Issues in Social and Environmental AccountingVol. 2, No. 2 Dec 2008/Jan 2009Pp. 233-259  The Determinants of the Relations...
234                 H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259conflicting results had ...
H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259   235the relationship of CSP and CFP, while...
236            H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259of the relationship will occu...
H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259   237                                      ...
238           H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259theory perspective (Wagner, 20...
H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259   239be found that performance variation in...
240            H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259in Tan and Lischert, 1994) an...
H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259   241pected to able to moderate the relatio...
242            H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259(1993) proving with conflicti...
H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259   243the company’s business strategy is im-...
244           H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259taking place in complex enviro...
H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259                   245nated widely, but dire...
246           H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259providing them with the organi...
H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259   247izational goal (Simons, 1995). There- ...
248           H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259ception (Simons, 1995b and 200...
H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259   249signed, can stimulate double loop lear...
250           H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259making include work environmen...
H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259   251                                      ...
252           H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259CSP principle and value. Under...
H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259   253      No. 2.                          ...
254          H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259      1, No. 1, pp. 131-144.   ...
H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259   255Gupta, A.K. & Govindarajan, V.(1984)  ...
256          H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259Lawrence, P., & Lorsch, J.W. (1...
11.vol call for paper no. 2_h fauzi_pp233_259_n
11.vol call for paper no. 2_h fauzi_pp233_259_n
11.vol call for paper no. 2_h fauzi_pp233_259_n
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  1. 1. Issues in Social and Environmental AccountingVol. 2, No. 2 Dec 2008/Jan 2009Pp. 233-259 The Determinants of the Relationship ofCorporate Social Performance and Financial Performance: Conceptual Framework1 Hasan Fauzi Faculty of Economis Sebelas Maret University, IndonesiaAbstractThe objective of this paper is to investigate relationship between CSP and CFP using contin-gency perspective derived from the strategic management domain. The investigation will bedone using lens of slack resource and good management theory. This study is expected to pro-vide a new insight on the link between corporate social performance and corporate financialperformance using contingency perspective as suggested in the strategic management and ac-counting literature, an area has not been examined in the prior studies. The result of this studycan resolve the existing conflict in the literatures by developing an integrated model of the linkbetween CSP and CFP and the notion of corporate performance which, in strategic manage-ment, is highly affected by four factors: business environment, strategy, organization structure,and control system. The model will explain in what condition the relationship of CSP and CFPis validKeywords: Corporate social performance, corporate financial performance, slack resourcetheory, good management theory, contingency theory, and moderating effect.Introduction 2001; Murphy, 2002; Simpson & Kohers, 2002; Griffin & Mahon, 1997;So far the relationship between CSP and McWilliams & Siegel, 2000;CFP has been investigated by research- McWilliams & Siegel, 2001; Moore,ers and produced inconsistent results: 2001; and Wright & Ferris, 1997; Fauzipositive, negative, and inconclusive (see et al., 2007). Some attempts have beenfor example Worrell,, 1997; Wad- conducted to explain the conflicting re-dock & Graves, 1997; Frooman, 1997; sults. According to some previous stud-Roman, 1999; Orlitzky, 2001; Or- ies (Wagner, 2001; Ruf, 2001;litzky & Benjamin, 2001; Ruf et al., Husted, 2000; Orlitzky et al., 2003), theHasan Fauzi is Director of Indonesian Center for Social and Environmental Accounting Research and Development(ICSEARD) and Head of International Partnership, International Office, Sebelas Maret University and can be reachedat: He is very grateful to the committee of AAA 2008 Annual Meeting for their review, totwo reviewers (Dr. Ku and Dr.Wan of Universiti Utara Malaysia) as well as to participants of Working Paper Forum ofFaculty of Economics, Sebelas Maret University for their critical and constructive review and suggestion of earlierdraft of the paper
  2. 2. 234 H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259conflicting results had been caused by the relation of CSP and CFP, but theytwo main factors: lack of theoretical fail to provide clear answer (Aupple etfoundation and methodological problem. al., 1985; Ullman, 1985; Wartick and Cochran, 1985; Wood 1991; Wood andThe absence of sound theoretical foun- Jones, 1995; Pava and Krausz, 1996;dation to explain CSP construct has con- Griffin and Mahon, 1997; Husted,tributed to the conflicting result of the 2000). One reason is due to the neglect-relationship between CSP and CFP. ing of the contingency aspect (Ullman,From the theoretical ground perspective, 1985). Other researchers also do sug-basically theories used in defining CSP gest that variations in the result of theconstruct have been derived from relationship between CSP and CFP bethought of neoclassical economic theory solved by using contingency theory per-and stakeholder theory. Those who de- spective (Wagner, 2001; Husted, 2000;veloped CSP construct using neoclassi- Margolish et al., 2003; Orlitzky et al.,cal economics paradigm found a nega- 2003). Due to the fact that CSP andtive result of the CSP and CFP relation- CFP are not related under all condition,ship, while proponents of the stake- the contingency perspective needs to beholder theory showed the positive result. used to examine under which conditionFurthermore, variation in the stakeholder the relation will be valid (Hedesströmtheory itself in defining CSP such as and Biel, 2008). In addition, Orlitzky etCarroll’s and Wood’s model has contrib- al., (2003) found that strong of the rela-uted to the conflicting result due to mis- tionship will be dependent upon contin-matching of the theory in empirical stud- gency such as reputation and constructies (Wood and Jones, 1995). One of operationalization. Some other re-causes for the mismatching is due to the searchers also have shown that CSP andfact that in empirical studies researchers CFP relation is positive using resource-operationalize the CSP construct based based view (strategy) as contingent vari-on certain type of industry and it leads to able (Hilman and Keim, 2001; Orliztkythe contribution to the inconsistent result et al., 2003; Pos et al., 2002).