11.fauzi, a.rahman 0131www.iiste.org call for_paper-144

Issues in Social and Environmental Accounting
Vol. 2, No. 1 June 2008
Pp. 131-144

The Role of Control System in Increasing
Corporate social Performance: The Use of
Levers of Control
Hasan Fauzi
Faculty of Economics
Sebelas Maret Universiy, Indonesia

Azhar Abdul Rahman
College of Business
Universiti Utara Malaysia, Malaysia

Abstract

One important instrument to be used in the control system design is strategic behaviors that can
lead to the expected organization performance. Referring to the extended definition of strategic
behavior using stakeholder-based strategic behavior, corporate social performance is kind of
strategic behavior to be influenced by using control system. This paper discusses how control
system, using Simons’ levers of control can play important role in increasing the corporate so-
cial performance. The interaction between control system, including belief system, boundary
system, diagnostic control system, and interactive control system, as well as the corporate fi-
nancial performance (CFP) can affect the corporate social performance (CSP) due to fact that
increase in CFP resulting from the appropriate use of control system components enables the
company has more chance to do the CSP. The levers of control are deemed to form an integral
part of employee socialization and support the development of an organization’s culture, the
system of shared beliefs, values, norms, and mores of organizational members which are
deemed to be a primary determinant of the direction of employee behavior.

Keywords: Control system, levers of control, corporate social performance, corporate finan-
cial performance

INTRODUCTION ering the interest of stakeholder groups
had been increasingly common, the term
Since a notion of Triple Bottom Line corporate1 performance has been ex-
(TBL) had been coined by Elkington tended to include not only financial as-
(1994) and the trend of business consid- pect, but also social and environmental

Hasan Fauzi is Director of Indonesian Center for Social and Environmental Accounting Research and Development
(ICSEARD) Faculty of Economics Sebelas Maret University, Surakarta, Indonesia, email: hfauzi2003@gmail.com.
Azhar Abdul Rahman is Associate Professor of Accounting in the College of Business Universiti Utara Malaysia,
email:azhar268@e-web.uum.edu.my.

132 H. Fauzi, A. A. Rahman / Issues in Social and Environmental Accounting 1 (2008) 131-144

dimensions. The inclusion of the two diono, 2005), business environment
more dimensions in the corporate per- (Woodward in Azumi and Hage, 1972;
formance can be argued that the respon- Gul, 1992; Chenhal et al., 1986), control
sibility of corporation is not only to gen- system (Govindarajan and Fisher, 1990;
erate economic welfare (profit) but also Govindarajan, 1988; Liao, 2005; Sand-
to save people (society) and planet ino, 2005; Albernethy and Brownell,
(environmental), a place where human 1999; Pant and Yuthas; Wynn-William,
beings are dwelling. All terms often 2001; Davila, 2000; Marginson, 2002;
called three Ps of TBL concept. This Haldma Laats, 2002; Salmon and Joiner,
understanding is in line with one of the 2005; Coenders et.al., 2003; Alexander
approaches to defining the concept of and Randolf, 1985), organization struc-
corporate social performance (CSP) as ture (Woodward in Azumi and Hage,
efforts by a company to meet multiple 1972; Sandino, 2005). Furthermore, the
responsibilities, using multidimensional area of research continues to be devel-
construct, including aspects of eco- oped by focusing on predictor of corpo-
nomic, legal, ethical, and discretionary rate performance as done by Lenz
(Carroll, 1977, 1999). The last two Ps (1980); Govindarajan & Gupta (1985);
of TBL, people and planet, can be re- Govindarajan (1988); Tan and Lischert
ferred to the last three aspects of Car- (1994) and Langfield-Smith (1997) with
roll’s CSP (1977 and 1999). In addition, the findings that factors affecting corpo-
when referring to the concept of the rate performance are matching of busi-
stakeholder, the basic idea underlying ness environment, strategy, internal
the concept of TBL is to accommodate structure, and control system. The pre-
the interest of stakeholder groups includ- vious studies defined corporate perform-
ing not only the one of shareholder ance by focusing on financial aspect.
group (O’Donovan, 2002; Henriques, Not only has the corporate performance
2004; Hubbard, 2006; Colbert and Ku- been heavily dominated by the financial
rucz, 2007). aspect resulting from demand of finan-
cial market actor (shareholder group),
In some decades ago, topics in corporate but the performance also does not ac-
performance have been important area commodate demands of other parties
of research in strategic management and outside the market system mechanism2.
accounting literatures. The research area Therefore, the concept of corporate per-
started examining the construct of performance that is also considering and
formance (both in corporation and measuring aspect of people (social) and
managerial perspective) and relating to planet (environment) as important part
other constructs such as strategy of a company’s performance is needed.
(Govindarajan and Gupta, 1985; Simons,
1987; Govindarajanand Fisher, 1990; Corporate performance is highly deter-
Govindarajan, 1988; liao, 2005; San- mined by how effectively and efficiently
1
In this paper the word corporate and company have factor market, and consumer in product market. The
been used interchangeably for the same meaning. secondary stakeholders are those in society affected
2
In stakeholder concept, the primary stakeholders The directly and indirectly by the firm’s decisions. They
primary stakeholders are those directly affecting and include local communities, the public, business groups,
affected by the decision to be made by the firm. They media, social activist groups, foreign government, and
include stockholder, supplier, labor, and consumer. central and local government. They communicate with
They interact with company using market mechanism, company using non market mechanism.
stockholder in financial market, labor and supplier in

