Management Control System of the Bank of South Pacific in Fiji SENIANA BOSE ID# 2016137825 1


Management
Control
System of
the Bank of
South Pacific
in Fiji
SENIANA BOSE
ID# 2016137825

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Contents
1.0 Introduction ……………………………………………………………………………………………………… 2
2.0 Historical Background – The Management Control System …………………………………… 2
2.1 Management and Management Control ……………………………………………………………. 3
2.1.1 Merchant’s Management Control Alternatives ……………………………………………. 4
2.2 Control system tightness ……………………………………………………………………………… 5
3.0 Management Control Systems in Commercial Banking Sector ………………………………. 6
4.0 Historical Background of the Bank of South Pacific ……………………………………………… 6
4.1 Management Control System of the Bank of South Pacific in Fiji ……………………. 7
4.1.1 Management Control System for Selection of Employee……………………………… 8
4.1.2 Generic Strategy……………………………………………………………………………………… 8
4.1.3 Marketing of New Services ……………………………………………………………………… 8
4.1.4 Target Setting Practice …………………………………………………………………………….. 8
4.1.5 Performance Measurement ………………………………………………………………………. 8
4.1.6 Reward System ………………………………………………………………………………………. 9
4.1.7 Encouragement to Employees to Learn New Skills …………………………………….. 9
4.1.8 Cooperation ……………………………………………………………………………………………. 9
4.1.9 Combination of Merchant’s Control Alternatives ……………………………………….. 9
5.0 Conclusion …………………………………………………………………………………………………….. 10
References ……………………………………………………………………………………………………………….. 12

Figure 1. Management Control System of the BSP Fiji ………………………………………………………………………… 7

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1.0 Introduction
This paper analysed the management control system of the Bank of South Pacific (BSP)
operations in Fiji. Commercial banking sector in Fiji is competitive. Most commercial banks
in Fiji have customer retention on its top priority like any other commercial banks around the
world. The Bank of South Pacific as a commercial bank encouraged their employees to upgrade
their knowledge and skill. The working environment was also congenial in Fiji commercial
banks; therefore, management control systems were essential tool to help BSP management to
steer the organization towards its strategic objectives. Designing and implementing an
appropriate management control system based on Fiji’s multicultural system could improve
both the short and long-term performance of BSP Banking company. This would make BSP
more efficient and cost effective in extending banking services to all the customers. However,
future research needs to examine the relationship between management control system and
effectiveness of BSP operations in Fiji.
2.0 Historical Background – The Management Control System
The need for management control arose after the Industrial Revolution and gave companies the
opportunity of greater growth and expansion than what had been possible earlier. Larger parts
of the value chain were situated within these new and greater companies instead of being spread
on different locations in smaller companies or single persons. After these great changes,
companies started to require financial measures as business ratios and transfer pricing, and
from that point the development of different types of management controls and accounting
controls began (Johnson ; Kaplan, 1987).

The Dupont Company was often considered to be the inventor of the modern management
control (Kaplan, 1984). In the early 1900s, DuPont decided to organize itself by dividing the
organization into separate functions, e.g. manufacturing, sales and purchasing. Every single
one of these functions had their own manager who could be very specialized in how to manage
the specific function. Hence, the senior managers did not have to be involved much in those
activities and could fully focus on things as long- term strategies. It was this type of
decentralized organization that made Dupont realizes that they needed a performance
measurement system. They launched a new accounting measure, return on investment (ROI),
because they thought it would be more accurate to use than the old measures which measured
earnings and profits as a percentage of sales or costs. Dupont along with General Motors are
considered as the pioneers in this area and were also involved in creating different types of

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decentralized organizations, budgeting and planning cycles (Kaplan, 1984). In an article from
1984, Kaplan discussed what had happened in the development of the area from 1925 to that
point. He considered that not as much as expected had happened between 1925 and 1984. Of
those new ideas that had been presented, many were just academic theories which had little or
no influence on the real organizations, who should be the beneficiaries.

As of today, the opposite problem from what Kaplan said in 1984 could be spotted. Today there
were almost too many choices in accounting and management control, and they are not as well
studied as the older theories and tools (Malmi ; Granlund, 2009). There is also another
problem with the new theories and tools, companies and organizations seem to have too much
faith in them and use them in an uncritical way. They are considered as the solution of all
management problems. Examples of these new theories and tools are, activity- based-costing
(ABC), business process reengineering (BPR), balanced Score cards (BSC) and total quality
management (TQM). These systems are often expensive to acquire and use, and companies
perhaps, do not evaluate the relation between costs and benefits of the systems they use, or why
they use it at all. Are they used just because they are modern, and all the competitors use it, or
do they really create value for the company (Siverbo ; AAkesson, 2009).