(Rowley and Berman, 2000). To solvethe weakness, it is suggested to opera- So far the use of contingency perspec-tionalize the construct in terms of com- tive in explaining the relationship ofpany’s relationship with its stakeholders CSP and CFP has been argued by some(Clarkson, 1995a and 1995b; Husted, researchers that CSP is the result of the2000; Rowley and Berman, 2000; Wood fit between endogenous organizationand Jones, 1995). In this regard, Husted variables of CSP and exogenous contex-(2000) defines CSP as “the ability of the tual variables (Russo and Fouts, 1997;firm to meet or exceed stakeholder ex- Rowley and Berman, 2000; McWilliampectations regarding social issues”. and Siegel, 2001; Husted, 2000). For example, Russo and Fout (1997) foundIn addition, some previous reviews and that the type of industry will determinetheories2 have been proposed to explain 2 For example The extended values and principles of1 the CSR (Aupple et al., 1985), social issues management The initial draft of this paper had been accepted for (Wartick et al., 1985), institutional, organizational, andpresentation at International Conference of American individual level of CSP theory (Wood, 1991a andAccounting Association (AAA), Anaheim, CA, 3-6 1991b), Mismatching stakeholder (Wood et al., 1995),August, 2008 and paradox of social cost (Pava et at., 1996)
  3. 3. H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259 235the relationship of CSP and CFP, while and Keim, 2001; Husted, 2000; Pos etHusted (2000) argues that the relation- al., 2002; Orliztky et al., 2003; Neville,ship of CSP and CFP depend upon 2005) did not clearly relate their contin-stakeholder issues. gency variable (strategy) to the corpo- rate performance in the context of TBL.Despite the importance of the use of The variable (strategy) specifically iscontingency perspective proposed by focused on handling social issues notprevious studies, there is still the follow- integrated into business strategy. Fur-ing one major gap. They do not inte- thermore in the level of empirical per-grate the contingency factors into the spective, the contingency variables usedimportant determining variables in cor- are beyond the TBL factors. Rather, theyporate performance both in the concep- use industry type and company size astual framework level and in the empiri- moderating variables, that is, variablescal perspective. This effort is needed affecting other relationship, to explainbecause CSP is an extended corporate the relationship between CSP and CFPperformance in the context of Triple (Fauzi, 2004; Brammer & Pavelin, 2006Bottom Line (TBL) concept. and Fauzi, 2007).Based on the review of accounting and Thus, this paper will address the gap bystrategic management literatures, it can using the variables affecting (moderatingbe found that corporate performances variables) the corporate performance asare matching of business environment, contingency factors to explain the rela-strategy, internal structure, and control tionship of CSP and CFP. More explic-system (Lenz, 1980; Gupta and Govin- itly, how variables such as business en-darajan, 1984; Govindarajan and Gupta, vironment, business strategy, organiza-1985; Govindarajan, 1988; Tan and tional structure, and control system canLischert, 1994; Langfield-Smit, 1997). affect the relationship between CSP andThus it can be argued that corporate per- CFP.formances referred to the notion of TBLshould be affected by some importantvariables: business environment, strat- Relationship between CSP and CFPegy, structure, and control system.Therefore, better attempts to seek expla- There are two important issues in thenation of the relationship between CSP relationship between CSP and CFP: di-and CFP need to be conducted using the rection and causality of the relationshipintegrated model as suggested in the ac- (Preston and O’Bannon 1997). The di-counting and strategic management lit- rection of the relationship refers to posi-eratures and considering the suggestions tive, negative and neutral of the relation-of Savage et al (1991), Husted (2000 and ship. The positive direction of the rela-2001), Orlitzky (2002), Rowley & Ber- tionship of CSP and CFP is that increaseman (2000), Orlitzky (2003), in CSP results in increase in CFP asItkonen (2003), and Brammer & Pavelin well, while the change in CSP leading to(2006). the change in CFP in different way is negative direction of the relationship. IfIn the level of the conceptual frame- a change in CSP does not affect thework, some previous studies (Hilman change in CFP, neutral effect direction
  4. 4. 236 H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259of the relationship will occur. The cau- that the relationship of CSP and CFPsality of the relationship denotes which will be contingent upon four variables:one between CSP and CFP will be be- business environment, business strategy,coming independent or dependent vari- organization structure, and control sys-able. In this case, there are two possi- tem.bilities: CSP as independent variable andCFP as independent variable. If CSP as The second issue that Griffin and Mahonindependent variable, it come first to raised is about the causality of the rela-affect CFP, while if CSP as dependent tionship of CSP and CFP. Waddock andvariable, CFP will come first to affect Graves (1997) and Dean (1999) put for-CSP. ward two theories to explain the causal- ity: Slack resource theory and goodBased on the literature review, the rela- management theory. Under the slacktionship between corporate social per- resource theory, a company should haveformance and corporate financial per- a good financial position to contribute toformance could be positive, negative, or the corporate social performance. Con-neutral. But most of the result of stud- ducting the social performance needsies indicated the positive relationship some fund resulting from the success ofand very few provided the negative and financial performance. According toneutral relationship (Worrell at al., 1991; this theory, financial performance comesPreston et al., 1997; Waddock et al., first. Therefore, CFP is independent1997; Frooman, 1997; Roman et al., variable to affect CSP. A good manage-1999; Orliztky, 2001; Orlizky et al., ment theory holds that social perform-2001;Rufel et al., 2001; Murphy, 2001; ance comes first. Based on the theory,Simpson et al., 2002; Griffin et al., CSP is independent variable resulting in1997; McWilliam et al., 2000 and 2001; CFP and a company perceived by itsMoore, 2001; Wright, 1997; Itkonen, stakeholders as having a good reputation2003). will make the company easier) to get a good financial position (through marketThe conclusion that can be drawn from mechanism). The two theories can bethe previous findings is that the relation- diagrammed in the figure 1 (see the nextship between CSP and CFP is not under page).all condition. The use of contingencyperspective is needed to understand un- The two theories will be used to modelder which condition the relationship will contingency perspective to explain thebe valid (Hedesström and Biel, 2008). relationship of CSP and CFP using theThis paper study will address the gap of variables of business environment, strat-unsound theory on the relationship of egy, internal structure, and control sys-CSP and CFP by developing the inte- tem as contextual variables or moderat-grated model derived from accounting ing variables (Lenz, 1980; Gupta andand strategic management literature. Govindarajan, 1984; Govindarajan andThe model to be developed, derived Gupta, 1985; Govindarajan, 1988; Tanfrom Langfield-Smith’s (1997) proposi- and Lischert, 1994; Langfield-Smit,tion on corporate performance, explains 1997).
