1.

INTRODUCTION

The practice of corporate governance (CG) in organizations has developed rapidly in recent times,
and its importance has been highlighted around the world. It has even been adopted by countries that
have not yet regulated the adoption of CG in their organizations. The reason for the global interest in
GC is that it underpins a company's operating framework. Therefore, the adoption and
implementation of the QA practice is expected to benefit the owners, since they are committed to
using the principles and mechanisms, which in the broadest sense amounts to an effective
monitoring of the activities of a company, particularly when the principles of disclosure and
transparency are adopted. (Grantham, 2020)
Corporate governance has become a topical issue because of its immense contribution to the
economic growth and development of nations. The absence of good corporate governance is a major
cause of failure of many well performing companies.
Corporate governance is the broad term describes the processes, customs, policies; laws and
institutions that direct the organizations and corporations in the way they act administer and control
their operations. It works to achieve the goal of the organization and manages the relationship among
the stakeholders including the board of directors and the shareholders. It also deals with the
accountability of the individuals through a mechanism which reduces the principal-agent problem in
the organization.
The case company of this thesis and one of the metal producing factories in Ethiopia and This study
deals with the application of single minute exchange of dies in metal industry. Kaliti Metal Products
Factory (KMPF) is one of the largest metal and engineering industries in Ethiopia. Currently the
company is specialized in the manufacturing of basic metal products like hollow section (different
size tubular and pipes lines), plain sheets, window and doors profiles, angle irons, roofing and
cladding sheets and different fabricated furniture and structural steels and structured products on
customer specifications.
2. Literature review
Corporate governance is seen as the whole set of measures taken within an enterprise to favor the
economic agents to take part in the productive process, in order to generate some organizational
surplus, and to set up a fair distribution between the partners, taking into consideration what they
have brought to the organization (Maati, 1999). The literature is reviewed from four complementary
theoretical perspectives.
2.1 Agency Theory
One of the theoretical principles underlining the issue of corporate governance is the agency theory
developed by Jensen and Meckling (1976) resulting out of the separation of ownership and control.
Investors have surplus funds to invest but due to technical constraints such as inadequate capital and
managerial expertise to manage the funds, employ the services of managers to invest their funds in
profitable ventures to generate good returns and the managers rewarded for their service.
Agency problem however arise because the actions of managers do not always promote the interest
of the financiers, some of their actions are very detrimental to the fortunes of the financiers. Thus
agency problem as described by Jensen and Meckling (1976) focuses on the consumption of
perquisites by managers and other types of empire building (La Porta et al., 2000).
It is interesting that, these managers often tend to entrench themselves in power. According to
Shleifer and Vishny (1989), managers can expropriate shareholders by entrenching themselves and
staying on the job even if they are no longer competent or qualified to run the firm. Managerial
expropriation of funds can also take more elaborate forms than just taking cash out, such as transfer
pricing (Shleifer and Vishny, 1997). Such transfer pricing, asset stripping, and investor dilution,
though often legal, have largely the same effect as theft (La Porta et al., 2000). Additionally,
managerial expropriation could also take the form of diversion of corporate opportunities from the
firm, installing possibly unqualified family members in key managerial positions, or overpaying
executives, using the profits of the firm to benefit themselves rather than return the money to the
investors (La Porta et al., 2000). As a result of the interest of the opportunistic, self-interested
managers, there was an agency loss which is the extent to which returns to the residual claimants, the
owners fall below what they would be if the owners, exercised direct control over the company
(Jensen and Meckling, 1976).
The remedies to this conception of the agency problem within corporate governance involves the
acceptance of certain ‘agency costs’ involved either in creating incentives or sanctions that will align
executive self-interest with the interest of shareholders, or incurred in monitoring executive conduct
in order to constrain their opportunism (Roberts, 2004). Thus principles of corporate governance are
meant to control the internal and external entrenchment practices of executives through internal and
external control mechanisms which either align the interest of executives with the shareholders or
monitor them directly (Boyd, 1994; Gibbs, 1993; Hill et al., 1988; Walsh et al., 1990).
Finally, agency theory represents one of the most serious attempts to formulate a general theory of
the firm in the framework of social relations (Jensen and Meckling 1976). These authors define the
agency relationship as a contract under which one or more people ("principal") hire another person
("agent") to perform some service for the benefit of the principal, which means delegating authority
over the agent decision making. The approach that supports this theory is associated with the so-
called agency costs: the “agents”, directors or managers of the companies, may be tempted to act for
their own benefit and make management decisions driven by their own interests. In any case, the
agency theory has been the most applied in corporate governance research (Tricker, 2009).

