Sustainability Characteristics of Performance Management Systems in Malaysia

(1)

Sustainability Characteristics of Performance Management

Systems in Malaysia

By

Lennart Albert Johannes Zwols

University of Groningen

Faculty of Economics and Business

MSc Business Administration - Organizational & Management Control

July 2012

Koninginnelaan 24a

9717 BV Groningen, The Netherlands lennartzwols@hotmail.com

(2)

1

Abstract

The purpose of this thesis is to investigate the implementation of corporate sustainability within a case organization in Malaysia. This is done by investigating the sustainability characteristics of Performance Management Systems (PMS). By describing how various PMS components are designed for the implementation of sustainability in a real life case organization, this research contributes to the field-based research in the domain of how PMS can influence sustainable decision making. The PMS framework of Ferreira & Otley (2009) is used to yield insights into the sustainability characteristics of PMS. A descriptive single-case study is conducted within a Malaysian based diversified multinational. The analysis is based on documents, semi-structured interviews and informal talks during a stay of five months within the headquarters of the case organization. The findings indicate that the prerequisite for the design of PMS for implementing sustainability, top management commitment, is not established in the case organization. The functional PMS components vision and mission, key performance measures, structure, strategy, key performance measures and targets contain sustainability characteristics. Although there are challenges in these components, for example the communication of these components, the components are designed for the implementation of corporate sustainability. The PMS components evaluation of sustainability performance and reward systems for sustainability performance are not well designed for the implementation of sustainability yet. In addition, the underlying factors influencing these functional PMS components, especially the organizational culture, are also not designed for the implementation of sustainability.

Keywords: Performance Management Systems (PMS), implementation of (corporate) sustainability,

(3)

Sustainability Characteristics of Performance Management Systems in Malaysia

2

Preface

This thesis is the final product of the master Business Administration - Organizational & Management Control. I had the privilege to conduct this research in the fascinating country Malaysia. The experiences I gained, the people I met and the places I visited in the six months that I lived in Kuala Lumpur have broadened my views on the world.

I would like to thank the people that helped me finishing this thesis. In the first place, I would like to thank dr. J.S. Gusc for being my supervisor during the whole process. Her constructive feedback, patience and enthusiasm made me keep proceeding in good spirits. I would also like to thank co-assessor drs. M.M. Bergervoet. I thank my colleagues of Sime Darby Berhad and the Business Council for Sustainability & Responsibility Malaysia. They made my stay in Malaysia a time that I will never forget. I also own my gratitude to my brother Elmer Zwols for taking the time of reviewing the first drafts of this thesis.

But most of all I would like to thank my parents, Jan and Coby, for their unconditional support during my whole study. Because of their emotional and financial support I was able to undertake incredible activities during my study, making my time as a student truly unforgettable. Thank you both so much.

I hope you will enjoy reading this thesis.

Yours sincerely,

Lennart Zwols

(4)

3

Index

1. Introduction ... 4

2. Theoretical background ... 7

2.1 Performance Management Systems (PMS) ... 8

2.2 Ferreira & Otley’s PMS framework ... 9

2.2.1 The role of leadership ... 9

2.2.2 Functional PMS components designed for implementing sustainability ... 10

2.2.3 Underlying factors influencing functional PMS components... 11

2.3 Conceptual model for implementing sustainability from a PMS perspective... 12

3. Research design ... 14 3.1 Research methodology ... 14 3.2 Case organization ... 14 3.3 Data collection ... 17 3.3.1 Documentation ... 17 3.3.2 Interviews ... 17 3.3.3 Informal talks ... 18 4. Findings ... 19

4.1 Findings for the role of leadership ... 19

4.2 Findings for functional PMS components ... 20

4.3 Findings for underlying factors ... 27

5. Conclusions ... 30

5.1 Conclusions for the role of leadership ... 30

5.2 Conclusion for functional PMS components ... 30

5.3 Conclusions for underlying factors ... 32

6. Discussion and future research ... 33

6.1 Limitations ... 36

References ... 37

Appendix 1: Interview guide ... 41

(5)

4

1. Introduction

Over the last decade, there has been a substantial shift in the expectations society has from businesses. Stakeholders increasingly demand that business adopts a more holistic view of business success, considering the wider environment and social implications of their decisions (Rocha et al., 2007). Customers are demanding sustainable business practices and products, shareholders and investors are developing and using sustainability indices and stakeholder groups are organizing conferences and partnerships to raise awareness and encourage sustainable business practices (Preston, 2001). In response to this pressure, many organizations have begun to develop strategies for addressing their sustainable development. Corporate sustainable development is the ability to anticipate and meet the needs of both present and future generations of stakeholders (World Commission on Environment and Development, 1987). Companies attempt to implement sustainability by addressing the ‘triple bottom line’ of their overall economic, environmental, and social performance (Bansal, 2005). Successful implementation of sustainability means that companies are able to keep the business operations (financial performance) viable, whilst not negatively impacting social and environmental systems (Smith & Sharicz, 2011).

The concept of corporate sustainability remains difficult to implement in practice, however (Robinson, 2000). There are various reasons why there are sustainability implementation problems. For example, sustainable development means so many different things to so many different people and organizations (Robinson, 2004, p. 373) and a great number of executives are still unclear on precisely what sustainability means (Smith & Sharicz, 2011). Also, specific environmental and social management systems that are implemented by companies have rarely been integrated with the general management systems of a company. As a consequence, sustainability is often seen as an add-on, environmental and social management is not linked to the economic success of the firm and the economic contributions of these initiatives remain unclear (Figge et al., 2002).

(6)

5 engagement (Parker, 2005; Durden, 2008). Different authors have come up with theoretical models for investigating sustainability characteristics of PMS (Epstein et al., 2010; Durden, 2008). These models can be used by managers to integrate the sustainability strategy into daily operations. That strategy can be linked to specific actions that have an influence economic, environmental and social performance. These models also stress the importance of both formal systems, such as reporting, measurement and reward systems, and informal systems, such as leadership, culture and people, in implementing sustainability. Finally, the models assist in measuring, monitoring and controlling economic, environment and social actions (Epstein et al., 2010; Durden, 2008). These theoretical models will be analyzed in this thesis to discover which PMS characteristics are important for the implementation of sustainability. This analysis leads to supplement the comprehensive PMS framework of Ferreira & Otley (2009), which is used to investigate the sustainability characteristics of PMS. It is expected that when PMS contain sustainability characteristics this can contribute to the implementation of sustainability.