  5. 5. H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259 237 Slack Resource Theory Corporate Financial Corporate Social Performance (CFP) Performance Good Management Theory Corporate Social Per- Corporate Financial formance Performance (CSP) Figure 1: Causality of the Relationship of CSP and CFPContingency Approach to Study on salistic view is common and applied inCSP and CFP Link any setting of management practices (Alexander and Alan, 1985; Gerdin andGenerally contingency theory states that Grave, 2004) and also in corporationorganization’s effectiveness will be con- social performance (see for exampletingent upon some factors often called Husted, 2000). One of the reasons ofcontextual variable (see for example the commonly used contingency ap-Hamberick and Lei, 1985; Gerdin and proach is due to the focus on the organ-Grave, 2004). Furthermore, focus in izational effectiveness, a general andcontingency theory will be on fit be- important organizational goal-relatedtween organization characteristics or practices and the contex-tual variable in achieving the organiza- In the context of CSR, there are sometion effectiveness (see for example previous studies suggesting the contin-Alexander and Alan, 1985; Doty et al, gency approach (Ullman, 1985; Husted,1993; Gerdin and Grave, 2004). The 2000; Wagner, 2001; Margolish et al.,organizational effectiveness can include 2003; Orliztky, 2001). Ullman (1985)economic or financial performance and argued that one reason of failure of stud-other criteria such social and environ- ies on CSP and CFP to explain the con-mental performance as referred to the flict results is due to the neglecting ofconcept triple bottom line (TBL). The the contingency aspect. Other research-use of the contingency view as an alter- ers also do suggest that variations in thenative view to extreme view of business result of the relationship between CSPin both situations: specific and univer- and CFP be solved by using contingency
  6. 6. 238 H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259theory perspective (Wagner, 2001; Some important studies had been con-Husted, 2001; Margolish et al., 2003; ducted to investigate the relationship ofOrlitzky et al., 2001 and 2003). Due to business strategy, control system, andthe fact that CSP and CFP are not related organizational structure and environ-under all condition, the contingency per- mental and social performance (Gerde,spective needs to be used to examine 1998; Pondeville, 2000; Husted, 2000,under which condition the relation will and Husted, 2001). In an effort to inves-be valid (Hedesström and Biel, 2008). In tigate stakeholders and organization de-addition, Orlitzky et al.(2001 and 2003) sign, Gerde (1998) used business strat-found that strong of the relationship will egy, control system, and organizationalbe dependent upon contingency such as structure as the predictors of corporatereputation and construct operationaliza- social performance including the envi-tion. Some researchers also have shown ronmental aspect. His findings were thatthat CSP and CFP relation is positive the variables did not increase the socialusing resource-based view (strategy) as performance. In his deductive study,contingent variable (Hilman and Keim, Pondeville (2000) synthesized that con-2001; Orliztky et al.,, 2003; Pos et al., trol system and business strategy, as2002). well as organization design (structure) have contributed to the environmentalConcept of Fit in contingency theory in performance. In an effort to get goodthe context of CSP can be traced the in understanding of corporate environ-accounting and strategic management mental and social performance, Hustedliteratures. Based on the review of the (2000) had constructed contingencyliteratures, it can be concluded that cor- model of corporate social performance.porate performances are matching of The fit between social issues and busi-business environment, strategy, internal ness strategy and structure had been pre-structure, and control system (Lenz, dicted to affect the corporate social per-1980; Gupta and Govindarajan, 1982 formance. Husted et al. (2001) in hisand 1984; Govindarajan et al.,1988; Go- deductive approach of another study de-vindarajan, 1988; Tan and Lischert, veloped a model called integrated view1994; Langfield-Smit, 1997). Thus cor- of business and social strategy. In theporate performances referred to the no- model, business strategy had been pre-tion of TBL should be affected by some dicted to affect financial and social per-important variables: business environ- formance.ment, strategy, structure, and controlsystem. Therefore, better attempts toseek explanation of the relationship be- Business Environment and CSP-CFPtween CSP and CFP are needed to con- Linkduct using the integrated model as sug-gested in the accounting and strategic Investigation on why an organization ormanagement literatures and considering corporate has higher performance thanthe suggestions of Savage et al.(1991), other organization can be found in threeHusted (2000 and 2001), Orlitzky bodies of research: industrial organiza-(2000), Rowley & Berman (2000), Or- tion, business policy, organization the-litzky et al. (2003), Itkonen (2003), and ory research (Lenz, 1980). Based onBrammer & Pavelin (2006). review of the bodies of research, it can
  7. 7. H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259 239be found that performance variation in to market condition in which a companyan organization or corporation can be has to compete with. In the absence ofexplained using the variables of environ- competition, a company can performment, strategy, and organization struc- well with no significant effort as the cus-ture used (Lenz, 1980; Gupta and Go- tomers have no choice or alternative tovindarajan, 1984; Govindarajan and satisfy their need. However, in the highGupta, 1985; Govindarajan, 1988; Tan competition indicated by so many alter-and Lischert, 1994; Langfield-Smit, natives for customers to satisfy their1997). In addition, accounting litera- want, a company has to devote its besttures also contributed to explanation of effort to satisfy the customers. There-the organization’s performance variation fore, the competitive intensity is ex-(Gupta and Govindarajan, 1984; Govin- pected to relate positively to organiza-darajan and Gupta, 1985; Govindarajan, tion performance. The last aspect of1988; Langfield-Smit, 1997; Albernetty business environment is the technologi-et al., 2004 and 2005). cal turbulence that is meant simply as the rate of technological change. For aAs one of the factors affecting the high company having characteristic of sensi-of organization performance, organiza- tive to technological change, innovationtion or business environment can be de- resulting from the technological changefined as conditions that are normally can be alternative to increase the com-changing and unpredictable an organiza- pany’s competitive advantage withouttion is facing. Lenz (1980) included having to focus more on the market ori-market structure, regulated industry, and entation. By contrast, for the companyother relevant environments in the con- with no innovation in technology, itcept of the business environment as the should strive to focus more on marketfactors to be affecting the corporate per- orientation. Therefore, the technologicalformance defined as corporate financial change is relating negatively to organi-performance (CFP). Jaworski and Kohli zation performance. This concept of(1993) extended the definition of busi- business environment is in line withness environment as including market Simons’ (2000) concept of strategic un-turbulence, competitive intensity, and certainty including technological de-technological turbulence. The market pendence, regulation and market protec-turbulence that is understood as the rate tion, value chain complexity, and ease ofof change in the composition of custom- tactical response. Technological de-ers and preferences can be a predictor of pendence has been close to the technol-business performance (Jaworski and ogy turbulence, while regulation andKohli, 1993). An organization operating market protection can be referred tounder market turbulence will tend to competition intensity. The strategic un-modify its product or services continu- certainty variables of value chain com-ally in order to satisfy its customers. plexity and ease of tactical response par-Adversely, if the market is stable indi- allel the concept of market turbulence.cated by no change in customers’ prefer- Furthermore, based on review of organi-ence, the organization is not likely to zation environment literature, it can bechange its product or service. Therefore, found that business environment can bethe market turbulence is expected to re- defined in general way as the source oflate positively to organization perform- information (Duncan, 1972; Lawrenceance. Competitive intensity is referred and Lorsch, 1967; Tung 1979 and cited
