Issues in Social and Environmental AccountingVol. 2, No. 1 June 2008Pp. 131-144 The Role of Control System in Increasing Corporate social Performance: The Use of Levers of Control Hasan Fauzi Faculty of Economics Sebelas Maret Universiy, Indonesia Azhar Abdul Rahman College of Business Universiti Utara Malaysia, MalaysiaAbstractOne important instrument to be used in the control system design is strategic behaviors that canlead to the expected organization performance. Referring to the extended definition of strategicbehavior using stakeholder-based strategic behavior, corporate social performance is kind ofstrategic behavior to be influenced by using control system. This paper discusses how controlsystem, using Simons’ levers of control can play important role in increasing the corporate so-cial performance. The interaction between control system, including belief system, boundarysystem, diagnostic control system, and interactive control system, as well as the corporate fi-nancial performance (CFP) can affect the corporate social performance (CSP) due to fact thatincrease in CFP resulting from the appropriate use of control system components enables thecompany has more chance to do the CSP. The levers of control are deemed to form an integralpart of employee socialization and support the development of an organization’s culture, thesystem of shared beliefs, values, norms, and mores of organizational members which aredeemed to be a primary determinant of the direction of employee behavior.Keywords: Control system, levers of control, corporate social performance, corporate finan-cial performanceINTRODUCTION ering the interest of stakeholder groups had been increasingly common, the termSince a notion of Triple Bottom Line corporate1 performance has been ex-(TBL) had been coined by Elkington tended to include not only financial as-(1994) and the trend of business consid- pect, but also social and environmentalHasan Fauzi is Director of Indonesian Center for Social and Environmental Accounting Research and Development(ICSEARD) Faculty of Economics Sebelas Maret University, Surakarta, Indonesia, email: firstname.lastname@example.org.Azhar Abdul Rahman is Associate Professor of Accounting in the College of Business Universiti Utara Malaysia,email:email@example.com.
132 H. Fauzi, A. A. Rahman / Issues in Social and Environmental Accounting 1 (2008) 131-144dimensions. The inclusion of the two diono, 2005), business environmentmore dimensions in the corporate per- (Woodward in Azumi and Hage, 1972;formance can be argued that the respon- Gul, 1992; Chenhal et al., 1986), controlsibility of corporation is not only to gen- system (Govindarajan and Fisher, 1990;erate economic welfare (profit) but also Govindarajan, 1988; Liao, 2005; Sand-to save people (society) and planet ino, 2005; Albernethy and Brownell,(environmental), a place where human 1999; Pant and Yuthas; Wynn-William,beings are dwelling. All terms often 2001; Davila, 2000; Marginson, 2002;called three Ps of TBL concept. This Haldma Laats, 2002; Salmon and Joiner,understanding is in line with one of the 2005; Coenders et.al., 2003; Alexanderapproaches to defining the concept of and Randolf, 1985), organization struc-corporate social performance (CSP) as ture (Woodward in Azumi and Hage,efforts by a company to meet multiple 1972; Sandino, 2005). Furthermore, theresponsibilities, using multidimensional area of research continues to be devel-construct, including aspects of eco- oped by focusing on predictor of corpo-nomic, legal, ethical, and discretionary rate performance as done by Lenz(Carroll, 1977, 1999). The last two Ps (1980); Govindarajan & Gupta (1985);of TBL, people and planet, can be re- Govindarajan (1988); Tan and Lischertferred to the last three aspects of Car- (1994) and Langfield-Smith (1997) withroll’s CSP (1977 and 1999). In addition, the findings that factors affecting corpo-when referring to the concept of the rate performance are matching of busi-stakeholder, the basic idea underlying ness environment, strategy, internalthe concept of TBL is to accommodate structure, and control system. The pre-the interest of stakeholder groups includ- vious studies defined corporate perform-ing not only the one of shareholder