The implementation framework will be applied in a case organization in Malaysia, reflecting the need for more field-based research. This is done to achieve the objective of this thesis which is to investigate the implementation of corporate sustainability within a case organization in Malaysia. The awareness of sustainability issues is low in Malaysia (Ramasamy & Woan Ting, 2004). Philanthropic (money) giving is considered a key characteristic of companies behaving responsible (Zulkifi & Amran, 2006). In general, companies concerned with the issue tend to start reporting in annual reports about their sustainability performance. Malaysia scores low in corporate social responsibility reporting and corporate environmental reporting is in its infancy (Thompson & Zakaria, 2004), reflecting possibly low involvement in sustainability issues. Because of the difficulty of implementing sustainability and the relative inexperience of Malaysian companies to implement this issue, the sustainability characteristics of PMS within a case organization in Malaysia that can contribute to the implementation of sustainability will be investigated. Sustainability characteristics within PMS already at work can be identified, and possibly also elements within PMS requiring improvements to implement sustainability.

The central research question of this thesis is:

‘What are sustainability characteristics of Performance Management Systems (PMS) that can contribute to the implementation of corporate sustainability in the case organization in Malaysia?’

In order to answer this research question and obtain a good understanding of the subject matter, a number of sub-questions will be examined:

(7)

6 - 2: What are underlying factors influencing the functional components of PMS that can contribute

to the implementation of sustainability?

- 3: How are the functional components of PMS in the case organization designed for implementing sustainability?

- 4: How are the underlying factors influencing the functional components of PMS designed for implementing sustainability in the case organization?

The outline of this thesis is as follows. First, the theoretical background will be discussed. This is done by discussing the topic corporate sustainability. PMS are then discussed as well as the Ferreira & Otley (2009) framework for investigating PMS functions within organizations. This framework is supplemented with findings from studies that investigated sustainability characteristics of PMS to come up with a conceptual model that can be used for investigating the implementation of sustainability in the case organization. Second, the research methodology, including a discussion about the case organization, will be described. Third, the findings from a case study within a Malaysian company are presented. The thesis is finalized with conclusions and a discussion about the implementation of sustainability within the case organization from a PMS perspective, limitations and suggestions for future research.

(8)

7

2. Theoretical background

The interest in sustainable development largely started with the Brundtland report from the World Commission on Environment and Development (1987). This report defined corporate sustainable development as the ability to anticipate and meet the needs of both present and future generations of stakeholders (WCED, 1987). The concept emerged as an attempt to bridge the gap between environmental concerns about the increasingly evident ecological consequences of human activities and socio-political concerns about human development issues (Robinson, 2004, p. 370). It is now generally believed that corporate sustainable development consist out of three pillars, namely, economic, environmental and social (also called the ‘triple bottom line’) (Bansal, 2005). Economic sustainable development, or economic prosperity, is fundamental for corporate financial success and involves the creation and distribution of goods and services that will help to raise standards of living around the world. Environmental sustainable development, or environmental integrity, ensures that corporate activities do not erode the land, air, and water resources of the planet. It considers for example the impact of business on the quality and quantity of natural resources, reductions in energy and resources, waste management, pollution and emissions management. Social sustainable development, or social equity, ensures that all members of society have equal access to resources and opportunities. Issues of this humanitarian context of business are for example poverty, income inequality, diseases, clean water and education (Haugh & Talwar, 2010; Bansal, 2005). The implementation of sustainability means that companies address this ‘triple bottom line’. By doing this, companies give attention to their economic, environmental and social performance. The goal of this implementation is to maintain financial performance positive, whilst not negatively impacting social and environmental systems (Smith & Sharicz, 2011).

(9)

8 externally communicate sustainability objectives. They should also monitor sustainability performance through measurement and motivate employees to accomplish sustainability objectives by linking reward systems to sustainability objective achievement (Norris & O’Dwyer, 2004; Lamberton, 2005). These are tasks assigned to Performance Management Systems (PMS) (Ferreira & Otley, 2009) and the design of these systems can therefore contribute to the implementation of sustainability.

2.1 Performance Management Systems (PMS)

PMS can thus play an essential role in implementing sustainability. This implementation means incorporating economic, social and environmental objectives into company mission, strategies and actions, spreading the sustainability principles throughout the organization (Rahbek Pedersen & Neergaard, 2008). PMS designed for sustainability contribute to the implementation of sustainability by giving managers an understanding of sustainability performance and its impact on stakeholder’s expectations. In general, PMS are (Ferreira & Otley, 2009, p. 264):

“PMS are the evolving formal and informal mechanisms, processes, systems, and networks used by organizations for:

- conveying the key objectives and goals elicited by management;

- assisting the strategic process and ongoing management through analysis, planning, measurement, control, rewarding, and broadly managing performance;

- supporting and facilitating organizational learning and change”

(10)

9

2.2 Ferreira & Otley’s PMS framework

The PMS framework of Ferreira & Otley (2009) is chosen because is it one of the few frameworks that recognize that PMS are concerned with defining, controlling and managing both the achievement of results as well as the means to achieve these results (Broadbent & Laughlin, 2009). It is an useful research tool for investigating PMS, because it can describe the structure and operation of PMS, as well as the underlying reasons for using certain PMS. Further, Ferreira & Otley (2009) build their conceptual model of PMS empirically by drawing from an analysis of management control systems in a range of organizations. The framework consists out of twelve questions, eight of which relating to functional concerns about PMS design and a further four attempting to capture the underlying factors influencing PMS (see Ferreira & Otley, 2009, p. 268). The framework forms the basis for the conceptual model at the end of this chapter. Two theoretical models for investigating sustainability characteristics of PMS (Epstein et al., 2010; Durden, 2008) are analyzed to find out which PMS characteristics are important for the implementation of sustainability. Before these PMS characteristics are described, the role of leadership is discussed because leaders play an important role in designing the PMS for the implementation of sustainability (Epstein, 2008).

