The use of management control systems to integrate sustainability within corporate strategy

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Master thesis

The use of management control systems to

integrate sustainability within corporate strategy

A multiple case study in the Dutch banking industry

By

Paul Kleinjan

S1921126

University of Groningen

Faculty of Economics and Business

MSc Business Administration - Organizational & Management Control

Supervisor: dr. H.J. van Elten

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Title page

Title The use of management control systems to integrate sustainability within corporate strategy: A multiple case study in the Dutch banking industry Author Paul Kleinjan

Student number S1921126 Contact details Nieuweweg 9

9711 TA Groningen paul.j.kleinjan@gmail.com 06 46 04 14 15

University Rijksuniversiteit Groningen Faculty Economics and Business

Master program Msc Business Administration – Organizational & Management Control Supervisor dr. H.J. van Elten

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Management summary

Due to the financial crisis, the activities of banks are more than ever under scrutiny. Not only by regulators but also by wide public including employees, investors and clients. Increasing attention is paid to sustainability performances of the banks. Recently1_{it was announced that the} Dutch House of Representatives is switching to another bank because of the poor sustainability performance of their current bank. The results of the Fair Bank Guide (Eerlijke Bankwijzer) show that this bank performs poorly with regard to human rights, animal welfare and the environment. This action indicates how important it is for banks to address sustainability issues nowadays. This thesis is focuses on the incorporation of sustainability within corporate strategies.

The main purpose of this study is to examine the role of a management control systems (MCS) in the integration of sustainability into corporate strategies. In order to address this issue, this research is based on a management control framework. This framework consists of four different systems that all work together to attain an effective control environment which supports competitive sustainability and strategy implementation. In brief: the belief system commits employees to core values and mission, the boundary system provides boundaries on actions, the

diagnostic system is used to motivate, monitor and reward achievement of goals, and the interactive system concerns the emergence of new ideas and strategies.

A multiple case study is conducted within the Dutch banking industry. This is particularly interesting since the reputation of banks has deteriorated considerably over the recent years. Moreover, although the impact of a bank’s internal operations on environment and society is not big, they do fulfil an important role in society in which they can make valuable contributions. What appears to be important is the involvement of internal and external stakeholders into the process of strategically integrating sustainability. It is essential to have a clear vision and concrete objectives and ambitions regarding sustainability performance. These issues should be developed in consultation with employees and directly be reflected in MCS. This results in easier communication and more effective monitoring of the strategic objectives. Additionally, external stakeholders should also be involved in this process because it is valuable to know what they consider as important. This satisfies stakeholders and facilitates external communicating and reporting about sustainability issues. Furthermore, a clear distinction can be made regarding the internal and external operations of the banks. For internal operations, different boundaries and targets are set which are mainly intended to limit the use of resources. This process is monitored and measured, and reporting is based on these outcomes. For external operations on the contrary, banks have set limits to a greater or lesser extent, with respect to their (investment) policies. However, they encounter difficulties in measuring the impact on the environment and society regarding their external operations. It is noteworthy that banks go through many processes in which collective use of different systems is clearly evident. Because of this collective use, the sustainability operations get stronger support from the MCS, and the likelihood of integrating sustainability successfully within corporate strategy increases.

1_{NOS, Tweede kamer dumpt huisbankier. Retrieved July 7, 2014 from:}

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Preface

After completing my bachelor at the Hanzehogeschool Groningen I was sure I wasn’t finished studying yet, so I decided to extent my study career and started with the master program Organizational & Management Control. After I had finished the pre-master program and the courses of this master, writing this thesis was the only thing left to do.

The subject of this thesis is a combination of the main topic of my master program, management control, and my personal interest in sustainability. Besides, the rising global interest in sustainability issues makes this research even more relevant. Currently, there is a shift going on towards more sustainable businesses. The recent financial crisis has put banks under the spotlight and due to public pressure, banks are expected to play a role in supporting the transition to a sustainable economy.

Writing this thesis would not have been realized without the help of several people. I would like to show my gratitude to my supervisor, Hilco van Elten, for his constructive feedback and support during the process. I am also very thankful to the respondents who cooperated in my interviews. Finally, I would like to thank my family and friends who always have supported me during my study period.

