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

Issues in Social and Environmental Accounting
Vol. 4, No. 1 June 2010
Pp 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 Malayia
Abstract

The objectives of this study is to investigate whether business environment, business strategy,
formalization, decentralization, reliance on combination of belief & boundary system, reliance
on 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 Stock
Exchange were selected and two regression models were developed to examine the relationship
between the related variables. The findings show that business environment has moderated the
CSR-CFP link under good management theory, decentralization has moderated the CSR-CFP
link 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 control
system, 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 Accounting
Research 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. The
authors are very grateful to some reviewers including Prof. Mustaffa M.Zein of UiTM Malaysia, and Prof. Ku Noor
Izzah Ku Ismail of Universiti Utara Malaysia and others for their direction and helpful suggestion on final stage of
research project and to some anonymous referees for comments

H. Fauzi, K.M. Idris / Issues in Social and Environmental Accounting 1 (2010) 40-64 41

son & Kohers, 2002; Waddock & 1980; Tan & Lischert, 1994). The pre-
Graves, 1997; Worrell et al., 1997; sent study thus considers these variables
Wright & Ferris, 1997), and there have - business environment, strategy, struc-
been attempts to explain the conflicting ture, and control system – in an attempt
results. Some have noted that the con- to seek explanation of the relationship
flicting results may have been caused by between CSR and CFP. By using the
two 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 the
contingency 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) did
endogenous organization variables of not clearly relate contingency variable
CSR and exogenous contextual variables (i.e. strategy) to corporate performance
(Husted, 2000; McWilliam & Siegel, in the context of TBL. Furthermore, the
2001; Russo & Fouts, 1997; Rowley & variable of strategy in those studies was
Berman, 2000). For example, Russo and not operationalized as business strategy
Fouts (1997) found that the type of in- per se but activities related to handling
dustry will determine the relationship social issues. Previous studies have also
between CSR and CFP, while Husted only common variables such as industry
(2000) argues that the relationship de- type and company size as moderating
pends 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 other
ies, many still neglect to integrate the factors that are more relevant in affect-
contingency factors in examining the ing corporate performance. Thus, this
determinants of CSR. It is argued that current study will address the gap by
such consideration is important because using the above variables as contingency
CSR 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 variables
the important variables of corporate per- such as business environment, business
formance. 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 corporate
performance is a function of fit between This study attempted to contribute to the
business environment, strategy, internal literature by addressing the following
structure, and control system research questions: Under the slack re-
(Govindarajan, 1988; Govindarajan & source theory, do the following variables
Gupta, 1985; Gupta & Govindarajan, moderate the relationship between CFP
1982; Langsfield-Smit, 1997; Lenz, and CSR, business environment, busi-

42 H. Fauzi, K.M. Idris / Issues in Social and Environmental Accounting 1 (2010) 40-64

ness strategy, formalization, specializa- Based on the review of strategic man-
tion, decentralization, belief system, agement literature, it can be found that
boundary system, diagnostic control sys- corporate performances are matching of
tem, and interactive control system? Un- business environment, business strategy,
der the good management theory, do the internal structure, and control system
following 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 and
formalization, decentralization, speciali- Lischert, 1994; Langsfield-Smit, 1997).
zation, belief system, boundary system, Thus, it can be argued that corporate
diagnostic control system, and interac- performances referred to the notion of
tive control system? TBL should be affected by some impor-
tant variables: business environment,
business strategy, structure, and control
Literature Review and Hypotheses system. Therefore, research to seek an
Development explanation of the relationship between
CSR and CFP need to be conducted us-
Contingency Approach to Studying CSR ing the integrated model as suggested in
and CFP Link the strategic management literature.