H. Fauzi, A. A. Rahman / Issues in Social and Environmental Accounting 1 (2008) 131-144 133

the company’s business strategy can be strument to be used in the control system
implemented (Walker et al., 1987 and design is strategic behaviors that can
cited in Olson, 2005). The success of lead to the expected organization per-
the company’s strategy implementation formance. Referring to the extended
is highly influenced by how well the definition of strategic behavior using
company is organized (Vorhies et al., stakeholder-based strategic behavior,
2003; Olson, 2005) and by the use of thus, corporate social performance is
strategic behavior such as customer fo- kind of strategic behavior to be influ-
cus, competitor analysis, and innovation enced by using control system.
(see for example Chen, 1996; Gatignon,
1997; Olson, 2005). Therefore, one This paper discusses how control sys-
factor affecting corporate financial per- tem, using Simons’ levers of control
formance (CFP) is the strategic behav- (Simons, 1995) can play important role
iors in organization. In the context of in increasing the corporate social per-
corporate social performance, the con- formance.
cept of strategic behaviors can be ex-
tended using the stakeholder theory to
explain the fit between organization SUSTAINABLE CORPORATE PER-
structure and corporate social perform- FORMANCE
ance (CSP). According to Chen (1996),
Gatignon et al. (1997); and Olson et al. Under stakeholder view, parties that are
(2005), the strategic behaviors can be concerned with a company are not only
identified into some components: cus- those discussed in the input-output or
tomer-oriented behavior, competitor ori- stockholder view typically including
ented behavior, innovation-oriented be- shareholder, supplier, employee, and
havior, and internal-cost behavior. The customer, but also other parties or
concept can be then extended using the groups in society. Frederick, Post, and
components of stakeholder as developed Davis (1992) classify stakeholder groups
by Donaldson et al.(1995). Supplier- into two categories: primary and secon-
focused behavior, employee-focused dary stakeholder. The primary stake-
behavior, society aspect-focused behav- holders are those directly affecting and
ior, and environment-focused behavior affected by the decision to be made by
are examples of stakeholder-based stra- the firm. The second group called the
tegic behavior that can be developed secondary stakeholders is those in soci-
based on stakeholder perspective. ety affected directly and indirectly by
the firm’s decisions. They include local
As stated by Ouchi (1977) and Robbin communities, the public, business
(in Olson etal., 2005), organization be- groups, media, social activist groups,
havior refers to work- related activities foreign government, and central and lo-
of member of organization. That is the cal government. Consequently, the de-
behavior of the organization members, cision made by the firm should posi-
in which any company’s concern is how tively satisfy the two groups.
to control the behavior toward the com-
pany’s goal. According to Snell (1992), There are many components constituting
controlling the behavior is done using a the stakeholder of a company. They
well-designed control system. One in- have own interest and powers to influ-


