A Risk-Focused Performance Management System Framework for Planning Change in Organisations Subject to Significant Environmental Pressures and Uncertainty

Abstract

In 2007, the New Zealand government, in principle, adopted the implementation of a cap and trade emissions trading scheme (ETS) in the energy sector from 2010. The objective of this paper is to develop a risk-focused performance management system (PMS) planning framework for organisations undergoing externally-driven regulatory change that constrains their operating environment and increases business and operating risk exposure. This paper focuses on the New Zealand electricity generators and retailers (gentailers). It utilises contingency theory and secondary data to explain PMS change implications due to the altered business risk exposure potential of the proposed emissions trading regime, and the associated carbon constraints this regulatory change imposes on these organisations' operating environment. The risk-focused PMS planning framework developed in this study, allowed the identification of the drivers and attributes that, due to the ETS adoption, potentially have significant negative business risk impacts for some gentailers. The findings arising from the application of this risk-focused PMS framework to the New Zealand electricity gentailers suggest that the predominantly thermal-based generators will be more disadvantaged due to a reduction in competitiveness and profitability. This reduction is the result of the interaction between the ETS-related risks and the sources and types of external and internal environmental uncertainty associated with the regulatory change. The business risks identified not only influence organisational-level PMS design, function, and operation needs, but also have economic consequences at sectoral and national levels, particularly in relation to national security of electricity supply. The paper provides insights into an organisation's potential internal adjustments in response to increases in internal and external business risks due to the introduction of the ETS and changing wider environmental management expectations. Theory implications relate to the role and use of risk in improving the application of contingency theory in explaining organisational change under environmental pressures. Additionally, the paper contributes to the management accounting research through the examination of the internalisation of externalities, such as wider climate change management. Consequently, the findings of this study will be of potential interest to academics, managers, accountants, other professionals, governments and policy-makers.