2.2.1 The role of leadership

(11)

10 way to engage in any situation, while taking informed and calculated risks (Ferdig, 2007). In implementing sustainability, leaders must not provide all the answers, but they must address the importance of employee learning about sustainability challenges and opportunities.

The role of leadership is discussed here separately because managers determine how the PMS components are designed for implementing sustainability. They also have an effect on the underlying factors influencing the functional PMS components. Leadership is not included in the conceptual model depicted at the end of this chapter. This is because effective sustainability leadership is a prerequisite for the design of sustainability characteristics of PMS. If this sustainability leadership is not established, PMS will not be well-designed for the implementation of sustainability (Epstein, 2008). Research shows that effective sustainability leaders are similar to traditional effective leaders. However, they must take in consideration a wider set of stakeholders and a different mindset as the purpose of the organization (Smith & Sharicz, 2011). This different mindset means that they should also pay attention to the environmental and social performance, next to the traditional economic performance. In discussing the functional PMS components and the underlying factors influencing the functional PMS components in the next sections, the (sustainability) leaders are responsible for incorporating the sustainability characteristics.

2.2.2 Functional PMS components designed for implementing sustainability

(12)

11 all layers of the organization should provide opportunities for employees to learn how they can make use of sustainability opportunities and can act according to the sustainability strategy. After establishing the sustainability structure and strategy, leaders must determine the sustainability key performance measures. The key sustainability performance measures are the economic, social and environmental measures used at different levels in organizations to evaluate success in achieving the sustainability strategy. Once it is clear within the organization which key performance measures are important, sustainability targets for each of the categories of the key performance measures needs to be set. After setting these sustainability targets, the performance in achieving these targets must be measured and sustainability performance evaluation must take place. Finally, employees must be rewarded in either financial or non-financial form for achieving certain sustainability targets. A strong motivator for many employees is tying base pay, bonuses and opportunities for advancement to performance against sustainability objectives. Another powerful motivator for employees is the fact that their leaders care about their sustainability initiatives. These emotional rewards result in strong intrinsic motivation, so leaders must recognize this important trait (Blackburn, 2007).

2.2.3 Underlying factors influencing functional PMS components

(13)

12 investigated in this thesis, but rather the extent and type of change that has taken place in PMS design. How the change in the functional components of PMS has been made will be investigated. Finally, the linkage between the functional components, as well as the underlying factors influencing the functional components, must be strong and coherent. This means for example that sustainability performance measures must be linked to the sustainability strategy, and the sustainability strategy must be linked to overall objectives and key success factors. Also, when an organization is developing and executing sustainability initiatives, this must be linked to sustainability targets; it cannot be an ad hoc process.

The Ferreira & Otley (2009) framework seems to be complete for the investigation of PMS in general. However, it has a shortcoming when it is used for investigating PMS that can assist in the implementation of sustainability. Ferreira & Otley (2009) themselves talk about the weak point of not explicitly discussing organizational culture, although it may be highly influential on PMS. From a sustainability implementation perspective, the organizational culture may be even more important to discuss, because it is an important determinant for the implementation of sustainability (Epstein et al., 2010). Linnenluecke & Griffiths (2010, p. 364) suggest in their theoretical paper that a sustainability culture needs to be low on internal process values and high on open systems values, but empirical evidence for this proposition is missing. Internal process values promote stability and control through formal means such as information management, precise communication and data-based decision making. Open systems values promote growth and resource acquisition by adaptability, change, visionary communication and flexible decision making. In addition, Epstein et al. (2010) conclude in their paper on ‘Western’ best-practice companies that a sustainability culture must emphasize norms that are essential for innovation, such as openness, autonomy, initiative and sometimes risk taking. These values of an organizational culture are thus expected to contribute to the implementation of sustainability.

2.3 Conceptual model for implementing sustainability from a PMS perspective

(14)

(15)

14

3. Research design

The goal of this research is to investigate the implementation of corporate sustainability within the case organization in Malaysia by investigating the sustainability characteristics of PMS. In doing this, it responds to the calls for a greater level of field-based research in the area of the role of PMS in the implementation of sustainability (Parker, 2005). This section will discuss the research methodology, the case organization and the data collection methods.

3.1 Research methodology

The field of implementing corporate sustainability and the role of PMS herein is developing (Durden, 2008). However, there is still limited empirical evidence of developed theoretical models. For this reason, it is difficult for managers to understand and interpret the characteristics of PMS that influence the implementation of sustainability. In order for these theoretical models to provide useful explanations for managers, organizations and society (Malmi & Granlund, 2009), they will be used to supplement the Ferreira & Otley (2009) PMS framework. This framework will be applied in a single-case, using combinations of qualitative research methods (Cooper & Schindler, 2006). Case studies can be used to provide description, test theory or generate theory (Eisenhardt, 1989; Yin, 2009). This thesis will be descriptive in nature. This is done by investigating the implementation of corporate sustainability within a case organization in Malaysia, emphasizing the rich, real-world context in which these phenomena occur (Eisenhardt & Graebner, 2007). A single-case study method is chosen, because the case organization is unique in the sense that it is one of the few large Malaysian multinationals where sustainability is implemented company wide. Because of this, investigating it can gain insides that other organizations in Malaysia are not able to provide (Siggelkow, 2007). The case organization is described in detail in the next section. The implementation of sustainability will be analyzed by describing the sustainability characteristics of PMS within the case organization, since PMS play an essential role in the implementation of sustainability (Rahbek Pedersen & Neergaard, 2008). It uses the Ferreira & Otley (2009) PMS framework, supplemented with factors that are important from a sustainability implementation perspective.

3.2 Case organization

(16)

15 stakeholders. In order to facilitate this, Sime Darby is now in the process of the corporate wide implementation of sustainability. For this reason the company is selected because it is particularly suitable for investigating the characteristics of PMS that can contribute to the implementation of corporate sustainability in Malaysia.

