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11.vol 0004www.iiste.org call for paper no 1 pp. 40-64

  1. 1. Issues in Social and Environmental AccountingVol. 4, No. 1 June 2010Pp 40-64 The Effect of Contextual Variables in the Rela-tionship between CSR and CFP: Evidence from Indonesian Companies Hasan Fauzi Faculty of Economics Sebelas Maret University Indonesia Kamil M. Idris College of Business Nothern University of MalayiaAbstractThe objectives of this study is to investigate whether business environment, business strategy,formalization, decentralization, reliance on combination of belief & boundary system, relianceon combination of diagnostic & interactive control system, reliance on interactive control sys-tem moderate the relationship between CSR and CFP under the slack resource and good man-agement theories. 220 respondents from manufacturing companies listed on the Jakarta StockExchange were selected and two regression models were developed to examine the relationshipbetween the related variables. The findings show that business environment has moderated theCSR-CFP link under good management theory, decentralization has moderated the CSR-CFPlink under slack resource theory, and reliance on combination of diagnostic and interactive con-trol system has moderated the CSR and CFP link based on slack resource theory.Keywords: CSR, slack resource theory, good management theory, contextual variables, finan-cial performance, business environment, business strategy, Decentralization, formalization,specialization, belief system, boundary system, diagnostic control system, interactive controlsystem, Indonesia.Introduction produced inconsistent results (e.g. Frooman, 1997; Griffin & Mahon, 1997;To date studies that looked at the rela- McWilliams & Siegel, 2000, 2001;tionship between CSR (corporate social Moore, 2001; Murphy, 2002; Orlitzky,responsibility performance) and CFP 2001; Orlitzky & Benjamin, 2001; Ro-(corporate financial performance) have man et al., 1999; Ruf et al., 2001; Simp-Hasan 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
  2. 2. H. Fauzi, K.M. Idris / Issues in Social and Environmental Accounting 1 (2010) 40-64 41son & Kohers, 2002; Waddock & 1980; Tan & Lischert, 1994). The pre-Graves, 1997; Worrell et al., 1997; sent study thus considers these variablesWright & Ferris, 1997), and there have - business environment, strategy, struc-been attempts to explain the conflicting ture, and control system – in an attemptresults. Some have noted that the con- to seek explanation of the relationshipflicting results may have been caused by between CSR and CFP. By using thetwo main factors: lack of theoretical integrated model as suggested in the ac-foundation and methodological problem counting and strategic management lit-(Husted, 2000; Orlitzky et al., 2003; Ruf eratures, the present study hopes to pro-et al., 2001; Wagner, 2001). vide a holistic explanation to the rela- tionship.So far the argument for considering thecontingency perspective in explaining Previous studies (e.g. Hilman & Keim,the relationship of CSR and CFP has 2001; Husted, 2000; Neville, 2005; Or-been that CSR is the result of fit between liztky et al., 2003; Pos et al., 2002) didendogenous organization variables of not clearly relate contingency variableCSR and exogenous contextual variables (i.e. strategy) to corporate performance(Husted, 2000; McWilliam & Siegel, in the context of TBL. Furthermore, the2001; Russo & Fouts, 1997; Rowley & variable of strategy in those studies wasBerman, 2000). For example, Russo and not operationalized as business strategyFouts (1997) found that the type of in- per se but activities related to handlingdustry will determine the relationship social issues. Previous studies have alsobetween CSR and CFP, while Husted only common variables such as industry(2000) argues that the relationship de- type and company size as moderatingpends upon stakeholder issues. variables to explain the relationship be- tween CSR and CFP (Brammer &Despite the importance of contingency Pavelin, 2006; Fauzi, 2004; Fauzi et al.,perspective proposed by previous stud- 2007), and have not considered otheries, many still neglect to integrate the factors that are more relevant in affect-contingency factors in examining the ing corporate performance. Thus, thisdeterminants of CSR. It is argued that current study will address the gap bysuch consideration is important because using the above variables as contingencyCSR is an extended corporate perform- factors to explain the relationship be-ance of TBL. Hence, in this context, this tween CSR and CFP. More explicitly,study is an attempt to relate CSR-CFP to the present study looks at how variablesthe important variables of corporate per- such as business environment, businessformance. strategy, organizational structure, and control system can affect the relation-The literatures on accounting and strate- ship between CSR and CFP.gic management highlight that corporateperformance is a function of fit between This study attempted to contribute to thebusiness environment, strategy, internal literature by addressing the followingstructure, and control system research questions: Under the slack re-(Govindarajan, 1988; Govindarajan & source theory, do the following variablesGupta, 1985; Gupta & Govindarajan, moderate the relationship between CFP1982; Langsfield-Smit, 1997; Lenz, and CSR, business environment, busi-
  3. 3. 42 H. Fauzi, K.M. Idris / Issues in Social and Environmental Accounting 1 (2010) 40-64ness strategy, formalization, specializa- Based on the review of strategic man-tion, decentralization, belief system, agement literature, it can be found thatboundary system, diagnostic control sys- corporate performances are matching oftem, and interactive control system? Un- business environment, business strategy,der the good management theory, do the internal structure, and control systemfollowing variables moderate the rela- (Lenz, 1980; Gupta and Govindarajan,tionship between CSR and CFP, busi- 1982 and 1984; Govindarajan et al.,ness environment, business strategy, 1988; Govindarajan, 1988; Tan andformalization, decentralization, speciali- Lischert, 1994; Langsfield-Smit, 1997).zation, belief system, boundary system, Thus, it can be argued that corporatediagnostic control system, and interac- performances referred to the notion oftive control system? TBL should be affected by some impor- tant variables: business environment, business strategy, structure, and controlLiterature Review and Hypotheses system. Therefore, research to seek anDevelopment explanation of the relationship between CSR and CFP need to be conducted us-Contingency Approach to Studying CSR ing the integrated model as suggested inand CFP Link the strategic management literature.As noted in the previous sections, the Thus, this current study addresses themixed result of the relationship of CSR gap by using moderating effect of busi-and CFP was due to the omission of the ness environment, business strategy,contingency aspect (Ullmann, 1985). organizational structure, and control sys-Other researchers also did suggest that tem as contingency factors to explain thevariations in the result of the relationship relationship of CSR and CFP under twobetween CSR and CFP be solved by us- theories- slack resource and good man-ing the contingency theory perspective agement.