2.2 Stewardship Theory

The stewardship theory emerged as a result of the seminar work by Donaldson and Davis (1991).
The theory is based on the assumption that the interest of shareholders and the interest of
management are aligned therefore management is motivated to take decisions that would maximize
performance and the total value of the company. The theory believes that there is greater utility in
cooperative than individualistic behavior and hence whilst the actions of management would be
maximizing shareholder wealth, it would at the same time be meeting their personal needs. The
managers protect and maximize shareholders wealth through firm performance, because by so doing,
their utility functions are maximized (Davis et al., 1997). To achieve this goal congruent, the
shareholders must put in place appropriate empowering governance structures and mechanisms,
information and authority to facilitate the autonomy of management to take decisions that would
maximize their utility as they achieve organizational rather than self-serving objectives. For CEOs
who are stewards, their pro-organizational actions are best facilitated when the corporate governance
structures give them high authority and discretion (Donaldson and Davis, 1991). Davis et al., (1997)
identified five components of the management philosophy of stewardship as trust, open
communication, empowerment, long-term orientation and performance enhancement.
This theory assumes that long-term contractual relationships develop based on trust, reputation,
collective goals, and participation, where the alignment of interests is a result that derives from
relational reciprocity (Van Slyke, 2006). The interests of the managers are aligned with those of the
shareholders there is no conflict of interest that must be overcome with mechanisms such as
financial incentives (Donaldson, 2008). Directors must recognize the interests of legitimate
customers, employees, suppliers and other stakeholders, but under the law their first responsibility is
to shareholders. Conflicts of interest between stakeholder groups and the company must be resolved
by the pressure of competition in free markets, supported by legislation and existing legal controls to
protect customers, employees, suppliers and society (Tricker, 2009).
2.3 Resource Dependency Theory
The resource dependency theory was developed by Pfeffer (1973) and Pfeffer and Salancik (1978)
with the objective of emphasizing the important role played by board of directors in providing access
to resources that would enhance the company’s performance and protect it against externalities.
Companies require resources in areas of finance, human, technical, information, communication and
technology to function properly and to achieve their objectives. Daily et al. (2003) posit that the
accessibility to resources enhances organizational functioning, performance and survival. Hillman et
al. (2000) argue that resource dependency theory focuses on the crucial role that the directors play in
providing or securing essential resources to the company through their linkages to the external
environment. They contend that, directors bring resources to the company in the form of
information, skills, access to key constituents such as suppliers, buyers, public policy makers, social
groups as well as legitimacy. Organizations depend on each other for business because they form the
largest proportion of the organization’s customer base, meaning the actions of one organization can
greatly influence the financial performance of the other either positively or negatively. Therefore the
need for organizations to establish relationships at board levels Johnson et al. (1996) agreed that the
theory provides focus on the appointment of representatives of independent organizations as a means
of gaining accessibility to resources critical to the organizations success.
According to Pfeffer and Salancik (1978) boards provide advice, counsel and know-how, legitimacy
and reputation, channel for communicating information with external organizations, and preferential
access to commitments or support from important actors outside the firm. The boards perform these
functions through social and professional networking (Johannisson and Huse, 2000) and interlocking
directorates (Lang and Lockhart, 1990). Abdullah and Valentine (2009) classified directors into four
categories of insiders, business experts, support specialists and community influential. Zahra and
Pearce (1989) posit that the diverse background of the directors enhance the quality of their advice.
The theory favors larger boards (Dalton et al., 1999; Booth and Deli, 1996; Pfeffer, 1973; Provan
1980).
2.4 Stakeholder Theory
Is Friedman (1962) in the book Capitalism and Freedom, expresses that the only social responsibility
of companies is to use resources in the development of activities that increase profits, obviously
within the rules of free enterprise. The companies do not have moral obligations or social
responsibilities with others that are not the shareholders, it is sought to maximize the profit for them.
In the shareholder approach, it is considered that the shareholders are the only ones with the right to
participate in the income created by the company therefore in this case the value created is measured
by what they receive.