The organizational sustainability governance structure is depicted in figure 2 on the next page and is divided in a Group and Divisional level. The role of the Group is to provide strategic directions in implementing sustainability. On Group level, the department Group Sustainability and Quality Management (Group SQM) is most involved in the implementation of sustainability. General sustainability policies, strategies and goals for the whole Group are set at this level. Group SQM also participates in the Group Sustainability Committee. This committee is formed to improve the communication and information sharing regarding sustainability within the company. The committee consists of the heads of the departments Group SQM, strategy, communications and risk. The Executive Vice Presidents (EVPs) from the Divisions also participate in the committee. This committee reports directly to the Chief Executive Officer (CEO). The CEO reports to the board of directors on sustainability issues. The departments on Divisional level most involved with the implementation of sustainability are called Sustainability and Quality Management (SQM). Their role is to operationally implement sustainability. They do this by setting performance measures and targets that are relevant for the specific Division. They have a direct influence on operations and report to the EVP of a specific Division. The Divisional EVPs report to the Group Sustainability Committee in general and more specific to Group SQM about their sustainability performance.

(17)

Group level

Divisional level

Figure 2: The sustainability governance structure

Board of Directors

CEO

Communications Risk

Strategy

- Interviewee 1: Chief Sustainability Officer

- Interviewee 2: Vice president 1 - Interviewee 3: Vice president 2

Group Sustainability and Quality Management

Executive Vice President Division 1

Executive Vice President Division 6 Executive Vice Presidents Divisions

Group Sustainability Committee

- Interviewee 4: Vice-president 1 - Interviewee 5

Executive

Divisional Sustainability and Quality Management Operations - Interviewee 6: Vice-president 1 - Interviewee 7: Vice-president 2

Divisional Sustainability and Quality Management

Operations

- Inteviewee 8: Vice-president 1

Operations

Operations Operations Operations

(18)

17

3.3 Data collection

Case studies typically combine data collection methods such as archives, interviews, questionnaires, and observations (Eisenhardt, 1989). Triangulation is the use of multiple data sources (Cooper & Schindler, 2006) and by using triangulation the weakness of using a single method can be overcome because the information from different data sources can be checked, compared and complemented with each other. By doing this, the construct validity and reliability of the study will increase (Yin, 2009). The data for this thesis is collected through triangulation of documentation, interviews and informal talks. The data is collected during a stay of five months within the case organization in Kuala Lumpur, Malaysia. During this period, the author was situated within the department Group Sustainability and Quality Management (Group SQM) within the headquarters of Sime Darby.

The data is collected to obtain information on the components of the conceptual model depicted in figure 1. For each data source it will be mentioned which information about the various components of the conceptual model can be obtained.

3.3.1 Documentation

Documents were analyzed to investigate the written information available about the sustainability characteristics of PMS. Different documents were analyzed including the Group Sustainability Strategy Blueprint, the Group Sustainability Maturity Indices, drafts of the first Sustainability Report, the Sime Darby Annual Report 2010 and 2011, Divisional Sustainability Blueprints and articles in sustainability related magazines. Information about the sustainability vision and mission, sustainability key success factors, sustainability structure, sustainability strategies and plans, sustainability performance measures, sustainability targets and PMS change were obtained from these documents.

3.3.2 Interviews

(19)

18 with different managers and executives of the SQM departments. To ensure anonymity of the interviewees (on request), only their function and their position in the organization are depicted in figure 2. All the components of the conceptual model were discussed during the interviews. This includes information about sustainability evaluation, sustainability reward systems, organizational culture, leadership, PMS use, information flows and learning and linkage strength and coherence.

3.3.3 Informal talks

During the five months period in Kuala Lumpur, the author was based in the department Group SQM within the headquarters of Sime Darby. Informal talks on the subject were held with various executives and managers (different from the interviewees) of Group SQM. Also with executives and managers from other departments on Group level informal talks were held on numerous occasions. The talks were about the organizational culture, (sustainability) leadership and evaluating and rewarding on sustainability performance.

(20)

19

4. Findings

This chapter presents the findings of the data collection process. The findings are presented following the conceptual model as depicted in figure 1. Quotes of the interviewees (adjusted to improve the grammar) and information from documents are used in the separate sections to clarify the findings1.

4.1 Findings for the role of leadership

Top management commitment is essential for the implementation of sustainability (Bansal, 2003). As depicted in figure 2, the CEO and the board of directors are the senior leaders in the sustainability governance structure for the whole organization. Within the case organization, there is an understanding that top management commitment is essential for implementing sustainability. However, some members of the board of directors are more committed to sustainability than others. Overall on Group level, the top managers can commit themselves more to sustainability. Communication of the Group top management’s commitment towards sustainability is hardly happening. This has an effect on the employees’ commitment towards sustainability. They perceive the importance that is given by the top management to the implementation of sustainability to be low. As a consequence, the employees’ commitment towards sustainability is also low. Two interviewees stated:

“The pressure [for top management] of really committing to sustainability is definitely not established here and also not more general in Malaysian companies. Most of [our] senior managers are not in their mindset dealing with sustainability” (Chief Sustainability Officer).

“In my opinion, sustainability issues are not really being emphasized by top management within the company” (Vice-President Divisional SQM).

Although the board of directors is not completely committed to sustainability yet, the process of obtaining commitment of all members of the board of directors has started. A vice-president Group SQM explains:

“I think top management commitment is everything. If you really want to see a cultural shift and a change of direction, nothing does that more than tone from the top. I would say it is starting now.”

On Divisional level, the senior managers are the Executive Vice Presidents (EVPs). In contrast with the interviewees on Group level, the interviewees on Divisional level all mentioned the large commitment that the EVPs have towards implementing sustainability. The EVPs communicate the importance of implementing sustainability extensively throughout the Divisions. By doing this, the employees in the Divisions get more committed to sustainability as well. Some quotes to explain this:

1

(21)

20

“Our Divisional Head [EVP] is very committed to sustainability. This is extremely important for the implementation of sustainability. I think for our Division this is well managed” (Vice-President Divisional SQM).

“I think the higher management within the Division is more involved with sustainability than on Group level” (Vice-President Divisional SQM).