ence the company. In some cases, they Gul’s (1991) study investigated the in-
establish coalition to force the company teraction effect (fit) between manage-
to meet a certain interest. Therefore, it ment accounting system and business
is logic that to be regarded “good” by environment on company’s performance
stakeholders, they expect the company and found that business environment
to achieve some performances to be sat- defined as perceived environment uncer-
isfying all interests of stakeholder tainty (PEU) affected the relationship
groups. Based on the stakeholder view between management accounting system
and according to Atkinson, Waterhouse, and company’s performance. At the sec-
and Wells (1997), the approach that a ond level of analysis, Ginzberg (in
company should use to measure the Fisher, 1995), which used formality and
company’s performance is the stake- procedures as dimension of control sys-
holder approach or often called a stake- tem design that interacted with environ-
holder-based approach to performance ment, found that the control system af-
measurement. By doing that the com- fected the performance, while Govinda-
pany’s performance will be measured in rajan’s (in Fisher, 1995) study, which
terms of three aspects: financial, social, focused on performance appraisal sys-
and environmental. tem as a dimension of management con-
trol system, concluded that the control
system had impact on the performance.
CONTROL SYSTEM The both studies supported the Gul’s
(1991) study.
In mapping the contingency-based con-
trol system and performance studies, In an effort to explain the role of manage-
Fisher (1995) classified the studies into ment control system to improve corpo-
four level of analysis. In the first level, rate’s competitive advantage, Pant and
relation between contingent factor and Yuthas, (2000) have stressed the impor-
management control system was made tance of management control system to
without going further to see the impact identify and build company’s dynamic
of the organizational outcome capabilities in order to improve its effec-
(performance). In the second, third, and tiveness3. Wynn-Williams (2001) used
fourth level, analysis of the relationship public hospital setting in testing the role
between contingent factor and control that management control system had
system was conducted and related to the played in explaining the determinant of
performance. The difference was placed effectiveness in the hospitals. In his
on the choice of contingency factor and study on management control system
management control system. The second design in new product development,
level dealt with one factor for contin- Davila (2000) found the correlation be-
gency and one for management control tween some variables of management
system, while one factor for contingency control system and performance. Some
and more than one dimensions of man- other resent studies trying to relate the
agement control system was for the third management control system and com-
level. The fourth level had more than pany’s performance or effectiveness
one contingency factor and more than
3
one dimensions of management control For the purpose of the discussion of this paper, effec-
tiveness is defined as including three aspects: financial,
system. social, and environmental.