(Wagner, 2001; Husted, 2000; Margol-ish and Walsch, 2003; Orlitzky et al., Business Environment and CSR-CFP2003). Due to the fact that CSR and CFP Linkare not related under one condition, thecontingency perspective needs to be Business environment can be defined asused to examine under which condition conditions an organization faces that arethe relationship is be valid (Hedesström normally changing and unpredictable.and Biel, 2008). In addition, Orlitzky et Lenz (1980) included market structure,al., (2003) found that the strength of the regulated industry, and other relevantrelationship will be dependent upon con- environments in the concept of the busi-tingency such as reputation and con- ness environment as factors affectingstruct operationalization. Some other corporate financial performance. Jawor-researchers also have shown that CSR ski and Kohli (1993) extended the defi-and CFP relation was positive using re- nition of business environment to in-source-based view (strategy) as contin- clude market turbulence, competitivegent variable (Hilman and Keim, 2001; intensity, and technological turbulence.Orliztky et al., 2003; Pos et al., 2002). Market turbulence is the rate of change in the composition of customers and
  4. 4. H. Fauzi, K.M. Idris / Issues in Social and Environmental Accounting 1 (2010) 40-64 43preferences (Jaworski & Kohli, 1993). referred to as perceived information un-An organization operating under high certainty, while hostility is similar tomarket turbulence will tend to modify its resource dependence (Tan & Lischert,product or services continually in order 1994). Following the concept of busi-to satisfy its customers. Adversely, when ness environment as multidimensionalthe market is stable there is no change in construct, Jauch et al. (1980) and Tancustomers’ preference, and the organiza- and Lischert (1994) had extended thetion is not likely to change its product or concept of business environment to in-service. Therefore, market turbulence is stitutional environment which considersexpected to relate positively to organiza- more varied elements dimensions similartion performance. Competitive intensity to stakeholder concept such as (1) com-refers to market condition in which a petitors, (2) customer, (3) suppliers, (4)company has to compete with. In the technological, (5) regulatory, (6) eco-absence of competition, a company can nomics, (7) social-cultural, and (8) inter-perform well with no significant effort national. Dill (1958) asserts that busi-as customers have no choice or alterna- ness environment will increase or de-tive to satisfy their need. However, in crease corporate performance. An or-high competition indicated by many al- ganization facing high uncertainty internatives for customers to satisfy their business environment has less ability towant, a company has to devote its best attain the organization’s goal. This argu-effort to satisfy the customers. There- ment has been echoed by Simons (2000)fore, competitive intensity is expected to who asserts that business environmentrelate positively to organization per- influences strategic uncertainty that informance. The last aspect of business turn will decrease the organization’senvironment is technological turbulence, ability to achieve its goal.which means simply the rate of techno-logical change. If a company has to be Based on the theory of slack resource,sensitive to technological change, inno- the interaction or fit between businessvation resulting from technological environment and corporate financial per-change can increase the company’s com- formance (CFP) can affect corporatepetitive advantage without having to social performance due to fact that in-focus more on the market orientation. crease in CFP resulting from businessBy contrast, if a company is not preoc- environment aspect enables the com-cupied with innovation in technology, it pany to have more chance to do theshould strive to focus more on market CSR. Thus, it is reasonable to expectorientation. Therefore, technological from this study that business environ-change is expected to relate negatively ment can moderate or affect the relation-to organization performance. ship between CFP and CSR. The hy- pothesis for the current study is as fol-Business environment can also be lows:viewed as a multidimensional constructof three dimensions: dynamism, com- H1a: Business environment moderatesplexity, and hostility (Duncan, 1972; the relationship between CFP andLawrence & Lorsch, 1967, as cited in CSR based on the slack resourceTan & Lischert, 1994). The dimensions theoryof dynamism and complexity have been
  5. 5. 44 H. Fauzi, K.M. Idris / Issues in Social and Environmental Accounting 1 (2010) 40-64Similarly, Higgin and Currie (2004) Business Strategy and CSR-CFP Linkidentified some factors that affect corpo-rate social performance. They are busi- Strategy is a complex concept that hasness climate, human nature, societal cli- consequently led to proliferation of itsmate, the competitiveness of the global definition (Lenz, 1980). Mintzbegbusiness environment, and the nature of (1987, as cited in Simons, 2000) viewedcompetitive organization performance. strategy in different lenses including strategy as perspective, position, plan,Hence, in an effort to seek the relation- pattern in action, and ploy. Strategy asship between CSR and CFP derived perspective refers to mission and visionfrom good management theory, business of a company as a basis for all activitiesenvironment is expected to moderate the of a company. As a position, strategyCSR and CFP relationship. Based on of indicates the way a company will pursueslack resource theory the interaction or to compete in the market. This view hasfit between business environment and led the use of Porter’s typology of strat-corporate financial performance (CFP) egy: differentiation and low costcan affect corporate social performance (Simons, 2000). Strategy as a plan isbecause an increase in CFP due to favor- differentiated as either short-term orable business environment will enable a long-term plan. Strategy as pattern incompany to conduct CSR. On the other action is a company’s action plan tohand, based on good management the- cope with the failure of the strategy im-ory, the interaction or fit between busi- plementation. It is in this view thatness environment and corporate social emerging strategy is coined (Simons,performance (CSR) can affect the corpo- 2000). Finally, strategy as ploy is a tac-rate financial performance because an tic a