The stakeholder approach considers that all participants in the creation of value have the right to
participate in the value that is added in the development of the value chain. This approach implies
that corporate governance is oriented to safeguard and manage that the remuneration of all
participants occurs, taking into account their opportunity cost. The interests of all participants and
stakeholders in the company who are affected by the decisions and actions that occur in it, as well as
their participation in corporate governance, are considered. The company is a nexus of contracts
between the different stakeholder’s shareholders, but also with creditors, employees, administrators,
clients, suppliers, authorities, others, or an agreement according to which the company constitutes a
cooperative game between the different stakeholders (Aoki, 1991).
In the stakeholder approach, corporate governance is affected by the relationships between the
agents that intervene in the corporate governance system. As the OECD (2004) points out, these
relationships are subject, in part, to laws and regulations, but also to voluntary adaptation and, more
importantly, to market forces.
Stakeholders are “any group or individual that can affect or is affected by the achievement of a
corporation’s purpose” (Freeman 1984, p.229). Donaldson and Preston (1995) defined stakeholders
as identifiable groups or persons who have legitimate interest in an organization and these interests
have intrinsic value. The theory is interested in how managerial decision making affect all the
stakeholders and no one interest should be able to dominate the others (Donaldson and Preston,
1995). Stakeholder theory like the resource dependency theory, also proposed for the representation
of the various interest groups on the organization’s board in order to ensure consensus building and
to avoid conflicts. The board therefore serves as arbitration over the conflicting interests of the
stakeholders and brings about cohesion needed for the achievement of the organizational objectives
(Donaldson and Preston, 1995).
In spite of the good intentions of the theory, it has been criticized for putting too much burden on
managers by making them accountable to many stakeholders without specific guidelines for solving
problems resulting from conflicting interests.
This situation has given managers the discretionary powers to decide on whose interest to serve
(Jensen, 2001). Jensen (2001) suggested that managers should pursue objectives that would lead to
increasing the long-term value of the firm since this would not be attained by ignoring the interest of
some of the stakeholders. Jensen (2001) also criticized the theory for adopting a single-valued
objective of maximizing wealth of its stakeholders. According to him, the performance of an
organization is not only measured by returns to the stakeholders but equally important is the
management of information in the organization with particular reference to vertical communication,
inter-personal relationships in the organization and the working environment. He refined the theory
to “enlighten stakeholder theory” to take care of the shortcomings. With this, the company should
take into consideration the interests and influences of people who are either affected or may be
affected by company’s policies and operations (Frederick et al., 1992). As a result of the complex
nature of the stakeholder relationship and the need for the better management of the various
stakeholders, Donaldson and Preston (1995) have concedes that stakeholder theory cannot be a
single theory but categorized them into three different approaches of descriptive, instrumental and
normative.
Shareholder or stockholder theory

This approach implies that corporate governance is oriented to the relationship between shareholders
and managers who control and manage the creation of value, and only the interests of shareholders
are taken into account. The goal of management is to maximize shareholder value.
Agency theory holds a contractual view of the relationship between managers and shareholders
where the managers have the sole objective of maximizing the wealth of shareholders. Stakeholder
theory considers this view to be too narrow since manager’s actions have effect on other interested
parties than just shareholders. The theory was developed by Freeman (1984) with emphasis on the
need for managers to have corporate accountability to stakeholders instead of shareholders.
Stockholder theory, also known as shareholder theory, says that a corporation’s managers have a
duty to maximize shareholder returns. According to the theory, which was first introduced by Milton
Friedman in the 1960s, a corporation is primarily responsible to its stockholders due to the cyclical
nature of business hierarchy. Shareholders approve the salary of a corporation’s business managers,
who, in turn, are in charge of the corporation’s spending, which should also be in line with the
wishes of the shareholders.

Corporate Governance and Firm Performance

Previous studies (Rajan and Zingale, 1998; Brickly et al., 1994; Williams, 2000; Drobetz et al.,
2003; Byrd and Hickman, 1992; Hossain et al., 2000; Rosenstein and Wyatt, 1990; Gemmill and
Thomas, 2004; Weisbach, 1988) have established positive relationship between good corporate
governance practices and firm performance. However, other studies (Bathala and Rao, 1995;
Hutchinson, 2002) have established negative relationship. Nevertheless, other researchers (Park and
Shin, 2003; Singh and Davidson, 2003) could not established any relationship. The inconsistencies
in the research findings could be attributed to the restrictive nature of data. Despite these conflicting
results, the literature generally attests that there is no doubt as to the importance of good corporate
governance in enhancing firm performance. This fact is attested to by the particular attention being
given to issues of corporate governance by governments, regional bodies, and private institutions.