The role of leadership goes further than only committing to and communicating the importance of sustainability. Sustainability must be managed in an effective manner, were leaders acknowledge the importance of creating a learning environment (Mitleton-Kelly, 2011). This effective sustainability leadership is found on Divisional level, but not on Group level. The Chief Sustainability Officer explained:

“From a sustainability perspective, once you take a long time to do something, you have either the issue that it will never happen because there is no shot in the system or the external context has changed so much that whatever it is that you were trying to change to become is no longer relevant. My way of managing is unique in this company, requiring the kind of values such as openness to change and openness to other points of view. If you don’t have that continuing you are not going to see much movement”.

4.2 Findings for functional PMS components

(22)

21 suggests that the sustainability vision and mission are not ingrained in the organization yet. The Chief Sustainability Officer stated:

“On Divisional level there were different visions and missions, suggesting that there is not a good understanding in terms of how you trickle down from the top. Different visions can lead to confusion. That certainly happened before and is happening now. What is tried to be done at Group level is to streamline these visions to be one vision, which then can be interpreted within sets of guiding principles that are captured in our sustainability mission. All the Divisions must be able to interpreter those overall guidelines in the context of their function or business.”

- Sustainability key success factors: The sustainability vision and mission are translated into sustainability key success factors. The purpose of these Group sustainability key success factors is to spell out the vision and mission into sustainability principles in order for employees to know what sustainability means and how to behave in order to implement sustainability. The general companywide success factors must flow down to the Divisions. There can be different key sustainability success factors within the Divisions because of the different industries in which the Divisions operate. These Divisional success factors must fit into the key factors that are set on Group level. The Group key success factors address the sustainability mission which are the economic, environment and social indicators of the ‘triple bottom line’ (Bansal, 2005) and are depicted in table 1.

1. Delivering economic growth

Maximize opportunities for financial gain Continuously improve operational efficiency

Generate and sustain profits without sacrificing long-term economic value creation

2. Respect for the environment

Proactively address environmental challenges Promote environmental responsibility

Encourage the development and use of environmentally-friendly designs and technologies

3. Respect for society

Respect fundamental human rights

Remediate instances of adverse human rights impacts within our direct operations Endeavour to advance respect for human rights within the Group’s sphere of influence

4. Accountability and transparency to stakeholders

Accountable and transparent to stakeholders on the Group’s sustainability and quality strategies, objectives and performance

(23)

22 - Sustainability structure: The sustainability governance structure depicted in figure 2 suggests a hierarchical order concerning the responsibilities in implementing sustainability. However, there is a mixture between a top-down and a bottom-up approach within the case organization for the implementation of sustainability. The top-down approach means that Group SQM sets policies regarding the implementation of sustainability where the Divisions must adhere to. Some large companywide sustainability projects, such as sustainability risk and carbon impact footprint, are initiated on Group level. Furthermore, the SQM departments in the Divisions need to report to the Group SQM on their sustainability performance. Also, the Divisional EVPs report to the Group Sustainability Committee on their sustainability performance. However, in terms of sustainability initiatives that are relevant in different Divisions, there is also a bottom-up approach regarding decision making responsibility. This is because the Group realizes that the Divisions understand their respective industries better than Group and the Divisions know what is relevant in their industries regarding sustainability. Also, the Divisions operate in very different industries, so it is hard for Group to be up-to-date with all the developments in the different industries. A Vice-President SQM on Divisional level explained:

“Group almost never has a problem with any initiative from our Division, because we know what is relevant for our business and we know what the concerns are from the people in operations.”

- Sustainability strategy: A Group sustainability strategy is developed by Group SQM to achieve the key sustainability success factors. The Group sustainability strategy aims to strive for recognition of the Group as a global leader in corporate sustainability. In order to do this, five strategic goals are formulated. These are:

1. Actively leverage on the sustainability agenda to create value for the Group

2. Effectively manage sustainability risks

3. Sustainability leadership in key sectors of operations

4. Sustainability reporting that meets the information needs of external stakeholders and supports the internal business decision making process

5. Install a performance culture Table 2: The strategic sustainability goals

(24)

23 sustainability strategy. In the strategy roadmap, it is determined per strategic goal which actions need to be taken to achieve that strategic goal. The strategy roadmap is used to better communicate the different Divisional strategies across the Group, and is also used to determine how the Divisional sustainability strategies align with the Group sustainability strategy. But the Group sustainability strategy is not communicated extensively at the moment, and Group SQM is working hard to improve this. A vice-president of Group SQM explained:

“Communication lines are something that we are working on right now. What we need to do is to actually report and share more across the Group; I think we still work in silos at the moment. In order to break this barrier, the Group Sustainability Committee was formed. This committee is a formal platform with representatives from all the Divisions plus key Group Departments for discussion and information sharing, removing the roadblock of bad communication between the Divisions.”

A lot emphasis is being put in by Group SQM to change the Divisional sustainability strategies from being reactive, to being proactive. Sustainability initiatives are found to be still very ad hoc at the moment, lacking a comprehensive picture of how everything fits together. In other words, the sustainability strategies are very much based on the short term. However, to adhere to the sustainability vision, mission and key success factors, the sustainability strategies must change from being short term and reactive to being long term and proactive. This realization exists within the organization as a vice-president of Group SQM described:

“Divisions have got their own strategies developed piecemeal. The driver for Group SQM is to get Divisions away from having reactive or one off projects and programs. We want things to be building on successes of the past, and the only way to achieve that is to have pathways, strategies and learning experience based on previous projects.”

(25)

24 mentioned in this section. The key sustainability performance measures are based on global sustainability attributes (GRI). The Chief Sustainability Officer described this process:

“Divisions should be able to link the measures to their sustainability strategy, because the attributes of the matrix tie back directly to the GRI index. If they cannot make the link, the initiative they are doing is not the right initiative, because you can’t measure it and you can’t determine the strategic value. It is one of the points of triangulation that we can use to determine if it is the right thing to do.”