  8. 8. 240 H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259in Tan and Lischert, 1994) and as source in turn, decreases the organization’sof scarce resource (Tan and Lischert, ability to achieve the organization’s1994). As source of information, busi- goal.ness environment is focused on per-ceived information uncertainty and sub- Based on the theory of slack resource,jective in nature, as source of scarce re- the interaction or fit between businesssource; business environment is resource environment and corporate financial per-dependence (Tan and Lischert, 1994). formance (CFP) can affect the corporateBased on the understanding, corporate social performance due to fact that in-performance can be controlled by using crease in CFP resulting from businessmanagement ability to control over the environment aspect enables the com-resource. Meanwhile, the concept of pany has more chance to do the environment can also be Thus, it is reasonable to expect from thisviewed as multidimensional construct study that the business environment canincluding three variables: dynamism, moderate or affect the relationship be-complexity, and hostility (Duncan, 1972; tween CFP and CSP. The propositionLawrence and Lorsch, 1967; cited in for business environment of the relation-Tan and Lischert, 1994). In the last con- ship of CSP and CFP is as follows:cept, components of dynamism and P1a: Business environment moder-complexity have been close to the per- ates the relationship between CFPceived information uncertainty, while and CSP based on the slack re-hostility is similar to the resource de- source theorypendence (Tan and Lischert, 1994). Fol-lowing the concept of business environ- In relating to the corporate social per-ment as multidimensional construct, formance, Higgin and Currie (2004) hadScott in Tan and Lischert (1994) and identified some variables affecting a cor-Jauch et al.(1980) had extended the con- porate to be ethical or legal behavior incept of business environment becoming running the company resulting in theinstitutional environment including lar- high of corporate social performance.ger components similar to stakeholder The factors are: business climate, humanconcept. The dimensions covered in- nature, societal climate, societal climate,clude: (1) competitors, (2) customer, (3) the competitiveness of the global busi-suppliers, (4) technological, (5) regula- ness environment, and the nature oftory, (6) economics, (7) social-cultural, competitive organization Performance.and (8) international. Based on the con- Thus, arguments for business climate orstruct defined in the previous studies, environment discussed above, especiallyThe business environment will come up for the concept of business environmentwith the increase or decrease in corpo- derived from the larger concept similarrate performance as suggested by Dill to stakeholder concept can be applied to(1958). Organization facing high uncer- the relationship between business envi-tainty in business environment has less ronmental and corporate social perform-ability to attain the organization’s goal. ance. Furthermore, in an effort to seekThis argument has been echoed by the relationship between CSP and CFPSimons (2000) by asserting that the busi- derived from the good management the-ness environment is one of the factors ory indicating that conducting CSP canresulting in the strategic uncertainty and, affect CFP, this variable will be ex-
  9. 9. H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259 241pected to able to moderate the relation- new strategy called emerging strategyship between the link between CSP and (Simons, 2000). The last, strategy asCFP. ploy is a tactic a company can do to fight with competitor. If the views ofBased on the arguments and finding strategy can be well implemented, thenfrom the previous studies, it can be con- strategy can be an important determinantcluded that the link between CSP and of the company’s performance. Further-CFP will be contingent upon the busi- more, in practical, strategy choice for aness environment variable. The follow- company is depending upon the environ-ing is the proposition of the relationship ment faced by the company. In this re-CSP and CFP moderated by business gard, Mitzberg (1973) defined the strat-environment under a good management egy as patterns of stream of decisiontheory: focusing on a set of a resource allocation P2b: Business environmental mod- in an attempt to accomplish a position in erates the relationship between an environment faced by the company. CSP and CFP based on good man- Using focus on decision as developed agement theory. Mistzberg (1973), Ventakraman (1989), Miller and Frieson (1982), and Tan and Lischert (1994) extended the concept ofStrategy and CSP-CFP Link strategy using dimensionality approach including: (1) analysis, (2) defensive-Concept of strategy is a complex con- ness, (3) futurity, (4) proactiveness, andcept and it leads to proliferation of defi- (5) riskiness.nition of strategy (Lenz, 1980). Mintz-beg (1987 and cited in Simons, 2000) There are some studies on the fit be-had classified the views on strategy, in- tween strategy and corporate perform-cluding strategy as perspective, strategy ance (CFP) identified by Fisher (1995)as position, strategy as plan, strategy as using the product life cycle as contin-patterns of action, and strategy as ploy. gency factor and performance appraisalStrategy as perspective refers to mission system as dimension control, (Simons,and vision of a company to be a base for 1987) utilizing competitive strategy asall activities of the company. This will contingency factor and budget flexibilitydetermine core value of the company. as dimension of control system, Govin-Strategy as position indicates the way a darajan and Fisher (1990) employingcompany will pursue to compete in the Porter typology as contingency factormarket. This view will lead to the use of and behavior and output control as di-Porter’s typology of strategy: differen- mension of control system, Govindara-tiation and low cost (Simons. 2000). jan (1988) exploiting Porter typology asStrategy as plan suggests short-term plan contingency factor and budget evalua-as series of long term plan in the strategy tion style and locus of control as dimen-as position. In this view, a company can sion of control system, and Fisher andevaluate the success of the implementa- Govindarajan (1993) applying Portertion strategy. Strategy as pattern in ac- typology and product life cycle as con-tion is a company’s action plan to cope tingency factor and incentive compensa-with the failure of the strategy imple- tion as dimension of control system.mentation. It is in this view that emerge Except for Fisher and Govindarajan