In the aftermath of the financial crises in 2007, OECD (2009) on the corporate lessons from the
financial crises concluded that, the crises was largely due to failures and weaknesses in corporate
governance arrangements which could not serve their purpose to safeguard against excessive risk
taking by the financial institutions.

Literature review
1.1. Performance evaluation.
1.1.1. The concept of performance evaluation.
Performance evaluation is the human resource management activity of an organization that
determines the extent to which an employee was performing his/her job effectively.
Kaufman (1988) believes that performance evaluation is a measurement method to prove and
specify that a planned effort achieved the desired result. Although performance evaluation
can be viewed from multiple perspectives, the purpose of performance evaluation is to assist
in the achievement of a corporation’s strategic mission, objective mission, and vision. With
an excellent performance evaluation system, a corporation can achieve its goal of
organizational performance and find operating problems within the corporation. Therefore,
performance evaluation can improve uniformity of operation among employees and promote
consistency of objectives to achieve the goal of a project. For the performance evaluation
system, Simon (2000) first proposed the organizational vision or mission, which would form
a strategy that could be performed and determine the organization planning and goals. After
establishing an excellent performance evaluation system, action must be taken or the
organization vision or mission would be difficult to achieve.
1.1.2. Index of performance evaluation.
Most of the traditional indices of performance evaluation were primarily focused on
quantitative financial indices based on the cost accounting system; however, many past
evidences have indicated that overemphasis on the financial indices could damage the
competitiveness of enterprises. Therefore, nonfinancial indices are gradually receiving
attention. Most of early research on the balanced scorecard has focused on the “balance” of
the scorecard, investigating how managers use scorecard measures to evaluate performance
(Lipe and Salterio, 2000, 2002; Ittner et al., 2003; Banker et al., 2004; Libby et al., 2004;
Roberts et al., 2004; Dilla and Steinbart, 2005; Helen, 2006; William, 2010). Recent research
indicates that a number of organizations begin to actively utilize BSCs to link their strategy
and operations (Bartlett and Goshal, 1996; Kaplan and Norton, 1996b; Hope and Fraser,
1997; Silk, 1998; Atkinson and Brander Brown, 2001). The selection of performance
measures is a major aspect of the balanced-scorecard implementation process (Niven, 2002).
The goals of the firm to develop performance measurement (PM) systems are not only to
evaluate performance, but to help align managerial actions. These systems have extensively
relied on financial measures which provide incentives for managers to make decisions that
focus on short-run performance (Butler et al., 1997; Kaplan and Norton, 1996; Laurie and
Nancy 2010). BSC should enable managers to engage in activities that are consistent with
firm goals, ultimately improving the manager’s decision-making process (Lipe and Salterio,
2002) and the firm’s long-run performance (KN, 1996, 2008). Bungay and Goold said that
nonfinancial performance measures provide short-term targets on the long-term strategic
road (1991).
The indicators in BSC have progressive layers in between and are inner-related to each other,
which are able to balance between different segments on the value chain, short-term and
long-term profits, objective and subjective measurement factors, financial and non-financial
indicators, main and secondary indicators, and between the results and the motivating
reasons (Xu, 2008; Li Hui, 2010). Kaplan and Norton proposed an alternative PM system,
BSC to help mitigate this short-term focus (1992, 1996). Lipe and Salterio said that evaluator
involvement in the implementation process could influence scorecard-related judgments
(2000).
In recent years, there have been several breakthrough developments in the accounting field,
including the concept of strategic performance evaluation. Enterprises turn corporate visions
and missions into strategic objectives and introduce strategic objectives into performance
evaluation systems. These evaluation systems provide corporate management with an
understanding of the competitive environment and a way to assess the achievement of
strategic objectives. Before the strategic performance evaluation was proposed, corporate
managers could only obtain evaluation results from traditional performance evaluations, and
they did not know the key factors responsible for their operational success or failure.
Therefore, to achieve the goals and strategic objectives of the enterprise, corporate
management should adjust the performance evaluation to make the evaluation information
more valuable.