2.1 Management and Management Control
Literature written on the subject, management was defined in several ways, but all have
something to do with the process of allocating resources and direct activities to fulfil the
organization’s overall objectives. Management was a broad subject and can be divided into
smaller elements such as operations, finance, marketing/sales and product development. The
management process could also be separated into smaller parts that were objective setting,
strategy formulation and management control. Objective setting was a necessary process to
formulate and sometimes reconsider the direction and destination of the company. If the
objectives were not set it would be impossible to determine if the resources were allocated in
the right way and if the right activities have been performed. Strategy formulation was the
process where organization finds out how to use their resources to meet their objectives. The
management processes of objectives setting, strategy formulation and management control was
a process of continuum (Merchant & Van der Stede, 2007).

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2.1.1 Merchant’s Management Control Alternatives
According to Merchant and Van der Stede (2007) companies and other organizations have four
management control alternatives; result control, action control, personnel controls and cultural
controls. The process of result controls includes four steps, the first was defining the
dimensions on which results were desired, the second was measuring performance on these
dimensions, the third was setting performance targets for employees to strive for and the last
was providing rewards to encourage the behaviours that would led to the desired results.

2.1.1.1 Result Controls
Results controls were usually used on professional employees who were able to work
effectively without being told how to do things, but instead work efficiently towards targets
(Merchant ; Van der Stede, 2007).

2.1.1.2 Action Controls
Action controls were somewhat the opposite of results controls, employees were told what to
do and how they should do it, e.g. by rules and procedures. The difficulty with this was that the
rules and procedures must be optimized, or else the employees would do everything wrong,
despite their doing what they were told by their managers (Merchant ; Van der Stede, 2007).

2.1.1.3 Personal Controls
Personnel controls refer to the assumption that employees by nature want to control themselves.
Managers do not have to tell employees what to do and then monitor their every move to be
sure that they do the tasks that that where intended. The assumption was that employees like to
perform well for themselves and this should result in a well performing company. Unlike, or
at least not as much as results and action controls, these types of controls require more careful
selection of employees. Everyone has to fully qualified for the position they occupy on the
organization to make it possible to use personnel control. Motivation was another important
aspect to make this work; managers have to keep their employees constantly motivated. This
may be achieved by training, further work-related education or different types of rewards
(Merchant ; Van der Stede, 2007).

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2.1.1.4 Cultural Controls
Cultural controls rely on the ability that group to keep up the values and approaches the
organization aims at. In the group organization everyone was supposed to take responsibility
and care of everyone else and the peer pressure was important. The idea is that the group should
motivate itself; the assignment of the managers was in this case to instruct the group in what to
be motivated to do. To their help managers could use things as codes of conduct or group
rewards and if the group performs well the group would receive a reward. If only group rewards
were provided the individual employee would try to do his/her best to make the group perform
well, instead of just caring about themselves (Merchant ; Van der Stede, 2007).

2.2 Control system tightness
The benefit from any well-functioning management control system (MCS) was that the
likelihood that the company will achieve its objectives increases. This benefit could be
described in terms of MCS tightness (or looseness), where a tight MCS increases the
probability that the employees will take actions that was desirable by the organization.
Managers often use more than one kind of management control alternative to tighten control.
Sometimes these controls overlap and sometimes they are complementary, which enables the
combination of them to create tight control over all of the factors critical to the organization’s
success (Merchant & Van der Stede, 2007).

Whether a results control was tight or loose depends on the characteristics of the definitions of
the desired result areas, the performance measures, and the reinforcement or incentives
provided. According to Merchant and Van der Stede (2007), for management control to be
considered tight in a results controls system, the results dimensions must be congruent with the
true organizational objectives, the performance targets must be specific, with feedback in short
time increments, the desired result must be effectively communicated and internalized by those
whose behaviours were being controlled, and if results controls were given exclusively in a
given performance area, the measures must be complete (PP 118 – 119). Congruence problems
could exist because the management does not understand the organization’s true objectives do
not reflect the organization’s true objectives (Merchant & Van der Stede, 2007). For a result
control system to be tight, the performance measures also have to be precise, objective, timely
and understandable. If the performance measures used do not possess these characteristics the
control system could not be considered tight since behavioural problems were likely.

