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11.vol. 0003www.iiste.org call for paper no. 2 pp 117-142

  1. 1. Issues in Social and Environmental AccountingVol. 3, No. 2 Dec 2009/Jan 2010Pp 117-142 The Performance Implications of Fit among Environment, Strategy, Structure, Control Sys- tem and Social Performance Hasan Fauzi Faculty of Economics Sebelas Maret University, Indonesia Kamil M. Idris College of Business Northern University of MalaysiaAbstractThe paper examined concept of corporate performance. The paper seeks to examine the impactof corporate social performance on the relationship among business environment, strategy, or-ganization, and control system and corporate performance. The paper is based on a synthesis ofthe existing literatures in strategic management and accounting filed. The paper finds that cor-porate social performance defined as stakeholder relationship become one important dimensionof the strategic behaviors that an organization can set to improve corporate performance. Thecontextual variables as discussed in strategic management and accounting domain will be con-tingent upon strategic behaviors, which are behaviors of members in an organization. Thepaper integrates the contextual variables including business environment, strategy, organizationstructure, and control system with corporate performance by using corporate social perform-ance as moderating variable by means of a recent literatures study from strategic managementand accounting field.Keywords Contextual Variable, Strategic behavior, Strategy, Business Environment, corporatesocial performance, corporate performanceIntroduction corporate performance refers to the endThe outcome of management process, result of management process indicatedfrom strategic planning to implementa- by the attainment of corporate goal.tion of the plan will lead to measuring Specifically, Daft (1991) defined per-performance (Daft, 1991). Thus, term formance as the organization‘s ability toHasan Fauzi, Ph.D. is senior lecturer (Lektor kepala, equivalent to Associate Professor) at Faculty of Economics,Sebelas Maret University, Indonesia and Director of Indonesian Center for Social and Environmental AccountingResearch and Development (ICSEARD) of Sebelas Maret University, email: hfauzi@icseard.uns.ac.id. Kamil Md.Idris, Ph.D. is Associate Professor at College of Business, University Utara Malaysia, email: kamil@uum.edu.my. Theauthors are very grateful to some reviewers including Prof. Mustaffa M.Zein of UiTM Malaysia, and Prof. Ku NoorIzzah Ku Ismail of Universiti Utara Malaysia and others for their direction and helpful suggestion on final stage ofresearch project and to some anonymous referees for comments on earlier draft of this paper. The authors also wouldlike to acknowledge that main funding for this project
  2. 2. H. Fauzi and K.M. Idris / Issues in Social and Environmental Accounting 2 (2009/2010) 117-142 118attain its goal by using resource in an ties in factor market such as suppliers orefficient and effective manner. In strate- the other production factor owners, thegic management literatures, the meas- corporate ability to pay in time and inurement of corporate performance can agreed amount of the factor productionbe varied perspectives (Lenz, 1980 and they rendered to will be important per-Ventrakaman and Ramanujam, 1986). formance. Finally, from the perspectiveFor example, Ventrakaman and Ra- of customer market, corporate perform-manujam (1986) classified business per- ance will be evaluated by parties in theformance into categories of measures: market based on the ability of the corpo-operational performance and financial ration to deliver products or services toperformance. The operational perform- customers with affordable price which isance include: market share, product the net effect, in turn, will be indicatedquality, and marketing effectiveness. in the corporate’s revenue. Overall, theFurthermore, based on its sources, finan- Simons’s (2000) view of corporate per-cial performance is broken down into formance parallels the Input-Outputtwo categories: market-based financial view of a corporation suggesting that theperformance and accounting-based fi- existence of a corporation is due to merenancial performance. However, in ac- contributions by stockholders/investors,counting literatures, concept of corpo- suppliers, labors, customers with therate performance always refers to finan- hope of return for each party throughcial aspects such as profit, ROA and market mechanism (Donaldson et al.,EVA, with the nick name of the bottom 1995). One difference between Simonsline, until Johnson and Kaplan (1987) (2000) and Donaldson et al (1995) iscoined idea of how to bring a company’s that in Simons’s work supplier and laborstrategy and used indicators together and are the same market (factor mar-later on, Kaplan and Norton (1996) ket),while in Donaldson et al (1995)’spopularized the idea as an extended per- work, the two parties are separated toformance measurement often called bal- picture the flow of input and output.anced scorecard. The main idea of thenew performance measurement is to bal- In some decades ago, topics in corporateance the domination of financial aspect performance have been important areain corporate performance and non finan- of research in strategic management andcial aspect. It is apparent that the Kap- accounting literatures. The research arealan and Norton’s extended corporate started examining the construct of per-performance has been in line with Ven- formance (both in corporation andtakraman and Ramanujam (1986)’s busi- managerial perspective) and relating toness performance. other constructs such as strategy (Govindarajan and Gupta, 1985; Govin-Simons (2000) defined corporate per- darajanand and Fisher, 1990; Govindara-formance using an approach of market jan, 1988; Liao, 2005; Sandiono, 2005),mechanism by which a corporation ac- business environment (Woodward intively interacts with some markets: fi- Azumi and Hage, 1972; Gul, 1992;nancial, factor, and costumer. In Finan- Chenhal, 1986), control systemcial market, the corporate performance (Govindarajan and Fisher, 1990; Govin-should satisfy stockholders and creditors darajan, 1988; Liao, 2005; Sandino,in form of financial indicators. For par- 2005; Albernethy and Brownell, 1999;