had been conducted by others three more levers: belief system, bound-
(Marginson, 2002; Haldma and Lääts, ary system, and interactive control sys-
2002; Salmon and Joiner, 2005; Sand- tem. The function of belief system is to
ino, 2005; Coenders, Bisbe, Saris, and inspire the people in an organization to
Batista-Foguet, 2003; Liao, 2005, and search for new ways and alternatives by
Alexander and Randolf, 1985) providing them with the organization’s
clear vision, mission, statement of pur-
pose, and credos through using formal
THE LEVERS OF CONTROL and informal system. It is expected from
the belief system mechanism, creativity
One important function of Management and innovation in the organization will
Control system4 or control system for be continuously updated to meet the ex-
short is management tool to implement pected growth. The use of boundary
the organization strategy. Of the typolo- system lever is meant to prevent un-
gies in control system as discussed in wanted impact of creativity and innova-
management control literature (for ex- tion by setting some rules limiting peo-
ample see Anthony et al., 1992; Maci- ple to do in the form of code of business
ariello et at., 1994; Merchant et al., conduct, strategic boundary, and internal
2003), Simons’ (1995 and 2000) typol- control. The role of interactive control
ogy is the most complete and compre- system is to provide an organization
hensive, including: belief system, with solution to cope with emerging
boundary system, diagnostic control sys- strategic uncertainty and with new strat-
tem, and interactive control system. In egy given that emerging situation.
corporate performance evaluation, so far
the concept of control system has had The careful and consistent use of the
some flaws. It has imbalances due to the control system typology, often called
domination of financial aspect. In addi- levers of control, can lead to the im-
tion, it has created some paradoxical proved corporate performance. The fol-
situation between control and innova- lowing is discussion on how the compo-
tion, opportunity and attention, and short nents of levers of control can be used to
term and long term goal, and human be- improve the corporate performance in-
havior. One reason of the problems is cluding corporate social performance.
that the old concept of control system The four levers of control can be dia-
had been defined as diagnostic control grammed in the figure 1.
only. In that definition of control, the
control process had been focused on the Belief System
matter of routine mechanism or process
of comparing some expected and real- Belief system is the one used in an or-
ized performances. According to ganization to communicate an organiza-
Simons (1994, 1995a, 1995b and 2000), tion’s core value to inspire people in the
to avoid the problem concept of control organization to search for new opportu-
system should be extended by adding nities or ways to serve customer’s needs
4
based on the core values (Simons, 1995,
In this paper, management control system or control
system for short is defined as formal (also informal), 2000). In an organization the belief sys-
information-based on routine and procedures managers tem has been created using variety of
use to maintain or alter patterns in organization activi- instruments such as symbolic use of in-
ties (Simons, 1995 and 2000).


formation. The instruments are used to The belief system can make people in an
communicate the organization’s vision, organization inspired to commit to or-
mission, and statement of purpose such ganization goal or purpose. In this re-
that people in the organization can well gard, commitment means believing in
understand the organization’s core organizational value and willing to at-
value. Westly et al. (1989; cited in tempt some efforts to achieve the organ-
Simons, 1995) supported the use of the izational goal (Simons, 1995). There-
instrument by arguing that great leaders fore, the goal commitment can lead to
and competent managers understand the improved corporate performance (Locke
power of symbolism and inspiration. et al., 1988). The conclusion is consis-
The benefit of using the symbolic instru- tent with what Klein et al. (1998) found
ment especially at individual level is in their study on situation constraints
also provided by Feldman et al. (1981) including goal commitment and sales
by delineating that symbols produce be- performance. Chong et al.(2002) study-
lief and belief can stimulate the discov- ing the effect of goal commitment and
ery of new realities. In this regard, the information role of budget and job
Westly (1990 cited Simons, 1995) con- performance provides the same finding.
tended that managers will not be very
eager to participate in search for oppor- The resultant of belief system is new
tunities if they do not understand the opportunities that may contain some
beliefs of organization and are not get problems. The boundary system con-
involved in converting the beliefs into cerns on how avoid some risks of inno-
actions and strategies. vation resulting from the belief system
(Simons, 1995). The risks that possibly
There is a need for an organization to emerge can be operating, assets impair-
formally communicate the core value, ment, competitive, and franchise risks
especially when it is facing the dramatic (Simons, 2000). On the other hands, the
change in business environment such as boundary system provides allowable
competition, technology, regulation and limits for opportunity seeker to innovate
other factors. The Change in the busi- as conditions encouraged in the belief
ness environment creates a need for system.
strong basic values to provide organiza-
tional stability (Simons, 1995). The im- Boundary System
portance of understanding the core is
also supported by study of Kotter (in There are two instrument used in bound-
Simons, 1995) concluding that inspira- ary system to establish the limit in order
tional motivation can be created by (1) avoid the risks: business conduct and
communicating vision that can address strategic boundaries (Simons, 1995;
the value of people in an organization, Simons, 2000). The business conduct
(2) permitting each individual to be boundaries are focused on behavior of
pleased about how he or she can contrib- all employees in an organization. The
ute to implementation of that vision, (3) source of the boundaries is of three
Providing eager support for endeavor, folds: society’s law, the organization’s
and (4) promoting public recognition belief system, and codes of behavior
and reward for all success. promulgated by industry and profes-
sional association (Gatewood and Car-