As noted in the previous sections, the Thus, this current study addresses the
mixed 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 the
variations in the result of the relationship relationship of CSR and CFP under two
between 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-CFP
2003). Due to the fact that CSR and CFP Link
are not related under one condition, the
contingency perspective needs to be Business environment can be defined as
used to examine under which condition conditions an organization faces that are
the 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 relevant
relationship will be dependent upon con- environments in the concept of the busi-
tingency such as reputation and con- ness environment as factors affecting
struct 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, competitive
gent 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


preferences (Jaworski & Kohli, 1993). referred to as perceived information un-
An organization operating under high certainty, while hostility is similar to
market 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 multidimensional
the market is stable there is no change in construct, Jauch et al. (1980) and Tan
customers’ preference, and the organiza- and Lischert (1994) had extended the
tion is not likely to change its product or concept of business environment to in-
service. Therefore, market turbulence is stitutional environment which considers
expected to relate positively to organiza- more varied elements dimensions similar
tion 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 in
ternatives for customers to satisfy their business environment has less ability to
want, 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 environment
relate positively to organization per- influences strategic uncertainty that in
formance. The last aspect of business turn will decrease the organization’s
environment 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 business
vation resulting from technological environment and corporate financial per-
change can increase the company’s com- formance (CFP) can affect corporate
petitive advantage without having to social performance due to fact that in-
focus more on the market orientation. crease in CFP resulting from business
By 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 the
should strive to focus more on market CSR. Thus, it is reasonable to expect
orientation. 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 construct
of three dimensions: dynamism, com- H1a: Business environment moderates
plexity, and hostility (Duncan, 1972; the relationship between CFP and
Lawrence & Lorsch, 1967, as cited in CSR based on the slack resource
Tan & Lischert, 1994). The dimensions theory
of dynamism and complexity have been


Similarly, Higgin and Currie (2004) Business Strategy and CSR-CFP Link
identified some factors that affect corpo-
rate social performance. They are busi- Strategy is a complex concept that has
ness climate, human nature, societal cli- consequently led to proliferation of its
mate, the competitiveness of the global definition (Lenz, 1980). Mintzbeg
business environment, and the nature of (1987, as cited in Simons, 2000) viewed
competitive 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 as
ship between CSR and CFP derived perspective refers to mission and vision
from good management theory, business of a company as a basis for all activities
environment is expected to moderate the of a company. As a position, strategy
CSR and CFP relationship. Based on of indicates the way a company will pursue
slack resource theory the interaction or to compete in the market. This view has
fit between business environment and led the use of Porter’s typology of strat-
corporate financial performance (CFP) egy: differentiation and low cost
can affect corporate social performance (Simons, 2000). Strategy as a plan is
because an increase in CFP due to favor- differentiated as either short-term or
able business environment will enable a long-term plan. Strategy as pattern in
company to conduct CSR. On the other action is a company’s action plan to
hand, 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 that
ness 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 is
ness environment aspect will enable the well implemented, it can be an important
company 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 not
ness environment variable. The follow- the strategy will work to help achieve
ing is the hypothesis: corporate performance depends upon the
environment faced by a company. In this
H1b: 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


an environment faced by the company. Organization Structure and CSR-CFP
Using focus on decision as developed Link
Mintzberg (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 efficiently
strategy using dimensionality approach the company’s business strategy is im-
including: (1) analysis, (2) defensive- plemented (Walker et al., 1987, as cited
ness, (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 is
Based on theory of slack resource, the organized (Olson, 2005; Vorhies et al.,
interaction or fit between strategy and 2003). Organization structure is needed
corporate 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 of
affect 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 characterized
In an effort to seek the relationship be- by simple and repetitive tasks (Olson el
tween CSR and CFP derived from the at., 2005; Ruekert et al., 1985; Walker et
good 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 with
tween CSR and CFP. Based on the argu- fewer formal rules and procedures is
ments and finding from the previous referred to organic organization (Burns
studies, 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 a
gent upon the strategy. The following company to have vertical and horizontal
hypothesis 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


