Key Performance Indicators (KPIs) impact behaviors in organizations and both incentivize required behavior or disincentivize behavior which is not desired. Bonuses paid to managers and other employees for meeting or exceeding personal and organizational KPIs can be powerful influences of human behavior. Performance bonuses can also stimulate a culture of greed and desensitize staff to acting in anyone’s interest if that is not in their short-term financial interest. This article focuses on the influence KPIs can have on human behavior and the role accounting professionals can play in developing broad-based measures of performance to stimulate responsible organizational conduct.
Key Performance Drivers
The intense focus on KPIs in many organizations including the setting of aspirational or stretch targets, combined with incentivized payment schemes, can distract employees at all organizational levels to “game” their behaviors, potentially in the customers’ interest but, at the same time, push out the boundaries of moral behaviors in accounting and business. This phenomenon, we believe, may constitute a dangerous cultural turn in which accountants and accounting may be implicated in failings which emerge. KPI-driven staff are incentivized to devote strong, if not excessive, attention to their measured personal performance, and its rewards, making them prone to “turn a blind eye” to their social and ethical obligations. Such self-interest influences what people including professional accountants observe, consider, decide and do, which can accentuate across time, weaken ethical norms in organizations, as well as lead to dangerous trust deficits in communities.
As we have previously commentated, accounting is not a mere technical practice but a social and moral practice. We advocate a comprehensive consideration of the major conceptions of organizational governance and the key role of accounting to more adequately consider all appropriate outcomes for all stakeholders. While responsibility for this consideration does not rest solely on the accounting profession, but rather on those charged specifically with effective organizational governance, the accounting profession can play a defining role in developing and reviewing performance measurement regimes and indicators, along with suitable incentives, which produce outcomes in the public interest.
Evidence from research and practice indicates that organizational cultures which feed personal greed and malnourish other human concerns, such as justice and honesty, are likely to stimulate unethical behaviors.
The Role of the Accounting Profession
Appreciating the prime importance of accounting and professional accountants on organizational and social functioning and development, we propose that the accounting profession has a role, and indeed a duty, to develop and apply a more embracing and well-balanced measurement and reporting orientation, such as the International Integrated Reporting Council (IIRC) Framework. Such an approach would focus attention not only on performance, bottom line and monetary value, but simultaneously on prized non-monetary values and outcomes.
Many KPI regimes are deliberately narrow and should at the very least be implemented with a strong evaluation and plan of “how” the improved performance can be achieved. Performance measurement which has a basis on delivering financial and non-financial outcomes, which are morally acceptable, in our view, is overdue. This is evidenced in the Commission’s (see example below) findings and various other examples of organizational and industry wide misconduct around the world. There is, unfortunately, no shortage of case studies, which showcase the undesirable outcomes of performance and remuneration regimes and their propensity to be dysfunctional, particularly in major organizations and, therefore, not in the public interest.
While some people, typically so-called “bad apples”, may be identified as a small number of unethical staff, this is often only part of the story. We believe that accountants may be more broadly implicated in permitting narrow, incentivized performance regimes, especially embracing stretch performance measurement and evaluation cultures, to be adopted and developed. Therefore, professional accountants’ careful and adequate regard for serving the public interest, especially where the emerging organizational behaviors are at least questionable, calls for ethical leadership by professional accountants and their professional organizations and is indeed required in order to satisfy accountants’ ethical and professional obligations.
The Code of Ethics for Professional Accountants, issued by the International Ethics Standards Board for Accountants (IESBA), in its first paragraph (100.1 A1) explicitly states: “A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. A professional accountant’s responsibility is not exclusively to satisfy the needs of an individual client or employing organization”. Compliance with this assertion and promise in the Code requires professional accountants to be alert to the possible adverse consequences of metrics and measures by means of careful evaluation of their consequences, including possible unintended consequences.
Accounting impacts human behavior, including unethical behavior. Being alert to the impacts of accounting, whether intended or not, requires an appreciation of accounting simultaneously as technical, social and moral practice.
Heightened and undeterred commitment to the public interest by the global accounting profession by emphasizing the primacy of “ethical performance measurement and management” is a major pathway to being a trusted profession. A new proposition along these lines appears to be timely, warranted and, in our view, would be welcomed by the profession’s stakeholders around the globe.
Misconduct in the Australian Banking, Superannuation and Financial Services Industry
In Australia on 4 February 2019, The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the Commission), led by the Honourable Kenneth Hayne AC QC, handed down its three-volume final report. The title of the Commission revealed the reason it was established on 14 December 2017. The front-page headlines in major Australian newspapers on 5 February 2019 made the main findings clear, with The Australian stating “Bank greed ‘criminal’” and The Age posturing “‘Sorry’ not enough”. Community feeling, understandably, was one of disappointment, if not frustration, or at worst, one of anger.
As stated in the Introduction of the Final Report, “the central task of the Commission has been to inquire into, and report on, whether any conduct of financial services entities might have mounted to misconduct and whether any conduct, practices, behaviour or business activities by those entities fell below community standards and expectations”. As the Initial Report of the Commission, released on 28 September 2018, had ascertained and the Final Report further evidenced, the conduct discovered “… includes conduct by many entities that has taken place over many years causing substantial loss to many customers but yielding substantial profit to the entities concerned”.
The Commission found that the law had been broken in many instances or the conduct discerned had fallen short of community expectations of the appropriate behavior expected, or even required, to be exercised by financial services entities. A well-honed system of paying incentive bonuses to managers and other staff of financial services entities including customer services officers or bank tellers, based on KPIs, helped to facilitate the prevailing culture of greed across these financial services entities. Many staff of these entities had become reliant on the bonuses they had become accustomed to earning, which were also firmly intended to drive the performance of financial services entities.