company can employ to compete.increase in CSR due to favorable busi- Based on these views, if the strategy isness environment aspect will enable the well implemented, it can be an importantcompany to gain financial performance. determinant of the company’s perform-Thus, this study may close the existing ance.gap by using business environment vari-able to affect the CSR-CFP link. Previous studies have considered fit be- tween strategy and corporate perform-Based on the arguments and finding ance (see for example Fisher, 1995;from the previous studies, it can be con- Fisher & Govindarajan, 1993; Govinda-cluded that the link between CSR and rajan & Fisher, 1990; Govindarajan,CFP will be contingent upon the busi- 1988; Simon, 1987). But whether or notness environment variable. The follow- the strategy will work to help achieveing is the hypothesis: corporate performance depends upon the environment faced by a company. In thisH1b: Business environmental moderates regard, Mintzberg (1973) defined strat- the relationship between CSR and egy as patterns of stream of decision CFP based on good management focusing on a set of a resource allocation theory. in an attempt to accomplish a position in
  6. 6. H. Fauzi, K.M. Idris / Issues in Social and Environmental Accounting 1 (2010) 40-64 45an environment faced by the company. Organization Structure and CSR-CFPUsing focus on decision as developed LinkMintzberg (1973), Ventakraman (1989),Miller and Frieson (1982), and Tan and Corporate performance is highly deter-Lischert (1994) extended the concept of mined by how effectively and efficientlystrategy using dimensionality approach the company’s business strategy is im-including: (1) analysis, (2) defensive- plemented (Walker et al., 1987, as citedness, (3) futurity, (4) proactiveness, and in Olson, 2005). The success of the com-(5) riskiness. pany’s strategy implementation is highly influenced by how well the company isBased on theory of slack resource, the organized (Olson, 2005; Vorhies et al.,interaction or fit between strategy and 2003). Organization structure is neededcorporate financial performance (CFP) to manage jobs in the organization con-can affect the corporate social perform- sistent with the intended strategy. Or-ance due to fact that increase in CFP ganization structure is reflected in for-resulting from strategy enables the com- malization, centralization, and speciali-pany has more chance to do the CSR. zation (Olson et al., 2005; Walker et al,Thus, it is reasonable to expect from this 1987). These three components are cen-study that the strategy can moderate or tral points of Mintzberg’s analysis ofaffect the relationship between CFP and organization structure (Olson et al.,CSR. The hypothesis for the current 2005).study is as follows: Formalization refers to the level of for-H2a: Business strategy moderates the mality of rules and procedures used to relationship between CFP and govern jobs and working relationships CSR based on the slack resource so that the organization is run efficiently theory by reducing administrative cost espe- cially in an environment characterizedIn an effort to seek the relationship be- by simple and repetitive tasks (Olson eltween CSR and CFP derived from the at., 2005; Ruekert et al., 1985; Walker etgood management theory, the strategy al., 1987). A company with highly for-variable is expected to be able to moder- mal rules and procedures is called me-ate the relationship between the link be- chanic organization, while one withtween CSR and CFP. Based on the argu- fewer formal rules and procedures isments and finding from the previous referred to organic organization (Burnsstudies, it can be concluded that the link & Stalker, as cited in Olson et al., 2005).between CSR and CFP will be contin- Organic organization enables people in agent upon the strategy. The following company to have vertical and horizontalhypothesis is thus formulated: communication. It also enables a com- pany to be rapidly awareness of and re-H2b: Business strategy moderates the spond accordingly to the changes in relationship between CSR and competition and market, have more ef- CFP based on good management fective information, and reduce lag time theory. between decision and action (Miles and
  7. 7. 46 H. Fauzi, K.M. Idris / Issues in Social and Environmental Accounting 1 (2010) 40-64Snow, 1992; Olson, 2005). zation may have high proportion of spe- cialists to conduct a well-defined set ofCentralization is a condition on whether activities (Ruekert et al., 1985; Olson,autonomy of making decision is held by 2005). A specialist is someone who hastop managers or be delegated to the expertise in respective areas and, in cer-lower level managers. In management tain condition he or she can be equippedliterature, this construct includes two with a sufficient authority to determineterms in the opposite ends: centralized the best approach to complete the specialand decentralized organization (Olson, tasks (Mintzberg, as cited in Olson,2005). In centralized organization, 2005). The expertise is needed by or-autonomy to make decision is held by ganizations to respond quickly to thetop managers. Although fewer innova- changes in competition and market intive ideas can be created in centralized order to meet organization goalsorganizations, implementation of the (Walker et al., 1987).decision is straight forward after the de-cision is made (Olson, 2005). However, Based on theory of slack resource, thethe benefit can only be realized in stable interaction or the fit between organiza-and in noncomplex environment (Olson tion structure and corporate financialet al., 1995; Olson et al., 2005; Ruekert, performance (CFP) can affect the corpo-1985). In an unstable and complex envi- rate social performance due to fact thatronment indicated by rapid changes in an increase in CFP resulting from or-competition and market, the use of or- ganization design enables the companyganization structure providing lower to have more chance to do the CSR.managers with autonomy of making de- Thus, it is reasonable to expect from thiscision is needed. In a decentralized or- study that the organization structure canganization, a variety of views and inno- moderate or affect the relationship be-vative ideas may emerge from different tween CFP and CSR. The hypotheseslevels of organization. Due to the fact for the current study are as follows:that autonomy of making decision isdispersed, it may take longer to make H3a1: Formalization moderates the rela-and implement the decision (Olson et al., tionship between CFP and CSR1995; Olson et al., 2005). However, in a based on the slack theorynon routine task taking place in complex H3a2: Decentralization moderates theenvironment, the use of decentralized relationship between CFP andorganization is more effective to achieve CSR based on the slack resourcethe organization goal as the type of or- theoryganization empower managers who are H3a3: Specialization moderates the rela-very close to the decision in question tionship between CFP and CSRand to make the decision and implement based on the slack resource the-it quickly (Ruekert et al., 1985). orySpecialization is the level of division of As mentioned above, another factor af-tasks and activities in organization and fecting corporate financial performancelevel of control people may have in con- (CFP) is the strategic behaviors in anducting those tasks and activities (Olson, organization. In the context of corporate2005). Organization with high speciali- social performance, the concept of stra-