1.2. Balanced scorecard.
BSC is an indicator for promoting future performance, and it overcomes the deficits of past
financial performance evaluation indices. It is not only an evaluation tool but also a tool for
corporate managers to transmit investment results to organization employees and other
related parties to achieve corporate strategies. Indeed, a corporation needs to have strategic
direction to acquire competitive advantages. These strategies can easily be achieved when
they are integrated with strategic themes, objectives, and an evaluation index of the four
dimensions of BSC. Scorecard initiatives are actionable plans intended to affect performance
in targeted objectives, but recently scorecard proponents have shifted emphasis from balance
to strategy, arguing that the scorecard serves as a tool for defining strategic objectives and
communicating them throughout the organization, identifying initiatives to achieve those
objectives, and evaluating whether those objectives have been achieved (Kaplan and Norton,
2000, 2001; Niven, 2002; Buytendijk et al., 2004; Kaplan and Norton, 2004a, 2004b, 2006).
A study by Bain and Company indicates that 53 percent of firms worldwide use BSC,
including 61 percent of large firms and 49 percent of firms in North America (Rigby and
Bilodeau, 2009) BSC includes four dimensions (i.e., financial, customer, internal business
process, and learning and growth), which allow corporate organizations to achieve a balance
between short-term and long-term goals, expected results and driving factors of these results,
and soft-subjective and hard-objective measurements.
The contents of the four dimensions of BSC are described below:
1. Financial dimension.
Kaplan and Norton (1996) have stated that the financial dimension is the intersection
of the goals and measurements of each dimension in BSC. Indeed, each measurement
within BSC should be an interlocking causal chain with the main purpose of
improving traditional financial performance. BSC retains the financial dimension
because the financial index can reflect the past performance of the enterprise, which
can be used to determine whether the implementation of corporate strategy can
contribute to profits.
2. Customer dimension.
Customer satisfaction is the main source of profit in business operations. Indeed, a
corporation cannot sustain its operations in a competitive environment if it does not know the
needs of its customers. Enterprises should use the concept of “customer first” as a basic
management guideline, and the operating activities of an organization can use customer
loyalty as a key indicator that they are meeting customer needs.
3. Internal business process dimension.
In the internal business process dimension, management must grasp the major internal
process to add value for customers and shareholders. In other words, management should
focus on improving and measuring these key processes to assist the business unit, improve
the attraction and retention of customers in the target market segment, and meet the
shareholder’s high expectations of financial reward. Kaplan and Norton (1996) said that the
internal business process dimension was mainly designed to achieve the goals at the
customer and financial levels; therefore, its focused measurements are customer satisfaction
and financial objectives of organization.
Learning and growth dimension.
Kaplan and Norton (1996) have pointed out that the three principal sources of organizational
growth and learning are people, systems, and organizational procedures. The financial,
customer, and internal business process dimensions in the balanced scorecard reflect the
actual capacity of people, systems, and organizational procedures to achieve goals. To
narrow the gap between these three dimensions and organizational objectives, enterprises
should invest more money and time on staff training. In addition, enterprises should use
information technology to strengthen the organizational system, retain the core values, and
create an excellent corporate culture.

2. Literature Review
2.1. Business Performance
Business performance and its evaluation belong to frequently used terms in management
theory. Despite its considerable popularity, we can find different views and definitions of
business performance. Neely et al. 2002 defined performance as the efficiency and
effectiveness of targeted action [13]. Dwight 1999 associated performance with the level of
goal achievement [14]. Veber 2009 defined performance as a general measure of an
individual’s or group’s effort [15]. Sink 1984 defined seven dimensions of performance as
efficiency, effectiveness, quality, and productivity, quality of working life, innovation and
profitability [16]. For every enterprise, it is important to gain the best possible performance.
As a necessary condition to achieve that, managers need to be able to effectively measure
and evaluate business performance [17] Cocca, P.; Alberti, M. 2010. PMS serve as an
important tool in the purpose of improving the business performance [18] Sorooshian, A.;
Ahmad, A.; Jubidin, S.; Mustapha, N.; Aziz, N 2015. PMS can be defined as a balancing and
dynamic system that is able to support the decision-making based on gathering, elaborating
and analyzing of information Neely et al. 2002 [13]. Since the mid-1980s, growing interest
has been seen on the study of PMS Gimbert, X.; Bisbe, J.; Mendoza, X. 2010 [19]. PMS is
defined as the set of (financial and/or non-financial) metrics used to quantify the efficiency
and effectiveness of past actions that enables to create decisions and take actions through the
acquisition, collation, sorting, analysis and interpretation of appropriate data and information
Neely et al. 2002 [13]. PMS affects communication processes by requiring and providing
relevant information, which influences the way to think, act, and collaborate Franco-Santos
et al. [20]. The use of PMS can bring many advantages and positive outcomes, including
profit increase; cost reduction; internal strategy communication improvement; better focus
on what is important to the organization; better achievement of results and organizational
goals; Sustainability 2021, 13, 4794 3 of 19 more effective management control;
improvement of business processes and quality of performance information, and clearer
vision of the members of the organization about their roles and goals they need to achieve de
Waal, A.; Kourtit, K. 2013 [5].