Completing this thesis also implies there has come an end to my life as a student. I look back at six fantastic years in Groningen and look forward to benefit from the gained knowledge in my future career.

Paul Kleinjan

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1. Introduction

Interest in the concept of sustainability has increased steadily since it became a topic about two decades ago. Because of the increasing concerns about how actions affect the environment and social society (Sprinkle & Maines, 2010), people and organizations are becoming more aware of the fact that there is a need for change in order to protect the world and society. A growing body of research shows that being sustainable can result in a lot of advantages for organizations (Wu, 2006; Sprinkle & Maines, 2010). The payoffs of improved sustainability performance can include increased employee satisfaction, lower operational and administrative costs, improved productivity, enhanced image and reputation, increased market opportunities through niche markets, better shareholder relationships, and stock market premiums (Epstein & Wisner, 2001). These benefits for environment and society as well as for the company itself, are resulting in a growing number of organizations that take sustainability into account (Bhattacharya & Sen, 2004). Epstein and Roy (2001) stated that for companies that are committed to improving their environmental and social performance, the difficulty question is no longer whether to implement sustainability, but how to do this. Managers are increasingly wonder how companies can improve sustainable performance, and, more specifically, how they can identify, manage and measure the drivers of sustainability performance and the systems and structures that can be created to improve corporate social performance (Epstein and Roy, 2001).

An important role in the incorporation of sustainability issues within corporate strategy is the use of management control systems (MCS). According to Epstein and Roy (2001), without MSC, organizations may not benefit from all the advantages associated with sustainable performance. The main purpose of this study is to examine the role of a MCS in the incorporation of sustainability into business strategies. A useful approach to examine this issue is the Levers of Control (LoC) framework of Simons (1995a). This widely used framework is comprised of belief, interactive, boundary, and diagnostic control systems. The integration of the different systems results in collective power that drives strategic renewal while at the same time control is used to achieve strategic objectives (Simons, 1995). Therefore this study is drawn upon the LoC framework to explore how MCS can be supportive in the integration of sustainability within corporate strategies.

This research is conducted within the Dutch banking industry. This is particularly interesting since the reputation of banks has deteriorated considerably over the recent years. As emphasized by the CEO of ABN AMRO bank: ‘‘Restoring trust in banks is the biggest challenge for the sector’’ (Sustainability report, ABN AMRO 2013). Moreover, although the impact of a bank’s internal operations on environment and society is not big, they do fulfil an important role in society (Scholtens, 2009), in which they can make contributions. Results of research conducted by Scholtens (2006) indicate that banks indeed do affect sustainable development.

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6 sustainability (Gond et al. 2012). A useful lens to examine sustainability activities is through the perspective of management control. These controls can yield a better understanding of the strategic intention of sustainability initiatives (Mersereau & Mottis, 2012). Weber (2005) investigated the level of integration of sustainability into businesses of European banks. However she did not address the role of management control.

This study contributes to existing literature by fulfilling this gap. By conducting a multiple case study within the banking industry, efforts are made to examine the role of MCS in the integration of sustainability within corporate strategies. Besides contributing to the accounting literature, this study provides implications for practice. It can assist managers to implement sustainability within the strategy of their organizations or increase the level of sustainability performance. With these objectives in mind, this study addresses the following research question: How can a management

control system be supportive in the integration of sustainability in corporate strategy?

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2. Literature review

This chapter provides background of existing literature about the constructs that will be examined in this research. First a review of literature about sustainability is provided. What does sustainability entail? How and why are organizations performing in a sustainable manner and what benefits can it yield? Subsequently, light will be shed on management control systems (MCS), followed by a discussion of the LoC framework. Finally the role of MCS in the integration of sustainability within corporate strategy will be discussed.