roll, 1991; Simons, 1995). When uncer- Diagnostic Control System
tainty resulting from new opportunities
is high or internal trust is low, the busi- Diagnostic control system is the one
ness conduct boundary is highly needed used by management to evaluate the im-
(Kanter in Simons, 1995). In the envi- plementation of an organization’s strat-
ronment of high uncertainty, (Merchant, egy by focusing on critical performance
1990 in Simon 1995) found that chances variables, which are the ones that can
to manipulate the profit figures by man- determine the success of strategy imple-
agers is high. The manipulation is one mentation and, at the same time, can
of risks that can endanger the managers’ conserve the management attention
company. Therefore, the business con- through the use of management by ex-
duct boundary will be imposed in that ception (Simons, 1995 and 2000). As a
situation to avoid the risk and, in turn, system relying upon the feedback
improve the corporate performance. The mechanism, the diagnostic control sys-
low in internal trust can result in the ab- tem is an example of application of sin-
sence of shared commitment to the or- gle loop learning whose purpose is to
ganization goal. No commitment to goal inform managers of outcomes that are
can affect the corporate performance. not meeting expectation and in accor-
The objective of applying the business dance with plan (Argyris, 1977 in
conduct boundary is to maintain the em- Simons,1995 ; Widener, 2006 and
ployee’s commitment to organization 2007). The single loop learning is a part
goal and, in turn, can improve the corpo- of organization learning that indicates
rate performance. benefits of implementing management
control system in general. Organiza-
Strategic boundaries are defined as rules tional learning originates in historical
and limitation applied to decisions to be experiences that are then encoded in rou-
made by managers needing the organiza- tines (Levitt and March, 1988; cited
tion’s resource allocation as response of Widener, 2006 and 2007). Based on
opportunities identified in the belief sys- historical experiences, the organization
tem (Simons, 1995 and 2000). Applica- adopts and formalizes “routines that
tion of ROI of 20% as hurdle rate in the guide behavior” (Levitt and March,
capital budgeting decision is one exam- 1998, 320). Therefore, control system
ple. Updated negative list on business can be said to be a learning tool. To sup-
area that is not allowed to go into is an- port this conclusion, Kloot (1997), in his
other example. In his study using case study using case study approach, investi-
approach in UK Telecommunication gated the link between control system
company, Marginson (2002) found that and organizational learning and found
the boundary system-strategic boundary that control system can facilitate organi-
can motivate people in that company to zation control. Based on organization
search for new ideas or opportunities theory literatures, organization learning
within the prescribed acceptable area. has impact on performance (Slater and
Thus, if well implemented, this system Narver, 1995; Levitt and March, 1988).
can avoid the potential risks and, in turn, The argument underlying the association
can improve the organization perform- is that organization learning is very criti-
ance. cal to competitive advantage. Organiza-
tion with learning orientation will have