  3. 3. 119 H. Fauzi and K.M. Idris / Issues in Social and Environmental Accounting 2 (2009/2010) 117-142Pant and Yuthas; Wynn-William, 2003; cerned with a company are not onlyDavila, 2000; Marginson, 2002; Haldma shareholder as discussed in the previ-and Laats, 2002; Salmon and Joiner, ous theory, but also other parties or2005; Coenders et.al., 2003; Alexander groups in society. Clarkson (1995 citedand Alan, 1985), organization structure by Moir, 2001) and Gray et al. (1996)(Woodward in Azumi and Hage, 1972; classified the parties or the groups intoSandino, 2005). Furthermore, the area two categories: primary and secondaryof research continues to be developed by stakeholder. The primary stakeholdersfocusing on predictor of corporate per- are those directly affecting and affectedformance as done Gupta and Govinda- by the decision to be made by the firm.rajan (1984), Govindarajan and Gupta Those categories include suppliers, em-(1985), Govindarajan (1988), and ployees, investors, and customers. TheLangfield-Smit (1997). with the find- second group called the secondary stake-ings that factors affecting corporate per- holders is those in society affecting andformance are matching of business envi- affected indirectly by the firm’s deci-ronment, strategy, internal structure, and sions. They include local communities,control system. The previous studies the public, business groups, media, so-defined corporate performance by focus- cial activist groups, foreign government,ing on financial aspect. Not only do the and central and local government. Con-corporate performance imbalance the sequently, the decision made by the firmfinancial aspect and non financial aspect, should positively satisfy the two groups.but the performance also does not ac- The stakeholder view of the firm can becommodate other parties outside the diagrammed in Figure 1.market system. Therefore, the concept ofcorporate performance that is consider- This theory can be justified using threeing and measuring aspect of people aspects (Donaldson and Preston, 1995(social) and planet (environment) as im- cited Cooper, 2004): descriptive accu-portant part of a company’s performance racy, instrumental power, and normativeis needed. validity. Descriptive accuracy of the theory explains that the parties related toThe objective of this paper is to discuss a company are not only shareholder butthe impact of the fit among business en- also other parties such as employee,vironment, strategy, organization struc- government, and community. They haveture, control system, and social perform- to be considered in the company’s deci-ance on business performance. sion making. Therefore, it has been ar- gued that stakeholder theory is importantStakeholder Theory due to the fact that the theory correctly reflects and predicts how business oper-Under stakeholder theory, a company ates (Brener and Cochran in Cooper,has connection with stakeholders de- 2004). Based on the argument of in-fined as any group or individual who can strument power of this theory, a com-affect or is affected by the achievement pany using the stakeholder approach inof organization’s objective (Freeman, managing the business will have im-1994; Clarkson, 1995a, 1995b; cited in proved organization performance inAmaeshi et al., 2007 and Moir, 2001). terms of economics and other criteria.Based on this view, parties that are con- That performance is important as sug-
  4. 4. H. Fauzi and K.M. Idris / Issues in Social and Environmental Accounting 2 (2009/2010) 117-142 120Adopted from Donaldson and Preston, 1995 Figure 1: Stakeholder Theorygested by Shankman (1999 and cited by their relationship with its stakeholdersCooper, 2004) that a balance between (Ullman, 1985). In this context, stake-the interests of different groups is holder theory framework is defined as aneeded in order for a company to con- construct having three dimensions:tinue to be viable and achieves other stakeholder power, strategic posture, andgoals. On the other hand, this aspect will economic performance (Ullman, 1985;say that stakeholder theory is tool used Elijodo-Ten, 2007a and 2007b; Chanto improve result. From the perspective and Kent, 2003). Stakeholder power isof the stakeholder theory’s normative an external dimension, consisting ofvalidity, it can be argued that based on shareholders, creditors and governmentmoral right of individuals a company power, affecting the condition of theshould reconsider all parties related to company. The strategic posture factor,the company. It will be not appropriate an internal dimension, is the corpora-in terms of ethical for a company to tion’s capabilities and willingness to usemaximize the shareholder’s wealth and its resources to improve social and envi-stakeholder theory should be used to ronmental performance by integratingachieve that goal (cooper, 2004). them with corporate strategy. The last dimension, economic performance, isAccording to stakeholder theory, corpo- the output of business activities thatrations disclose social and environ- arise from corporate strategy implemen-mental information as means to maintain tations using economic indicator, such as
  5. 5. 121 H. Fauzi and K.M. Idris / Issues in Social and Environmental Accounting 2 (2009/2010) 117-142profit. Under this framework, corporate literatures. Based on the review of thesocial responsibility not only focuses on literatures, it can be concluded that cor-the philanthropic aspect (non market), porate performances are matching ofbut also embracing activities relating business environment, strategy, internaldirectly to market mechanism such as structure, and control system (Lenz,the responsibility to employee (labor 1980; Gupta and Govindarajan, 1982relation) and to the customer in case of and 1984; Govindarajan et al.,1988; Go-product responsibility. vindarajan, 1988; Tan and Lischert, 1994; Langfield-Smit, 1997).Contingency Theory Some important studies had been con-Generally contingency theory states that ducted to investigate the relationship oforganization’s effectiveness will be con- business strategy, control system, andtingent upon some factors often called organizational structure and environ-contextual variable (see for example mental and social performance(Gerde,Hamberick and Lei, 1985; Gerdin and 1998; Pondeville, 2000; Husted, 2000,Grave, 2004). Furthermore, focus in and Husted, 2001). In an effort to inves-contingency theory will be on fit be- tigate stakeholders and organization de-tween organization characteristics or sign, Gerde (1998) used business strat-management practices and the contex- egy, control system, and