However, some interviewees mentioned the danger of focusing too much on the GRI index. They mentioned that the Divisions should develop performance measures that are really addressing the Divisional and Group sustainability strategies. A vice-president of Group SQM elaborates:

“There are certain similarities between the performance measures in GRI and how we measure [sustainability] performance, but we are not going to look at the GRI as a benchmarking tool which we need to comply with. That is one of the largest misconceptions of the GRI; ticking all the boxes doesn’t necessary mean you are sustainable at all.The measures we use may be loosely linked to the GRI, but much more effort can be achieved if you focus on the matters that really make sense for you.”

Therefore, the key sustainability performance measures that are used are based on GRI but only if a GRI measure is relevant for a specific Division. The interviewees mentioned that not all the performance measures of the GRI are relevant for the different Divisions, so not all the GRI measures will be addressed.

(26)

25

“Once you agree that an initiative has got some strategic value you would set interim targets. It links back to the sustainability maturity index and the categories business as usual, competitive advantage and sector leadership. You would want to set targets that are sufficient for you to go to the next category. The difficulty of the targets relates again to your competitors, if you are in business as usual, and some of your competitors are in sector leadership, the targets will be very challenging.”

Key performance

measure Business as usual

Competitive

advantage Sector leadership

Economic Stakeholder engagement Compliance based

engagement Annual sustainability reports Stakeholder engagement plan

Environmental Biodiversity Compliance-based

conservation CSR philanthropy

Strategic eco-system management

Social Talent - Develop & retain Technical training Talent development programmes

Employee engagement programmes Table 3: An example of the sustainability maturity index

Although this is how the mapping process is designed and should be used, there is a difference between the Divisions in how they apply this sustainability maturity index in their sustainability target setting. Some Divisions use this maturity index extensively in target setting and have year-to-year numerical targets set in order to achieve the long term goals. Other Divisions are not applying this mapping process and only have short term targets. These targets are only focused on the economic performance, ignoring the environmental and social performance. This proves that there is a difference between Divisions in how active they use the sustainability maturity indices. Two quotes to illustrate this:

“We have fourteen targets set to achieve our strategic goals in 2020. We monitor these targets by setting interim targets each year until 2020. We know where we are, for some of the targets we are already quite far ahead, and initiatives for some of the targets have not yet started. There is a justifiable rational behind each of the targets” (Vice-President Divisional SQM).

“There are some sustainability targets set, but this is more an ad hoc process. Our main concern is economic performance. When business is bad, there is no money to spend on sustainability. When business is good, there is money to spend on sustainability” (Vice-President Divisional SQM).

(27)

26 everybody in the organization adheres to this design. However, in terms of evaluating for sustainability performance, the design lacks sustainability characteristics. At the moment, only the Divisional EVPs and the CEO are evaluated on sustainability performance. On what items they are evaluated depends on which objectives are put into specific, personal key performance indicators (KPIs). These KPIs are determined based on the sustainability key success factors and sustainability strategy of the specific Division. Other employees are not evaluated on sustainability performance yet. There is a plan to implement it for all employees in the Divisions next year. The fact that there is almost no evaluation of sustainability performance shows that the organization is still in the process of designing all the functional components of PMS so that they contribute to the implementation of sustainability. When employees are not evaluated on their sustainability performance, sustainability is not completely implemented within the organization (Epstein, 2008). A vice president of Group SQM illustrated:

“At the moment evaluation of sustainability performance flows down to a certain level, it falls under Divisional Heads [EVPs] and the CEO. The KPIs of the Divisional Heads [EVP] are now really about strategy, because it is hard to have a KPI on performance if you don’t have a complete plan in place. Their KPI is focused on making sure that there is a strategy and strategy alignment between Divisions. What happens if the strategy is agreed is that there will be specific performance KPIs in achieving the different targets, but that will happen in the future.”

- Sustainability rewards: Related to the above mentioned KPIs, financial rewards are given if the KPIs are met. These are monetary bonuses for the senior managers who have KPIs on sustainability on which they are evaluated. No bonuses are given if KPIs are not met. Non-financial awards, leading to intrinsic motivation (Blackburn, 2007) are currently not used within the organization. The percentage that is attached to sustainability performance is small, only 5% of the total financial awards (compared to 40% attached to profit). Other employees in the organization are not rewarded on sustainability performance. There is an understanding in the organization that for the complete implementation of sustainability, all employees should be rewarded on sustainability performance. However, this is currently not happening, reflecting the fact that the reward systems hardly have sustainability characteristics yet. The Chief Sustainability Officer explained:

(28)

27

4.3 Findings for underlying factors

-Information flows and learning: The information flows are important to support the operation of PMS and can consist out of feedback and feed-forward information. Feedback information is used to undertake corrective or adaptive actions to improve sustainability performance; feed-forward information is used to enable the organization to learn from its experience, generate new ideas and recreate strategies and plans. As already mentioned in the theoretical background, it is important that employees can learn about sustainability and how they contribute to improve sustainability performance. However, in the case organization, the information flows are only used in a feedback manner. This information is not used at the moment to learn about sustainability initiatives or trends. Some quotes to illustrate this:

“We are still in the process of ironing out the information flows. A wider process of learning from information is still being developed. In the end we want information to measure the progress against targets, information that helps you to improve your performance, information that helps you to understand what happens in different parts of the organization, and information to let employees think about what initiative to start or which not” (Vice-president Group SQM).

“For now, we use the information to determine how we are doing at the present time as opposed to what we want to achieve” (Vice-President Divisional SQM).

“Some information is used in a feed-forward manner, but probably not in sustainability. Being able to predetermine and then compensate for sustainability risks etcetera, is not happing” (Chief Sustainability Officer).

- PMS use: Related to the information flows is how PMS are used by the leaders in the organization. As already explained above, the PMS are only used to monitor goals and to measure progress towards targets. In the typology of Simons (1995), the PMS are used diagnostically. There is no use of PMS interactively where leaders use PMS to learn about key (future) strategic issues. This relates to the fact that PMS are only used by internal stakeholders. External stakeholders are currently not involved in, for example, determining the sustainability strategy or the sustainability targets. A vice-president of Group SQM explained:

“How stakeholders are engaged is mainly internal so far, Group SQM for example has been working with Group Strategy how they [KPIs] should be developed. We haven’t currently taken external views in terms of the things we are focusing on and the things we are going to be reporting on, but it is something we plan to do in the future.”