  8. 8. H. Fauzi, K.M. Idris / Issues in Social and Environmental Accounting 1 (2010) 40-64 47tegic behaviors can be extended using short is management tool to implementthe stakeholder theory to explain the fit the organization strategy. Of the typolo-between organization structure and cor- gies in control system, Simons’ (2000)porate social performance (CSR). Ac- typology is more complete and compre-cording to Chen (1996); Gatignon and hensive, including belief system, bound-Xeureb (1997); and Olson et al. (2005), ary system, diagnostic control system,the strategic behaviors can be identified and interactive control system.into some components: customer-oriented behavior, competitor oriented The careful and consistent use of thebehavior, innovation-oriented behavior, control system typology, often calledand internal-cost behavior. The concept levers of control, can lead to the im-can be extended using components of proved performance (CFP). The follow-stakeholder as contended by Donaldson ing is discussion on how the componentsand Preston (1995). Supplier-focused of levers of control can be associatedbehavior, employee-focused behavior, with the performance and, therefore, thesociety aspect-focused behavior, and expectation of the impact of the use ofenvironment-focused behavior are stake- components of the control systems onholder-based strategic behavior to be the relationship between CSR and CFPexpected to improve corporate financial can be based upon.performance. Using the argument, CSRwill affect CFP. Belief system is the one used in an or- ganization to communicate an organiza-Based on the finding and the logic, the tion’s core value to inspire people in theconcern of this study is that the fit be- organization to search for new opportu-tween organization structure and CSR nities or ways to serve customer’s needswill affect the financial performance. based on the core values (Simons, 1994,Hypotheses for this current research are 1995a, 1995b, 2000). In an organizationas follows: the belief system has been created using a variety of instruments such as sym-H3b1: Formalization moderates the rela- bolic use of information. The instru- tionship between CSR and CSR ments are used to communicate the or- based on good management the- ganization’s vision, mission, and state- ory ment of purpose such that people in theH3b2: Decentralization moderates the organization can well understand the relationship between CSR and organization’s core value. CFP based on good management theory The belief system can make people in anH3b3: Specialization moderates the rela- organization inspired to commit to or- tionship between CSR and CFP ganization goals or purposes. In this based on good management the- regard, commitment means believing in ory organizational values and willingness to attempt some efforts to achieve the or-Control System and CSR-CFP Link ganizational goal (Simons, 1995a and 1995b). Therefore, the goal commit-One important function of management ment can lead to improved corporatecontrol system or control system for performance (Locke et al., 1988). The
  9. 9. 48 H. Fauzi, K.M. Idris / Issues in Social and Environmental Accounting 1 (2010) 40-64conclusion is consistent with what Klein mentation and, at the same time, canand Kim (1998) found in their study on conserve the management attentionsituation constraints including goal com- through the use of management by ex-mitment and sales performance. Chong ception (Simons, 1995a, 1995b, andand Chong (2002) who studied the effect 2000). As a system relying upon theof goal commitment and the information feedback mechanism, the diagnosticrole of budget and job performance dem- control system is an example of applica-onstrate the same finding. tion of single loop learning whose pur- pose is to inform managers of outcomesThe resultant of belief system is new that are not meeting expectation and inopportunities that may contain some accordance with plan (Argyris, 1977 asproblems. The boundary system con- cited by Simon, 1995b; Widener, 2006,cerns on how to avoid some risks of in- 2007). The single loop learning is a partnovation resulting from the belief sys- of organization learning that indicatestem (Simons, 1994). The risks that pos- benefits of implementing managementsibly emerge can be operating, assets control system in general.impairment, competitive, and franchiserisks (Simons, 2000). On the other hand, Based on theory of slack resource, thethe boundary system provides allowable interaction or fit between control system,limits for opportunity seekers to inno- including belief system, boundary sys-vate as conditions encouraged in the be- tem,, diagnostic control system, and in-lief system. teractive control system, as well as CFP can affect CSR due to fact that increaseStrategic boundaries are defined as rules in CFP resulting from the appropriateand limitation applied to decisions to be use of control system components en-made by managers needing the organiza- ables the company to have more chancetion’s resource allocation as response of to do the CSR. Thus, it is reasonable toopportunities identified in the belief sys- expect from this study to formulate thetem (Simons, 1995 a, 1995b, 2000). hypotheses of current study as follows:In his study using case approach in UKTelecommunication company, Margin- H4a1: reliance on belief system moder-son (2002) found that the boundary sys- ates the relationship between CFPtem-strategic boundary can motivate and CSR based on the slack re-people in that company to search for source theory.new ideas or opportunities within the H4a2: reliance on boundary system mod-prescribed acceptable area. Thus, if well erates the relationship betweenimplemented, this system can avoid the CFP and CSR based on the slackpotential risks and, in turn, can improve resource theorythe organization performance. H4a3: reliance on diagnostic control sys- tem moderates the relationshipDiagnostic control system is the one between CFP and CSR based onused by management to evaluate the im- the slack resource theoryplementation of an organization’s strat- H4a4: reliance on interactive control sys-egy by focusing on critical performance tem moderates the relationshipvariables, which are the ones that can between CFP and CSR based ondetermine the success of strategy imple- slack resource theory.