  10. 10. 242 H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259(1993) proving with conflicting result, prices. The products, markets and ac-they supported the fit relationship to the tivities that define organizational strat-performance. In more recent studies, egy also define the organization’s stake-Liao (2005) and Sandino (2005) contrib- holder set. Consequently, a firm pursu-uted to the same finding as the prior ing socially responsible initiatives thatstudies mentioned above. Using the lack consistency with its corporate strat-same fit, but with different position for egy is not likely to meet the particularthe contingency factor, Abernethy and expectations of its stakeholders.Brownell (1999) also provided the fitrelationship to the performance. In an effort to seek the relationship be- tween CSP and CFP derived from theBased on theory of slack resource, the good management theory, the strategyinteraction or fit between strategy and variable will be expected to able to mod-corporate financial performance (CFP) erate the link between CSP and CFP.can affect the corporate social perform- Based on the arguments and findingance due to fact that increase in CFP from the previous studies, it can be con-resulting from strategy enables the com- cluded that the link between CSP andpany has more chance to do the CSP. CFP will be contingent upon the strat-Thus, it is reasonable to expect from this egy. The following is proposition on thestudy that the strategy can moderate or effect of strategy of the relationship ofaffect the relationship between CFP and CSP and CFP:CSP. The proposition for strategy of the P2b: strategy moderates the rela-CFP-CSP link is as follows: tionship between CSP and CFP P2a: strategy moderates the rela- based on good management the- tionship between CFP and CSP ory. based on the slack resource theoryThe conflicting results from empirical Organization Structure and CSP-CFPstudies into the CSP-CFP relationship Linkindicate to the need for a contingent per-spective to determine the conditions that Study directly relating to organizationaffect the nature of the CSP-FP relation- structure fit and performance is Sandinoship (Rowley and Berman, 2000). (2005). He found that interaction be-Husted (2000), for instance, proposed tween control system and organizationthat the CSP-CFP relationship is a func- structure affected company’s perform-tion of the fit between the nature of rele- ance. In addition, the insight regardingvant social issues and the organization’s this fit relation to the performance cancorresponding strategies and structures. be predicted based on the direct relation-Further, McWilliams and Siegel (2001) ship between organization structure andproposed that the impact of socially re- job satisfaction variable (Ali and Ali,sponsible actions on financial perform- 2005). If employees feel satisfied it canance would be contingent on the econo- be expected to increase the company’smies garnered from the organization’s performance.size and level of diversification, productmix, advertising, consumer income, gov- Corporate performance is highly deter-ernment contracts and competitors’ mined by how effectively and efficiently
  11. 11. H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259 243the company’s business strategy is im- fewer formal rules and procedures isplemented (Walker et al., 1987 and cited referred to organic organization (Burnsin Olson, 2005). The success of the and Stalker in Olson et al., 2005). Or-company’s strategy implementation is ganic organization enables people in ahighly influenced by how well the com- company to have vertical and horizontalpany is organized (Vorhies et al., 2003; communication to manage the com-Olson, 2005) and the use of strategic pany’s works. Therefore, benefit thatbehavior such as customer focus, com- can be gained from using the organicpetitor analysis, and innovation (see for organization include rapid awareness ofexample Chen, 1996; Gatignon, 1997; and response to the changes in competi-Olson, 2005). The organization struc- tion and market, more effective informa-ture is needed to manage the works in tion, reduced lag time between decisionorganization that are divided into small and action (Miles et al., 1992; Olson,parts to achieve the intended strategy. It 2005).is the management of works leading tothe emergence of variety of alternative Centralization is a condition on whetherof organization structure and, in turn, autonomy of making decision is held bycan shape the company. The organiza- top manager or be delegated to the lowertion structure can be defined using three manager. In management literature, thisconstructs: formalization, centralization, construct includes two terms in the op-and specialization (Walker et al, 1987; posite ends: centralized and decentral-Olson et al., 2005). The three compo- ized organization (Olson, 2005). In cen-nents are central points of Mintzberg’s tralized organization, autonomy to makeanalysis of organization structure (Olson decision is held by top manager. Al-et al., 2005). though fewer innovative ideas can be created in centralized organization, im-Formalization refers to the level of for- plementation of the decision is straightmality of rules and procedures used to forward after the decision is madegovern the works in a company includ- (Ullrich and Wieland in Olson, 2005).ing decision and working relationship However, the benefit can only be real-(Olson, 2005). The rule and procedure ized in stable and in noncomplex envi-can explain the expected appropriate ronment (Olson et al., 1995; Ruekert,behavior in working relationship and 1985; Olson et al., 2005). In unstableaddress the routine aspect of works. As a and complex environment indicated byresult, people and organization itself can rapid changes in competition and mar-gain the benefit of using the rules and ket, the use of organization structureprocedures. In this regard, the use of the providing the lower manager with auton-rules and procedures can lead to the in- omy of making decision is needed. Increase in efficiency and the decrease in the decentralized organization, a varietyadministrative cost especially in the nor- of views and innovative ideas maymal environment situation characterized emerge from different level of organiza-by simple and repetitive tasks (Ruekert tion. Due to the fact that autonomy ofet al., 1985; Walker et al., 1987; Olson making decision is dispersed, it mayel at., 2005). A company with highly take longer to make and implement theformal rules and procedures is called decision (Olson et al., 1995; Olson et al.,mechanic organization, while one with 2005). However, in the non routine task
  12. 12. 244 H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259taking place in complex environment, and CSP based on the slack the-the use of decentralized organization is orymore effective to achieve the organiza- P3a2: Decentralization moderatestion goal as the type of organization em- the relationship between CFPpower managers who are very close to and CSP based on the slack re-the decision in question and to make the source theorydecision and implement it quickly P3a3: Specialization moderates(Ruekert et al., 1985). the relationship between CFP and CSP based on the slack re-Specialization is the level of division of source theorytasks and activities in organization andlevel of control people may have in con- As mentioned above, another factor af-ducting those tasks and activities (Olson, fecting corporate financial performance2005). Organization with high speciali- (CFP) is the use of strategic behaviors inzation may have high proportion of spe- organization. In the context of corporatecialist to conduct a well-defined set of social performance, the concept strategicactivities (Ruekert et al., 1985; Ol- behaviors can be extended using theson,2005). Specialist refers to someone stakeholder theory to explain the fit be-who has expertise in respective areas tween organization structure and corpo-and, in certain condition; he or she can rate social performance (CSP). Accord-be equipped with a sufficient authority ing to Chen (1996); Gatignon et determine the best approach to com- (1997); and Olson et al. (2005), the stra-plete the special tasks (Mintzberg in Ol- tegic behaviors can be identified intoson, 2005). The expertise is needed by some components: customer-orientedorganization to quickly respond the behavior, competitor oriented behavior,changes in competition and market in innovation-oriented behavior, and inter-order to meet organization goal (Walker nal-cost behavior. The concept can beet al., 1987). extended using components of stake- holder as contended by Donaldson et al.Based on theory of slack resource, the (1995). Supplier-focused behavior, em-interaction or fit between organization ployee-focused behavior, society aspect-structure and corporate financial per- focused behavior, and environment-formance (CFP) can affect the corporate focused behavior are stakeholder-basedsocial performance due to fact that in- strategic behavior to be expected to im-crease in CFP resulting from organiza- prove corporate financial performance.tion design enables the company has Using the argument, CSP will affectmore chance to do the CSP. Thus, it is CFP.reasonable to expect from this study thatthe organization structure can moderate In the formalization aspect, typical bu-or affect the relationship between CFP reaucratic structures normally may workand CSP. The proposition on organiza- well. In the typical structure, Informa-tion structure of the CFP-CSP link is as tion can be routed to the relevant spe-follows: cialist who can make decisions on the basis of standard corporate policies P3a1: Formalization moderates (Thompson & Tuden in Husted, 2000). the relationship between CFP However, Information is not dissemi-