organizationaltual variable in achieving the organiza- structure as the predictors of corporatetion effectiveness (see for example social performance including the envi-Alexander and Alan, 1985; Doty et al, ronmental aspect. His findings were that1993; Gerdin and Grave, 2004). The the variables did not increase the socialorganizational effectiveness can include performance. However, In his deductiveeconomic or financial performance and study, Pondeville (2000) synthesizedother criteria such social and environ- that control system and business strat-mental performance as referred to the egy, as well as organization designconcept triple bottom line (TBL). The (structure) have contributed to the envi-use of the contingency view as an alter- ronmental performance. In an effort tonative view to extreme view of business get good understanding of corporate en-in both situations: specific and univer- vironmental and social performance,salistic view is common and applied in Husted (2000) had constructed contin-any setting of management practices gency model of corporate social per-(Alexander and Alan, 1985; Gerdin and formance. The fit between social issuesGrave, 2004) and also in corporation and business strategy and structure hadsocial performance (see for example been predicted to affect the corporateHusted, 2000). One of the reasons of the social performance. Husted et al. (2001)commonly used contingency approach is in his deductive approach of anotherdue to the focus on the organizational study developed a model called inte-effectiveness, a general and important grated view of business and social strat-organizational goal-related concept. egy. In the model, business strategy had been predicted to affect financial andConcept of Fit in contingency theory in social performance.the context of CSP can be traced to theaccounting and strategic management As mentioned by Olson et al. (2005), of
  6. 6. H. Fauzi and K.M. Idris / Issues in Social and Environmental Accounting 2 (2009/2010) 117-142 122the factor affecting corporate perform- corporate social performance is strategicance (CFP) is the strategic behaviors in behavior to be influenced using controlorganization. In the context corporate system and, in turn, to be expected tosocial performance, the concept strategic improve the corporate performance.behaviors can be extended using thestakeholder theory to explain the varia- Business Environment and Corporatetion in business performance. Accord- Performance1ing to Chen (1996); Gatignon et al.(1997); and Olson et al. (2005), the stra- Investigation on why an organization ortegic behaviors can be identified into corporate has higher performance thansome components: customer-oriented other organization can be found in threebehavior, competitor oriented behavior, bodies of research: industrial organiza-innovation-oriented behavior, and inter- tion, business policy, organization the-nal-cost behavior. The concept can be ory research (Lenz, 1980). Based onextended using components of stake- review of the bodies of research, it canholder as contended by Donaldson et al. be found that performance variation in(1995). Supplier-focused behavior, em- an organization or corporation can beployee-focused behavior, society aspect- explained using the variables of environ-focused behavior, and environment- ment, strategy, and organization struc-focused behavior are stakeholder-based ture used (Lenz, 1980; Gupta and Go-behavior strategic to be expected to im- vindarajan, 1984; Govindarajan andprove corporate performance. Gupta, 1985; Govindarajan, 1988; Tan and Lischert, 1994; Langfield-Smit,Concept of Strategic Behavior 1997). In addition, accounting litera- tures also contributed to explanation ofAs stated by Ouchi (1977) and Robbin the organization’s performance variation(in Olson et al, 2005), organization be- (Gupta and Govindarajan, 1984; Govin-havior refers to work related activities of darajan and Gupta, 1985; Govindarajan,member of organization. That is the 1988; Langfield-Smit, 1997; Abernetty,behavior of the organization members. 2004; Abernetty et al., 2004 and 2005).Any company is very concerned aboutcontrolling the behavior. That is done As one of the factors affecting the highusing a well designed control system of organization performance, organiza-(Snell, 1992). One instrument to be tion or business environment can be de-used in the control system is strategic fined as conditions that are normallybehaviors that can lead to expected or- changing and unpredictable an organiza-ganization performance. Chen (1996); tion is facing. Lenz (1980) includedGatignon et al. (1997); and Olson et al. market structure, regulated industry, and(2005) listed the strategic behavior in- other relevant environments in the con-cluding: customer oriented behavior, cept of the business environment as thecompetitor oriented behavior, innovation factors to be affecting the corporate per-oriented behavior, and internal/cost ori- formance defined as corporate financialented behavior. The list can be referred performance (CFP). Jaworski and Kohlito input-output model of Donaldson et 1al. (1995). The list can also be extended In this paper term business, corporate, and company performance are used interchangeably for the sameusing the contingency theory. Thus, meaning
  7. 7. 123 H. Fauzi and K.M. Idris / Issues in Social and Environmental Accounting 2 (2009/2010) 117-142(1993) extended the definition of busi- zation performance. This concept ofness environment as including market business environment is in line withturbulence, competitive intensity, and Simons’ (2000) concept of strategic un-technological turbulence. The market certainty including technological de-turbulence that is understood as the rate pendence, regulation and market protec-of change in the composition of custom- tion, value chain complexity, and ease ofers and preferences can be a predictor of tactical response. Technological de-business performance (Jaworski and pendence has been close to the technol-Kohli, 1993). An organization operating ogy turbulence, while regulation andunder market turbulence will tend to market protection can be referred tomodify its product or services continu- competition intensity. The strategic un-ally in order to satisfy its customers. certainty variables of value chain com-Adversely, if the market is stable indi- plexity and ease of tactical response par-cated by no change in customers’ prefer- allel the concept of market