  10. 10. H. Fauzi, K.M. Idris / Issues in Social and Environmental Accounting 1 (2010) 40-64 49As stated by Ouchi (1977) and Robbins Research Method(2002), organization behavior refers to There are several variables used in thisbehaviors of members of an organiza- study: Corporate social performance,tion. In general, any organization is con- corporate financial performance, busi-cerned about controlling the behavior of ness environment, strategy, organizationthe employees and this can be achieved structure, and control system as mainby using a well designed control system variable; and company size and type of(Snell, 1992). One instrument to be used company (in term of ownership: state-in the control system is strategic behav- owned company non state-owned com-iors. Chen (1996), Gatignon & Xeureb pany) as control variables. The measure(1997), and Olson et al. (2005) listed for CSR variable in this study used thestrategic behaviors to include customer MJRA’s dimensions of CSR by deletingoriented behavior, competitor oriented some indicators to adjust Indonesianbehavior, innovation oriented behavior, environment. This CFP variable wasand internal/cost oriented behavior. The measured by using the perceptuallist can be referred to input-output model method to match with the CSR measureof Donaldson and Preston (1995). The (Wood and Jones, 1995). In this ap-list can also be extended using the con- proach, some subjective judgments weretingency theory. Thus, corporate social provided by respondents using 8 (eight)performance is strategic behavior af- indicators developed by Ventakramanfected by control system and, this in turn (1989) comprising of two dimensions:is expected to improve corporate finan- growth and profitability dimension.cial performance. Business environment were measured using managers’ perception of the levelBased on the finding and the logic, the of hostility, dynamism, and complexityconcern of this study is that the fit be- in each environmental dimension using atween control system and CSR will af- 7-point scale (Tan and Lischert, 1994).fect the corporate financial performance. The business strategy variable wasThus hypotheses for the current studies measured by strategic orientation. Usingare as follows: focus on decision as developed byH4b1: reliance on belief system moder- Mintzberg (1973), the strategic orienta- ates the relationship between CSR tion were broken down into several di- and CFP based on the good man- mensions including (1) analysis, (2) de- agement theory fensiveness, (3) futurity, (4) proactive-H4b2: reliance on boundary system mod- ness, and (5) riskiness. The organization erates the relationship between structure was measured using three di- CSR and CFP based on the good mensions: formalization, decentraliza- management theory tion, and specialization. Control systemH4b3: reliance on diagnostic control sys- was defined by using typology of control tem moderates the relationship of Simons (1995 and 2000) including between CSR and CFP based on belief system, boundary system, diag- the good management theory nostic control system, and interactiveH4b4: reliance on interactive control sys- control system. The company size fol- tem moderates the relationship lowed the measure used by Mahoney between CSR and CFP based on and Robert (2007) with the argument the good management theory that total asset is “money machine” to
  11. 11. 50 H. Fauzi, K.M. Idris / Issues in Social and Environmental Accounting 1 (2010) 40-64generate sales and income. Type of business environment, strategy, organi-company was measured using dummy zation structure, and management con-variable. The measure of 1 is for state- trol system to test the moderating effectowned company and while 0 is for non- of the contextual variables on CSR-CFPstate-owned company. link and to test managers’ perception toward CSR. Using the same way, dataUnit of analysis in this study is Indone- for state-owned companies were selectedsian managers. Population of this study from the list of manufacturing sectoris all Indonesian managers working in (including mining) in Indonesian State-the Jakarta stock exchange’s listed com- Owned Companies under control of thepanies and in state-owned companies. Indonesian Ministry of State-Owned Companies. The sampling selection forData set of manufacturing sector in pub- two sets of data was conducted using thelicly traded companies’ stock (private- purposive sampling method. Given thatowned companies) and in the directory method, samples were selected from theof state companies in State Ministry of two sampling frames: list of companiesState Owned Company (state-owned listed in Jakarta Stock Exchange in 2007companies=BUMN) was used with the for non state companies and list of state-intention to reduce mismatching prob- owned companies under Ministry oflem as suggested by Wood and Jones State-Owned Companies.(1995) in addition to lessen the samplingerror. The data are perception and views There are several techniques used toof managers in BUMN and private- analysis the data (1) psychometric analy-owned companies pertaining to the indi- sis, (2) factor analysis, (3) and multiplecators of corporate social performance, regression analysis. The psychometriccompanies’ financial performance, busi- analysis is used to determine consistencyness environment, strategy, organization or reliability of the measured result.structure, and management control sys- Exploratory factor analyses includingtem. In broader sense, state-owned com- coefficient alpha and item-to-total corre-panies can be defined as a legal entity lation were estimated to assess the psy-created by a government to undertake chometric characteristics of scales forcommercial or business activities on be- each variable.half of an owner government. Due to the fact that latent variables areData for the non state (private)-owned used in this study coming from con-companies were taken from the compa- structs that have been developed basednies listed in Jakarta Stock exchange on some dimensions of concept, factor(Indonesia Stock Exchange). The choice analysis was need to reduce the dimen-of the manufacturing sector is based on sions becoming the single measure ofthe fact that this sector (including all the latent variables. There were criteriamining companies) has contributed more used in conducting factor analysis: Kai-to the aspect of people (social) and ser-Meyer-Olkin (KMO), and (2) factorplanet (environmental) than other sec- loading.tors. In addition to having the data onindicators of corporate social perform- There two models used in this study: (1)ance, this study also captured the data on model 1 and (2) model 2. Model 1 is