ance by focusing on financial aspect.group (O’Donovan, 2002; Henriques, Not only has the corporate performance2004; Hubbard, 2006; Colbert and Ku- been heavily dominated by the financialrucz, 2007). aspect resulting from demand of finan- cial market actor (shareholder group),In some decades ago, topics in corporate but the performance also does not ac-performance have been important area commodate demands of other partiesof research in strategic management and outside the market system mechanism2.accounting literatures. The research area Therefore, the concept of corporate per-started examining the construct of per- formance that is also considering andformance (both in corporation and measuring aspect of people (social) andmanagerial perspective) and relating to planet (environment) as important partother constructs such as strategy of a company’s performance is needed.(Govindarajan and Gupta, 1985; Simons,1987; Govindarajanand Fisher, 1990; Corporate performance is highly deter-Govindarajan, 1988; liao, 2005; San- mined by how effectively and efficiently1 In this paper the word corporate and company have factor market, and consumer in product market. Thebeen used interchangeably for the same meaning. secondary stakeholders are those in society affected2 In stakeholder concept, the primary stakeholders The directly and indirectly by the firm’s decisions. Theyprimary stakeholders are those directly affecting and include local communities, the public, business groups,affected by the decision to be made by the firm. They media, social activist groups, foreign government, andinclude stockholder, supplier, labor, and consumer. central and local government. They communicate withThey interact with company using market mechanism, company using non market mechanism.stockholder in financial market, labor and supplier in
H. Fauzi, A. A. Rahman / Issues in Social and Environmental Accounting 1 (2008) 131-144 133the company’s business strategy can be strument to be used in the control systemimplemented (Walker et al., 1987 and design is strategic behaviors that cancited in Olson, 2005). The success of lead to the expected organization per-the company’s strategy implementation formance. Referring to the extendedis highly influenced by how well the definition of strategic behavior usingcompany is organized (Vorhies et al., stakeholder-based strategic behavior,2003; Olson, 2005) and by the use of thus, corporate social performance isstrategic behavior such as customer fo- kind of strategic behavior to be influ-cus, competitor analysis, and innovation enced by using control system.(see for example Chen, 1996; Gatignon,1997; Olson, 2005). Therefore, one This paper discusses how control sys-factor affecting corporate financial per- tem, using Simons’ levers of controlformance (CFP) is the strategic behav- (Simons, 1995) can play important roleiors in organization. In the context of in increasing the corporate social per-corporate social performance, the con- formance.cept of strategic behaviors can be ex-tended using the stakeholder theory toexplain the fit between organization SUSTAINABLE CORPORATE PER-structure and corporate social perform- FORMANCEance (CSP). According to Chen (1996),Gatignon et al. (1997); and Olson et al. Under stakeholder view, parties that are(2005), the strategic behaviors can be concerned with a company are not onlyidentified into some components: cus- those discussed in the input-output ortomer-oriented behavior, competitor ori- stockholder view typically includingented behavior, innovation-oriented be- shareholder, supplier, employee, andhavior, and internal-cost behavior. The customer, but also other parties orconcept can be then extended using the groups in society. Frederick, Post, andcomponents of stakeholder as developed Davis (1992) classify stakeholder groupsby Donaldson et al.