2.1 Sustainability

In 1987, the World Commission of Environment and Development presented the Brundtland report about sustainable development. From that moment interest in sustainability arose largely and up to today awareness concerning the importance of this topic continues to grow. This well-cited report defined sustainable development as ‘’development that meets the needs of the present without compromising the ability of future generations to meet their own needs’’ (Brundtland, 1987). Since the presentation of the Brundtland report, the concept of sustainable development initially emerged as a global issue. Nowadays it has increasingly been applied at the corporate level (Rocha, 2007). Incorporating sustainability activities in organizational operations is often referred to as Corporate Sustainable Responsibility (CSR). Much more definitions are developed over the years regarding sustainability or comparable concepts, such as CSR. Since this research is focused on sustainability within corporations, the concepts sustainability and CSR are used interchangeably. Similar as Weber (2008) pointed out, due to the overlaps between CSR and sustainability, the theory development in this study is based on sustainability as well as CSR research. Marrewijk (2003) also argues that nowadays many consider corporate sustainability and CSR as synonyms. He covers corporate sustainability and CSR in one definition and states: ‘‘In

general, corporate sustainability and, CSR refer to company activities – voluntary by definition – demonstrating the inclusion of social and environmental concerns in business operations and in interactions with stakeholders’’ (Marrewijk, 2003, p.102). For the purpose of a consistent

terminology, the term sustainability is also used when referring to CSR aspects. 2.1.1 Definition

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8 2.1.2 Motives to be sustainable

Now it is clear what is meant by sustainability and known that an increasing number of organizations is addressing sustainability issues, it might be interesting to investigate why they incorporate sustainability practices in their business operations. What are the payoffs for organizations to perform in a sustainable way? Marrewijk (2003) simply stated: ‘‘they either feel obliged to do it; are made to do it or they want to do it’’. The most common motivations for engaging in sustainability will be discussed in order to clarify this simple statement. There is made a distinction between extrinsic motives, i.e. pressure from external parties, and intrinsic motivation which directly could benefit the firm and enhance organizational performance.

Extrinsic motivation

Pressure from external parties might organizations force to put sustainability on organizations agenda. Looking from the traditional shareholder perspective, the objective of an organization is to maximize profit and shareholder value as best they can. In order to achieve this in the best possible way, operations might hamper environment and society. However, maximizing shareholder value might be in best interest of the shareholders, nowadays they might, through shareholder activism, also demand organizations to operate in more socially responsible ways (Campbell, 2007). Next to shareholders, the voice of other stakeholders becomes stronger as well (Rocha, 2007). For example nongovernmental organizations, employees or customers monitor corporate behavior and put pressure on firms in order to make organizations operate sustainable (Porter & Kramer, 2006). Freeman (1984) indicates that organizations are not only accountable to its shareholders but should also balance a multiplicity of stakeholders interests that can affect or are affected by the achievement of an organization’s objectives. Another party that increasingly plays a role is the government who enforce for example environmental and labor laws. Some actions of organizations are regulated by law which obliged firms to perform actions in a mandated way or forbids to perform particular actions. Nowadays, governments increasingly require reporting on sustainability issues, next to traditional company reports (Buhman, 2006). Although above motives to behave in a sustainable way are mainly caused by external pressure, this does not necessarily have to obstruct organizations in their operations. Performing in a sustainable way can yield many benefits for organizations. These payoffs will be discussed in the next section.

Intrinsic motivation

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9 reputation. Furthermore, performing in a sustainable way can have positive effects on human resource activities. Sustainable organizations can be attractive and positively influence employee motivation, retention, and recruitment (Turban & Greening, 1997; Mirvis, 2012). Finally, sustainable performance can also be used as a means to reduce or manage risks. This can be done by for example reducing the probabilities of expected financial, social or environmental crisis that could influence the cash flow of an organization (Sharfman and Fernando, 2008).

2.2 Management Control Systems

Now it is clear what sustainability entails and what possible benefits it can yield for organizations, it must be examined how this can be integrated in business strategies. The role of management control systems (MCS) is important in this process. Epstein and Roy (2001) argue that without the use of MCS, organizations may not benefit from all the advantages associated with sustainability performance. Next to this, Simons (1995a) states that the world’s best strategies are worthless unless the implementation is not controlled effectively. These assertions indicate that proper use of MCS is essential when a strategy is implemented.