Snow, 1992; Olson, 2005). zation may have high proportion of spe-
cialists to conduct a well-defined set of
Centralization is a condition on whether activities (Ruekert et al., 1985; Olson,
autonomy of making decision is held by 2005). A specialist is someone who has
top 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 equipped
literature, this construct includes two with a sufficient authority to determine
terms in the opposite ends: centralized the best approach to complete the special
and 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 the
top managers. Although fewer innova- changes in competition and market in
tive ideas can be created in centralized order to meet organization goals
organizations, 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, the
the benefit can only be realized in stable interaction or the fit between organiza-
and in noncomplex environment (Olson tion structure and corporate financial
et 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 that
ronment indicated by rapid changes in an increase in CFP resulting from or-
competition and market, the use of organization design enables the company
ganization structure providing lower to have more chance to do the CSR.
managers with autonomy of making de- Thus, it is reasonable to expect from this
cision is needed. In a decentralized or- study that the organization structure can
ganization, a variety of views and inno- moderate or affect the relationship be-
vative ideas may emerge from different tween CFP and CSR. The hypotheses
levels of organization. Due to the fact for the current study are as follows:
that autonomy of making decision is
dispersed, it may take longer to make H3a1: Formalization moderates the rela-
and implement the decision (Olson et al., tionship between CFP and CSR
1995; Olson et al., 2005). However, in a based on the slack theory
non routine task taking place in complex H3a2: Decentralization moderates the
environment, the use of decentralized relationship between CFP and
organization is more effective to achieve CSR based on the slack resource
the organization goal as the type of or- theory
ganization empower managers who are H3a3: Specialization moderates the rela-
very close to the decision in question tionship between CFP and CSR
and to make the decision and implement based on the slack resource the-
it quickly (Ruekert et al., 1985). ory

Specialization is the level of division of As mentioned above, another factor af-
tasks and activities in organization and fecting corporate financial performance
level of control people may have in con- (CFP) is the strategic behaviors in an
ducting those tasks and activities (Olson, organization. In the context of corporate
2005). Organization with high speciali- social performance, the concept of stra-


tegic behaviors can be extended using short is management tool to implement
the 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 the
behavior, innovation-oriented behavior, control system typology, often called
and 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 components
and Preston (1995). Supplier-focused of levers of control can be associated
behavior, employee-focused behavior, with the performance and, therefore, the
society aspect-focused behavior, and expectation of the impact of the use of
environment-focused behavior are stake- components of the control systems on
holder-based strategic behavior to be the relationship between CSR and CFP
expected to improve corporate financial can be based upon.
performance. Using the argument, CSR
will 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 the
concern 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 needs
will affect the financial performance. based on the core values (Simons, 1994,
Hypotheses for this current research are 1995a, 1995b, 2000). In an organization
as 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 the
H3b2: 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 an
H3b3: 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 corporate
control system or control system for performance (Locke et al., 1988). The


conclusion is consistent with what Klein mentation and, at the same time, can
and Kim (1998) found in their study on conserve the management attention
situation constraints including goal com- through the use of management by ex-
mitment and sales performance. Chong ception (Simons, 1995a, 1995b, and
and Chong (2002) who studied the effect 2000). As a system relying upon the
of goal commitment and the information feedback mechanism, the diagnostic
role 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 outcomes
The resultant of belief system is new that are not meeting expectation and in
opportunities that may contain some accordance with plan (Argyris, 1977 as
problems. 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 part
novation resulting from the belief sys- of organization learning that indicates
tem (Simons, 1994). The risks that pos- benefits of implementing management
sibly emerge can be operating, assets control system in general.
impairment, competitive, and franchise
risks (Simons, 2000). On the other hand, Based on theory of slack resource, the
the 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 increase
Strategic boundaries are defined as rules in CFP resulting from the appropriate
and limitation applied to decisions to be use of control system components en-
made by managers needing the organiza- ables the company to have more chance
tion’s resource allocation as response of to do the CSR. Thus, it is reasonable to
opportunities identified in the belief sys- expect from this study to formulate the
tem (Simons, 1995 a, 1995b, 2000). hypotheses of current study as follows:
In his study using case approach in UK
Telecommunication company, Margin- H4a1: reliance on belief system moder-
son (2002) found that the boundary sys- ates the relationship between CFP
tem-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 between
implemented, this system can avoid the CFP and CSR based on the slack
potential risks and, in turn, can improve resource theory
the organization performance. H4a3: reliance on diagnostic control sys-
tem moderates the relationship
Diagnostic control system is the one between CFP and CSR based on
used by management to evaluate the im- the slack resource theory
plementation of an organization’s strat- H4a4: reliance on interactive control sys-
egy by focusing on critical performance tem moderates the relationship
variables, which are the ones that can between CFP and CSR based on
determine the success of strategy imple- slack resource theory.