(1995). Supplier- into two categories: primary and secon-focused behavior, employee-focused dary stakeholder. The primary stake-behavior, society aspect-focused behav- holders are those directly affecting andior, and environment-focused behavior affected by the decision to be made byare examples of stakeholder-based stra- the firm. The second group called thetegic behavior that can be developed secondary stakeholders is those in soci-based on stakeholder perspective. ety affected directly and indirectly by the firm’s decisions. They include localAs stated by Ouchi (1977) and Robbin communities, the public, business(in Olson etal., 2005), organization be- groups, media, social activist groups,havior refers to work- related activities foreign government, and central and lo-of member of organization. That is the cal government. Consequently, the de-behavior of the organization members, cision made by the firm should posi-in which any company’s concern is how tively satisfy the two groups.to control the behavior toward the com-pany’s goal. According to Snell (1992), There are many components constitutingcontrolling the behavior is done using a the stakeholder of a company. Theywell-designed control system. One in- have own interest and powers to influ-
134 H. Fauzi, A. A. Rahman / Issues in Social and Environmental Accounting 1 (2008) 131-144ence the company. In some cases, they Gul’s (1991) study investigated the in-establish coalition to force the company teraction effect (fit) between manage-to meet a certain interest. Therefore, it ment accounting system and businessis logic that to be regarded “good” by environment on company’s performancestakeholders, they expect the company and found that business environmentto achieve some performances to be sat- defined as perceived environment uncer-isfying all interests of stakeholder tainty (PEU) affected the relationshipgroups. Based on the stakeholder view between management accounting systemand according to Atkinson, Waterhouse, and company’s performance. At the sec-and Wells (1997), the approach that a ond level of analysis, Ginzberg (incompany should use to measure the Fisher, 1995), which used formality andcompany’s performance is the stake- procedures as dimension of control sys-holder approach or often called a stake- tem design that interacted with environ-holder-based approach to performance ment, found that the control system af-measurement. By doing that the com- fected the performance, while Govinda-pany’s performance will be measured in rajan’s (in Fisher, 1995) study, whichterms of three aspects: financial, social, focused on performance appraisal sys-and environmental. tem as a dimension of management con- trol system, concluded that the control system had impact on the performance.CONTROL SYSTEM The both studies supported the Gul’s (1991) study.In mapping the contingency-based con-trol system and performance studies, In an effort to explain the role of manage-Fisher (1995) classified the studies into ment control system to improve corpo-four level of analysis. In the first level, rate’s competitive advantage, Pant andrelation between contingent factor and Yuthas, (2000) have stressed the impor-management control system was made tance of management control system towithout going further to see the impact identify and build company’s dynamicof the organizational outcome capabilities in order to improve its effec-(performance). In the second, third, and tiveness3. Wynn-Williams (2001) usedfourth level, analysis of the relationship public hospital setting in testing the rolebetween contingent factor and control that management control system hadsystem was conducted and related to the played in explaining the determinant ofperformance. The difference was placed effectiveness in the hospitals. In hison the choice of contingency factor and study on management control systemmanagement control system. The second design in new product development,level dealt with one factor for contin- Davila (2000) found the correlation be-gency and one for management control tween some variables of managementsystem, while one factor for contingency control system and performance. Someand more than one dimensions of man- other resent studies trying to relate theagement control system was for the third management control system and com-level. The fourth level had more than pany’s performance or effectivenessone contingency factor and more than 3one dimensions of management control For the purpose of the discussion of this paper, effec- tiveness is defined as including three aspects: financial,system. social, and environmental.