(29)

28 sustainability characteristics, which was not the case three years ago. The fact that three years ago there was not a sustainability function installed yet, and there are now SQM departments on Group and Divisional level, with Divisions reporting to Group about their sustainability performance marks a proactive PMS change. However, for the complete implementation, still other changes need to be made. This gradual change of PMS towards implementing sustainability was explained by an interviewee:

“To be honest, yes I think the PMS have changed a lot and I would be interested to see if there are any other organizations in Malaysia that has sustainability related KPIs on CEO level.I still think more changes need to be made, but it is a gradual process. But in terms of PMS we definitely show progression” (Vice-president Group SQM).

- Linkage strength and coherence: As already mentioned before, Group is now in the process of aligning all the sustainability visions, mission, structure, strategies, key performance measures and targets. So in terms of linkage strength and coherence, there is now a general understanding that everything should fit together. A Vice-President Divisional SQM explains this:

“The vision, mission and strategies are all cascaded down to tell us what we have to achieve in the next 5 years, so Division wide we know what are our KPIs, so it’s a natural filtering down of components. There is no such thing as initiatives standing on their own.”

However, there are inconsistencies between targets, sustainability evaluation and sustainability rewards. More general, there are inconsistencies between the functional components of PMS designed for sustainability and the underlying factors affecting the functional components. The next chapter with conclusions will elaborate on this.

(30)

29

“Yes, there should be a culture that has open systems values but there is not such a culture here. You can try to do it without it, but then it is way more challenging and obviously progress is much slower” (Chief Sustainability Officer).

“No, I think it is a little bit too early to talk about culture. Culture takes a long time to put into place. In terms of culture, it is still very much an emerging culture as far as sustainability is concerned, there are still little pockets of people talking about it” (Vice-president Group SQM).

“In our Division the sustainability awareness is still very low. We know this because every time we do our engagement, a lot of people working on the ground are still asking us what sustainability means” (Executive Divisional SQM).

However, there is a sense of urgency that the organizational culture must change to implement sustainability. This sense of urgency mostly lives within the SQM departments, but this is not companywide. There is also an understanding that leadership, especially from top managers, plays a crucial role to change the culture. Some illustrations:

“We want to instill a sustainability culture.Our sustainability mission is real to us, that means if you talk to the top management, if you talk to the middle management, if you talk to the executive, if you talk to the officer, if you talk to the tea lady, they all must talk in the same language” (Vice-President Divisional SQM).

(31)

30

5. Conclusions

The central research question of this thesis was:

‘What are sustainability characteristics of Performance Management Systems (PMS) that can contribute to the implementation of corporate sustainability in the case organization in Malaysia?’

In order to answer this central research question, it was investigated if the functional PMS component and the underlying factors influencing these functional PMS components contained sustainability characteristics. The role of leadership in implementing sustainability was also investigated.

5.1 Conclusions for the role of leadership

The top managers on Group level do not completely contribute to the implementation of sustainability. Not all the Group top managers support the implementation of sustainability and the pressure for Group top managers of really committing to sustainability is not established. As a consequence, the tone of the top is not emphasizing the importance of sustainability. Because of this lack of commitment, the case organization is not able to communicate the full Group top management’s commitment towards sustainability. This has a direct influence on the commitment that the employees in the organization have towards sustainability, which is in general also low.

On Divisional level, the commitment of the top managers (EVPs) towards sustainability is found to be large. This is surprising because the EVPs are hierarchical lower in the organization (see figure 2). The EVPs communicate their commitment towards sustainability, influencing the commitment of employees within the Divisions. This Divisional top managers’ commitment towards sustainability is larger than the top managers on Group level. Effective sustainability leadership is established on Divisional level, but not on Group level.

5.2 Conclusion for functional PMS components

(32)

31 moment, and they are not very actively communicated. There is a mixture between a top-down and a bottom-up approach within the case organization for the implementation of sustainability.

The Group sustainability strategy is described in this thesis and a lot of effort is being put to make clear how all the Divisions and other Group departments are involved in achieving the overall Group sustainability strategy. The Group Sustainability Committee (see figure 2) is formed for that purpose. A lot of the Divisional sustainability strategies were found to be reactive and based on the short term. Group SQM in collaboration with Divisional SQMs are now in the progress of changing this to be proactive strategies, aimed at the long term.

On an operational/Divisional level, the sustainability key performance measures and targets are determined. Key performance measures are determined by investigating which sustainability measures are important for the industry of the specific Division. This is a structured process and the measures link back to the sustainability strategies. The targets are set by determining how the Division relates to its competitors regarding sustainability measures (see table 3 for an example). How challenging a target is depends on how advanced the competitors are in a certain performance category. Interim targets are then set for each year to determine what needs to be done to achieve set target. There is a difference between Divisions in how advanced they are in their sustainability target setting, proving that the status of the process of setting sustainability targets is not the same in the different Divisions of the organization.

The evaluation of sustainability performance and reward systems for sustainability performance are not well designed for the implementation of sustainability. Only senior top managers (CEO and EVPs) are evaluated if there is a sustainability strategy and if there is alignment between these strategies. Other employees are not evaluated on sustainability issues. Only a small percentage of financial awards are attached to these sustainability evaluations for the senior top managers. Other employees lower in the organization are not rewarded for sustainability performance. Non-financial awards for sustainability performance do not exist in the case organization.

(33)

32

5.3 Conclusions for underlying factors

Currently, the information flows used to make decisions about the functional PMS components are only used in a feedback manner. The information is used to determine what the current sustainability performance is and to set sustainability targets. Information is not used in a feed forward manner, meaning that information is not used to learn about what future directions of the sustainability strategy should be. Related with this, the PMS are only used to monitor goals and to measure progress towards targets. The PMS are used diagnostically; no interactive use of PMS is being made. In implementing sustainability, the PMS have changed gradually to contain sustainability characteristics, but for the complete implementation of sustainability more changes need to be made.