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3.0 Management Control Systems in Commercial Banking Sector
The banking sector serves as the main source of resource mobilization in developing
economies. Commercial bank plays significant role in the economic development. Today and
more precisely in future, companies, organizations (banks) and other decision-making entities
whether profit making or not, will face major management challenges. Irrespective of whether
the main goal of the organization is to make profit or not, it becomes necessary to institute a
mechanism in those entities to control the activities of managers so that they remain on track
of the proper routes as established by management. In order to keep activities of the
organization in track a management control system is essential.
4.0 Historical Background of the Bank of South Pacific
The Bank of South Pacific (BSP) is the leading bank in Papua New Guinea (PNG) and has a
long and proud track record of serving the needs of customers in PNG and other countries
across the South Pacific with operations dated back to 1957, when it was founded in Port
Moresby as a branch of National Bank of Australasia Ltd. In 1993, a consortium of PNG
businesses acquired the bank and created the first and only PNG private sector owned bank at
the time. In 2002, BSP merged with the state-owned PNG Banking Corporation creating the
largest bank in PNG. Other acquisitions followed, including Habib Bank in Fiji in 2006,
National Bank of Solomon Islands in 2007 and Colonial Bank and Colonial Fiji Life Insurance
Ltd in 2009. In 2015 and 2016, BSP completed the acquisition of Westpac’s operations in Cook
Islands, Samoa, Solomon Islands, Tonga and Vanuatu, significantly expanding and
strengthening BSP’s geographical reach. Today, BSP continues to be a leading force in PNG
and the South Pacific markets with the largest branch network and was a pioneer in bringing
financial innovation and technology to the region.

The bank engaged in commercial banking and related services. The bank is currently operating
through 79 branches and 52 sub-branches with target market conceits of individual client as
well as number of business organization and has segment the market on demographic,
psychological and behavioural style to target maximum number of segments with different
varieties of products suitable for each segment. Dynamic and high value product includes Car
Financing, Home Financing, Travelers Cheques, Credits Cards, Debit Cards, Online Banking,
ATM and consumer Durables. In addition to this, BSP extended its services to improve access
to financial services for Fiji’s rural and unbanked population. This facilitates their commitment

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to a culture of innovation and seeks out synergies with clients and service providers to ensure
interrupted services to its customers.

4.1 Management Control System of the Bank of South Pacific in Fiji
The bank perceived the requirements of customers and matches them with quality products and
service solutions. During the past five years, BSP has emerged as one of the foremost financial
institution in the region endeavouring to meet the needs of tomorrow as well as today. To
continually upgrade the quality of service to the customers, training of team members in all the
integral aspects of banking, customer service and management control system (MCS) was
specially focused. Figure 1 below depicted the MCS employed by BSP operations in Fiji. The
management control units are indicated by blue arrows and relates to each other for effective
and efficient control. These control units are further elaborated in the Sub-Sections of Section
4.1. The benefits of each control units are described by the combination of the Merchant’s
Control Alternatives.

Figure 1. Management Control System of the Bank of South Pacific operations in Fiji
(Source: By the Researcher 2018).
Management Accounting
Extensive Measurement
Management Control
Selection of Employee Generic Strategy
Marketing of New Services Target Setting Practice
Performance Measurement Reward System
Employees New Skills Cooperation
Combination of Merchant’s
Control Alternatives

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4.1.1 Management Control System for Selection of Employee
Every new employee is carefully selected to fit the profile of how BSP wants them to be and
the employees need to know how important the core values are for the bank. The education and
banking experience have important consideration during selection of new employees. The
personality and which values you have are also important. Hence, selection of employees is
important and tries to employee people that already have the right values and beliefs to fit the
culture. They also think it is important that the applicants have an interest in bank job. They
believe that if the applicant has visited their own website to look for employment, they have
taken the first step to show to show interest in bank job. When a new person is employed he or
she undergoes an introduction education and training for few days.

4.1.2 Generic Strategy
The generic strategy of BSP was divided for two main areas of business, deposit and lending.
The different branches of the same commercial banks at the different geographical location
were adopting result, action, personnel and culture controls jointly. In case of lending majority
of branches uses result and action control simultaneously.

4.1.3 Marketing of New Services
Most of the commercial bank branches promote their products/services very aggressively by
using result and action control. The majority of the commercial bank branches are
concentrating in maintaining customers and only some branches are competing for customer
acquisition.

4.1.4 Target Setting Practice
The commercial bank set target for their branches for the purpose of planning and controlling
the activities. In most of the branches target is fixed in terms of number of clients, amount of
deposit and the amount of lending. Individual target was also set and properly communicated
to them.

4.1.5 Performance Measurement
The Bank of South Pacific compares actual performance with predetermined target of their
branches frequently.