2.2. Characteristics of PMS and Its Implementation
The importance of measuring the business performance as well as implementing a suitable
PMS has already been subjects of many academic papers [2, 4, 13, 21–23]. In late 1980s and
early 1990s, the dissatisfaction of the traditional approaches to performance measurement
based on accounting [1] led to development of new approaches to PMS and to demand for
PMS to be more relevant, integrated, balanced, strategic and dynamic [2]. It also led to
foundations of “multi-dimensional” performance measurement frameworks [1] and
combinations of the multiple financial and non-financial performance indicators in PMS [2,
21]. There are well-established models providing frameworks and guidelines for business
practice, like Tableau de Bord, SMART Performance Pyramid System, Balanced Scorecard
or Performance Prism [19]. Katic [24] distinguishes PMS into two groups of models: (1)
models that emphasize self-assessment like the Deming Prize, the Baldridge Award, the
EFQM Excellence Model; (2) models that are designed to assist management and to improve
business processes: Capability Maturity Matrices, the Performance Pyramid, the Effective
Progress and Performance Measurement (EP2M) and the Balanced Scorecard (BSC). Theory
also suggests areas of KPIs and performance measures that are recommended for measuring
performance in enterprises, mainly in areas of cost, quality, productivity, flexibility, and
time. With changes coming with Industry 4.0, new measures are also suggested, like
measuring innovation [25], intellectual capital [26], human interactions (e.g., reduced human
effort, improved employee learning) and computing (e.g., computing skills, data reliability,
data speed and information security) [27].
There are many tools and techniques appearing in the literature, making it almost impossible
to get an overall view of all of them, or distinguish between suitable and less suitable
performance measuring instruments. Research and practice itself confirm the fact that
models and techniques of PMS are not perfect as they do not provide solutions to all the
problems that businesses face [28,29]. Each tool or technique has its specific performance
measurement criteria, while the task of managers is to harmonize individual parameters into
a functioning unit [30]. Additionally, there is no general structure or framework for the usage
of PMS in the most effective and efficient manner in SMEs [31]. Therefore, to use PMS
successfully, business managers need to know the given specifics and, based on them, to
creatively incorporate the right tools into companies in the right way and at the right time.
The point is not to discover one elementary solution for PMS but find out which mechanisms
to use when and how. As Wasniewski [8] mentioned, PMS is specific to each enterprise in
which it is implemented in, due to a unique set of subsystems and unrepeatable conditions of
existence. Previous studies [7, 10–12] pointed out that literature lacks the guidelines or
practical steps on how to choose appropriate PMS and implement PMS in practice in SMEs.
Only well-developed and implemented PMS helps the organization to improve its
performance [18]. PMS should be directly related to the organization strategy, to decision
making processes and communication processes. It should support processes of setting goals,
developing a set of performance measures, collecting, analyzing, reporting, interpreting,
reviewing and acting of performance data [32]. There are several authors who studied the
implementation of PMS [1, 3, 5, 11, and 33]. In our study, we follow Bourne et al. [1], who
created a three phase’s model which allows enterprises to consider and implement suitable
PMS to better match their environment, conditions and limits:
1. The design of the performance measures (what and how to measure).
2. The implementation of the performance measures.
3. The use of the performance measures.
There are already some factors suggested to successful implementation of PMS, like aligning
PMS with strategy, and use of performance indicators for testing of strategic Sustainability
2021, 13, 4794 4 of 19 assumption [1]. Brem et al. [10] suggested for SMEs to improve PMS
implementation by limitation of problems in all phases of this process: (1) in design phase—
missing formulated strategy, missing knowledge and personal sources; (2) in implementation
phase—missing information system, missing technical structure, missing time and personal
resources; (3)
in use phase—missing resources through day-to-day operative activities, missing reporting
tools, missing time and personal resources. To increase the likelihood of successful
implementation of PMS, as well as for SMEs, Kaplan and Norton [2] recommended using
the Balanced Scorecard aspects. A sustainable PMS should be a transformation process and
not just a project of defining performance indicators. Meekings [34] recommended top-down
measurement architecture, a systematic review architecture, and an integrated budget and
planning process to overcome barriers of implementation, which should help to develop a
collective understanding of the purpose of PMS implementation. Bourne et al. [1] identified
that the information system is an important factor in the success of PMS implementation
process. Companies that already have a sophisticated IT infrastructure and a well-developed
IT architecture are more likely to implement PMS. According to Eccles [35], there are three
important factors for the successful application of PMS: the development of information
architecture with supporting technology, the alignment of incentives with the new
measurement system, and the way senior management is conducted. The ability of keeping
the PMS continuously updated and relevant is a challenge for every enterprise, but
particularly for SMEs, as they need to be extremely flexible and reactive to market changes
while dealing with lack of recourses and expertise [9,17,36]. PMS should reflect the internal
and external changes in the company’s environment and allow goals to be reviewed and
updated [7]. PMS is the most efficient when it is adjusted to elements such as business
strategy, organizational culture, and the external environment [37].
2.3. Barriers of SMEs in Connection to PMS Implementation
Managing performance in SMEs requires understanding of its characteristics and limitations
that can influence the process of PMS implementation [38,39]. SMEs are often limited by
more factors [38, 40, and 41]:
1. Human resources (SMEs have limited human resources, so employees often carry out
diverse activities in enterprises and do not have the remaining time for other activities, such
as implementing a PMS);
2. Managers and their capacity (SMEs are characterized by a flat organizational structure in
which the owner is overwhelmed with operational or management functions and thus does
not have enough time to perform all managerial activities);
3. Financial resources (it is more difficult for SMEs to implement a PMS compared to large
companies as they have limited financial resources and find PMS implementation as costly);
4. Reactive approach (SMEs are characterized by a weak level of strategic planning along
with informal decision-making processes; they lack explicit strategies or methods that
promote short-term business orientation and a reactive approach to managing individual
activities);
5. Little attention is paid to the formalization of processes (lack of management systems and
formal processes increase the difficulty of collecting the information needed to implement
and use PMS);
6. Incorrect perception and misunderstanding of PMS (PMS can only be effectively
implemented and used if the company’s employees perceive its benefits. However, top
managers of SMEs often do not understand the potential benefits of implementation and
perceive PMS as the cause of excessive bureaucracy or an obstacle to organizational
flexibility). Therefore, the question arises as to whether there are factors or essential
requirements that SMEs should meet if they want to effectively implement a PMS. Scientific
literature and authors’ direct experiences with the development and implementation of PMS,
as well as the percentage of failed businesses, suggest that successful PMS implementation
Sustainability 2021, 13, 4794 5 of 19 is not a simple matter [10]. Authors [1, 2,42], in their
work, described their experiences with implementation of PMS as often durative for several
years. Implementation of a PMS is certainly not a short-term issue and there are several
barriers that managers can come across during the whole process. Kaplan and Norton [2]
identified four possible barriers of PMS implementation: (1) impossibility of applying vision
and strategy—this is the case when a team of managers has not reached a consensus on
vision. Different groups are thus striving for different agendas in the company, and their
efforts are not coherent and linked to the strategy; (2) the strategy is not linked to
departments, teams and individual goals—employees continue to follow the old traditional
performance criteria and prevent the introduction of a new strategy; (3) the strategy is not
associated with resource allocation—it is when long-term strategic planning processes and
the annual budget process are separate. Funding and capital allocation are therefore not
linked to strategic priorities; (4) feedback is tactical and not strategic—feedback focuses
solely on short-term results (such as financial measures) and little time is reserved for
reviewing performance indicators and strategy success. Meekings [34] added the fifth
barrier: (5) lack of understanding and fear of employee personal risk. Further, Hacker and
Brotherton [43] pointed out: (6) lack of leadership and resistance to change as another
barrier. Other authors [10,44] contributed with more barriers influencing the design and
implementation of performance measurement systems, such as: (7) difficulties in assessing
the relative importance of performance indicators; (8) insufficient definition of metrics; (9)
lack of time and cost; (10) insufficient focus on stakeholders; (11) large number of indicators
causing rigidity and confusion in measurement and evaluation; or (12) the need for a highly
developed information system.