  12. 12. H. Fauzi, K.M. Idris / Issues in Social and Environmental Accounting 1 (2010) 40-64 51needed to test the CFP-CSR link under BELslack resource theory by considering CFP/BND=Interaction between CFP andmoderating effect. Like model 1, Model BND2 is based on the good management the- CFP/DNT=Interaction between CFP andory to test the CSR-CFP link. DNT CFP/INC= Interaction between CFP andThe main theoretical model under slack INCresource theory (model 1) and good CSR/BEV=Interaction between CSRmanagement theory (model 2) are as and BEVfollows, respectively: CSR/STG=Interaction between CSR and STGCSR = f {CFP, BEV, STG, FOR, DEC, CSR/FOR= Interaction between CSR SPE, BEL, BND, DNT, INC, and FOR CFP/BEV, CFP/STG, CFP/ CSR/DEC= Interaction between CSR FOR, CFP/DEC, CFP/SPE, and DEC CFP/BEL, CFP/BND, CFP/ CSR/SPE= Interaction between CSR and DNT, CFP/INC} SPECFP = f {CSR, BEV, STG, FOR, DEC, CSR/BEL= Interaction between CSR SPE, BEL, BND, DNT, INC, and BEL CSR/BEV, CSR/STG, CSR/ CSR/BND= Interaction between CSR FOR, CSR/DEC, CSR/SPE, and BND CSR/BEL, CSR/BND, CSR/ CSR/DNT= Interaction between CSR DNT, CSR/INC} and DNTWhere: CSR/INC= Interaction between CSR andCFP=Corporate financial performance INCCSR=Corporate social responsibilityBEV=Business environmentSTG=Strategy Results and DiscussionFOR=FormalizationDEC=Decentralization Based on the factor analysis resultSPE=Specialization (Rotated component matrix), the factorsBEL=Belief system created for organization structure andBND=Boundary system control system are not the same as theDNT=Diagnostic control system initial dimensions. Rather, they undergoINC=Interactive control system some modification. The created factorsCFP/BEV=Interaction between CFP and for organization structure have two di- BEV mensions: (1) formalization (FOR) andCFP/STG=Interaction between CFP and (2) decentralization (DEC). The created STG factors for control system having threeCFP/FOR=Interaction between CFP and dimensions include: (1) CBELBGOU, FOR (2) CDIAINT, and (3) INT. Given theCFP/DEC=Interaction between CFP and new variable, the new hypotheses are DEC formulated as follows:CFP/SPE=Interaction between CFP and SPE H3a1: Formalization moderates the rela-CFP/BEL=Interaction between CFP and tionship between CFP and CSR
  13. 13. 52 H. Fauzi, K.M. Idris / Issues in Social and Environmental Accounting 1 (2010) 40-64 Table 1. Summary of Regression Results Regression Model Model 1 Model 2 Dependent Variables CSR CFP 2 Adjusted-R 0.731 0.468 p-value of F Statistics 0.000* 0.000* SIZE 0.000 0.000 (0.987) (0.829) TYPE 0.961 -0.200 (0.616) (0.795) CSR 0.079 (0.004)* CFP 0.615 (0.000)* BEV 0.182 -0.016 (0.005)* (0.482) STG -0.086 -0.035 (0.419) (0.456) FOR 2.613 0.075 (0.182) (0.456) DEC 2.596 1.058 (0.056)*** (0.087) CBELBOU 13.517 2.998 (0.000) (0.001) CDIAINT 9.269 0.267 (0.000) (0.624) INT 4.836 0.321 (0.000)* (0.601) CFP*BEV -0.002 (0.785) CFP*STG 0.012 (0.298) CFP*FOR 0.351 (0.103) CFP*DEC 0.539 (0.001* CFP*CBELBOU -0.203 (0.441) CFP*CDIAINT 0.661 (0.002)* CFP*INT -0.153 0.496 CSR*BEV 0.002 (0.012)** CSR*STG -0.001 (0.629)
  14. 14. H. Fauzi, K.M. Idris / Issues in Social and Environmental Accounting 1 (2010) 40-64 53 Table 1. Summary of Regression Results CSR*FOR -0.004 0.917 CSR*DEC 0.006 (0.806) CSR*CBELBOU 0.038 (0.308) CSR*CDIAINT 0.044 (0.120) CSR*INT 0.045 (0.118)Note:*** significant at 1%** significant at 5% based on slack resource theory tem moderates the relationshipH3a2: Decentralization moderates the between CFP and CSR based on relationship between CFP and CSR good management theory based on slack resource theory H5b3: Reliance on interactive control sys-H3b1: Formalization moderates the rela- tem moderates the relationship tionship between CSR and CSR between CFP and CSR based on based on good management theory good management theoryH3b2: Decentralization moderates the relationship between CSR and CFP Therefore, given the modification of the based on good management theory dimensions of organization structure andH4a1: Reliance on combination of belief control system construct, the corre- system and boundary system mod- sponding models are modified in terms erates the relationship between of variables resulting from the created CFP and CSR based on slack re- dimensions. The modified models are: source theory Model 1:H4a2: Reliance on combination of diag- nostic and interactive control sys- CSR =α + β1 CFP + β2 BEV + β3 STG + tem control system moderates the β4 FOR + β5 DEC + β6 CBEL- relationship between CFP and CSR BOU + β7 CDIAINT + β8 INT + based on the slack resource theory β9 CFP*BEV + β10 CFP*STG +H4a3: Reliance on interactive control sys- β11 CFP*FOR + β12 CFP*DEC + tem moderates the relationship β13CFP*CBELBOU+ between CFP and CSR based on β 1 4 C FP* C D IA INT + β 1 5 slack resource theory CFP*INT + β16 SIZE + β17H4b1: Reliance on combination of belief TYPE+ e system and boundary system mod- erates the relationship between Where CFP and CSR based on good man- CSR= Composite score of corporate so- agement theory cial responsibilityH5b2: Reliance on combination of diag- CFP = Composite score of corporate nostic and Interactive control sys- financial performance
  15. 15. 54 H. Fauzi, K.M. Idris / Issues in Social and Environmental Accounting 1 (2010) 40-64BEV= Composite score of uncertainty Model 2:business environmentSTG= Composite score of companies’ CFP = α + β1 CSR + β2 BEV + β3 STGstrategic orientation + β4 FOR + β5DEC + β6FOR= Total score of formalization di- BEL_BOU + β7 DIA_INT + β8mension of organization structure INT + β9 CSR*BEV + β10DEC=Total score of decentralization CSR*STG + β11 CFP*FOR + β12dimension of organization structure CSR*DEC + β13 CFP*CBELBOUCBELBOU=Total score of combination + β14 CSR*CDIAINT + β15belief and boundary system CSR*INT + β16 SIZE + β17CDIAINT =Total score of combination TYPE+ ediagnostic and interactive control systemINT= Total score of interactive system Wherecontrol system CFP= Composite score of corporate fi-CFP*BEV= Composite score of corpo- nancial performancerate financial performance* Composite CSR= Composite score of corporate so-score of uncertainty business environ- cial responsibilityment BEV= Composite score of business en-CFP*STG= Composite score of corpo- vironmentrate financial performance* Composite STG= Composite score of companies’score of companies’ strategic orientation strategic orientationCFP*FOR= Composite score of corpo- FOR= Total score of formalization di-rate financial performance* Total score mension of organization structureof formalization dimension of organiza- DEC=Total score of decentralizationtion structure dimension of organization structureCFP*DEC= Composite score of corpo- CBELBOU=Total score of combinationrate financial performance* Total score belief and boundary systemof decentralization dimension of organi- CDIAINT =Total score of combinationzation structure of diagnostic and interactive control sys-CFP*CBELBOU= Composite score of temcorporate financial performance* Total INT= Total score of interactive systemscore of combination of belief and control systemboundary system CSR*BEV= Composite score of corpo-CFP*CDIAINT= Composite score of rate social responsibility * Compositecorporate financial performance* Total score of uncertainty business environ-score of combination of diagnostic and mentinteractive control system CSR*STG= Composite score of corpo-CFP*INT= Composite score of corpo- rate social responsibility * Compositerate financial performance* Total score score of companies’ strategic orientationof interactive control system CSR*FOR= Composite score of corpo-SIZE= Company size measured by com- rate social responsibility *Total score ofpany’s total asset formalization dimension of organizationTYPE= Dummy variable indicating 1for structurestate owned-companies and 0 for private CSR*DEC= Composite score of corpo--owned companies rate social responsibility * Total score ofe= Error term decentralization dimension of organiza-