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4.1.6 Reward System
The Bank of South Pacific, benefit/reward/salary/promotion is mostly determined by
performance followed by education, experience, new relationship/ customer marketed in
deposit or lending and factors respectively like majority get benefit for better performance and
some did not get performance benefit. The bank provides bonus to their employees out of profit.
The amount of bonus was based on the amount of salary the employees received. Some bonuses
were related to outstanding performance.

4.1.7 Encouragement to Employees to Learn New Skills
The Bank of South Pacific was encouraging their employees to discharge better performance
and enhance educational qualification and attain trainings. The majority of employees working
in the bank get leave sanctioned from their bank to attain training related to their jobs. It also
supports that the commercial bank is encouraging employees to learn new skill and knowledge.

4.1.8 Cooperation
Majority of the employees feel they get complete cooperation from their co-workers. It
indicates the working environment was very conducive in the bank to discharge better
performance.

4.1.9 Combination of Merchant’s Control Alternatives
As described by Merchant and Van der Stede (2007) the benefit from a management control
system could be expressed by the tightness or looseness of the management control system. As
specified, a tight results control system must include results dimensions that are congruent with
the organizations true objectives, performance targets that were specific, feedback in short time
intervals, effective communication of the desired result and complete measures if the results
control system was used exclusively (Merchant and Van der Stede, 2007). As author argued
below, he thought all these factors were met at the Bank branch.

According to Merchant and Van der Stede (2007), a tight results control system also has
comprised performance measures that were, precise, objective, timely and understandable.
Furthermore, they argued that the results control system was likely to be tighter if rewards or
punishments were directly and linked to the accomplishment or non-accomplishment of the
desired targets. The performance measures of the Bank of South Pacific (BSP) met the

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characteristics described by Merchant and Van der Stede (2007). The salary system used by
the bank was also linked to their performance on the desired targets. Hence, it seems like the
results control system of the bank could be considered as tight.

The action control systems of a BSP do not include as many rules, but instead they have a quite
strict organization and governance structure. They also use daily, weekly, monthly
performance follow up sheets and manuals to control the actions of employees. Merchant and
Van der Stede (2007) exemplified action controls as behavioural constraints, preauction
reviews and action accountability and further argued that the action control systems could be
considered tight only if it is likely that employees would consistently perform the actions. Bank
branch does not use as many physical constraints but rather more administrative constraints
such as restricting some decisions making to higher levels of the organization. However, in
general, the bank branch managers and supporting employees have quite a high influence on
their own department of the branch and could make many decisions on their own.

The employee’s actions were supervised by their closest manager and since bank has many
different organization levels and each has their own manager it was likely that the managers
could track their subordinate’s actions quite carefully. Furthermore, since the results control
system was tight, it was reasonable to believe that undesirable actions would be discovered
quickly. Reinforcements used were group rewards such as one basic or two basic salaries that
would be paid if the bank employees have achieved the targets. The bank action control systems
could not be considered as either tight or loose, but rather moderate or average.

The Bank of South Pacific culture controls includes customer’s care-consciousness, equality,
advances/loans and deposits target focus. These values are prominent and present in their
vision, mission as well as in everything they do. They also emphasize the importance that every
employee should share their values to fit in. This implies that bank corporate culture was strong
which enables me to conclude that their personnel/cultural control was tight or at least
moderately tight.
5.0 Conclusion
The Bank of South Pacific (BSP) is very competitive. The bank was competing mainly in
services to put in competitive position, to retain customer’s services at top priority. The bank
branches have been using results control system and were applying the concept of management

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control system by setting targets for their branch and at individual and comparing it with actual
performance. The target for a branch is fixed in terms of number of clients, amount of deposit
and lending. Target was also fixed for most of the individuals employees. The target of the
branches and individuals level was frequently monitored against their performance. The
manager of the different branches desired to evaluate the performance of the branch by
encouraging employees to participate in decision-making process. The employees financial and
non-financial benefits were based on performance followed by education, training and
experience and their yearly bonus was based on the salary. Future research needs to examine
the relationship between management control system and effectiveness of BSP.

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References
Johnson, T. H., & Kaplan, R. S. (1987). Relevance lost: the rise and fall of management
accounting.
Kaplan, R. S. (1984). The evolution of management accounting. In Readings in accounting
for management control (pp. 586–621). Springer.
Malmi, T., & Granlund, M. (2009). In search of management accounting theory. European
Accounting Review, 18(3), 597–620.
Merchant, K. A., & Van der Stede, W. A. (2007). Management control systems: performance
measurement, evaluation and incentives. Pearson Education.
Siverbo, S., & AAkesson, J. (2009). Överdos av styrning. CIO Sweden, 4, 32–35.

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