  13. 13. H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259 245nated widely, but directly to the individ- short is management tool to implementual decision maker. For example, rules the organization strategy. Of the typolo-in the form of ethics codes can work gies in control system, Simons’ (2000)effectively to resolve problems to the typology is complete and comprehen-satisfaction of stakeholders where stake- sive, including: belief system, boundaryholders and the firm share similar values system, diagnostic control system, andand understandings of what happened. interactive control system. In its devel-To cope with the problems, companies opment stages, the control system hadcreate organization units undergone evolution in terms of ap-(decentralization and specialization proach used and complexity of environ-structure) to handle some tasks such as ment faced by a company. The evolutionenvironmental assessment, corporate included the use of direct control ap-philanthropy, and public relations. It is proach focusing on manager’s observa-usually the units that assume responsi- tion of what is going on the company tillbility of the companies’ ethics program indirect control approach relying upon(Center for Business Ethics, 1986). Ac- accounting control. For the last evolu-cording to Reed,Collin,Oberman, and tion, it included using static and flexibleToy in Husted, (2000), the presence of budget till adopting the concept of profitsuch routinized structures can have a or investment center (see for examplepositive impact on corporate social per- Horngren, 1996). The concept of con-formance. trol system centers on the concept of bottom line (financial performance).Based on the finding and the logic, the Not only did the concept have someconcern of this study is that the fit be- flaws on imbalances due to the domina-tween organization structure and CSP tion of financial aspect, but also it cre-will affect the financial performance. ated some paradoxical situation betweenThe proposition can be then developed: control and innovation, opportunity and attention, and short term and long term P3b1: Formalization moderates the goal, and human behavior. One reason relationship between CSP and of the problems is that the old concept of CSP based on good management control had been defined as diagnostic theory control only. In that definition of con- P3b2: Decentralization moderate trol, the control process had been fo- the relationship between CSP and cused on the matter of routine mecha- CFP based on good management nism or process of comparing some ex- theory pected and realized performances. Ac- P3b3: Specialization moderates the cording to Simons (1995a, 1995b and relationship between CSP and 2000), to avoid the problem concept of CFP based on good management control should be extended by adding theory three more levers: belief system, bound- ary system, and interactive control sys- tem. The function of belief system is toControl System and CSP-CFP Link3 inspire the people in an organization to search for new ways and alternatives byOne important function of ManagementControl system or control system for 3 This section is adapted from Fauzi et al. (2008)
  14. 14. 246 H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259providing them with the organization’s Simons, 1995b) supported the use of theclear vision, mission, statement of pur- instrument by arguing that great leaderspose, and credos through using format and competent managers understand theand informal system. It is expected from power of symbolism and inspiration.the belief system mechanism, creativity The benefit of using the symbolic instru-and innovation in the organization will ment especially at individual level isbe continuously updated to meet the ex- also provided by Feldman et al. (1981)pected growth. The use of boundary by delineating that symbols produce be-system lever is meant to prevent un- lief and belief can stimulate the discov-wanted impact of creativity and innova- ery of new realities. In this regard,tion by setting some rules limiting peo- Westley (1990 cited Simons, 1994) con-ple to do in the form of code of business tended that managers will not be veryconduct, strategic boundary, and internal eager to participate in search for oppor-control. The role of interactive control tunities if they do not understand thesystem is to provide an organization beliefs of organization and are not getwith solution to cope with emerging involved in converting the beliefs intostrategic uncertainty and with new strat- actions and strategies.egy given that emerging situation. There is a need for an organization toThe careful and consistent use of the formally communicate the core value,control system typology, often called especially when it is facing the dramaticlevers of control, can lead to the im- change in business environment such asproved performance (CFP). The follow- competition, technology, regulation anding is discussion on how the components other factors. The Change in the busi-of levers of control can be associated ness environment creates a need forwith the performance and, therefore, the strong basic values to provide organiza-expectation of the impact of the use of tional stability (Simons, 1995b). Thecomponents of the control systems on importance of understanding the core isthe relationship between CSP and CFP also supported by study of Kotter (incan be based upon. Simons, 1995b) concluding that inspira- tional motivation can be created by (1)Belief system is the one used in an or- communicating vision that can addressganization to communicate an organiza- the value of people in an organization,tion’s core value to inspire people in the (2) permitting each individual to beorganization to search for new opportu- pleased about how he or she can contrib-nities or ways to serve customer’s needs ute to implementation of that vision, (3)based on the core values (Simons, 1994, Providing eager support for endeavor,1995, 2000). In an organization the be- and (4) promoting public recognitionlief system has been created using vari- and reward for all success.ety of instruments such as symbolic useof information. The instruments are The belief system can make people in anused to communicate the organization’s organization inspired to commit to or-vision, mission, and statement of pur- ganization goal or purpose. In this re-pose such that people in the organization gard, commitment means believing incan well understand the organization’s organizational value and willing to at-core value. Westly et al. (1989; cited in tempt some efforts to achieve the organ-
  15. 15. H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259 247izational goal (Simons, 1995). There- The manipulation is one of risks that canfore, the goal commitment can lead to endanger the managers’ company.improved corporate performance (Locke Therefore, the business conduct bound-et al., 1988). The conclusion is consis- ary will be imposed in that situation totent with what Klein et al. (1998) found avoid the risk and, in turn, improve thein their study on situation constraints corporate performance. The low in in-including goal commitment and sales ternal trust can result in the absence ofperformance. Chong et al.