turbulence.ence, the organization is not likely tochange its product or service. Therefore, Furthermore, based on review of organi-the market turbulence is expected to re- zation environment literature, it can belate positively to organization perform- found that business environment can beance. Competitive intensity is referred defined in general way as the source ofto market condition in which a company information (Duncan, 1972; Lawrencehas to compete with. In the absence of and Lorsch, 1967; Tung 1979 and citedcompetition, a company can perform in Tan and Lischert, 1994) and as sourcewell with no significant effort as the cus- of scarce resource (Tan and Lischert,tomers have no choice or alternative to 1994). As source of information, busi-satisfy their need. However, in the high ness environment is focused on per-competition indicated by so many alter- ceived information uncertainty and sub-natives for customers to satisfy their jective in nature, as source of scarce re-want, a company has to devote its best source; business environment is resourceeffort to satisfy the customers. There- dependence (Tan and Lischert, 1994).fore, the competitive intensity is ex- Based on the understanding, corporatepected to relate positively to organiza- performance can be controlled by usingtion performance. The last aspect of management ability to control over thebusiness environmental is the techno- resource. Meanwhile, the concept oflogical turbulence that is meant simply business environment can also beas the rate of technological change. For viewed as multidimensional constructa company having characteristic of sen- including three variables: dynamism,sitive to technological change, innova- complexity, and hostility (Duncan, 1972;tion resulting from the technological Lawrence and Lorsch, 1967; cited inchange can be alternative to increase the Tan and Lischert, 1994). In the last con-company’s competitive advantage with- cept, components of dynamism andout having to focus more on the market complexity have been close to the per-orientation. By contrast, for the com- ceived information uncertainty, whilepany with no innovation in technology, hostility is similar to the resource de-it should strive to focus more on market pendence (Tan and Lischert, 1994). Fol-orientation. Therefore, the technological lowing the concept of business environ-change is relating negatively to organi- ment as multidimensional construct,
  8. 8. H. Fauzi and K.M. Idris / Issues in Social and Environmental Accounting 2 (2009/2010) 117-142 124Scott in Tan and Lischert (1994) and Based on the arguments and findingJauch et al.(1980) had extended the con- from the previous studies, it can be con-cept of business environment becoming cluded that when business environmentinstitutional environment including lar- is uncertain, the CSP will increase. Theger components similar to stakeholder increase in the CSP, based on good man-concept. The dimensions covered in- agement theory will increase businessclude: (1) competitors, (2) customer, (3) performance. This argument can lead tosuppliers, (4) technological, (5) regula- following proposition:tory, (6) economics, (7) social-cultural, P1: The increase in uncertainty ofand (8) international. Based on the con- business environment will im-struct defined in the previous studies, the prove corporate performance bybusiness environment will come up with increasing CSPthe increase or decrease in corporateperformance as suggested by Dill Strategy and Corporate Performance(1958). Organization facing high uncer-tainty in business environment has less Concept of strategy is a complex con-ability to attain the organization’s goal. cept and it leads to proliferation of defi-This argument has been echoed by nition of strategy (Lenz, 1980). Mintz-Simons (2000) by asserting that the busi- beg (1987 and cited in Simons, 2000)ness environment is one of the factors had classified the views on strategy, in-resulting in the strategic uncertainty and, cluding strategy as perspective, strategyin turn, decreases the organization’s as position, strategy as plan, strategy asability to achieve the organization’s patterns of action, and strategy as ploy.goal. Strategy as perspective refers to mission and vision of a company to be a base forIn relating to the corporate social per- all activities of the company. This willformance as means of strategic behavior determine core value of the company.(Higgin and Currie, 2004) had identified Strategy as position indicates the way asome variables affecting a corporate to company will pursue to compete in thebe ethical or legal behavior in running market. This view will lead to the use ofthe company resulting in the high of cor- Porter’s typology of strategy: differen-porate social performance. The factors tiation and low cost (Simons. 2000).are: business climate, human nature, so- Strategy as plan suggests short-term plancietal climate, societal climate, the com- as series of long term plan in the strategypetitiveness of the global business envi- as position. In this view, a company canronment, and the nature of competitive evaluate the success of the implementa-organization Performance. Thus, argu- tion strategy. Strategy as pattern in ac-ments for business climate or environ- tion is a company’s action plan to copement discussed above, especially for the with the failure of the strategy imple-concept of business environment derived mentation. It is in this view emerging afrom the larger concept similar to stake- new strategy called emerging strategyholder concept can be applied to the re- (Simons, 2000). The last, strategy aslationship between business environ- ploy is a tactic a company can do tomental and corporate social perform- fight with competitor. If the views ofance. strategy can be well implemented, then strategy can be an important determinant