As stated by Ouchi (1977) and Robbins Research Method
(2002), organization behavior refers to
There are several variables used in this
behaviors 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, organization
the employees and this can be achieved
structure, and control system as main
by 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 the
strategic behaviors to include customer
MJRA’s dimensions of CSR by deleting
oriented behavior, competitor oriented
some indicators to adjust Indonesian
behavior, innovation oriented behavior,
environment. This CFP variable was
and internal/cost oriented behavior. The
measured by using the perceptual
list can be referred to input-output model
method to match with the CSR measure
of Donaldson and Preston (1995). The
(Wood and Jones, 1995). In this ap-
list can also be extended using the con-
proach, some subjective judgments were
tingency theory. Thus, corporate social
provided by respondents using 8 (eight)
performance is strategic behavior af-
indicators developed by Ventakraman
fected 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 level
Based on the finding and the logic, the
of hostility, dynamism, and complexity
concern of this study is that the fit be-
in each environmental dimension using a
tween control system and CSR will af-
7-point scale (Tan and Lischert, 1994).
fect the corporate financial performance.
The business strategy variable was
Thus hypotheses for the current studies
measured by strategic orientation. Using
are as follows:
focus on decision as developed by
H4b1: 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 system
H4b3: reliance on diagnostic control sys-
was defined by using typology of control
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 interactive
H4b4: reliance on interactive control sys-
control system. The company size fol-
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


generate 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 effect
owned company and while 0 is for non- of the contextual variables on CSR-CFP
state-owned company. link and to test managers’ perception
toward CSR. Using the same way, data
Unit of analysis in this study is Indone- for state-owned companies were selected
sian managers. Population of this study from the list of manufacturing sector
is all Indonesian managers working in (including mining) in Indonesian State-
the Jakarta stock exchange’s listed com- Owned Companies under control of the
panies and in state-owned companies. Indonesian Ministry of State-Owned
Companies. The sampling selection for
Data set of manufacturing sector in pub- two sets of data was conducted using the
licly traded companies’ stock (private- purposive sampling method. Given that
owned companies) and in the directory method, samples were selected from the
of state companies in State Ministry of two sampling frames: list of companies
State Owned Company (state-owned listed in Jakarta Stock Exchange in 2007
companies=BUMN) was used with the for non state companies and list of state-
intention to reduce mismatching prob- owned companies under Ministry of
lem as suggested by Wood and Jones State-Owned Companies.
(1995) in addition to lessen the sampling
error. The data are perception and views There are several techniques used to
of managers in BUMN and private- analysis the data (1) psychometric analy-
owned companies pertaining to the indi- sis, (2) factor analysis, (3) and multiple
cators of corporate social performance, regression analysis. The psychometric
companies’ financial performance, busi- analysis is used to determine consistency
ness environment, strategy, organization or reliability of the measured result.
structure, and management control sys- Exploratory factor analyses including
tem. 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 for
commercial or business activities on be- each variable.
half of an owner government.
Due to the fact that latent variables are
Data for the non state (private)-owned used in this study coming from con-
companies were taken from the compa- structs that have been developed based
nies 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 of
the fact that this sector (including all the latent variables. There were criteria
mining companies) has contributed more used in conducting factor analysis: Kai-
to the aspect of people (social) and ser-Meyer-Olkin (KMO), and (2) factor
planet (environmental) than other sec- loading.
tors. In addition to having the data on
indicators 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


needed to test the CFP-CSR link under BEL
slack resource theory by considering CFP/BND=Interaction between CFP and
moderating effect. Like model 1, Model BND
2 is based on the good management the- CFP/DNT=Interaction between CFP and
ory to test the CSR-CFP link. DNT
CFP/INC= Interaction between CFP and
The main theoretical model under slack INC
resource theory (model 1) and good CSR/BEV=Interaction between CSR
management theory (model 2) are as and BEV
follows, respectively: CSR/STG=Interaction between CSR and
STG
CSR = 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} SPE
CFP = 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 DNT
Where: CSR/INC= Interaction between CSR and
CFP=Corporate financial performance INC
CSR=Corporate social responsibility
BEV=Business environment
STG=Strategy Results and Discussion
FOR=Formalization
DEC=Decentralization Based on the factor analysis result
SPE=Specialization (Rotated component matrix), the factors
BEL=Belief system created for organization structure and
BND=Boundary system control system are not the same as the
DNT=Diagnostic control system initial dimensions. Rather, they undergo
INC=Interactive control system some modification. The created factors
CFP/BEV=Interaction between CFP and for organization structure have two di-
BEV mensions: (1) formalization (FOR) and
CFP/STG=Interaction between CFP and (2) decentralization (DEC). The created
STG factors for control system having three
CFP/FOR=Interaction between CFP and dimensions include: (1) CBELBGOU,
FOR (2) CDIAINT, and (3) INT. Given the
CFP/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