(2002) study- shared commitment to the organizationing the effect of goal commitment and goal. No commitment to goal can affectthe information role of budget and job the corporate performance. The objec-performance provides the same finding. tive of applying the business conduct boundary is to maintain the employee’sThe resultant of belief system is new commitment to organization goal and, inopportunities that may contain some turn, can improve the performance.problems. The boundary system con-cerns on how avoid some risks of inno- Strategic boundaries are defined as rulesvation resulting from the belief system and limitation applied to decisions to be(Simons, 1994). The risks that possibly made by managers needing the organiza-emerge can be operating, assets impair- tion’s resource allocation as response ofment, competitive, and franchise risks opportunities identified in the belief sys-(Simons, 2000). On the other hands, the tem (Simons, 1995b and 2000). Appli-boundary system provides allowable cation of ROI of 20% as hurdle rate inlimits for opportunity seeker to innovate the capital budgeting decision is oneas conditions encouraged in the belief example. Updated of negative list onsystem. business area that is not allowed to go into is another example. In his study us-There are two instrument used in bound- ing case approach in UK Telecommuni-ary system to establish the limit in order cation company, Marginson (2002)avoid the risks: business conduct and found that the boundary system-strategicstrategic boundaries (Simons, 1995b; boundary can motivate people in thatSimons, 2000). The business conduct company to search for new ideas or op-boundaries are focused on behavior of portunities within the prescribed accept-all employees in an organization. The able area. Thus, if well implemented,source of the boundaries is of three this system can avoid the potential risksfolds: society’s law, the organization’s and, in turn, can improve the organiza-belief system, and codes of behavior tion performance.promulgated by industry and profes-sional association (Gatewood and Car- Diagnostic control system is the oneroll, 1991; Simons, 1994). When uncer- used by management to evaluate the im-tainty resulting from new opportunities plementation of an organization’s strat-is high or internal trust is low, the busi- egy by focusing on critical performanceness conduct boundary is highly needed variables, which is the ones that can de-(Kanter in Simons, 1994). In the envi- termine the success of strategy imple-ronment of high uncertainty, Merchant mentation and, at the same time, can(1990) found that chances to manipulate conserve the management attentionthe profit figures by managers is high. through the use of management by ex-
  16. 16. 248 H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259ception (Simons, 1995b and 2000). As a of management by exception toolsystem relying upon the feedback (Simons, 1995b and 2000). With themechanism, the diagnostic control sys- tool, the control system reports to man-tem is an example of application of sin- agement only if the deviation things hap-gle loop learning whose purpose is to pen. Therefore, efficient aspect will beinform managers of outcomes that are resulted from the use of the tool.not meeting expectation and in accor- Simons (1991) also provided empiricaldance with plan (Argyris, 1977; evidence from the health care industryWidener, 2006 and 2007). The single that managers feel overloaded with in-loop learning is a part of organization formation if their attentions are focusedlearning that indicates benefits of imple- on broad scope of control attributes andmenting management control system in concluded that diagnostic control systemgeneral. Organizational learning origi- could facilitate the efficient use of theirnates in historical experiences that are attentions. According to Schick et al. (inthen encoded in routines (Levitt and Widener, 2006 and 2007), the informa-March, 1988; cited Widener, 2006 and tion overload occurs when demand for2007). Based on historical experiences, information exceeds its supply of time.the organization adopts and formalizes To encourage the efficient use of man-“routines that guide behavior” (Levitt agement attentions (time), the manage-and March, 1998, 320). Therefore, con- ment attentions should be focused on thetrol system can be said to be a learning critical success factors and core compe-tool. To support this conclusion, Kloot tence that are likely associated with im-(1997), in his study using case study proved performance.approach, investigated the link betweencontrol system and organizational learn- In an attempt to implement the organiza-ing and found that control system can tion strategy, it is necessary to note thatfacilitate organization control. Based on strategy initially set in strategic plan-organization theory literatures, organiza- ning, often called intended strategy, intion learning has impact on performance the classification of Mintzberg’s (1978)(Slater and Narver, 1995; Levitt and typology of strategy, may not becomeMarch, 1988). The argument underlying realized strategy due to the fact that anythe association is that organization learn- strategy has inherent strategic uncer-ing is very critical to competitive advan- tainty defined as external factors result-tage. Organization with learning orien- ing from market dynamics, governmenttation will have improved performance regulation, and dramatic change in tech-(Tippin and Soha, 2003). Chenhal nology triggering the intended strategy(2005) provided support for the finding become invalid (Simons, 1995b;by investigating the relationship of con- Simons, 2000). He proposed the use oftrol system and delivery service using Interactive control system to solve theorganization learning as mediating vari- obstacles. The control system will de-able. tect the driver of invalidity of intended strategy and follow them up by workingIn addition to providing organization together between top managers and theirlearning aspect, the use of diagnostic subordinates to create dialog and tocontrol system also can conserve man- share information in order to solve theagement attention trough the application problems. This process, if well de-
  17. 17. H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259 249signed, can stimulate double loop learn- P4a4: reliance on interactive con-ing in which the search, scanning, and trol system moderate the relation-communication process allow the emer- ship between CFP and CSP basedgence of new strategies, strategy of on slack resource theorywhich, in the Mintzberg’s (1978) strat-egy typology, often called emerging As stated by Ouchi (1977) and Robbinstrategy. Levit and March (1988) ech- (2002), organization behavior refers tooed that situation by stating that if the work related activities of member ofstructural problems in organizational organization. That is the behavior of thelearning cannot be eliminated, they can organization members. Any company isbe mitigated. In their study in the hospi- very concerned about controlling thetal area, Abernetty and Brownel (1999) behavior. That is done using a well de-also support the conclusion that interac- signed control system (Snell, 1992).tive control system can facilitate the or- One instrument to be used in the controlganization learning. Considering the system is strategic behaviors that canimportance of organization learning as lead to the expected organization per-mentioned above, the process in turn can formance. Chen (1996); Gatignon et al.improve the organization performance. (1997); and Olson et al. (2005) listed the strategic behavior including: customerBased on theory of slack resource, the oriented behavior, competitor orientedinteraction or fit between control system, behavior, innovation oriented behavior,including belief system, boundary sys- and internal/cost oriented behavior. Thetem,, diagnostic control system, and in- list can be referred to input-output modelteractive control system, as well as the of Donaldson et al. (1995). The list cancorporate financial performance (CFP) also be extended using the contingencycan affect the corporate social perform- theory. Thus, corporate social perform-ance due to fact that increase in CFP ance is strategic behavior to be influ-resulting from the appropriate use of enced using control system and, in turn,control system components enables the to be expected to improve the corporatecompany has more chance to do the financial performance.CSP. Thus, it is reasonable to expectfrom this study to formulate the proposi- Most prior literature considering the mo-tion of current study as follows: tives for socially responsive decision making derives from the business ethics P4a1: reliance on belief system literature. Considerable attention has moderates the relationship be- been given to determining the factors tween CFP and CSP based on the that influence ‘ethical’ organizational slack resource theory decision making (Soutar et al., 1994). P4a2: reliance on boundary system For example, models of ethical behavior moderates the relationship be- have been developed which indicate that tween CFP and CSP based on the there is a set of situational variables slack resource theory which interact with and influence ethical P4a3: reliance on diagnostic control decision making processes (Bommer et system moderates the relationship al., 1987; Stead et al., 1990; Trevino, between CFP and CSP based on 1986). One set of situational variables the slack resource theory deemed to influence ethical decision