  16. 16. H. Fauzi, K.M. Idris / Issues in Social and Environmental Accounting 1 (2010) 40-64 55tion structure ness growth, he proposed the concept ofCSR*CBELBOU= Composite score of four levers of control including: (1) be-corporate social responsibility * Total lief system, (2) boundary system, (3)score of combination of belief and diagnostic control system, and (4) inter-boundary system active control system. However, basedCSR*CDIAINT= Composite score of on the finding of factor analysis, thecorporate social responsibility * Total components of the levers of control havescore of combination diagnostic and in- undergone a modification as indicatedteractive control system by Simons (1994 and 2000) for the pos-CSR*INT= Composite score of corpo- sibility of combination among the leversrate social responsibility *Total score of in the implementation stage. The modifi-interactive control system cations based on this study include: (1) e= Error term combination of belief system & bound- ary system, (2) combination of diagnos-According to the result of Model 1, the tic & interactive control system, and (3)CFP-CSR link depends upon two as- interactive control system. The combina-pects: (1) decentralization (H4a2), and (2) tion actually had been predicted bydiagnostic and interactive control system Simons (2000) when explaining the use(H5a2). of diagnostic and interactive control sys- tem in practice. Abernethy and BrownellDecentralization refers to the degree of (1999) also use the combination of diag-autonomy to make decision in units in nostic and interactive control system in aorganization. The objective of decen- study on the role of budget in strategictralization is to improve the effective- situation. When explaining the first twoness in an organization (Govindarajan, components of levers of control, Simons1986). According to Elkington’s (1994) (2000) implicitly said that belief andthe concept of TBL (triple bottom line), boundary system should be combined.the effectiveness of an organization can The function of belief system is to in-be defined by three aspects: (1) finan- spire people in organization to alwayscial, (2) social, and (3) environment. search for alternatives for better effec-Thus, the degree of decentralization as tiveness (performance) by improvingdepicted by Govindarajan (1986) can innovativeness. However, the continuinginfluence the relationship between CFP innovativeness can make an organizationand CSR. In the recent trend, the in- apprehensive; thus, the breaker tool iscreasing number of departments in or- needed. The breaker tool is the functionganization handling the CSR can also of the boundary system. Therefore,support the relationship. This finding is based on logic, the belief and boundaryconsistent with the proposition of Centre should be combined. In addition, thefor Business Ethics (1986). interactive control system alone is needed especially for handling the char-The combination of diagnostic & inter- acteristic of strategy that is uncertainty.active control system is a part of concept According to Simons (2000), strategy setof levers of control introduced by in strategic planning become invalid ifSimons (1994 and 2000). In response to the following factors emerge: (1) newthe problem of effectiveness of organi- technology, (2) change in customer de-zation resulting from the pace of busi- sires, (3) changes in legislation, and (4)
  17. 17. 56 H. Fauzi, K.M. Idris / Issues in Social and Environmental Accounting 1 (2010) 40-64entry/exit competitors. To meet that pur- satisfy its customers. Adversely, if thepose, interactive control system is effec- market is stable, indicated by no changetive tools to create new strategy in customers’ preference, the organiza-(emerging strategy). tion is not likely to change its product or service. Therefore, the market turbu-The finding of this study that diagnostic lence is expected to relate positively to& interactive control system can influ- organization performance. Competitiveence the CFP-CSR link may be ex- intensity is referred to market conditionplained as follows. Some important con- in which a company has to competetrol tools in diagnostic control system with. In the absence of competition, aare performance measurement and re- company can perform well with no sig-ward system. The use of TBL for the nificant effort as the customers have noperformance measurement including the choice or alternative to satisfy theirthree dimensions: (1) financial, (2) so- needs. However, when the competitioncial, and (3) environment, along with the is high, a company has to devote its bestproper reward system, will improve effort to satisfy the customers. There-CSR. At the same time, companies are fore, the competitive intensity is ex-always facing risks and competition, pected to relate positively to organiza-especially the ones who are low depend- tion performance. The last aspect ofence on technology, should focus on business environment is technologicalcustomers and their needs, which, in the turbulence defined as the rate of techno-perspective of interactive control tool, logical change. For a company that iscan emerge new strategy to handle the sensitive to technological change, inno-risk. This kind of action resulting from vation resulting from the technologicalthe interactive control system can im- change can be an alternative to increaseprove CFP and, in turn, affect the CSR. the company’s competitive advantage without having to focus more on theThe CSR-CFP link under good manage- market orientation. In contrast, for ament theory (Model 2) is also positively company with no innovation in technol-significant. This study finds that only ogy, it should strive to focus more oncontextual variable of business environ- market orientation. Therefore, thement (H1b) can influence the CSR-CFP change in technology relates negativelylink. to organization performance.According to Jaworski and Kohli (1993), The finding of this study is consistentbusiness environment facing companies with Lenz (1980), Gupta and Govindara-include the following: (1) market turbu- jan (1984), Govindarajan and Guptalence, (2) competitive intensity, and (3) (1985), Govindarajan (1988), Tan andtechnological turbulence. Market turbu- Lischert (1994) and Langsfield-Smitlence is the rate of change in the compo- (1997). This study also confirms thesition of customers and preferences. It proposition of Higgin and Currie (2004).can be a predictor of business perform- They had identified a number of vari-ance (Jaworski and Kohli, 1993). An ables that affect CSR in a corporation.organization operating under market The factors include business climate,turbulence will tend to modify its prod- human nature, societal climate, the com-uct or services continually in order to petitiveness of the global business envi-