H. Fauzi, A. A. Rahman / Issues in Social and Environmental Accounting 1 (2008) 131-144 135had been conducted by others three more levers: belief system, bound-(Marginson, 2002; Haldma and Lääts, ary system, and interactive control sys-2002; Salmon and Joiner, 2005; Sand- tem. The function of belief system is toino, 2005; Coenders, Bisbe, Saris, and inspire the people in an organization toBatista-Foguet, 2003; Liao, 2005, and search for new ways and alternatives byAlexander and Randolf, 1985) providing them with the organization’s clear vision, mission, statement of pur- pose, and credos through using formalTHE LEVERS OF CONTROL and informal system. It is expected from the belief system mechanism, creativityOne important function of Management and innovation in the organization willControl system4 or control system for be continuously updated to meet the ex-short is management tool to implement pected growth. The use of boundarythe organization strategy. Of the typolo- system lever is meant to prevent un-gies in control system as discussed in wanted impact of creativity and innova-management control literature (for ex- tion by setting some rules limiting peo-ample see Anthony et al., 1992; Maci- ple to do in the form of code of businessariello et at., 1994; Merchant et al., conduct, strategic boundary, and internal2003), Simons’ (1995 and 2000) typol- control. The role of interactive contrology is the most complete and compre- system is to provide an organizationhensive, including: belief system, with solution to cope with emergingboundary system, diagnostic control sys- strategic uncertainty and with new strat-tem, and interactive control system. In egy given that emerging situation.corporate performance evaluation, so farthe concept of control system has had The careful and consistent use of thesome flaws. It has imbalances due to the control system typology, often calleddomination of financial aspect. In addi- levers of control, can lead to the im-tion, it has created some paradoxical proved corporate performance. The fol-situation between control and innova- lowing is discussion on how the compo-tion, opportunity and attention, and short nents of levers of control can be used toterm and long term goal, and human be- improve the corporate performance in-havior. One reason of the problems is cluding corporate social performance.that the old concept of control system The four levers of control can be dia-had been defined as diagnostic control grammed in the figure 1.only. In that definition of control, thecontrol process had been focused on the Belief Systemmatter of routine mechanism or processof comparing some expected and real- Belief system is the one used in an or-ized performances. According to ganization to communicate an organiza-Simons (1994, 1995a, 1995b and 2000), tion’s core value to inspire people in theto avoid the problem concept of control organization to search for new opportu-system should be extended by adding nities or ways to serve customer’s needs4 based on the core values (Simons, 1995, In this paper, management control system or controlsystem for short is defined as formal (also informal), 2000). In an organization the belief sys-information-based on routine and procedures managers tem has been created using variety ofuse to maintain or alter patterns in organization activi- instruments such as symbolic use of in-ties (Simons, 1995 and 2000).
136 H. Fauzi, A. A. Rahman / Issues in Social and Environmental Accounting 1 (2008) 131-144formation. The instruments are used to The belief system can make people in ancommunicate the organization’s vision, organization inspired to commit to or-mission, and statement of purpose such ganization goal or purpose. In this re-that people in the organization can well gard, commitment means believing inunderstand the organization’s core organizational value and willing to at-value. Westly et al. (1989; cited in tempt some efforts to achieve the organ-Simons, 1995) supported the use of the izational goal (Simons, 1995). There-instrument by arguing that great leaders fore, the goal commitment can lead toand competent managers understand the improved corporate performance (Lockepower of symbolism and inspiration. et al., 1988). The conclusion is consis-The benefit of using the symbolic instru- tent with what Klein et al. (1998) foundment especially at individual level is in their study on situation constraintsalso provided by Feldman et al. (1981) including goal commitment and salesby delineating that symbols produce be- performance. Chong et al.