  9. 9. 125 H. Fauzi and K.M. Idris / Issues in Social and Environmental Accounting 2 (2009/2010) 117-142of the company’s performance. Further- mentioned above. Using the same fit,more, in practical, strategy choice for a but with different position for the contin-company is depending upon the environ- gency factor, Albernethy and Brownellment faced by the company. In this re- (1999) also provided the fit relationshipgard, Mitzberg (1973) defined the strat- to the performance.egy as patterns of stream of decisionfocusing on a set of a resource allocation Equivocal results from empirical studiesin an attempt to accomplish a position in into the CSP-CFP relationship point toan environment faced by the company. the need for a contingent perspective toUsing focus on decision as developed determine the conditions that affect theMistzberg (1973), Ventakraman nature of the CSP-FP relationship(1989b), Miller and Frieson (in Ventra- (Rowley and Berman, 2000). Hustedkaman, 1990), and Tan and Lischert (2000), for instance, proposed that the(1994) extended the concept of strategy CSP-CFP relationship is a function ofusing dimensionality approach includ- the fit between the nature of relevanting: (1) analysis, (2) defensiveness, (3) social issues and the organization’s cor-futurity, (4) proactiveness, and (5) riski- responding strategies and structures.ness. Further, McWilliams and Siegel (2001) proposed that the impact of socially re-There are some studies on the fit be- sponsible actions on financial perform-tween strategy and corporate perform- ance would be contingent on the econo-ance (CFP) identified by Fisher (1995) mies garnered from the organization’susing the product life cycle as contin- size and level of diversification, productgency factor and performance appraisal mix, advertising, consumer income, gov-system as dimension control, Simons ernment contracts and competitors’(1987) utilizing competitive strategy as prices. The products, markets and ac-contingency factor and budget flexibility tivities that define organizational strat-as dimension of control system, Govin- egy also define the organization’s stake-darajan and Fisher (1990) employing holder set. Consequently, a firm pursu-Porter typology as contingency factor ing socially responsible initiatives thatand behavior and output control as di- lack consistency with its corporate strat-mension of control system, Govindara- egy is not likely to meet the particularjan (1988) exploiting Porter typology as expectations of its stakeholders. Due tocontingency factor and budget evalua- the stakeholder context of CSP, an or-tion style and locus of control as dimen- ganization’s socially responsible initia-sion of control system, and Fisher and tives will be assessed relative to stan-Govindarajan (1993) applying Porter dards important to its stakeholderstypology and product life cycle as con- (Wartick, 2002).tingency factor and incentive compensa-tion as dimension of control system. Based on the arguments and findingExcept for Fisher and Govindarajan from the previous studies, it can be con-(1993) finding the conflict result, they cluded that the strategic behaviors in thesupported the fit relationship to the per- improved CSP will help the implementa-formance. In more recent studies, Liao tion of business strategy and, in turn,(2005) and Sandino (2005) contributed will improve corporate performance.to the same finding as the prior studies The proposition of the situation is:
  10. 10. H. Fauzi and K.M. Idris / Issues in Social and Environmental Accounting 2 (2009/2010) 117-142 126 P2: The social performance as a gain the benefit of using the rules and company’s strategic behavior is a procedures. In this regard, the use of the means for the success of strategy rules and procedures can lead to the in- implementation to improve corpo- crease in efficiency and the decrease in rate performance administrative cost especially in the nor- mal environment situation characterizedOrganization Structure and Corpo- by simple and repetitive tasks (Ruekertrate Performance et al., 1985; Walker et al., 1987; Olson el at., 2005). A company with highlyCorporate performance is highly deter- formal rules and procedures is calledmined by how effectively and efficiently mechanic organization, while one withthe company’s business strategy is im- fewer formal rules and procedures isplemented (Walker et al., 1987 and cited referred to organic organization (Bursin 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-
  11. 11. 127 H. Fauzi and K.M. Idris / Issues in Social and Environmental Accounting 2 (2009/2010) 117-142ket, the use of organization structure Tuden in Husted, 2000). Information isproviding the lower manager with auton- not disseminated widely, but directly toomy of making decision is needed. In the individual decision maker. For ex-the decentralized organization, a variety ample, rules in the form of ethics codesof views and innovative ideas may can work effectively to resolve problemsemerge from different level of organiza- to the satisfaction of stakeholders wheretion. Due to the fact that autonomy of stakeholders and the firm share similarmaking decision is dispersed, it may values and understandings of what hap-take longer to make and implement the pened. Often, companies will have spe-decision (Olson et al., 1995; Olson et al., cific departments (those have been close2005). However, in the non routine task to the type of decentralization and spe-taking place in complex environment, cialization constructs) to handle routinethe use of decentralized organization is processes such as environmental assess-more effective to achieve the organiza- ment, corporate philanthropy, and publiction goal as the type of organization em- relations. These structures usually formpowers managers who are very close to the heart of a firms ethics programthe decision in question and to make the (Center for Business Ethics, 1986). Re-decision and implement it quickly search indicates that the presence of(Ruekert et al., 1985). such routinized structures can have a positive impact on corporate social per-Specialization is the level of division of formance (Reed, Collin, Oberman, andtasks and activities in organization and Toy in Husted, 2000).level of control people may have in con-ducting those tasks and activities (Olson, Based on the finding and the logic, the2005). Organization with high speciali- concern of this study is that the fit be-zation may have high proportion of spe- tween organization structure and CSPcialist to conduct a well-defined set of will affect the financial performance.activities (Ruekert et al., 1985; Ol- Proposition for this relationship is asson,2005). Specialist refers to someone follows:who has expertise in respective areas P3: Formalization, decentraliza-and, in certain condition; he or she can tion, ands specialization will im-be equipped with a sufficient authority prove corporate performance mod-to determine the best approach to com- erated by the CSP as strategic be-plete the special tasks (Mintzberg in Ol- havior in the companyson, 2005). The expertise is needed byorganization to respond quickly the Control System and Corporate Per-changes in competition and market in formanceorder to meet organization goal (Walkeret al., 1987). In mapping the contingency-based con- trol system and performance studies,In the case of nonissues, typical bureau- Fisher (1995) classified the studies incratic structures, referred to formaliza- four level of analysis. In the first level,tion aspect, work well. Information can relation between contingent factor andbe routed to the relevant specialist who management control system was madecan make decisions on the basis of stan- without going further to see the impactdard corporate policies (Thompson & of the organizational outcome
  12. 12. H. Fauzi and K.M. Idris / Issues in Social and Environmental Accounting 2 (2009/2010) 117-142 128(performance). In the second, third, and tiveness (corporate performance-CFP).fourth level, analysis of the relationship Wynn-Williams (2001) used public hos-between contingent factor and control pital setting in testing the role that man-system was conducted and related to the agement control system had played inperformance. The difference was placed explaining the determinant of effective-on the choice of contingency factor and ness in the hospitals. In his study onmanagement control system. The second management control system design inlevel dealt with one factor for contin- new product development, Davilagency and one for management control (2000) also found the correlation be-system, while one factor for contingency tween some variables of managementand more than one dimensions of man- control system and performance. Someagement control system was for the third other studies trying to relate the manage-level. The fourth level had more than ment control system and company’s per-one contingency factor and more than formance or effectiveness have beenone dimensions of management control conducted by others (Marginson, 2002;system. Haldma and Lääts, 2002; Salmon and Joiner, 2005; Sandino, 2005; Coenders,Gul (1991) study investigated the inter- Bisbe, Saris, and Batista-Foguet, 2003;action effect (fit) between management Liao, 2005, and Alexander and Alan,accounting system and business environ- 1985). In addition, using concept per-ment on company’s performance and formance measurement system to referfound that business environment defined to management control system, Kaplanas perceived environment uncertainty and Norton (1996); Chenhall and Langs-(PEU) affected the relationship between field-Smith (1998); Mahama (2006)management accounting system and found that management control systemcompany’s performance. At the second has association to corporate performancelevel of analysis, Ginzberg ( in Fisher, (CFP).1995) used formality and procedural asdimension of control system design that One important function of Managementinteracted with environment found that Control system or control system forthe control system affected the perform- short is management tool to implementance, while Govindarajan ( in Fisher, the organization strategy. Of the typolo-1995) study that focused on performance gies in control system, Simons’ (2000)appraisal system as a dimension of man- typology is complete and comprehen-agement control system concluded that sive, including: belief system, boundarythe control system had effect on the per- system, diagnostic control system, andformance. The both studies were sup- interactive control system. In its devel-ported by the Gul (1991) study. opment stages, the control system had undergone evolution in terms of ap-In an effort to explain the role of manage- proach used and complexity of environ-ment control system to improve corpo- ment faced by a company. The evolutionrate’s competitive advantage, Pant and included the use of direct control ap-Yuthas, (2000) have stressed the impor- proach focusing on manager’s observa-tance of management control system to tion of what is going on the company tillidentify and build company’s dynamic indirect control approach relying uponcapabilities in order to improve its effec- accounting control. For the last evolu-
  13. 13. 129 Fauzi and K.M. Idris / Issues in Social and Environmental Accounting 2 (2009/2010) 117-142tion, it included using static and flexible The careful and consistent use of thebudget till adopting the concept of profit control system typology, often calledor investment center (see for example levers of control, can lead to the im-Horngren, 1996). The concept of con- proved performance (CFP). The follow-trol system centers on the concept of ing is discussion on how the componentsbottom line (financial performance). of levers of control can be associatedNot only did the concept have some with the performance and, therefore, theflaws on imbalances due to the domina- expectation of the impact of the use oftion of financial aspect, but also it cre- components of the control systems onated some paradoxical situation between the relationship between CSP and CFPcontrol and innovation, opportunity and can be based upon.attention, and short term and long termgoal, and human behavior. One reason Belief system is the one used in an or-of the problems is that the old concept of ganization to communicate an organiza-control had been defined as diagnostic tion’s core value to inspire people in thecontrol only. In that definition of con- organization to search for new opportu-trol, the control process had been fo- nities or ways to serve customer’s needscused on the matter of routine mecha- based on the core values (Simons,nism or process of comparing some ex- 1994,1995a,1995b,2000). In an organi-pected and realized performances. Ac- zation the belief system has been createdcording to Simons (1995a, 1995b, and using variety of instruments such as2000), to avoid the problem concept of symbolic use of information. The in-control should be extended by adding struments are used to communicate thethree more levers: belief system, bound- organization’s vision, mission, and state-ary system, and interactive control sys- ment of purpose such that people in thetem. The function of belief system is to organization can well understand theinspire the people in an organization to organization’s core value. Westly et al.search for new ways and alternatives by (1987; cited in Simons, 1995) supportedproviding them with the organization’s the use of the instrument by arguing thatclear vision, mission, statement of pur- great leaders and competent managerspose, and credos through using format understand the power of symbolism andand informal system. It is expected from inspiration. The benefit of using thethe belief system mechanism, creativity symbolic instrument especially at indi-and innovation in the organization will vidual level is also provided by Feldmanbe continuously updated to meet the ex- et al. (1981) by delineating that symbolspected growth. The use of boundary produce belief and belief can stimulatesystem lever is meant to prevent un- the discovery of new realities. In thiswanted impact of creativity and innova- regard, Westly (1987 cited Simons,tion by setting some rules limiting peo- 1994) contended that managers will notple to do in the form of code of business be very eager to participate in search forconduct, strategic boundary, and internal opportunities if they do not understandcontrol. The role of interactive control the beliefs of organization and are notsystem is to provide an organization get involved in converting the beliefswith solution to cope with emerging into actions and strategies.strategic uncertainty and with new strat-egy given that emerging situation. There is a need for an organization to
  14. 14. H. Fauzi and K.M. Idris / Issues in Social and Environmental Accounting 2 (2009/2010) 117-142 130formally 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, 1995b). The There are two instrument used in bound-importance of understanding the core is ary system to establish the limit in orderalso supported by study of Kotter (in avoid the risks: business conduct andSimons, 1995b) concluding that inspira- strategic boundaries (Simons, 1995;tional motivation can be created by (1) Simons, 2000). The business conductcommunicating vision that can address boundaries are focused on behavior ofthe value of people in an organization, all employees in an organization. The(2) permitting each individual to be source of the boundaries is of threepleased about how he or she can contrib- folds: society’s law, the organization’sute to implementation of that vision, (3) belief system, and codes of behaviorProviding eager support for endeavor, promulgated by industry and profes-and (4) promoting public recognition sional association (Gatewood and Car-and reward for all success. roll, 1991; Simons, 1994). When uncer- tainty resulting from new opportunitiesThe belief system can make people in an is highly or internal trust is low, theorganization inspired to commit to or- business conduct boundary is highlyganization goal or purpose. In this re- needed (Kanter in Simons, 1994). Ingard, commitment means believing in the environment of high uncertainty,organizational value and willing to at- Merchant (1981) found that chances totempt some efforts to achieve the organ- manipulate the profit figures by manag-izational goal (Simons, 1995). There- ers is high. The manipulation is one offore, the goal commitment can lead to risks that can endanger the managers’improved corporate performance (Locke company. Therefore, the business con-et al., 1988). The conclusion is consis- duct boundary will be imposed in thattent with what Klein et al. (1998) found situation to avoid the risk and, in turn,in their study on situation constraints improve the corporate performance. Theincluding goal commitment and sales low in internal trust can result in the ab-performance. Chong et al.(2002) study- sence of shared commitment to the or-ing the effect of goal commitment and ganization goal. No commitment to goalthe information role of budget and job can affect the corporate performance.performance provides the same finding. The objective of applying the business conduct boundary is to maintain the em-The resultant of belief system is new ployee’s commitment to organizationopportunities that may contain some goal and, in turn, can improve the per-problems. The boundary system con- formance.cerns on how avoid some risks of inno-vation resulting from the belief system Strategic boundaries are defined as rules(Simons, 1994). The risks that possibly and limitation applied to decisions to beemerge can be operating, assets impair- made by managers needing the organiza-
  15. 15. 131 H. Fauzi and K.M. Idris / Issues in Social and Environmental Accounting 2 (2009/2010) 117-142tion’s resource allocation as response of “routines that guide behavior” (Levittopportunities identified in the belief sys- and March, 1998, 320). Therefore, con-tem (Simons, 1995 and 2000). Applica- trol system can be said to be a learningtion of ROI of 20% as hurdle rate in the tool. To support this conclusion, Klootcapital budgeting decision is one exam- (1997), in his study using case studyple. Updated of negative list on business approach, investigated the link betweenarea that is not allowed to go into is an- control system and organizational learn-other example. In his study using case ing and found that control system canapproach in UK Telecommunication facilitate organization control. Based oncompany, Marginson (2002) found that organization theory literatures, organiza-the boundary system-strategic boundary tion learning has impact on performancecan motivate people in that company to (Slater and Narver, 1995; Levitt andsearch for new ideas or opportunities March, 1988). The argument underlyingwithin the prescribed acceptable area. the association is that organization learn-Thus, if well implemented, this system ing is very critical to competitive advan-can avoid the potential risks and, in turn, tage. Organization with learning orien-can improve the organization perform- tation will have improved performanceance. (Tippin and Soha, 2003). Chenhal (2005) provided support for the findingDiagnostic control system is the one by investigating the relationship controlused by management to evaluate the im- system and delivery service using or-plementation of an organization’s strat- ganization learning as mediating vari-egy by focusing on critical performance able.variables, which is the ones that can de-termine the successful of strategy imple- In addition to providing organizationmentation and, at the same time, can learning aspect, the use of diagnosticconserve the management attention control system also can conserve man-through the use of management by ex- agement attention trough the applicationception (Simons, 1995 and 2000). As a of management by exception toolsystem relying upon the feedback (Simons, 1995 and 2000). With the tool,mechanism, the diagnostic control sys- the control system reports to manage-tem is an example of application of sin- ment only if the deviation things happen.gle loop learning whose purpose is to Therefore, efficient aspect will be re-inform managers of outcomes that are sulted from the use of the tool. Simonsnot meeting expectation and in accor- (1991) also provided empirical evidencedance with plan (Argyris in Simons, from the health care industry that man-1995; Widener, 2006 and 2007). The agers feel overloaded with information ifsingle loop learning is a part of organi- their attentions are focused on broadzation learning that indicates benefits of scope of control attributes and con-implementing management control sys- cluded that diagnostic control systemtem in general. Organizational learning could facilitate the efficient use of theiroriginates in historical experiences that attentions. According to Schick et al. (inare then 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-
  16. 16. H. Fauzi and K.M. Idris / Issues in Social and Environmental Accounting 2 (2009/2010) 117-142 132agement attentions (time), the manage- the search, scanning, and communica-ment attentions should be focused on the tion process allow new strategiescritical success factors and core compe- emerge, strategy of which, in the Mintz-tence that are likely associated with im- berg’s (1978) strategy typology, oftenproved performance. called emerging strategy. Levit and March (1988) echoed that situation byIn an attempt to implement the organiza- stating that if the structural problems intion strategy, it is necessary to note that organizational learning cannot be elimi-strategy initially set in strategic plan- nated, they can be mitigated. In theirning, often called intended strategy, in study in the hospital area, Albernettythe classification of Mintzberg’s (1978) and Brownel (1999) also support thetypology of strategy, may not become conclusion that interactive control sys-realized strategy due to the fact that any tem can facilitate the organization learn-strategy has inherent strategic uncer- ing. Considering the importance of or-tainty defined as external factors result- ganization learning as mentioned above,ing from market dynamics, government the process in turn can improve the or-regulation, and dramatic change in tech- ganization performance.nology triggering the intended strategybecome invalid (Simons, 1995; Simons, Most prior literature considering the mo-2000). He proposed the use of Interac- tives for socially responsive decisiontive control system to solve the obsta- making derives from the business ethicscles. The control system will detect the literature. Considerable attention hasdriver of intended strategy invalidity and been given to determining the factorsfollow them up by working together be- that influence ‘ethical’ organizationaltween top managers and their subordi- decision making (Soutar et al., 1994).nates to create dialog and to share infor- For example, models of ethical behaviormation in order to solve the problems. have been developed which indicateThis process, if well designed, can there is a set of situational variablesstimulate double loop learning in which which interact with and influence ethical STRATEGIC BEHAVIOR- CORPORATE SOCIAL PERFORMANCE BUSINESS ENVIRONMENT (P1- P4) BUSINESS STRATEGY CORPORATE ORGANIZATION PERFORMANCE STRUCTURE CONTROL SYSTEM Figure 2: Contingent CSP of the relationship Business Environment, Strategy, Structure, Control System, and Performance
  17. 17. 133 H. Fauzi and K.M. Idris / Issues in Social and Environmental Accounting 2 (2009/2010) 117-142decision making processes (Bommer et rate social performance defined as stake-al., 1987; Stead et al., 1990; Trevino, holder relationship become one impor-1986). One set of situational variables tant dimension of the strategic behaviorsdeemed to influence ethical decision that an organization can set to improvemaking include work environment and corporate performance.organizational factors (Bommer et al.,1987; Falkenberg and Herremans, 1995; The theoretical implication is that to beSinghapakdi et al., 2000; Verbeke et al., successful strategic behavior, CSP1996). For instance, employee socializa- should be tied to the corporate culturetion processes aimed at internalizing and a part of the company’s core value.socially responsive/ethical standards It means that CSP cannot view as phil-within individual employees have been anthropic activities. Rather it is meansheld to influence socially responsive to maintain the stakeholder relationship.decision-making (Smith and Carroll,1984; Soutar et al., 1994). Control sys-tems are deemed to form an integral part Referencesof employee socialization (Gatewoodand Carroll, 1991). They support the Abernethy, M.A., & Brownell, P.development of an organization’s cul- (1999). “The role of budgets inture, the system of shared beliefs, val- organizations facing strategicues, norms, and mores of organizational change: an exploratory study”,members (Glands and Bird, 1989), Accounting, Organization andwhich is deemed to be a primary deter- Society, 24.minant of the direction of employee be- Abernethy, M. A. (2004) “The Relation-havior (Robin and Reidenbach, 1987; ship Between Organization Struc-Trevino, 1986). ture and Management Control in Hospital”: An Elaboration andBased on the finding and the logic, the Test of Mintzberg’s” Accounting,interaction components of control sys- Accountability, and Auditingtem and the strategic behavior-CSP can Journal ( 3/3)improve the company’s goal Abernethy, M. A., Bouwens, J., & Lent,(performance). The proposition is as L.V. (2004) “Determinants offollows: Control System Design in Divi- P4 The appropriate interaction of sionalized Firms”, The Account- control system and strategic be- ing Review. (Jul) 79(3):545-570. havior will improve a company’s Abernethy, M. A., & Bouwens, J. (2005) performance. “Determinants of Accounting In- novation Implementation”, Aba- cus, 41(3).Conclusion Alexander, J.W. & Alan, R.W.(1985). “The Fit Between Technology andThe paper argues that the contextual Structure as Predictor of Perform-variables as discussed in strategic man- ance”, Academy of Managementagement domain will be contingent upon Journal (28/4).strategic behaviors, which are behaviors Amaeshi, K.M., Adi, B. (2007).of members in an organization. Corpo- “Reconstructing the corporate
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