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)


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 relationship
H3a2: 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 theory
H3b2: Decentralization moderates the
relationship between CSR and CFP Therefore, given the modification of the
based on good management theory dimensions of organization structure and
H4a1: 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 + β17
H4b1: 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 responsibility
H5b2: Reliance on combination of diag- CFP = Composite score of corporate
nostic and Interactive control sys- financial performance


BEV= Composite score of uncertainty Model 2:
business environment
STG= Composite score of companies’ CFP = α + β1 CSR + β2 BEV + β3 STG
strategic orientation + β4 FOR + β5DEC + β6
FOR= Total score of formalization di- BEL_BOU + β7 DIA_INT + β8
mension of organization structure INT + β9 CSR*BEV + β10
DEC=Total score of decentralization CSR*STG + β11 CFP*FOR + β12
dimension of organization structure CSR*DEC + β13 CFP*CBELBOU
CBELBOU=Total score of combination + β14 CSR*CDIAINT + β15
belief and boundary system CSR*INT + β16 SIZE + β17
CDIAINT =Total score of combination TYPE+ e
diagnostic and interactive control system
INT= Total score of interactive system Where
control system CFP= Composite score of corporate fi-
CFP*BEV= Composite score of corpo- nancial performance
rate financial performance* Composite CSR= Composite score of corporate so-
score of uncertainty business environ- cial responsibility
ment BEV= Composite score of business en-
CFP*STG= Composite score of corpo- vironment
rate financial performance* Composite STG= Composite score of companies’
score of companies’ strategic orientation strategic orientation
CFP*FOR= Composite score of corpo- FOR= Total score of formalization di-
rate financial performance* Total score mension of organization structure
of formalization dimension of organiza- DEC=Total score of decentralization
tion structure dimension of organization structure
CFP*DEC= Composite score of corpo- CBELBOU=Total score of combination
rate financial performance* Total score belief and boundary system
of decentralization dimension of organi- CDIAINT =Total score of combination
zation structure of diagnostic and interactive control sys-
CFP*CBELBOU= Composite score of tem
corporate financial performance* Total INT= Total score of interactive system
score of combination of belief and control system
boundary system CSR*BEV= Composite score of corpo-
CFP*CDIAINT= Composite score of rate social responsibility * Composite
corporate financial performance* Total score of uncertainty business environ-
score of combination of diagnostic and ment
interactive control system CSR*STG= Composite score of corpo-
CFP*INT= Composite score of corporate social responsibility * Composite
rate financial performance* Total score score of companies’ strategic orientation
of interactive control system CSR*FOR= Composite score of corpo-
SIZE= Company size measured by com- rate social responsibility *Total score of
pany’s total asset formalization dimension of organization
TYPE= Dummy variable indicating 1for structure
state owned-companies and 0 for private CSR*DEC= Composite score of corpo-
-owned companies rate social responsibility * Total score of
e= Error term decentralization dimension of organiza-


tion structure ness growth, he proposed the concept of
CSR*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, based
CSR*CDIAINT= Composite score of on the finding of factor analysis, the
corporate social responsibility * Total components of the levers of control have
score of combination diagnostic and in- undergone a modification as indicated
teractive control system by Simons (1994 and 2000) for the pos-
CSR*INT= Composite score of corpo- sibility of combination among the levers
rate 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 by
diagnostic and interactive control system Simons (2000) when explaining the use
(H5a2). of diagnostic and interactive control sys-
tem in practice. Abernethy and Brownell
Decentralization 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 a
organization. The objective of decen- study on the role of budget in strategic
tralization is to improve the effective- situation. When explaining the first two
ness in an organization (Govindarajan, components of levers of control, Simons
1986). According to Elkington’s (1994) (2000) implicitly said that belief and
the 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 always
cial, (2) social, and (3) environment. search for alternatives for better effec-
Thus, the degree of decentralization as tiveness (performance) by improving
depicted by Govindarajan (1986) can innovativeness. However, the continuing
influence the relationship between CFP innovativeness can make an organization
and CSR. In the recent trend, the in- apprehensive; thus, the breaker tool is
creasing number of departments in or- needed. The breaker tool is the function
ganization handling the CSR can also of the boundary system. Therefore,
support the relationship. This finding is based on logic, the belief and boundary
consistent with the proposition of Centre should be combined. In addition, the
for 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 set
of levers of control introduced by in strategic planning become invalid if
Simons (1994 and 2000). In response to the following factors emerge: (1) new
the 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)


entry/exit competitors. To meet that pur- satisfy its customers. Adversely, if the
pose, interactive control system is effec- market is stable, indicated by no change
tive 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. Competitive
ence the CFP-CSR link may be ex- intensity is referred to market condition
plained as follows. Some important con- in which a company has to compete
trol tools in diagnostic control system with. In the absence of competition, a
are 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 no
performance measurement including the choice or alternative to satisfy their
three dimensions: (1) financial, (2) so- needs. However, when the competition
cial, and (3) environment, along with the is high, a company has to devote its best
proper 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 of
ence on technology, should focus on business environment is technological
customers and their needs, which, in the turbulence defined as the rate of techno-
perspective of interactive control tool, logical change. For a company that is
can emerge new strategy to handle the sensitive to technological change, inno-
risk. This kind of action resulting from vation resulting from the technological
the interactive control system can im- change can be an alternative to increase
prove CFP and, in turn, affect the CSR. the company’s competitive advantage
without having to focus more on the
The CSR-CFP link under good manage- market orientation. In contrast, for a
ment 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 on
contextual variable of business environ- market orientation. Therefore, the
ment (H1b) can influence the CSR-CFP change in technology relates negatively
link. to organization performance.

According to Jaworski and Kohli (1993), The finding of this study is consistent
business environment facing companies with Lenz (1980), Gupta and Govindara-
include the following: (1) market turbu- jan (1984), Govindarajan and Gupta
lence, (2) competitive intensity, and (3) (1985), Govindarajan (1988), Tan and
technological turbulence. Market turbu- Lischert (1994) and Langsfield-Smit
lence is the rate of change in the compo- (1997). This study also confirms the
sition 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-


ronment, 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 consequence
ment 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.
Conclusion
From the analysis of all the models
above it is clear that contextual variables This study addresses research problems
(business environment, , business strat- using contextual variables to explain the
egy, organization structure, and control relationship of CSR and CFP. More ex-
system) can resolve the conflicting result plicitly, it describes how variables such
of the relationship between CFP and as business environment, business strat-
CSR (under slack resource theory) and egy, organizational structure, and control
CSR 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 have
never considered the contextual vari- This study also addresses methodologi-
ables as predictors of CSR. Therefore, cal problems, which become the sources
the body of knowledge of CSR contrib- of the conflicting result of CSR-CFP
uted by this study explained that (1) link. The problems include (1) mis-
CSR concept is an extended corporate matching measurement, (2) sampling
performance, then becoming sustainable error, and (3) measurement error
corporate performance including finan-
cial, social, and environmental perform- Under slack resource theory, only decen-
ance, (2) the contextual variables also tralization and diagnostic & interactive
determine 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 need
to do an in-depth study on the impact of Based on the finding of the study, there
contextual variables of corporate per- is a need for further study on the impact
formance 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 develop
This suggestion for future research is TBL-based CSR reporting in Indonesia.
vital for several reasons. First, stake- This suggestion for future research is
holder theory used in this study and important for the following reasons: (1)
other studies may undergo modifications stakeholder theory used in this study and
given the continuous study on impact of others may undergo some modification
contextual 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


implication, the CSR need to be rede- The fourth limitation is that no study has
fined in Indonesian and (3) there is the examined the constructs of this research
possibility of making mandatory CSR (integrating contextual variables affect-
reporting as a consequence of imple- ing corporate performance into CSR as
mentation of Law No. 40/2007 (Article an extended corporate performance),
74). either in Indonesia or outside Indone-
sian. Therefore, the researcher has to
It should be pointed out that this study proceed without the advantage of having
has 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. References

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