(2002) study-lief and belief can stimulate the discov- ing the effect of goal commitment andery of new realities. In this regard, the information role of budget and jobWestly (1990 cited Simons, 1995) con- performance provides the same finding.tended that managers will not be veryeager to participate in search for oppor- The resultant of belief system is newtunities if they do not understand the opportunities that may contain somebeliefs of organization and are not get problems. The boundary system con-involved in converting the beliefs into cerns on how avoid some risks of inno-actions and strategies. vation resulting from the belief system (Simons, 1995). The risks that possiblyThere is a need for an organization to emerge can be operating, assets impair-formally communicate the core value, ment, competitive, and franchise risksespecially when it is facing the dramatic (Simons, 2000). On the other hands, thechange in business environment such as boundary system provides allowablecompetition, technology, regulation and limits for opportunity seeker to innovateother factors. The Change in the busi- as conditions encouraged in the beliefness environment creates a need for system.strong basic values to provide organiza-tional stability (Simons, 1995). The im- Boundary Systemportance of understanding the core isalso supported by study of Kotter (in There are two instrument used in bound-Simons, 1995) concluding that inspira- ary system to establish the limit in ordertional motivation can be created by (1) avoid the risks: business conduct andcommunicating vision that can address strategic boundaries (Simons, 1995;the value of people in an organization, Simons, 2000). The business conduct(2) permitting each individual to be boundaries are focused on behavior ofpleased about how he or she can contrib- all employees in an organization. Theute to implementation of that vision, (3) source of the boundaries is of threeProviding eager support for endeavor, folds: society’s law, the organization’sand (4) promoting public recognition belief system, and codes of behaviorand reward for all success. promulgated by industry and profes- sional association (Gatewood and Car-
H. Fauzi, A. A. Rahman / Issues in Social and Environmental Accounting 1 (2008) 131-144 137roll, 1991; Simons, 1995). When uncer- Diagnostic Control Systemtainty resulting from new opportunitiesis high or internal trust is low, the busi- Diagnostic control system is the oneness conduct boundary is highly needed used by management to evaluate the im-(Kanter in Simons, 1995). In the envi- plementation of an organization’s strat-ronment of high uncertainty, (Merchant, egy by focusing on critical performance1990 in Simon 1995) found that chances variables, which are the ones that canto manipulate the profit figures by man- determine the success of strategy imple-agers is high. The manipulation is one mentation and, at the same time, canof risks that can endanger the managers’ conserve the management attentioncompany. Therefore, the business con- through the use of management by ex-duct boundary will be imposed in that ception (Simons, 1995 and 2000). As asituation to avoid the risk and, in turn, system relying upon the feedbackimprove the corporate performance. The mechanism, the diagnostic control sys-low in internal trust can result in the ab- tem is an example of application of sin-sence of shared commitment to the or- gle loop learning whose purpose is toganization goal. No commitment to goal inform managers of outcomes that arecan affect the corporate performance. not meeting expectation and in accor-The objective of applying the business dance with plan (Argyris, 1977 inconduct boundary is to maintain the em- Simons,1995 ; Widener, 2006 andployee’s commitment to organization 2007). The single loop learning is a partgoal and, in turn, can improve the corpo- of organization learning that indicatesrate performance. benefits of implementing management control system in general. Organiza-Strategic boundaries are defined as rules tional learning originates in historicaland limitation applied to decisions to be experiences that are then encoded in rou-made by managers needing the organiza- tines (Levitt and March, 1988; citedtion’s resource allocation as response of Widener, 2006 and 2007). Based onopportunities identified in the belief sys- historical experiences, the organizationtem (Simons, 1995 and 2000). Applica- adopts and formalizes “routines thattion of ROI of 20% as hurdle rate in the guide behavior” (Levitt and March,capital budgeting decision is one exam- 1998, 320). Therefore, control systemple. Updated negative list on business can be said to be a learning tool. To sup-area that is not allowed to go into is an- port this conclusion, Kloot (1997), in hisother example. In his study using case study using case study approach, investi-approach in UK Telecommunication gated the link between control systemcompany, Marginson (2002) found that and organizational learning and foundthe boundary system-strategic boundary that control system can facilitate organi-can motivate people in that company to zation control. Based on organizationsearch for new ideas or opportunities theory literatures, organization learningwithin the prescribed acceptable area. has impact on performance (Slater andThus, if well implemented, this system Narver, 1995; Levitt and March, 1988).can avoid the potential risks and, in turn, The argument underlying the associationcan improve the organization perform- is that organization learning is very criti-ance. cal to competitive advantage. Organiza- tion with learning orientation will have
