The effect of integrating strategic risk information in the balanced scorecard on managers strategy evaluations and recommendations

Abstract

There has been growing awareness by practitioners, academics and regulators that managing strategic risks is critical to organizational success. One approach that has been suggested to improve strategic risk management is integrating strategic risk information within strategic performance management systems (SPMS), such as the balanced scorecard (BSC). While recent survey evidence has found that managers use SPMS to respond to changes and uncertainties in the external environment (e.g., Chenhall 2005; Widener 2007), there has been little investigation of the impacts that integrating strategic risk information in SPMS has on managers strategy-related judgments. This thesis aims to empirically examine the effect of integrating strategic risk information in the BSC on managers strategy evaluations and strategy recommendations. Specifically, this thesis compares the judgmental effects of integrating strategic risk information in the BSC to presenting strategic risks in a risk register separate to the BSC, and the moderating role of different strategic risk profiles (that is, whether the strategy is exposed to high strategic outcome risks or high strategic input risks). Based on the results of an experiment, this thesis shows that when strategic risk information is integrated in the BSC, managers make less favorable strategy evaluations and strategy recommendations for a strategy with high strategic input risks than one with high strategic outcome risks. However, managers strategy evaluations and strategy recommendations are not influenced by these different strategic risk profiles when strategic risk information is presented in a risk register separate to the BSC. This thesis contributes to the literature by being one of the first to investigate the effect of strategic risks on managerial judgments. The findings also demonstrate that integrating strategic risk information in SPMS, such as the BSC, has potential beneficial effects in enabling managers to distinguish between strategic risks that have differential impacts on a strategy.