The objective of this paper is to explore the relationship between organisational budgetary control and the capital market. The paper describes the changing relationship between the capital market and corporations and focuses on the effects that this changing relationship has had on the operation of organisation control through the use of a budgetary system.

The capital market is broadly defined here as the market, or markets, where investment products such as stocks and bonds are bought and sold and commonly referred to as the stock market. Historically firms have focused on the product market from where they derived their revenue through sales of their products or services. Although the two markets are theoretically separate, they have increasingly become mutually dependent with firms having to be successful in mediating their position within both markets. In other words, firms have to be good at not only producing and selling goods and services but also at managing their relationship with their shareholders. Capital market investors demand returns measured by levels of increasing shareholder value. The field-study based case study described and analysed in this paper shows that the firm level accountability for increasing returns is moving increasingly down the organisation to the level of the individual by means of a changing control environment illustrated in this paper through the workings of a budgetary control system.

The influence of the capital market on budget implementation is considered in this paper within a case study context of a particular organisation, referred to as Eurel. This is done by connecting the world of the capital market with that of the organisation to show the changing influence on and changing practices of budgetary control. The paper is located within a discussion of key work on budgetary control particularly in the areas of participation, slack, performance measurement, time frames and bias ([Argyris, 1952], [Hofstede, 1968], [Hopwood, 1972], [Likert, 1961] and [Llewellyn, 1998]; Lowe & Shaw, 1968; [Merchant, 1985], [Otley, 1978], [Otley, 2001] and [Schiff and Lewin, 1970]; Van der Stede, 2000). All of these issues were relevant to Eurel and its organisation members.1

The capital market has impacted on corporations through changing expectations focussing especially on expected performance and growth issues. In recent years, shortening product life cycles and increased competition has meant that sales and profit growth has been difficult to maintain often resulting in a shortfall between actual results versus those predicted. The demand for organisational credibility in the attainment of results has been led especially by institutional shareholders, who no longer show a loyalty to the companies in which they invest ([Drucker, 1999], [Handy, 1995] and [Rappaport, 1986]).

The movement from individual ownership to larger fund management groups has lead to changes in shareholder priorities (Handy, 1995). The growth in fund management has institutionalised share dealing and ownership (Froud et al., 2006 J. Froud, S. Johal and A. Leaver, Financialization and strategy: narrative and numbers, Routledge, London (2006).Froud, Johal, & Leaver, 2006). The traditional holding of shares has increasingly been delegated to the fund management community who along with the investment analysts (for example the Wall Street analysts), exercise major steering power and influence over organisations and their strategies. Much of this has been enabled by the ever more remote separation of ownership and the growth in management of international share portfolios ([Drucker, 1999] and [Handy, 2002]). Institutional shareholders (pension funds, private equity funds, and so forth) have had an increasing policy of engaging in what has been described as the active management of funds rather than the previously more common practice of long-term share ownership. Rappaport (1986) notes that portfolio managers compete for best returns by moving in and out of individual stocks with the possible consequence that this is not necessarily based on a company’s long-term future goals but on short-term return expectations for shareholders. Institutional investors are increasingly willing to intervene in the affairs of organisations and can influence the manner in which managers carry out their duties. They can influence for example the expectations as to what constitutes a fair return on funds invested and the time frame in which it is expected. Historically, share ownership was more dispersed with the result that there were limits to the boundary of impact that individual owners could make (Berle & Means, 1968; Froud et al., 2006).

2. Overview of the paper

The paper starts with a review of the essence of budgetary control with a focus on the issues of participation, slack, measurement, time frames and bias. This section also signals and integrates aspects of a changing business environment that includes the growing influence of shareholders. This is followed by a brief description of the research methodology. There is also an overview of the case organisation and the two business units that provide the case detail. The fourth section includes the discussion of the case-study data. The paper concludes with a summary that synthesises the results and links to existing theory.

3. Literature review

3.1. The essence of budgetary control

Buckley and McKenna (1972) describe budgetary control as consisting of planning, controlling, co-ordinating and motivation through money values and departments within an organisation. It is a plan, in quantitative terms, usually for 1 year. The essence of the budget process is the influencing of management behaviour by setting agreed performance standards and controlling the attainment of those standards. The planning or budget function appears steeped in the notion of a stable environment aspiring as it does to having no surprises or at least being able to adjust and get back on track as far as planned outcomes are concerned. Otley (2001) noted that although budgetary control is part of a complex organisation reality, it appears to “work reasonably satisfactorily in a relatively stable environment” (p. 257). However, the current business context can be said to be anything but stable but one that is argued favours a shorter term perspective in an attempt to maximise the certainty of short-term planned results.