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Keywords: Agency theory, balanced scorecard, decision facilitating, decision influencing
ABSTRACT
In this paper, we develop a theory of how the balanced scorecard (BSC) mitigates agency problems. Through the lens of the decision-facilitating and decision-influencing roles of the BSC in management accounting, we propose that (a) the information available in the BSC can reduce information asymmetry; (b) the multidimensional performance-based measures in a BSC can reduce differences in risk tolerance; (c) the strategically linked performance measures in a BSC can reduce differences in risk tolerance; and (d) the strategically linked performance measures in a BSC aligns the individuals' goal with the organization's goal. This paper contributes to the management accounting literature by shedding light on how the BSC can alleviate agency problems and optimize firms' performance.
INTRODUCTION
How to mitigate agency problems has long been discussed in academic literature. When there are information asymmetry and uncertainty between a principal and an agent, agency theory predicts specific problems: the principal is unable to monitor the agent's behavior, and the principal cannot force the agent to perform the task (for which the agent is compensated). Empirical researchers have found ways to effectively mitigate agency problems. These efforts include using a contract to increase satisfaction and reduce agency costs; using financial and non-financial measures in the contract to improve the agency relationship; and increasing the effectiveness of each component in the contract. In this paper, we apply agency theory to demonstrate how the balanced scorecard (BSC) approach can mitigate agency problems in contracts.
In 1992, Kaplan and Norton introduced the BSC concept in a Harvard Business Review article (Kaplan & Norton, 1992). The BSC is a strategically-linked performance measurement system that translates an organization's strategy into a set of measurable objectives, targets, and initiatives. Kaplan and Norton (1992; 1996) link the four dimensions of financial and nonfinancial performance measurement-learning and growth, internal business processes, customer, and financial-with the vision and strategy of the organization. In addition to being a strategic measurement system, BSC is also a strategic control system. According to Kaplan and Norton (1996, p. 19), the BSC can be used to "clarify and gain consensus about strategy, communicate strategy throughout the organization, align departmental and personal goals to strategy, link strategic objectives to long-term targets and...