  18. 18. 250 H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259making include work environment and on the good management theoryorganizational factors (Bommer et al.,1987; Falkenberg and Herremans, 1995; Based on the literature review and dis-Singhapakdi et al., 2000; Verbeke et al., cussion in the previous section, concep-1996). For instance, employee socializa- tual framework for explaining the deter-tion processes aimed at internalizing minants of the relationship of corporatesocially responsive/ethical standards social performance (CSP) and corporatewithin individual employees have been financial performance (CFP) under twoheld to influence socially responsive theories can be diagrammed in figure 2decision-making (Smith and Carroll, (see the next page).1984; Soutar et al., 1994). Control sys-tems are deemed to form an integral partof employee socialization (Gatewood Conclusions and directions for futureand Carroll, 1991). They support the researchdevelopment of an organization’s cul-ture, the system of shared beliefs, val- Investigations of the relationship of CSPues, norms, and mores of organizational and CFP have produced the conflict re-members (Gands and Bird, 1989), which sults so far. There are some theories thatis deemed to be a primary determinant have been developed to explain the rela-of the direction of employee behavior tionship, coming from neoclassical the-(Robin and Reidenbach, 1987; Trevino, ory of economy and stakeholder theory.1986). But they failed to clearly and satisfacto- rily explain. The use of contingency hasBased on the finding and the logic, the been highly recommended to explain theconcern of this study is that the fit be- relationship. However, the contextualtween control system and CSP will af- variables used in the previous studies arefect the corporate financial performance. not related to the determinants of corpo-Proposition on the control system of the rate performance as identified in theCSP-CFP link can be then developed as strategic management and accountingfollows: literatures. As discussed in the previous section, CSP is an extended corporate P4b1: reliance on belief system performance and, therefore, some as- moderates the relationship be- pects affecting the corporate perform- tween CSP and CFP based on the ance should also apply to the CSP. The good management theory failure to include the dimensions of cor- P4b2: reliance on boundary system porate performance: business environ- moderates the relationship be- ment, strategy, organizational structure, tween CSP and CFP based on the and control system as contextual vari- good management theory ables in the relationship of CSP and CFP P4b3: reliance on diagnostic con- may add the reasons of the conflicting trol system moderates the relation- results. ship between CSP and CFP based on the good management theory Others issues of the conflicting result of P4b4: reliance on interactive con- the relationship are coming from meth- trol system moderates the relation- odology aspects, including: (1) mis- ship between CSP and CFP based matching measurement, (2) sampling
  19. 19. H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259 251 Figure 2 Theoretical Model of Determinants of the Relationship of CSP and CFPerror, and (3) measurement error. Mis- CSP principle and value (Orliztky,matching measurement includes the 2003). The disclosure approach is con-choice of CSP measurement that does ducted by using content analysis methodnot fit CFP measurement. If the prob- of documented materials such as annuallem cannot be resolved, the conflict re- report. The reputation rating is the ap-sults will occur. Therefore, for direction proach to measuring CSP based on theof future research, the use of CSP meas- company’s perception of one of stake-urement that can be theoretically linked holders using single or multi-dimensionsto the corresponding CFP measurement of CSP. In so doing, it is assumed thatis highly needed. Sampling error prob- the perceived items represent a goodlem mainly resulted from the limitation reputation of the company. The nextof samples used in the previous studies. category of measurement strategy forThe measurement error of the constructs CSP is using social audit, CSP process,of CSP narrowly defined can also lead to and observable outcome. This is a sys-the error in the result of the relationship tematic way by third party to assess abetween CSP and CFP. company’s behavior of CSP, normally using multi dimension measures to haveThe construct of CSP can be approached a ranked index of CSP. The third partyby using four types of measurement includes KLD (Kinder Lydenbergstrategy: (1) disclosure, (2) reputation Domini) and CEP (Council on Eco-rating, (3) social audit; CSP process; and nomic Priorities). The final approach toobservable outcome, and (4) managerial measuring the CSP is using managerial
  20. 20. 252 H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259CSP principle and value. Under this ap- between them, is coming first? Whetherproach survey research has been done to companies having strong in financialassess a company’s activities using val- performance can improve their socialues and principles of CSR developed performance based on slack resourceinitially by Caroll (1979) and extended theory or whether practices of socialby Aupple (1984). The values and prin- activities done by companies can in-ciples of the CSR include four dimen- crease the companies’ financial perform-sions: economy, legal, ethics, and discre- ance as explained in good managementtionary. In the simple way, Cochran and theory. Therefore, to resolve the prob-Wood (1984) contended that there are lem it is highly needed to use the twotwo generally accepted methods to theories to be tested.measure CSP: content analysis and repu-tation index. Based on their argument,the last three classifications of Orliztky Referenceset al (2003) fall into the reputation indexmethod. Abernethy, M.A., & Brownell, P. (1999) “The role of budgets in organiza-Meanwhile, CFP is also measured using tions facing strategic change: anthree alternative approaches: (1) market exploratory study”, Accounting,based measure, (2) accounting-based Organization and Society, 24.measure, and (3) perceptual measure _____________, Bouwens, J., & Lent,(Orliztky et al, 2003). Under the first L.V. (2004) “Determinants ofapproach, the market value of a com- Control System Design in Divi-pany derived from stock price of the sionalized Firms”, The Account-company is used to measure CFP. This ing Review, Vol. 79, No. 3, pp.approach reflects notion that primary 545-570.stakeholder of the company is share- _____________ & Bouwens, J. 2005)holder. Accounting-based measure is “Determinants of Accounting In-one to measure CFP derived from a novation Implementation”. Aba-company’s competitive effectiveness cus, Vol. 41, No. 3.and a competitive internal efficiency as Ali, I., & Ali, J.H. (2005) “The Effectswell as optimal utilization of assets, for of the Interaction of Technology,some certain measures. Measures such Structure, and Organizational Cli-as net income, ROA, ROE, and EVA are mate on Job Satisfaction, Sunwaysome examples of this approach. The Academic Journal, Vol. 2.last approach to measuring CFP is using Alexander, J.W. & Alan, R.W. (1985)perceptual method. In this approach, “The Fit Between Technology andsome subjective judgments for CFP will Structure as Predictor of Perform-be provided by respondents using some ance”, Academy of Managementperspectives such as ROA, ROE, and Journal, Vol. 28, No. position relative to other com- Aupperle, K.E., Carroll, A.B., & Hat-panies. field, A.D. (1985) “An empirical examination of the relationshipAs discussed in the previous section, the between corporate social responsi-causality problem of the relationship bility and Profitability”, Academybetween CSP and CFP is which one, of Management Journal , Vol. 28,
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