Theory about the relationship between strategy and control processes started to develop since Anthony provided the first definition of management control: “the process by which managers

ensure that resources are obtained and used effectively and efficiently in the accomplishment of the organization’s objectives” (Anthony, 1965, p.17). Since then, the literature field about this concept

has increasingly evolved (Simons, 1994). In its broadest sense, the purpose of a management control system (MCS) is to provide information useful in decision-making, planning and evaluation (Merchant & Otley, 2006). A lot of authors have defined MCS and Chenhall (2003) indicates that the definition of MCS has evolved over the years. The focus changed from the provision of more formal, financially quantifiable information to support managerial decision making to one that embraces a much broader scope of information. More information about the external environment of the organization is included and there is made more use of decision support mechanisms and informal personal and social controls (Chenhall, 2003). Next to Chenhall, some others authors using very broad conceptions of what could be considered as MCS. For example, Malmi and Brown (2008) use a package approach and view MCS more as a concept, rather than an organizational control system. They define MCS as: ‘‘Management controls include all the devices and systems managers use to ensure that the behaviors and decisions of their employees are consistent with the organization’s objectives and strategies, but exclude pure decision-support systems. Any system, such as budgeting or a strategy scorecard can be categorized as a management control system.‘‘ (Malmi & Brown, 2008: p209).

A narrower view on MCS is provided by Simons (1995a) who limits the definition to formal aspects of control. He defines MCS as: ‘‘MCS are the formal, information-based routines and procedures managers use to maintain or alter patterns in organizational activities’’ (Simons, 1995a: p5). He points out that these information-based systems become control systems when they are used to maintain or alter patterns in organizational activities.

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10 usefully into four different types of formal, information-based systems according to the strategy of an organization. These four systems are: belief systems, boundary systems, diagnostic systems and interactive systems and all work together. His widely used (e.g. Arjaliès and Mundy, 2013; Tuomela, 2005; Widener, 2007) Levers of Control (LoC) framework is strongly focused on business strategy. Simons (1994, p.170) points out that ‘‘MCS must accommodate deliberately

intended strategies as well as incremental strategies that emerge in various corners of the organization’’. Since the main purpose of this study is to examine the role of a MCS in the

incorporation of sustainability into business strategy, this research is built on this broadly referenced LoC framework. However, although this research is based on the constructs of Simons, which is limited to formal control, this study does not purely exclude informal control. Otley (1980) argues that if a wide range of control mechanisms are used for multiple purposes, it is difficult, if not impossible, to isolate the effects of other controls. Moreover, the effectiveness of formal control may be dependent on the nature of informal controls (Langfield-Smith, 1997). This indicates that informal controls are an important aspect of MCS and therefore not neglected. As Arjaliès and Mundy (2013) indicate, the LoC framework is fundamentally concerned with the use of control systems to drive strategic renewal while at the same time control is used to achieve strategic objectives. The framework is discussed in more detail in the next section.

2.3 Levers of Control Framework

The LoC framework is comprised of four control levers and used as a way of analyzing how organizations leverage their MCS in order to implement business strategies. Simons (1995a, p.5) states: ‘‘The four control levers are nested - they work simultaneously but for different purposes.

Their collective power lies in the tension generated by each lever’’. The use, purpose and tension

between the different levers is discussed below. 2.3.1 Belief and boundary systems

The belief and boundary levers guide search activity in organizations which are both variations of formal control systems. Both intent to motivate employees’ opportunity seeking: the belief lever is a positive force that motivates the search for opportunities; the boundary lever is a negative force that sets limits on opportunity seeking behavior (Simons, 1995a).

The belief system is “the explicit set of organizational definitions that senior managers

communicate formally and reinforce systematically to provide basic values, purpose, and direction for the organization” (Simons, 1995a, p. 34). The purpose is to inspire employees to commit to the

organization’s core values and mission in their search for new opportunities (Speklé et al. 2014). These core values are linked to the business strategy of the firm (see figure 1). The system is created and communicated through documents such as credos, mission statements, and statements of purpose. However, in dynamic environments, employees must be constrained from engaging in high-risk behaviors. This constraint is the boundary system, which acts in opposition to the belief system (Widener, 2007).

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11 modern organizations are embedded in standards of ethical behavior and codes of conduct and are written in terms of activities that are off-limits. They are the brakes of an organization (Simons, 1995b). Simons (1995a) argues that the positive belief system and negative boundary system create forces of yin and yang. The result is a dynamic tension between commitment and punishment.

2.3.2 Diagnostic and interactive control system

Diagnostic control systems are ‘‘the formal information systems that managers use to monitor

organizational outcomes and correct deviations from preset standards of performance’’ (Simons,

1995a, p.59). Its main purpose is to allow managers to ensure that important goals are being achieved efficiently and effectively. Information on critical performance variables (see figure 1) of the firm is reported and used by managers to monitor underlying organizational drivers in order to realize the intended strategy of the organization (Simons, 2000).