improved performance (Tippin and Sohi, ing from market dynamics, government
2003). Chenhal (2005) provided support regulation, and dramatic change in tech-
for the finding by investigating the rela- nology triggering the intended strategy
tionship of control system and delivery become invalid (Simons, 1995; Simons,
service using organization learning as 2000). He proposed the use of Interac-
mediating variable. tive control system to solve the obsta-
cles. The control system will detect the
In addition to providing organization driver of invalidity of intended strategy
learning aspect, the use of diagnostic and follow them up by working together
control system also can conserve man- between top managers and their subordi-
agement attention trough the application nates to create dialog and to share infor-
of management by exception tool mation in order to solve the problems.
(Simons, 1995 and 2000). With the tool, This process, if well designed, can
the control system reports to manage- stimulate double loop learning in which
ment only if the deviation things happen. the search, scanning, and communica-
Therefore, efficient aspect will be re- tion process allow the emergence of new
sulted from the use of the tool. Simons strategies, strategy of which, in Mintz-
(1991) also provided empirical evidence berg’s (1978) strategy typology, is often
from the health care industry that man- called emerging strategy. Levit and
agers feel overloaded with information if March (1988) echoed that situation by
their attentions are focused on broad stating that if the structural problems in
scope of control attributes and con- organizational learning cannot be elimi-
cluded that diagnostic control system nated, they can be mitigated. In their
could facilitate the efficient use of their study in the hospital area, Albernetty
attentions. According to Schick et al. (in and Brownel (1999) also support the
Widener, 2006 and 2007), the informa- conclusion that interactive control sys-
tion overload occurs when demand for tem can facilitate the organization learn-
information exceeds its supply of time. ing. Considering the importance of or-
To encourage the efficient use of man- ganization learning as mentioned above,
agement attentions (time), the manage- the process, in turn, can improve the or-
ment attentions should be focused on the ganization performance.
critical success factors and core compe- Based on theory of slack resource
tence that are likely associated with im- (Waddock et al., 1997), the interaction
proved performance. between control system, including belief
system, boundary system,, diagnostic
Interactive Control System control system, and interactive control
system, as well as the corporate financial
In an attempt to implement the organiza- performance (CFP) can affect the corpo-
tion strategy, it is necessary to note that rate social performance (CSP) due to
strategy initially set in strategic plan- fact that increase in CFP resulting from
ning, often called intended strategy, in the appropriate use of control system
the classification of Mintzberg’s (1978) components enables the company has
typology of strategy, may not become more chance to do the CSP.
realized strategy due to the fact that any Most prior literature considering the mo-
strategy has inherent strategic uncer- tives for socially responsive decision
tainty defined as external factors result- making derives from the business ethics


literature. Considerable attention has tion processes aimed at internalizing
been given to determining the factors socially responsive/ethical standards
that influence ‘ethical’ organizational within individual employees have been
decision making (Soutar et al., 1994). held to influence socially responsive
For example, models of ethical behavior decision-making (Smith and Carroll,
have been developed which indicate 1984; Soutar et al., 1994). The Control
there is a set of situational variables systems (levers of control) are deemed
which interact with and influence ethical to form an integral part of employee so-
decision making processes (Bommer et cialization (Gatewood and Carroll,
al., 1987; Stead et al., 1990; Trevino, 1991). They support the development of
1986). One set of situational variables an organization’s culture, the system of
deemed to influence ethical decision shared beliefs, values, norms, and mores
making include work environment and of organizational members (Gands and
organizational factors (Bommer et al., Bird, 1989), which are deemed to be a
1987; Falkenberg and Herremans, 1995; primary determinant of the direction of
Singhapakdi et al., 2000; Verbeke et al., employee behavior (Robin and Reiden-
1996). For instance, employee socializa- bach, 1987; Trevino, 1986).

Figure 1: Levers of Control

(Adopted from Simons, 1995b)
CONCLUSION on purpose, and credos should be stated
in three dimensions and communicated
The use of levers of control to increase to internal and external factors. In belief
corporate social performance starts by system context, that instrument will
extending concept of corporate perform- guide the people in organization to act.
ance including the Three Bottom Line The search for new ways and alterna-
(TBL): Financial, social, and Environ- tives should be based on the sustainable
mental. Vision and mission, statement performance. The boundary taking into


account the three factors will be set to & Tuttle, M.(1987) "A Behavioral
anticipate the negative impact of some Model of Ethical and Unethical
creativity by people. Also, the emerging Decision Making", Journal of
strategic uncertainty should be coped Business Ethics, Vol. 6, No. 4, pp.
with in interactive system by finding 265-280.
new strategies to be realized. Theoreti- Carroll, A.B. (1979) “A three-
cally, the use of the levers of control will dimensional conceptual model of
increase corporate social performance by corporate social Performance”,
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Responsibility: Evolution of a
Therefore, Using the levers of control Definitional Construct”, Business
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non financial and in terms of varied and Interfirm Rivalry: Toward A
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