138 H. Fauzi, A. A. Rahman / Issues in Social and Environmental Accounting 1 (2008) 131-144improved performance (Tippin and Sohi, ing from market dynamics, government2003). Chenhal (2005) provided support regulation, and dramatic change in tech-for the finding by investigating the rela- nology triggering the intended strategytionship of control system and delivery become invalid (Simons, 1995; Simons,service using organization learning as 2000). He proposed the use of Interac-mediating variable. tive control system to solve the obsta- cles. The control system will detect theIn addition to providing organization driver of invalidity of intended strategylearning aspect, the use of diagnostic and follow them up by working togethercontrol system also can conserve man- between top managers and their subordi-agement attention trough the application nates to create dialog and to share infor-of management by exception tool mation in order to solve the problems.(Simons, 1995 and 2000). With the tool, This process, if well designed, canthe control system reports to manage- stimulate double loop learning in whichment only if the deviation things happen. the search, scanning, and communica-Therefore, efficient aspect will be re- tion process allow the emergence of newsulted from the use of the tool. Simons strategies, strategy of which, in Mintz-(1991) also provided empirical evidence berg’s (1978) strategy typology, is oftenfrom the health care industry that man- called emerging strategy. Levit andagers feel overloaded with information if March (1988) echoed that situation bytheir attentions are focused on broad stating that if the structural problems inscope of control attributes and con- organizational learning cannot be elimi-cluded that diagnostic control system nated, they can be mitigated. In theircould facilitate the efficient use of their study in the hospital area, Albernettyattentions. According to Schick et al. (in and Brownel (1999) also support theWidener, 2006 and 2007), the informa- conclusion that interactive control sys-tion overload occurs when demand for tem can facilitate the organization learn-information exceeds its supply of time. ing. Considering the importance of or-To encourage the efficient use of man- ganization learning as mentioned above,agement attentions (time), the manage- the process, in turn, can improve the or-ment attentions should be focused on the ganization performance.critical success factors and core compe- Based on theory of slack resourcetence that are likely associated with im- (Waddock et al., 1997), the interactionproved performance. between control system, including belief system, boundary system,, diagnosticInteractive Control System control system, and interactive control system, as well as the corporate financialIn an attempt to implement the organiza- performance (CFP) can affect the corpo-tion strategy, it is necessary to note that rate social performance (CSP) due tostrategy initially set in strategic plan- fact that increase in CFP resulting fromning, often called intended strategy, in the appropriate use of control systemthe classification of Mintzberg’s (1978) components enables the company hastypology of strategy, may not become more chance to do the CSP.realized strategy due to the fact that any Most prior literature considering the mo-strategy has inherent strategic uncer- tives for socially responsive decisiontainty defined as external factors result- making derives from the business ethics
H. Fauzi, A. A. Rahman / Issues in Social and Environmental Accounting 1 (2008) 131-144 139literature. Considerable attention has tion processes aimed at internalizingbeen given to determining the factors socially responsive/ethical standardsthat influence ‘ethical’ organizational within individual employees have beendecision making (Soutar et al., 1994). held to influence socially responsiveFor example, models of ethical behavior decision-making (Smith and Carroll,have been developed which indicate 1984; Soutar et al., 1994). The Controlthere is a set of situational variables systems (levers of control) are deemedwhich interact with and influence ethical to form an integral part of employee so-decision making processes (Bommer et cialization (Gatewood and Carroll,al., 1987; Stead et al., 1990; Trevino, 1991). They support the development of1986). One set of situational variables an organization’s culture, the system ofdeemed to influence ethical decision shared beliefs, values, norms, and moresmaking include work environment and of organizational members (Gands andorganizational factors (Bommer et al., Bird, 1989), which are deemed to be a1987; Falkenberg and Herremans, 1995; primary determinant of the direction ofSinghapakdi et al., 2000; Verbeke et al., employee behavior (Robin and Reiden-1996). For instance, employee socializa- bach, 1987; Trevino, 1986). Figure 1: Levers of Control(Adopted from Simons, 1995b)CONCLUSION on purpose, and credos should be stated in three dimensions and communicatedThe use of levers of control to increase to internal and external factors. In beliefcorporate social performance starts by system context, that instrument willextending concept of corporate perform- guide the people in organization to act.ance including the Three Bottom Line The search for new ways and alterna-(TBL): Financial, social, and Environ- tives should be based on the sustainablemental. Vision and mission, statement performance. The boundary taking into
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