  18. 18. H. Fauzi, K.M. Idris / Issues in Social and Environmental Accounting 1 (2010) 40-64 57ronment, and the nature of competitive be redefined in Indonesian context. Fi-organization performance. Thus, argu- nally, there is a possibility to make man-ments for business climate or environ- datory CSR reporting as a consequencement discussed above, especially for the of the CSR implementation in accor-concept of business environment derived dance with article 74 of the Law No.from the larger concept similar to stake- 40/2007.holder concept can moderate the CSR-CFP link. ConclusionFrom the analysis of all the modelsabove it is clear that contextual variables This study addresses research problems(business environment, , business strat- using contextual variables to explain theegy, organization structure, and control relationship of CSR and CFP. More ex-system) can resolve the conflicting result plicitly, it describes how variables suchof the relationship between CFP and as business environment, business strat-CSR (under slack resource theory) and egy, organizational structure, and controlCSR and CFP (under the good manage- system can affect the relationship be-ment theory). The studies on the rela- tween CSR and CFP.tionship between CSR and CFP havenever considered the contextual vari- This study also addresses methodologi-ables as predictors of CSR. Therefore, cal problems, which become the sourcesthe body of knowledge of CSR contrib- of the conflicting result of CSR-CFPuted by this study explained that (1) link. The problems include (1) mis-CSR concept is an extended corporate matching measurement, (2) samplingperformance, then becoming sustainable error, and (3) measurement errorcorporate performance including finan-cial, social, and environmental perform- Under slack resource theory, only decen-ance, (2) the contextual variables also tralization and diagnostic & interactivedetermine the variability of CSR, and (3) variables moderate the relationship be-the causality of the relationship of CSR tween CSR and CFP. Under good man-and CFP is also significantly determined agement theory, only business environ-by the contextual variables. ment variable moderates the relationship between CSR and CFP.Based on the implication, there is a needto do an in-depth study on the impact of Based on the finding of the study, therecontextual variables of corporate per- is a need for further study on the impactformance on CSR as a basis to develop of contextual variables of corporate per-TBL-based CSR reporting in Indonesia. formance on CSR as a base to developThis suggestion for future research is TBL-based CSR reporting in Indonesia.vital for several reasons. First, stake- This suggestion for future research isholder theory used in this study and important for the following reasons: (1)other studies may undergo modifications stakeholder theory used in this study andgiven the continuous study on impact of others may undergo some modificationcontextual variables of corporate on given the deep study on impact of con-CSR. Second, as suggested in manage- textual variables of corporate on CSR,rial decision implication, CSR needs to (2) as suggested in managerial decision
  19. 19. 58 H. Fauzi, K.M. Idris / Issues in Social and Environmental Accounting 1 (2010) 40-64implication, the CSR need to be rede- The fourth limitation is that no study hasfined in Indonesian and (3) there is the examined the constructs of this researchpossibility of making mandatory CSR (integrating contextual variables affect-reporting as a consequence of imple- ing corporate performance into CSR asmentation of Law No. 40/2007 (Article an extended corporate performance),74). either in Indonesia or outside Indone- sian. Therefore, the researcher has toIt should be pointed out that this study proceed without the advantage of havinghas several limitations. This may be es- an established model to refer to and re-pecially important for researchers who search findings as comparisons.are less familiar with Indonesia culture,business environment, and differing cul-ture. ReferencesThe first limitation of the study is the Abernethy, M.A. & Brownell, P. (1999).timing of the survey. For the last two “The role of budgets in Organi-years, compulsory implementation of zations facing strategic change:CSR in Indonesia based on the Law No. an exploratory study”. Account-40/2007 has been in the process and ing, Organizations and Society,most Indonesian companies objected to Vol. 24, pp.189-204.the compulsory implementation of the Argyris, C. (1977) “Organizationallaw. learning and management infor- mation systems”, Accounting,The second limitation is related to the Organizations, and Society,questionnaire procedure. The length of Vol.2, No.2, pp.113-123.the questionnaires exceeds eleven pages. Brammer, S.J., & Pavelin, S. (2006).”Such length, according to Dilman Corporate Reputation and Social(1978), may reduce the expected re- Performance: The Importance ofsponse rate. In addition, non random and Fit” Journal of Managementnon probability methods were used in Studies, Vol. 43, No.3selecting the sample. These techniques Center for Business Ethics.1986. “Aremay influence the finding of the study Corporations Institutionalizingand its application to businesses other Business Ethics”? Journal ofthan manufacturing. Business Ethics, Vol.5, pp. 85- 91The third limitation is that the popula- Chen, MJ. (1996).”Competitor Analysistion of the study for non BUMN was and Interfirm Rivalry: Toward Amanufacturing companies listed on ISE Theoretical(Indonesian Stock Exchange). Thus, Integration”. Academy of Man-other big manufacturing companies in- agement Review, Vol.21, No.1,cluding mining companies such as Free- pp.100-134port are not included in the sample as Chong, V.R., & Chong, K.M.(2002).they are not listed on the Exchange. “Budget Goal Commitment andSuch companies may have importantly Informational Effect of Budgetcontributed to the environment. Participation Performance: A Structural Equation Modeling
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