The organizational culture does not support or facilitate the implementation of sustainability. This was found to be a very limiting factor to the importance that is attached to the implementation of sustainability. The organizational has many internal process values, where stability and control are more valued than growth and adaptability. Also, the concept/definition of sustainability is not integrated in the organizational culture yet. Employees are still unfamiliar with the concept. They are not concerned on a day-to-day basis with how they can contribute to sustainability initiatives and sustainability performance. Installing a culture for sustainability is also not addressed by the top management of the case organization. Although there is an understanding in the organization that the organizational culture should have more open system values such as growth and adaptability, these values are not in the organizational culture at the moment.

(34)

33

6. Discussion and future research

The objective of this thesis was to investigate the implementation of corporate sustainability within a case organization in Malaysia. The PMS framework of Ferreira & Otley (2009) was used to yield insights into the sustainability characteristics of PMS within the case organization. By describing how various PMS components are designed for the implementation of sustainability in a real life case organization, this thesis contributes to the empirical research in the field of how PMS can influence sustainable decision making. It is unique in the sense that the extensive Ferreira & Otley (2009) framework is used to gain detailed insights in the PMS design for implementing corporate sustainability. However, as this study was descriptive in nature, the conceptual model in figure 1 should not been seen as a normative framework. As Ferreira & Otley (2009, p. 266) mention, the focus of the framework is to provide a descriptive tool that may be used to collect evidence upon which further analysis can be based. No normative position is taken on the mechanisms that should be used in any specific context. For this study this means that it is investigated if a certain PMS element contains sustainability characteristics, it does not investigate if this has a positive or negative influence on the implementation of sustainability. It is expected that when PMS contain sustainability characteristics this can contribute to the implementation of sustainability, but empirical research must be carried out to test this relationships.

The investigation of the sustainability characteristics of PMS started with discussing the role of leadership in designing PMS so they contribute to the implementation of sustainability. The senior leaders have the ultimate responsibility in designing the sustainability characteristics of PMS. They must truly commit to and understand the importance of implementing sustainability. This commitment and understanding of top managers was not established in the case organization. If this lack of top management commitment has a negative influence on the implementation of sustainability can be the subject of future research. Also, future (quantitative) research could more specifically focus on the traits that effective sustainability leaders should have. An example of this kind of research is the article of Epstein et al. (2010). They conclude that leadership and people nurture the drive for sustainability (p. 43). They see leadership as a crucial determinant in managing economic, social and environmental performance.

(35)

34 the PMS in the case organization lack the function of motivating employees to accomplish objectives by linking the reward systems to objective achievement. Lindsay et al. (1996) conclude the same when they investigated the process of installing ethics into organizational decision making. They conclude that most focus was on the first component, specifying and communicating objectives, but even the efforts were incomplete with respect to the communication aspect. They also claimed that the investigated firms were doing very little with respect to the other two PMS functions. The same can be said for the design of the PMS components in the case organization for implementing sustainability. The objectives for sustainability performance were specified in the case organization, however, the communication of these objectives was in general lacking. The evaluation of the objectives (targets) and rewarding based on these objectives (targets) was not happening. Future research could focus if this lack in design impairs the sustainability performance.

The values of the overall organizational culture were also found not to contain sustainability characteristics. The organizational culture was dominated by internal process values. Organizations that are dominated by these values and seek to introduce a commitment to corporate sustainability might experience a strong tension between their existing culture based on stability and control, and a need to introduce curiosity, exploration and flexibility (Linnenluecke & Griffiths, 2010, p. 361). This tension was also mentioned by different interviewees. As a consequence, sustainability initiatives in the case organization were many times only pursued when it was possible to unambiguously translate these initiatives into increased (traditional) economic performance. This economic bottom line was found to be still the most important determinant in undertaking sustainability initiatives. Future research could focus on which values of an organizational culture influence the economic performance and at the same time the environmental and social performance in a positive manner.

(36)

35 The Ferreira & Otley (2009) framework is a useful tool for describing the technical side of PMS, but is says little about context factors such as leadership and organizational culture. Because of this, Broadbent & Laughlin (2009) made an extension to the model that could be beneficial for the investigation of implementing sustainability. They claim that any PMS can be described conceptually and empirically as either ‘transactional’ or ‘relational’. ‘Transactional’ PMS are likely to have a high level of specificity about the ends to be achieved (e.g. through performance measures, targets) and often clear specifications of the means needed to achieve these defined ends (p. 289). In contrast, in ‘relational’ PMS it is likely that the ends and means are deliberately subject to a discourse between different stakeholders. The key underlying theme in ‘relational’ PMS is that there is ownership by the stakeholders of PMS that drive the actions within the organization. A ‘relational’ PMS is driven by the exercise of communicative rationality between stakeholders. Companies that were successful in implementing sustainability broadly identified, and engaged with, their stakeholders and included their expectations for corporate sustainability goals (Durden, 2008). So this stakeholder approach is important for the implementation of sustainability. When leaders are able to use the PMS more ‘relational’, they are perhaps better able to get more commitment of both the external stakeholders, as well as the internal stakeholders in the implementation of sustainability. The internal stakeholders (i.e. employees) were found to be not committed towards sustainability in the case organization because there was little discourse about the importance of sustainability. As described before, because of this the organizational culture was also not containing sustainability characteristics. Future research could focus on the question if ‘relational’ use of PMS by sustainability leaders can lead to installing an organizational culture that contributes to the implementation of sustainability.

Ferreira & Otley (2009) and Broadbent & Laughlin (2009) mention that the context in which an organization operates can have an influence on PMS. An element of this context is the external culture (as imposed to the organizational culture, which is described in this thesis). Ferreira & Otley (2009) have left the external, national culture unexposed, because this factor is largely outside the control of the organization. However, investigating the influence of national culture on the implementation of sustainability can be an interesting topic for future research, because it is possible that values of external, national cultures can have an influence on the implementation of sustainability within an organization. Since this study was conducted in Malaysia, it is interesting to find out how this description of sustainability characteristics of PMS relate to other Asian and Western countries, to find out if there are differences that can be attributed to national cultural differences. One quote will be given to illustrate that there can be a relation between national culture and the implementation of sustainability: