipulating accounting data peaked in the
1990s:
“The situation prior to 2000 was quite appalling. The books had no credibility, cash
spending was very much at the headman’s whim and financial planning was
practically non-existent, budgeting was inconsequential …account falsification was
very much a routine operation.” (interview with the Head of Office of HN, 2009)
However, incentivization of staff through “irregular behaviour” and creation of
“private treasuries” did not produce any sustainable solution to other, long-standing
problems encapsulated in the “SOE illness”. Prior to the CRS reform, company
archives revealed a tendency for the organization to oscillate between rather extreme
forms of “stagnation” as a result of managers and staff refraining from performanceenhancing actions and “anarchy” emanating from a loss of control over “irregular
behaviour” such as data manipulation and asset stripping. Such pendulum swings
continued throughout the 1980s and most of the 1990s. According to the Party
Secretary-General of HN:
“Tackling the SOE illness is a long and ardous process, an extremely complex project
involving many impossible trade-offs. Since the 1960s we have been trying to find a
healthy balance between anarchy and stagnation so that operations can proceed
“normally”; but we always come back to ground zero…we are not unique in this—
there are some larger, structural issues at play, and I do not think individual
managers can come up with a satisfactory answer to the problem.” (interview with
the Party Secretary-General of HN, 2009)
A particularly serious incident reinforcing the tendencies towards “stagnation” took
place in 1996 when HN, attracted by a significant price discount, acquired a heavily
depreciated refinery line from Eastern Europe. The line never passed trial production
tests and caused a three-year disruption of production which allegedly brought the
company to the brink of bankruptcy. Conversely, “irregular behavior” was widely
seen as crucial in reversing this situation. Branch managers and staff unanimously
interpreted the turn-around of HN in 1998 as entailing “intelligent” adoption of such
behaviour as a new, “entrepreneurial” Managing Director set up a “private treasury”
to incentivize staff to cut costs and improve production efficiency. However, the
tendencies for such behavior to deteriorate into “anarchy” were arguably avoided as
senior management took a highly hands-on approach to finance and personnel matters
and closely monitored operations through daily inspections of the refinery lines.
These measures proved relatively effective in overcoming the tendencies towards
“stagnation” previously plaguing the company and by 2000 HN had established itself
as the largest domestic supplier in its industry.
The Development of Responsibility Accounting in MetalCo
14
The Modern Enterprise Systems Reform and the Formation of MetalCo
From the mid-1990s, the poor financial performance of SOEs prompted a new wave
of reforms which resulted in some re-framing of governance and control practices
around the so-called Modern Enterprise System (MES). To support the emerging
policies of consolidating SOEs into larger and more competitive entities through
mergers and acquisitions and privatization through stock market listings and
formation of joint ventures, corporate governance reforms drawing considerable
inspiration from “best practices” from the West were initiated under the banner of
nurturing a “scientific” approach to management (Clarke, 2003; Wong, 2005). The
MES reform evolved as an explicit attempt to overcome the problems of lingering
government intervention and politically embedded incentives detracting from
financial performance and aimed at establishing SOEs as more independent entities
governed by boards of directors primarily responsible to shareholders. Important
policy advice underpinning this development was provided by the World Bank and
Chinese economists trained in the West and entailed notable elements of neo-liberal
market economics thinking (Hassard et al., 2007; Steinfeld, 1998). Reports published
by the World Bank in the 1990s made explicit and repeated references to agency
theory as a basis for justifying reforms and especially drew attention to the need to
improve the alignment of the interests of owners and managers and address the
problem of information asymmetries. Solutions prescribed to this end included the
clarification of property rights and lines of authority, improved quality of information
for monitoring corporate performance and a better balance between managerial
autonomy and accountability for financial results (see e.g., World Bank, 1995, 1996,
1997).
At one level, the MES reform may thus be seen as a relatively forceful attempt to
disentangle corporate governance and control from socially embedded practices that
previously generated overflows detracting from financial performance. However,
since the late 1990s the salience of agency theoretic arguments and other
manifestations of “Western” corporate governance discourses has decreased as a
result of the diminishing influence of the World Bank on policy development and the
growth in domestic institutional capacity to oversee SOE reforms (Nolan, 2005). This
marked the starting point of a more pragmatic phase in the MES reform where notable
steps were taken to strengthen the monitoring of SOE performance whilst adjustments
were made to reconcile it with long-standing political and social concerns. An
important step in this development was the formation of the Chinese State Assets
Supervision and Administration Committee (SASAC) as a governing body for central
SOEs in 2003.6 Apart for being charged with safeguarding the value of state assets
and promoting continued management reforms the SASAC assumed relatively
complete responsibility for a range of strategic decisions, such as the scope of SOE
activities, personnel policies and investments, that were previously dispersed across
different government departments. However, it has also been entrusted with
controlling political and social performance aspects, such as those of ensuring that
safety and environmental standards are met and preventing any tendencies towards
social unrest and instability. The political pressures on SOEs to control such
performance aspects has increased as the more extensive lay-offs following the MES
6
Central SOEs are distinct from local SOEs in that the former are centrally controlled and administered
whereas the latter are controlled and managed by local authorities.
15
reform have enhanced the risk of labour conflicts (Hassard et al., 2008) and are
notably manifest in the performance monitoring practices forming a cornerstone of
the SASAC’s governance of SOEs. The system partly relies on league tables based on
the ranking of SOEs along five grades across such indicators as total profits, return on
investment and a selection of operating-level measures capturing industry-specific
characteristics. However, the performance contracts embedded in the league tables are
part of a broader and highly complex system for managing the performance of SOEs.
For instance, some SOEs are given “policy allowances” whereby financial
performance can partly be traded off for undertaking government-sanctioned tasks
partly aimed at upholding social stability. Individual SOEs may also face degrading in
the league tables if such tasks are overlooked. In addition, the personnel controls of
central government and the CCP remain loosely coupled to these performance
monitoring practices in that the former take a broader range of social and political
aspects into account and grant these actors considerable discretion in the appointment,
promotion and dismissal of senior SOE managers. Hence political constraints
continue to exercise an important influence on control practices (cf. O’Connor et al.,
2006) and managerial incentives are not entirely disentangled from long-standing
social and political concerns.
The formation of MetalCo as a central SOE was a direct outcome of the MES reform
and was heralded as an integral part of the process of “furthering industry
consolidation, curtail the SOE illness and improve the financial performance of
SOEs”.7 Heeding the call of the CCP and central government to develop more
internationally competitive SOEs, MetalCo was to embark on an aggressive strategy
of expansion through national and international mergers and acquisitions. This
strategy received forceful support from central government through preferential
policies and interventions granting the company access to favourable prices for key
inputs such as electricity and loans from China’s major commercial banks. Central
government also intervened to ensure that national mergers and acquisitions received
the backing of local governments. In addition, MetalCo was singled out as a
“flagship” of continued SOE reforms pivoting on the nurturing of “scientific
management” practices. As explicated in the ensuing case narrative, this entailed the
introduction of a new management control system based on a notion of responsibility
accounting partly inspired by agency theoretic ideals and mirroring the SASAC’s
ambition to strengthen performance monitoring.
The Rise of the “MetalCo Model” and Emerging Overflows (2001-2004)
The new management control system came to be known as the “MetalCo Model” and
was primarily devised by a newly appointed Chief Financial Officer (CFO) who had
previously headed a large European company. Albeit a native Chinese he had no prior
experience of Chinese SOEs. His appointment was viewed as a politically significant
manifestation of the ambition to improve the financial performance of SOEs and he
was given a clear mandate to pursue the modernizing agenda embedded in the MES
reform and work towards facilitating the listing of MetalCo on international stock
markets. Despite being the only “outsider” on the senior management team, he was
granted considerable authority and was widely seen as the “real” executive head of
7
Extract from company publicity material.
16
the management board. He enjoyed the whole-hearted support of the Chairman of
MetalCo who repeatedly appealed to branch managers to:
“… offer unreserved support for Comrade NN’s work. The reform is crucial to
building the competitiveness of MetalCo. The task [of making MetalCo an
internationally competitive company] is of great economic and political importance.”
(Extract from Chairman’s speech at the annual conference of MetalCo, 2003, 2004)
The system of responsibility accounting underpinning the “MetalCo Model” relied on
a return to centralized performance monitoring rather than managerial incentives
linked to more comprehensive financial performance contracts although it was
heralded as epitomizing a spirit of merit-based performance management. To tighten
control of the newly incorporated SOEs, branches were transformed into cost centres
in charge of direct branch costs and were to be subjected to tight cash management
and budgetary control (framed in terms of “total budgetary control”). However, there
were no attempts to render performance contracts more comprehensive through
allocation of uncontrollable corporate overheads and the re-framing of financial
responsibilities were accompanied by a withdrawal of decision-making rights from
the branches across a range of key operating areas. In early 2002, the authorization of
operating budgets, capital investments, research and development and repair and
maintenance budgets was centralized to headquarters. This was followed by
centralization of most of the personnel, production planning, sales and purchasing
functions over the following years. To further the ability of headquarters to monitor
branch performance a decision to implement an enterprise resource planning system
(supplied by SAP) was also made in 2004.
Whilst the matching of centralized decision-making with less comprehensive
performance contracts may be seen as an attempt to adhere to the controllability
principle (cf. McNally, 1980), the CFO espoused a “non-negotiable” approach to the
tendencies towards routine adjustments for allegedly uncontrollable factors in
performance evaluation. A similar approach was adopted with respect to other types
of behaviour presumably detracting from the emphasis on shareholder interests. To
justify this position and the return to centralized performance monitoring, explicit
support was derived from the imperatives of agency theory. For instance, in his
keynote address during a corporate-wide training seminar for senior accounting staff,
the CFO explained:
“… ultimately we need to deliver shareholder value. We can only achieve that
through profit maximisation. That is why we need to build a modern corporate
governance structure. A modern corporate governance structure is based on agency
thinking. Western agency theory argues that a company is a network of performance
contracts between layers of managements. It is concerned with the design of these
contracts and the division of the responsibility between different levels of the
business. For example, in MetalCo headquarters has headquarters’ agendas,
branches have branches’ agendas. How do you coordinate these agendas so that we
are moving in the same direction? Centralisation is the most suitable way to regulate
the relationship between the headquarters and the branches, to optimise resource
allocation, and to standardise financial and operational practices.” (Extract from
CFO speech, 2004)
17
A similar emphasis on heightened managerial attention to financial control permeated
the CFO’s speeches and memoranda throughout the early years of the “MetalCo
Model”. Of particular concern in this regard was the persistent emphasis on
centralized performance monitoring as an antidote to “irregular behaviour”, such as
the creation of “private treasuries” through data manipulation. This was accompanied
by concerted efforts to disentangle responsibility accounting from “old” SOE
practices. For instance, in a memorandum to branch managers about a year after the
launch of the “MetalCo Model” the CFO rebuked them for their continued
entanglement in embedded mindsets and practices and for being slow in complying
with the new, shareholder-focused reform agenda:
“Some branch managers conflated the [MetalCo] Model with old central planning
and assumed they could get away with their old behaviour. This is a gross
misunderstanding. Last year’s budgeting was a disaster ... instead of thinking on
behalf of MetalCo, many branches stood in opposition to headquarters and engaged
in extensive gaming, adding layers and layers of “water” to their resource claims. …
These problems are underpinned by the old SOE style of thinking. But we are not an
old SOE anymore. We are a consolidated, integrated, listed modern enterprise. We
need to be aware of and remove the old mentality to become market oriented, to
embrace the mission of profit maximisation for our shareholders. …. I must remind
everybody that the rule of the game has changed, the business context has changed
and our thinking and mode of management must change accordingly. We are no
longer self-serving work units, we work for our investors, or we will be voted out.”
(CFO memorandum, 2003)
Similarly, in a speech to branch managers around the same time, he concluded:
“I stress once more that you are no longer an old SOE. You need to live up to the
reputation of a listed modern enterprise. I want every one attending this meeting to
achieve the same level of thinking, adjust their attitude and act as managers of a
market-oriented, global modern enterprise.” (CFO, 2003, senior branch financial
managers training seminar)
However, despite these efforts to disentangle financial control from “old” SOE
practices,, the notion of responsibility accounting was not isolated from broader
control practices requiring branch managers to take wider, social concerns into
consideration. Following the requirement of the SASAC to use league tables similar
to those governing central SOEs for management control, branch performance was
compiled annually into corporate league tables based on a weighted average of a
range of financial, operational and political performance indicators. Even though the
weight attached to financial indicators grew increasingly dominant over the coming
decade, branches were required to meet targets for social stability and compliance
with other political directives issued by headquarters to be included in the league
tables and avoid embarrassment and negative career implications.
Another manifestation of the continued entanglement of financial control with
socially embedded practices was evident in the mechanisms employed to build
organizational commitment to the “MetalCo Model”. Even though the league tables
were complemented with an incentive system giving branches the discretion to
allocate 40 per cent of their salary budgets as performance-related pay to departments
18
and individuals, these efforts relied less on performance-based, financial incentives
than tried-and-tested methods reminiscent of the mass-line principle. The model was
rolled out across the branches with an intensity similar to the political campaigns of
the pre-reform era. For three years after its inception, branches were required to
devote their weekly political learning seminars to the “MetalCo Model” and branch
accounting personnel, in particular, were urged to “broaden their horizons, take into
heart the collective interest of MetalCo and follow headquarters’ commands
whenever it is in conflict with local decisions”.8 Measures were also taken to replace
“non-conformists” with “loyalists” through internal transfers and a company-wide
personnel rotation scheme was set up to train high-performing employees at
headquarters. Such political pressures for conformance were reinforced by the
external acclaim bestowed on MetalCo and its new control practices. In 2003, the
SASAC singled out MetalCo as a role model for “scientific management”, praising it
for its “clear vision, solidarity and strong leadership”.9 A year later, the company rose
to the top ten in the league table for central SOEs and the press referred to “the
MetalCo phenomenon” to capture the public’s imagination. Within MetalCo, this
fostered an atmosphere of ostensible enthusiasm and strengthened the framing of the
“MetalCo Model” as a vehicle of improved control. Even though some of our
interviewees claimed to have harboured personal misgivings about the efficacy of the
model from an early stage, there was widespread recognition that questioning the
reform might have negative career implications. The Assistant Director of HN
succinctly captured the attitude of several of his colleagues at the time:
“Questioning [the economic feasibility of] the model is to question headquarters, that
is to say the government’s political agenda, which would be very career limiting… it
is hard to say which kind of mistake [questioning the model on economic or political
grounds] is graver, at the end of the day they are the same… given that centralisation
is politically correct, it must also be economically right no matter what you think.”
(interview with the Assistant Director of HN, 2010)
The implementation of the “MetalCo Model” thus relied heavily of political
incentives partly grounded in embedded practices originating in the pre-reform era.
Initially, this framing seemed to produce relatively powerful constitutive effects
supporting the emerging reform agenda. Consistent with the intentions of the CFO,
there were signs of a reduced incidence of “irregular behaviour” and propensity for
routine adjustments of performance evaluation for uncontrollable factors to avoid
financial scrutiny. Branch managers generally agreed that the system of responsibility
accounting brought control practices into a new era of regulation. Looking back at the
development over the past twenty years, the Head of Budgeting of HN acknowledged
that:
“Centralisation led to a more disciplined managerial regime. That fact is beyond
dispute... Previously our annual budget was treated like a joke and adjustments were
made all the time. Since incorporation …we have taken annual budgeting more
seriously and been doing our best to produce more accurate plans. Financial
management was modernised as a result” (interview with the Head of Budgeting of
HN, 2008)
8
9
internal memo, 2003.
Excerpt form SASAC report, 2003.
19
This view was shared by other members of HN management:
“Total budgetary control was effective in that it indeed curtailed irregular behaviour
and gave our financial management a more scientific outlook.” (interview with the
Assistant Director of HN, 2008)
“The CFO made huge efforts to reinforce financial and operational discipline … The
SAP system is the culmination of all his reforms. SAP made branch activities highly
visible, so most of the ‘behind-the-scene activities’ just had to stop. We could hardly
change the layout of our monthly reports let alone cooking the books…this is not to
say [the latter] was impossible… but because it involved so much hassle and so little
gain, the practice was indeed scaled down quite a lot.” (interview with the Deputy
Head of Office of HN, 2008)
However, the continued entanglement of the “MetalCo Model” with political
incentives soon produced overflows with detrimental consequences for financial
performance at the branch level. Only a few years after the introduction of the model,
new signs of the familiar tendencies towards “stagnation” began to emerge as branch
managers became more pre-occupied with being seen to conform to political
directives than taking “entrepreneurial” initiatives to improve financial performance.
The Head of HN’s Human Resource department, who also headed the Performance
Evaluation Committee, described the emerging situation as follows:
“[Control] practices became open to all kinds of political influence and human
factors…the truly capable people are leaving. The rest of our managers talk and
behave like bureaucrats, pre-occupied with taking orders and instructions from
above.” (interview with the Head of Human Resource of HN, 2008 )
He further observed:
Managers, myself included, are primarily driven by the prospects of promotion and
status. Economic incentives do not matter much and economic performance is just
one of the many reference points for promotion decisions… There are a great deal of
similarities to the system used by the government departments in the sense that the
Party controls the personnel, decisions are often made behind closed doors and there
is much scope for discretionary judgment. (interview with the Head of Human
Resource of HN, 2009)
A first, major sign of the lack of attention to financial performance aspects was the
spread of “irresponsible purchasing” practices across several of the branches. Whilst
rooted in the emerging lack of “entrepreneurial” behaviour, these practices may also
be understood as an overflow stemming from the centralization of purchasing
decisions. Although the “MetalCo Model” vested formal power over purchasing in
corporate headquarters it soon became clear that it had neither sufficient information
nor the necessary local network contacts to single-handedly manage the complex
supply chain. Centralized purchasing decisions consequently became dependant on
“purchasing requests” from the branches. However, the latter had few incentives to
economise on purchasing due to the return to relatively incomprehensive, financial
performance contracts preventing them from retaining any surplus. The resultant lack
20
of attention to efficient purchasing routines caused considerable frustration on the part
of headquarters. In 2005, the CFO openly condemned the lack of cost consciousness
amongst branch managers during the annual performance review:
“We all know that grade 6 [ore] is perfectly adequate…then why did some branches
insist headquarters provide them with grade 7?...One particular branch even
requested headquarters to provide them with XX [a key chemical for refinery] at the
laboratory standard… What kind of attitude lay behind such requests? Where is your
cost awareness?”(CFO speech at the internal annual performance review of MetalCo,
2005)
The incentives for staff to engage in more “entrepreneurial” behaviour were also
weakened by the removal of “private treasuries” from the branches. Although the
CFO insisted that the official performance-related pay budget accounting for 40 per
cent of the salary budget was motivational, our interviewees in HN indicated that the
unofficial forms of payment previously available could amount to as much as 100 and
even 150 per cent of formal pay. Thus, the Head of Budgeting at HN recalled:
“Completely eliminating hidden treasuries was bound to backfire as it was our main
source of incentives, especially since headquarters was not prepared to make up for it
by increasing the formal salary budget.” (interview with the Head of Budgeting of
HN, 2010)
However, the weakening of financial incentives was not only due the removal of
“private treasuries”, but also the difficulties in reconciling the official system of
performance-related pay with the strongly embedded “average culture” at the branch
level. Two of our informants within HN explained:
“The designer clearly has no idea of the reality of SOEs where you need to save
people’s face and cannot differentiate their performance scores to create big pay
gaps. If you do, you get a bad name for yourself and your window might be smashed
at night.”(interview with the Head of Human Resource of HN, 2009)
“After modification and adjustment the performance scores never differ much and we
all get more or less the same performance related pay…this may sound strange to
you, but the workforce has lived and worked together for three generations since the
late 1950s…people are very conscious of saving each other’s face. It is just not
possible to create huge pay gaps.” (interview with the Head of the Salary Office of
HN, 2009)
These problems of reconciling performance-related pay with the “average culture”
testify to the difficulties in radically re-framing relationships at the branch level such
that novel control practices are disentangled from their broader, socio-economic
context. As explicated below, such problems of disentangling the “MetalCo Model”
from embedded practices became increasingly salient over the coming years and
contributed to perpetuate a range of overflows.
Re-Framing of the “MetalCo Model” and Continued Overflows (2004-2008)
21
The emerging signs of “stagnation” prompted some modifications of the “MetalCo
Model” between 2004 and 2005. However, a number of factors prevented the
situation from getting “hot” and triggering more radical re-framing of responsibility
accounting at this stage. MetalCo maintained its strong performance in the central
SOE league tables and continued to be hailed as a beacon of reform by the SASAC.
This positive image was reinforced by its successful strategy of international
expansion and attraction of foreign investors, which helped it secure a cherished
position as a Fortune 500 company in 2007. These achievements gained the CFO a
considerable amount of official praise, including the award of “CFO of the Year” in
2005, and his position within MetalCo remained unchallenged. He continued to enjoy
the full support of the Chairman and the management board and was able to push
ahead with his reform agenda. Hence the modifications of the “MetalCo Model” were
relatively marginal and were implemented without any major disputes. Even though
the CFO redefined the financial responsibility of branches from constituting
“production centres” to “profit-conscious cost centres” and introduced a market-based
transfer pricing system to compile profit metrics, such as Return on Investment, for
performance evaluation this was not accompanied by any increase in the budget for
performance-related pay or any substantial delegation of decision-making rights. In
2005, headquarters recognised the need to decentralise purchasing decisions and
allowed about 40 per cent of supplies to be organised at the branch level. However,
decentralization never went beyond the purchasing function. The implementation of
the enterprise resource planning system also progressed according to plan and was
fully operational in 2006.
Not surprisingly, this re-framing of the “MetalCo Model” did not strengthen the
incentives to engage in more “entrepreneurial” behaviour or assume more complete
responsibility for financial performance. In so far as one of the main overflows
motivating the re-framing was concerned (ie. the problem of “irresponsible
purchasing”), the situation continued to deteriorate. Even though branches regained
some of their authority over purchasing decision, the preceding wave of centralisation
and removal of “private treasuries” had inflicted considerable damage on local supply
networks and the branches’ ability to nurture critical relationships with local political
authorities. Taken together, this considerably weakened their competitive position visà-vis budding, private sector refineries. According to the former Head of Accounting
and Finance of HN, local governments had a natural inclination to discriminate
against SOEs in favour of private sector refineries in important areas, such as the
price of electricity and the logistics necessary to ensure reliable supplies of raw
materials, due to tax reasons.10 Elaborating on the consequences of the removal of
“private treasuries” he explained:
“We used to have excellent informal relationships with local authorities and many
issues were negotiable…. But now we can no longer afford presents and
entertainment, which is exactly what the headquarters wanted. But dealing with
officials at the official level is much more costly for the business…The private
refineries are extremely generous at giving gifts…why do they do that? It pays
off…we are clean so we lose out. What I am saying is that the headquarters’ idealism
10
Only 30 per cent of the corporate tax on SOE profits goes to local government in comparison with
100 per cent of that of private sector companies. Boosting the profits of the latter thus benefits local
government.
22
has a lot to answer for our present rise in total costs.”(interview with the former
Head of Accounting and Finance of HN, 2010)
The Head of Purchasing of HN confirmed these problems and described the
performance consequences of the lack of control over the supply chain:
“HN was only 26 per cent self-sufficient [in raw materials supply]. It has been a real
struggle to rebuild the supply network. Now we have to rely on less credible mining
companies and operate with sub-standard raw materials. This is causing a lot of
efficiency issues. We should not be held responsible for missing the cost target
because it was the headquarters’ fault in the first place.” (interview with the Head of
Purchasing of HN, 2011)
The re-framing of responsibility accounting also failed to provide adequate resources
to incentivize staff. Faced with such difficulties, branches sought alternative, illicit
ways of enhancing their financial discretion and ability to provide staff benefits. This
included a return to practices prevailing in SOEs prior to 1978, such as submission of
inflated investment requests. However, such practices were forcefully rebutted by the
CFO and the branches largely seem to have failed to restore their capacity to create
“private treasuries”. For instance, in 2005 financial managers from all branches were
summoned to BeiJing to account for their failure to monitor capital investments:
“Headquarters encourages technological upgrade. However, I have noticed that
some of the investment requests were made without any reference to the market and
were motivated not by the profitability of MetalCo but the need to polish their own
performance reports. Worse still, some investment requests were ostensibly inflated.
Headquarters is not blind...Again I ask financial managers to take into heart the
interest of MetalCo and carefully consider the financial consequences of your
investment requests. Is it economic? Can it deliver? …As I have stressed before, you
are appointed by the headquarters. You need to keep professional distance from the
local influences and stay loyal to headquarters’ agenda even if that involves offending
the branch directors.” (CFO speech at the special meeting, 2005)
Nevertheless, financial managers continued to manipulate financial data to help
branches meet their financial targets and were arguably under considerable pressure to
do so as a result of the socially embedded expectations to comply with the communal
ethos at the branch level. Rather than confronting their superiors, financial managers
in HN paid lip-service to headquarters’ directives whilst continuing to collude in data
manipulation. As the Head of Accounting and Finance of HN confessed:
“Yes, I was appointed by the CFO and I was supposed to act more independently on
behalf of headquarters. But this is extremely difficult because HN is where my roots
are - not BeiJing. I have worked here for twenty-five years and I would like to retire
in a decent respectful way (as a devoted manager of the branch). Besides my salary is
paid through the branch budget, so is my wife, my daughter and everybody else in the
department. I am morally obliged to look after the branch…The CFO does not
understand that…[hence] his ideal [of total control over local finance by emphasising
the independence of the branch financial managers] just won’t work” (interview with
the Head of Accounting and Finance of HN, 2009)
23
These findings show how the entanglement of branch managers in social relationships
at the local level continued to detract from compliance with the “MetalCo Model” and
contributed to the generation of overflows. Such overflows were made possible by
emerging opportunities to manipulate performance data embedded in the enterprise
resource planning system. At HN, this was achieved by delaying data entries and
postponing and even falsifying purchasing information in collusion with local
suppliers. Such practices were said to have helped HN meet its financial targets and
avoid taking the bottom position in the corporate league table. Collusion between the
branches also occurred through what headquarters called “passive aggression” as they
collectively refrained from following the templates for data entry in the enterprise
resource planning system. The resultant problems of information overload caused
considerable concern on the part of the CFO:
“Last month branches sent us over 600 spreadsheets without making any effort to sort
or analyse the data. The lack of managerial initiatives is shocking...I can see a
dangerous trend forming where managers adopt a minimum approach to their
work…this is disgraceful… Headquarters’ capacity is limited and you must not pass
all responsibilities to headquarters.” (CFO memorandum, 2006)
The attempts to avoid closer scrutiny through collusion were particularly noticeable in
HN and another branch with a similar history of carrying extensive social
responsibilities. These social responsibilities prevented them from radically climbing
the corporate league table but also provided a pretext detracting from the pressures to
improve financial performance. The assistant of the Chairman of MetalCo described
the general attitude to performance improvements in the two branches as “broken
glasses which couldn’t care less if smashed again”. Instead of taking forceful actions
to improve financial performance, the managers of the two branches repeatedly
exchanged and manipulated performance data in such a way that they could take turns
in occupying the bottom position of the corporate league tables and avoid “public
humiliation”.11 To the researchers, the Head of Finance at HN made no secret of such
practices and blamed it on headquarters’ tendency to push the branches too far to
achieve “mission impossible”.
The CFO’s response to these enduring problems of disentangling financial control
from embedded, social obligations was to persist in his emphasis on the “MetalCo
Model” as a “non-negotiable” frame but increasingly resorting to tried-and-tested
methods, such as mass mobilization and moral persuasion, to enhance managerial
commitment. Internal memoranda exchanged between headquarters and HN since
2005 showed the former making increasing use of moral and political appeals to
reinforce managers’ attention to financial performance aspects through “selfsacrifice”, “solidarity” and “collectivism”. This was accompanied by recurring
political campaigns to encourage branch managers to take the “MetalCo Model” to
heart. Whilst this reinforced the political incentives of managers to be seen as
complying with the corporate reform agenda it largely failed to address their loyalty
to the branches and foster more deep-seated commitment to change. In HN, this
continued entanglement of branch managers in social relationships detracting from
financial performance was notably manifest in a reversal to a prevalent “excuse
11
Headquarters ruled that if a branch stayed at the bottom of the league table for three consecutive
quarters, then the branch director would receive a public reprimand and be required to offer a personal
apology to headquarters.
24
culture” in conjunction with performance evaluation. So called “historical” and
allegedly uncontrollable factors associated with the branch’s extensive social
obligations were frequently invoked to counter criticisms of poor financial
performance. This stood in marked contrast to the CFO’s intentions. However, by the
time our fieldwork started, the managerial consensus in HN was that the model had
“hit the wall” and that “the CFO had turned into a UFO” as the Deputy Head of the
Office of HN put it in a candid exchange with us. Similarly, junior accounting staff in
HN saw the idea of “profit conscious cost centres” as just another headquarters
command to be obeyed but being of little practical significance. Such superficial
commitment led to increasing frustration on the part of the CFO. His internal speech
in 2007 revealed a rare occasion of admitting to having failed to address emerging
overflows and appealing to the branches for enhanced cooperation:
Having reviewed the accounting work across branches, I am far from
satisfied…headquarters invested so much in merit based performance measurement
system and yet branches take it as a joke … The lack of commitment is shocking … I
am disheartened to see branch financial managers fail to internalise total budgetary
control and take it as an assignment instead. ... I am also disappointed to see
branches so lacking in cost consciousness. …[and] branch financial managers still
engage in practices that they should not. Why is that? I have stressed before that
financial managers must take instructions from the rules and headquarters, not your
managing directors. Unfortunately that is not the case ... Yes I agree that there might
be some structural issues and I understand that some branches felt let down by
headquarters. I hope we can open up to each other and discuss your concerns more
openly. Whatever doubts you may have can be resolved, but we need to sit down and
listen to each other. Creating a healthy managerial environment is not a one-sided
exercise but requires input from headquarters and the branches. (CFO speech at the
internal annual review of the accounting work of MetalCo, 2007))
However, the CFO’s attempts to disentangle financial control from the wider, social
obligations of the branches were counteracted by the propensity of the management
board to tacitly accept the attribution of poor financial performance to such “historical
factors”. For instance, the assistant to the chairman of MetalCo remarked:
“The board is not unaware of the excuse culture. The CFO, in particular, detests this
type of behaviour, but he can hardly argue against “historical factors”. Besides, the
branch and the headquarters alike must both fill socio-political responsibilities. There
can be nothing worse than an up-rise in a [geographically isolated] place like HN,
which would immediately terminate their careers.” (interview with the assistant to the
chairman of MetalCo, 2008)
Similarly, the Head of the Office of HN described how the costs of providing for
“unofficial staff” put tremendous financial strain on the branch whilst simultaneously
offering opportunities for management to shirk financial responsibilities:
“Headquarters formulates and imposes universal cost targets across all branches.
But these targets do not affect us in any real sense because we both [branches and
headquarters] know that “historical factors” cannot be ignored. No one can afford
the [political] cost of ignoring these “historical factors”… even the MetalCo Model
has to allow for them. The economic and social responsibilities can only co-exist in
25
harmony in times of extraordinarily good markets.” (interview with the Head of
Office of HN, 2008)
Hence a range of overflows detracting from financial performance continued to
prevail as a result of the entanglement of responsibility accounting with the broader,
socio-economic context in which the “MetalCo Model” was implemented. However,
the situation remained relatively “cold” for an extended period of time and did not
prompt any radical re-framing despite emerging evidence of the wider performance
implications of such overflows. In particular, the continuous problems of securing
reliable supplies of raw materials contributed to a significant loss in domestic market
share for MetalCo’s key products. From enjoying a near monopoly position at its
foundation MetalCo’s market share gradually decreased to below 40 per cent in 2008.
Yet, at the corporate level, such performance problems were long over-shadowed by
the success of the state-backed, international growth strategy and a booming
international commodity market. From 2001 to 2007, MetalCo’s assets grew fivefold. Over the same time period, corporate profits soared by over 1,000 per cent and
the company continued to occupy a prominent position in the central SOE league
tables. As explicated below, however, this trend was abruptly reversed in 2008, which
turned the situation “hot” and prompted a relatively radical re-framing of control
practices.
The Waning of the “MetalCo Model” (2008-2011)
From 2008, a series of external events began to take their toll on MetalCo’s
performance and its standing as a leading example of SOE reform. Following an
abrupt market downturn, the industry as a whole entered into a severe depression in
the last quarter of 2008. The price of MetalCo’s main product dropped by nearly 50
per cent and continued to fluctuate erratically throughout the following years.
However, the branches failed to respond in a timely fashion to the market turmoil. For
instance, at the end of 2008 HN was still operating at full capacity in spite of the
plummeting demand whilst a neighbouring private sector competitor had temporarily
suspended production. Similar performance problems emerged across the other
branches and caused MetalCo to incur heavy losses. In early 2009, the company faced
a severe liquidity crisis. This coincided with a setback in its global expansion strategy
in the form of a highly publicized failure to acquire a major international competitor
for which the Chairman had to offer official apologies. These events tarnished
MetalCo’s reputation and its position in the central SOE league table dropped
significantly. The deteriorating performance of MetalCo also weakened the position
of the CFO and put heat into the process of re-framing control practices over the
coming years. From having enjoyed unanimous support from the management board
and important external actors, such as the SASAC, the appointment of a new
Chairman in early 2009 drastically changed this situation. The CFO gradually lost
much of his influence and was first relegated to the “backbench” and eventually
resigned at the end of 2010 claiming health reasons. Whilst ostensibly in charge up till
that point, the Assistant to the Chairman of MetalCo intimated that the fate of the
CFO was finally sealed by the growing concerns that he would face litigation from
overseas investors for failing to curb the extensive manipulation of financial data over
the preceding years.
26
With its chief architect and champion being marginalised, the “MetalCo Model”
became increasingly contested and ultimately discredited. Although the model
officially remained the backbone of management control, the new Chairman took
personal charge and launched a series of campaigns which “looked just like the
Cultural Revolution”.12 These campaigns superseded any formal performance
contracts embedded in the “MetalCo Model” and were aimed at more direct and
forceful management intervention to mobilize staff into action. Internal memoranda
produced after 2008 made liberal use of political slogans such as those frequently
used as a means of mass mobilization during the pre-reform era, whilst much less
emphasis was placed on the “MetalCo Model” as a symbol of reform and progress.
Instead, forceful interventions by corporate management were justified under the
pretext that “radical situations require radical measures” and were accompanied by
appeals to “the will power of the masses against all material odds”.13 In 2009, the first
of a series of corporate-wide cost-saving campaign was initiated based on the
following motivation:
“MetalCo is in a deep crisis—we are to confront a battle of life and death. I instruct
all branch managers to take personal responsibility to break even and remove any
waste and inefficiency in the production process….should slack, either in attitude or
action, be noticed, we will change posts immediately.”(chairman speech at the
internal annual conference of MetalCo, 2009)
This re-framing of management control practices around tried-and-tested methods of
mass mobilization had some constitutive effects on economic behaviour as branch
managers scurried to comply with the new corporate agenda. In HN, this became
manifest in a flurry of activity to avoid reprisals for non-conformity. A special TV
channel was set up to boost staff morale and a list of hundreds of cost saving
initiatives was drawn up. A particularly drastic measure involved sending managers to
the operational front line to engage in hands-on work and to impress the sense of
urgency on the work force. However, losses continued to accumulate. At the end of
2009, MetalCo dropped to the bottom of the central SOE league table and faced the
threats of stock market delisting and asset consolidation by the State. This prompted a
new wave of cost-cutting campaigns whose efficacy proved relatively short-lived and
which failed to produce sustained improvements in financial performance. In 2010,
less than a third of all branches met their performance targets and HN continued to be
the worst performer in the corporate league table. In an alleged state of “panic”14
more radical measures followed. The Chairman ordered all functional areas to reduce
their head count by 30 per cent and cut the salaries of remaining staff by 30 per cent.
However, HN in particular struggled to comply with this initiative due its heavy social
responsibilities and its Managing Director was subsequently replaced by the head of
the best performing branch who initiated a new cost-cutting campaign. Around the
time our field work ended in 2011 hundreds of proposals for cost savings had recently
been received whilst steps were also taken to check tendencies towards social unrest.
Nevertheless, this re-framing of control practices around the idea of mass
mobilization did not imply a complete disentanglement from the use of responsibility
accounting as a means of improving financial control. The cost-cutting campaigns
12
Interview with the Deputy Head of Office of HN, 2009.
Memo issued by the chairman of MetalCo, 2009.
14
Interview with the Assistant Director of HN, 2010
13
27
were combined with an element of “measured delegation” and at least a notional
return to more comprehensive financial performance contracts to contain some of the
major overflows emerging over the preceding years. Towards the end of 2009, seven
business sectors were created under headquarters with considerable decision-making
autonomy in areas such as sales, finance, investments and purchasing. The business
sectors were to be held accountable to headquarters for profits and return on
investment and were placed in direct charge of the branches which were, in turn,
redefined as “cost as well as profit centres”. To resolve the lingering problems of
inefficient purchasing routines, purchasing decisions were fully devolved to branch
managers although they were expected to coordinate these decisions with
headquarters. However, these initiatives were accompanied by measures aimed at
strengthening headquarters’ control and disentangling financial control from
embedded, local relationships reinforcing the tendencies of financial managers to
collude in the manipulation of performance data. To this end, eight “branch CFOs”
directly reporting to headquarters were appointed. The “branch CFOs” were
instructed to work closely with other branch managers in coordinating performance
management, investment appraisals and business development decisions and were
also entrusted with direct responsibility for special cash budgets designated to the rebuilding local supply networks. However, our interviews in HN suggest that the reframing of financial responsibilities and reporting lines made little difference. The
view of the Head of Office of HN was representative:
“Previously we reported to headquarters; presently we report to section leaders as
well as headquarters. Given our current financial performance headquarters couldn’t
possibly let go of direct control. Restructuring makes no difference to the way
branches operate but merely adds another layer of bureaucracy. Our last two
investment proposals were refuted, clearly proving my point…We will always be at
the bottom of the food chain.” (interview with the Head of Office of HN, 2010)
This observation was confirmed by internal correspondence and memoranda issued in
2010 and 2011 suggesting that no substantive changes in the lines of reporting or
clarification of the financial responsibility of the branches materialized from the restructuring of MetalCo. Rather, it was officially acknowledged that the revised system
of responsibility accounting gave rise to new overflows, such as coordination
problems stemming from a lack of communication across various hierarchical levels,
and perpetuated extant ones, such as the tendency of production managers to resort to
some “excuse culture” by systematically explaining away inefficiencies with
reference to uncontrollable factors.15 Neither did the re-framing of financial
responsibilities entirely curtail data manipulation. For instance, in an informal
conversation in the summer of 2010 branch managers boasted about ways in which
they tried to make HN “break even” by “massaging” inventory figures. They further
suggested that a truly competent manager must find ways to “beat” the enterprise
resource planning system by manipulating data entries. The new CFO of MetalCo
also confirmed that such problems of data manipulation continued to be of more
general concern across the corporation:
“The enterprise resource planning system has failed to deliver true and timely
reports. … In 2010, we have found several cases of branches keeping private
15
Internal memo issued by the CFO, 2011.
28
treasuries, hiding profits, falsifying expenditures and stripping assets.” (CFO speech
at the internal annual review of the accounting work of MetalCo, 2011)
The unfolding development of the notion of responsibility accounting in MetalCo thus
failed to provide a more stable or orderly frame supporting the recurring cost-cutting
campaigns. Indeed, there were even signs of these campaigns reinforcing rather than
resolving the problems of data manipulation, or as the Deputy Head of Accounting at
HN explained:
“We budgeted for a loss of 700 million for this year but this was turned down [by
headquarters], then reduced to 500 million, which was turned down again, it went
down further to 350 million, which was still unacceptable. It was finally agreed that
this year our loss would be 60 million. How could this be possible? This left people
with no alternative than to cook the books.” (interview with the Head of Budgeting,
2010)
Neither did the re-framing of financial responsibilities and decision-making rights
produce any lasting improvements in so far as purchasing was concerned. The
delegation of purchasing decisions to the branches largely failed to enhance the
efficiency and transparency of purchasing practices and corruption and collusion
between supply-chain managers and suppliers flourished under the pretence of
competitive tendering.16 Headquarters was so alarmed by these continuing overflows
that it decided to re-centralize all purchasing decisions except for the acquisition of
metal ore in early 2011. Hence at the time our field work ended the system of
responsibility accounting was again in a state of flux without any managerial
consensus as to how to resolve such long-standing problems being forthcoming. In
other words, the situation surrounding the framing of responsibility remained
relatively “hot” and showed few signs of settling around more stable social
arrangements to contain overflows.
Concluding Discussion
We began this paper by raising the issue of how the notion of responsibility
accounting shapes economic behaviour and developing an analytical framework
grounded in economic sociology as an alternative to the agency theoretic approaches
informing much research on this topic. Our field study in a Chinese SOE sheds further
light on this issue by illuminating how the evolution of responsibility accounting is
conditioned by broader socio-economic contingencies and how the interplay between
such contingencies and emerging systems of responsibility accounting shapes the
constitutive roles of the latter. As explicated below, this provides for some
rapprochement between classical versions of economic sociology and more recent
advances within the performative tradition.
Consistent with accounting research inspired by classical versions of economic
sociology (e.g., Modell and Wiesel, 2008; Neu, 1992; Neu and Simmons, 1996), our
analysis demonstrates how systems of responsibility accounting evolving both prior to
and after the formation of MetalCo were reconciled with long-standing, socially
16
Internal annual review of the accounting work of MetalCo, 2010.
29
embedded practices. Rather than forming a powerful mechanism for nurturing
sustained improvements in financial performance, the initial system of responsibility
accounting introduced in HN evolved into a very lax means of financial control in
response to the deeply ingrained expectations to provide unauthorized pay rises and
staff benefits and other practices aimed at maintaining social stability. Even though
the subsequent system of responsibility accounting underpinning the “MetalCo
Model” was designed to curb such tendencies towards adjustment and enhance
financial discipline it too relied heavily on socially embedded mechanisms, such as
principles of mass mobilization, rather than formal financial incentive schemes
devised to align managerial interests with the emerging, shareholder-focused reform
agenda. Moreover, the incentives of managers to prioritise financial performance
improvements were weakened by the integration of financial performance indicators
into league tables that also required them to pay close attention to long-standing
political concerns with social stability. As the system of responsibility accounting
evolved over the following years it also became clear that socially embedded
phenomena, such as the expectations on financial managers to conform to the
communal ethos at the branch level and lingering social welfare obligations,
continued to constrain its efficacy by perpetuating problems of data manipulation and
a lack of fiscal probity.
Taken together, these findings show how the use of responsibility accounting to reframe control practices around increasing concerns with enhanced financial
performance and shareholder interests continued to be entangled with broader socioeconomic contingencies historically detracting from such goals in Chinese SOEs
(Miller, 2002). This is not to deny the constitutive effects of emerging accounting
practices. Indeed, the launch of the “MetalCo Model” and the subsequent framing of
the notion of responsibility accounting around the need for centralized performance
monitoring did re-constitute economic behaviour by removing the possibilities of
creating “private treasuries” and gradually generated a range of overflows, such as
“irresponsible purchasing” and the creation of novel opportunities for data
manipulation (cf. Callon, 1998b). However, in contrast to much accounting research
within the performative vein of economic sociology (e.g., Christensen and Skærbæk,
2004; Skærbæk, 2009; Skærbæk and Tryggestad, 2010), we argue that such
constitutive effects are not only a result of more or less successful attempts to
disentangle economic behaviour from its broader, socio-economic context. Rather,
our analysis suggests that both the efforts to re-constitute economic behaviour through
the framing of control practices and subsequent overflows can be understood as an
outcome of an intricate interplay between emerging and embedded practices. For
instance, the initial acceptance of centralized performance monitoring as a new frame
relied heavily on its entanglement with political incentives grounded in long-standing
principles of mass mobilization whilst the same incentives subsequently bolstered the
tendencies towards “stagnation” underpinning the problems of “irresponsible
purchasing”. A similar pattern was discernible towards the end of our study as the reframing of control practices around principles of mass mobilization reinforced the
incentives to engage in periodic cost cutting campaigns whilst the entanglement of
such campaigns with the notion of responsibility accounting cemented extant
overflows such as data manipulation to meet financial targets.
These findings are indicative of how insights from classical versions of economic
sociology may prompt some re-conceptualization of the possibilities of framing
30
economic behaviour and thus enrich the performative tradition. Rather than
conceiving of framing as a relatively isolated event aimed at disentangling economic
behaviour to render it controllable, it would seem pertinent to recognise how it
depends on and is continuously conditioned by a range of embedded practices.
Empirical enquiries closely following Callon’s (1998a, 1998b) work have placed
considerable emphasis on the theories and specific calculative devices constituting
economic behaviour (e.g., Christensen and Skærbæk, 2004; MacKenzie and Millo,
2003; Skærbæk, 2009; Skærbæk and Tryggestad, 2010). By contrast, our findings
suggest that economic theories played a less direct, constitutive role and that it was
largely superseded by socially embedded practices once specific calculative practices,
such as responsibility accounting, were put into practice. Whilst agency theory was
explicitly invoked to legitimize the MES reform and the introduction of the “MetalCo
Model”, it became much less salient in the subsequent framing of economic behaviour
as a result of the reconciliation of responsibility accounting with long-standing
political and social concerns. This, in turn, fostered a more complex framing process
where key actors, such as the CFO of MetalCo, continuously sought to disentangle
financial control from embedded practices whilst such practices continued to
condition economic behaviour and emerging overflows. From a Callon-inspired
perspective, such outcomes may be seen as a consequence of accounting forming a
very incomplete and fragile frame (cf. Christensen and Skærbæk, 2004; Gill, 2008;
Skærbæk, 2009). However, given the seemingly intractable task of disentangling
responsibility accounting from the broader, socio-economic context of Chinese SOEs,
we are more inclined to conceive of framing as a process that inherently draws on and
is in constant interaction with elements situated outside the focal frame (cf. Miller,
2002). At the same time, our analysis confirms central tenets of Callon’s (1998b)
work in so far as the propensity for more or less radical re-framing is concerned. The
system of responsibility accounting devised by the CFO of MetalCo proved
remarkably resilient despite escalating overflows and it was only when his position
was weakened by exogenous events, such as the market downturn in 2008, that the
situation turned sufficiently “hot” for the system to be discredited and control
practices to be re-framed around periodic cost-cutting campaigns.
This revised conceptualisation of framing has important implications for the notion of
responsibility accounting and the theorization of its role in organizations. Much
research on this theme has concentrated on the possibilities and merits of adhering to
or flouting the controllability principle. We initially suggested that adherence to the
controllability principle may be seen as a way of disentangling financial
responsibilities from environmental disturbances in an attempt to maintain the
stability of control practices. Whilst this is inherently problematic where the framing
of responsibility accounting is continuously conditioned by broader, socio-economic
contingencies, our analysis provides some insights into how it might be achieved. In
MetalCo, allegedly uncontrollable factors continued to be evoked by branch managers
to deflect attention from poor financial performance and this “excuse culture” was
tacitly accepted as a way of reconciling financial control with long-standing social
welfare obligations despite the CFO’s resistance to such practices. This provides an
alternative rationale as to why the influence of uncontrollable factors is filtered out of
performance evaluation to those generally emphasised in the literature. Empirical
accounting research has mainly explained variations in this regard from a
motivational perspective with reference to the influence of organizational structures
and business environments (e.g., Frow et al., 2005; Giraud et al., 2008; Merchant,
31
1987, 1989) without relaxing the assumption that the ultimate objective of
responsibility accounting is that of aligning the interests of managers and
shareholders. By contrast, our findings suggest that some uncontrollable factors are at
least implicitly excluded from financial performance evaluation to avoid destabilising conflicts with socially embedded priorities competing with pressures for
enhanced shareholder orientation. However, it would be fallacious to assume that
economic behaviour is controllable merely because a seemingly stable frame has been
established through the use of responsibility accounting. As demonstrated by the
persistence of the “MetalCo Model” such stability may prevail despite the emergence
of a multitude of overflows unless wider changes in the socio-economic environment
prompt a radical re-framing of control practices.
Our view of responsibility accounting as a device for framing economic behaviour
also adds important insights that are generally overlooked in the economics-based
literature on the topic. Most importantly, the finding that the use of responsibility
accounting to frame economic behaviour is entangled with broader social priorities
enhances our understanding of the role of goal conflicts emanating from a broader
range of socio-economic objectives being endorsed by dominant stakeholders.
Agency theorists have typically paid little attention to such goal conflicts by assuming
that dominant stakeholders, or principals, possess relatively stable and consistent
preferences (Shapiro, 2005). With respect to responsibility accounting the over-riding
preference of the principal is generally seen as being that of profit maximization.
However, this is rarely a realistic assumption in organizations that continue to fill
wider, socio-economic functions despite being exposed to increasing pressures for
enhanced financial performance as is often the case in SOEs in emerging and
transitional economies (Shirley and Xu, 1998, 2001). Even though the policy
discourse initially underpinning the MES reform echoed much of the agency theoretic
concerns with enhanced financial performance and shareholder orientation the
governance and control practices subsequently devised by the SASAC and permeating
MetalCo reveal a rather more complex reform trajectory where such concerns became
entangled with broader, socially embedded priorities and how this continued to detract
from financial performance. This observation nuances prior commentaries suggesting
that the MES reform followed some Anglo-American corporate governance ideal
infused with agency theory in a rather slavish and unreflexive manner (e.g., Clarke,
2003; Wong, 2005). However, it is consistent with the finding that political
constraints have continued to exercise an important influence on control practices in
SOEs (O’Connor et al., 2006).
The economic sociology perspective advanced in this paper also provides a more
holistic and dynamic view of how responsibility accounting is implicated in shaping
economic behaviour than that normally found in the economics-based literature.
Whereas the latter body of research mainly examines specific behavioural
consequences, or agency problems, in isolation from each other, our analysis shows
how a multitude of overflows are both generated by and condition the continuous
development of responsibility accounting. This adds important, complementary
insights to recent research showing how responsibility accounting is implicated in
organizational change by shaping the socio-cognitive boundaries conditioning
economic behaviour (Rowe et al., 2008). In contrast to such advances, our study
demonstrates how responsibility accounting interacts with a broader range of socioeconomic contingencies rooted in political reforms unfolding over an extended period
32
of time. However, we believe that future research has much to gain from connecting
such macro-level categories to mechanisms operating at a deeper, cognitive level to
enhance our understanding of how individual actors conceive of and engage with
responsibility accounting. This may foster further, multi-level analyses of how
different sources of embeddedness interact in shaping economic behaviour (cf. Dacin
et al., 1999). It may also enrich emerging research into how cognitive mechanisms
influence individual reactions to key aspects of responsibility accounting, such as
variations in adherence to the controllability principle (Burkert et al., 2011), by
drawing attention to how such mechanisms are conditioned by the broader socioeconomic environment in which they are embedded.
33
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40
HN
Office
Refinery
Production
mgt
Power
plant 1
Human
resource
Power
plant 2
Equipment
& Engery
Carbon
factory
Transport
unit
Accounting
& finance
Mainte
-nance
Engineering &
Project mgt.
R&D
Inf.
system
Safty &
environment
Sales
Figure 1. Organizational structure of HN around the time of our field work.
41
Inventory
mgt
Appendix
List of interviews
List of interviews with governing agencies of SOEs
Interviewee
Head of Performance Review Division,
Performance Bureau, China State Asset
Administration Committee (SASAC)
Duration
(min.)
Date
2008
2009
2010
60
11/08/09
45
4/09/09
45
Chief, Performance Bureau., SASAC
2011
6/08/10
60
5/09/11
60
24/09/11
20
6/08/10
30
Deputy Minister, Ministry of Finance
5/09/11
120
4/09/09
30
Deputy Chief, XX Municipal branch of
SASAC
5/08/10
90
23/09/11
20
28/09/11
60
10/09/09
50
Chief, SOE performance division, XX
municipal Party Committee,
20/09/11
90
2/10/08
45
9/09/09
120
1/8/10
45
4/09/11
60
20/09/11
Subtotal:18
2
4
4
8
2010
2011
List of interviews at MetalCo headquarters
Interviewee
Assistant to the chairman
Duration
(min.)
90
Date
2008
2009
22/10/08
7/8/09
90
50
6/ 8/10
17/9/11
Deputy Chief, Accounting and Finance
120
23/10/08
45
7/09/09
60
16/9/11
Secretary of Office
60
6/ 8/10
Staff, Accounting and Finance
120
7/ 8/10
Deputy Director, the ining function
90
7/ 8/10
Deputy Director of Sales
30
8/09/09
42
Head of the Investors’ Relations
45
22/10/08
Deputy Head, SAP team
60
23/10/08
60
5/09/09
Subtotal: 14
4
4
4
2
List of interviews at HNbrach
Interviewee
Duration
(min.)
Managing Director
60
Date
2008
35
Party Secretary-General
2009
2010
25/8/09
60
23/8/10
30
2/8/10
45
14/10/08
30
23/8/09
45
2/8/10
30
23/8/10
30
Assistant to the Managing Director
Chairman, Disciplinary Committee
Head of Sales
Head of Office
1/10/11
30
10/9/08
30
1/11/08
60
5/08/09
60
25/8/09
30
11/09/09
120
31/7/10
30
19/7/10
30
3/9/11
60
1/10/11
45
15/10/08
40
17/10/08
90
13/10/08
40
24/8/09
90
24/8/10
90
21/8/10
60
1/8/10
90
Deputy Head of Office
60
2/10/11
14/10/08
40
Head of Human Resource
150
24/8/09
17/10/08
120
27/8/09
50
Head of Accounting and Finance
2011
13/10/08
23/8/10
90
15/10/08
90
17/10/08
120
26/8/09
45
24/8/10
5/10/11
43
Deputy Head
Finance
of
Accounting
and
90
15/10/08
45
26/8/09
3/8/10
+lunch
22/8/10
+dinner
90
120
Head of Purchasing
30
3/10/11
Head of XX Mine
40
3/9/11
60
6/9/11
90
4/10/11
60
6/10/11
Former Head of Accounting
Finance
and
30
16/10/08
90
Tax officer, Accounting and Finance
24/8/10
60
20/10/08
60
16/10/08
60
29/8/09
90
26/8/09
21/8/10
+dinner
60
Head of Budgeting Office, Accounting
and Finance
90
16/10/08
4/8/10;
lunch
40
60
4/10/10
Chief Finance Officer, the Mining
Function
120
3/8/10
Chief Finance Officer, LZ branch
180
21/8/10
Worker, Refinery 2
40
22/8/10
Head of
Resource
Salary
Office,
Human
120
20/10/08
150
27/8/09
Staff, Salary Office, Human Resource
45
27/8/09
Chief, Refinery1
120
Chief, Refinery2
Deputy Director, cement factory,
60
28/8/09
60
28/8/09
60
Factory worker, Refinery 2
14/10/08
15/10/08
45
120
SAP team members, IT Dept.
28/8/09
20/10/08
60
31/8/09
Managing Director, private competitor
A
Whole day
1/8/09
Head of Office, private competitor A
Whole day
1/8/09
Whole day
3/9/09
Whole day
3/9/09
Deputy Managing Director,
competitor B
Production
Manager,
competitor B
Subtotal: 72
private
private
20
44
22
19
11
45