Simons (1995a) states that while diagnostic control systems do constrain innovation and opportunity-seeking (negative force) to ensure the predictable goal achievement needed for intended strategies, interactive systems produce exactly the opposite effects. These lever stimulate search and learning (positive force) and allowing new strategies to emerge as a response to perceived opportunities and threats. The interactive system allows managers to involve themselves in the decision activities of employees (Speklé et al. 2014). This interaction between managers and employees results in discussion of performance and debate about the relevance, reliability and meaning of each measure (Mersereau & Mottis, 2012). In this way, the operational layers are connected with the management of the organization and employees are more involved in the processes.

Similar to the boundary system, the diagnostic system acts as a constraint on employee behavior, which results in dynamic tension (Simons, 2000; Widener, 2007). This dynamic tension is created by the inter-dependent use of the levers. Henri (2006) found some evidence that the dynamic tension between this two levers is positively associated with performance.

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2.4 Linking the LoC framework with sustainability

The use of MCS plays a crucial role in implementing a strategy that leads to a more sustainable organization. Arjaliès and Mundy (2013) point out that MCS facilitates CSR activities and can in turn support corporate strategy. Additionally, Gond et al. (2012) note that MCS support strategy, and if used appropriately, they can push organizations in the direction of sustainability. Moreover, Epstein and Roy (2001) argue that without the use of MCS, organizations may not benefit from all the advantages concerning sustainability performance. These statements indicate that proper use MCS is of significant importance within the integration of sustainability in corporate strategy. This section discusses the integration of sustainability with support of the LoC framework. Based on expectations and findings from existing literature, the role of each lever with respect to sustainability is described. This section concludes with discussing the integrative use of the levers since the power of the framework is created by the dynamic tension between the levers.

Several authors use the LoC framework of Simons (1995) as a basis for examining the relation between the use of MCS and the integration of sustainability. Gond et al. (2012) use the diagnostic and interactive lever in relation to the integration of sustainability. They clarified paths and barriers to the integration of sustainability and defined eight configurations that have a different impact on sustainable performance. These configurations reflect various uses and also the way of integration of sustainable control systems and MCS within organizations. Arjaliès and Mundy (2013) provide insights into the use of MCS to manage CSR strategy of publicity listed French organizations. By using the LoC framework they showed how these companies use MCS in order to meet their external requirements, manage their risk and exploit strategic opportunities generated by CSR activities.

2.4.1 Belief systems and sustainability

Arjaliès and Mundy (2013) state that belief systems are used to establish a standard vision of CSR within an organization. Formal and explicit statements of intentions with respect to CSR missions and values are used to inspire employees to seek opportunities and to motivate them in their implementation of CSR initiatives. The aim is to band them together around a set of organizational values and to connect the CSR strategy of the organization at the group level of operational activities. This done by for example mission statements, training sessions and communication tools. Mersereau & Mottis (2012) found out that in their case-study organization the beliefs system is the main control lever in managing CSR. They state: ‘‘Management understands that the

greatest results will come from the actions and ideas of employees’’ (p. 30). It is expected that this

positive force within the framework result in increasing involvement of employees and therefore contributes to the integration of sustainability.

2.4.2 Boundary systems and sustainability

To provide constraints around the belief systems, boundary systems are used to manage risk. Arjaliès and Mundy (2013) argue that strategic and operational limits are set in order to give direction to employees to what extent they are permitted to engage in CSR activities and to ensure that their behavior is aligned with organizational goals. MCS provide boundaries by external documentation on legal and voluntary regulations (e.g. reduction in water pollution or CO2

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13 behavior. Examples they provide in relation to CSR include: assigning specific environmental roles and tasks, policies against workplace discrimination and policies on purchasing. Although Simons regards this lever as a negative force, it is not expected that this lever constrains the process of integration of sustainability. It set limits for minimum sustainability performance but it is not expected that this has negative influence on the behavior of employees.

2.4.3 Diagnostic systems and sustainability

Arjaliès and Mundy (2013) describe the relation between diagnostic systems and sustainability as defining and measuring key performance indicators for the CSR strategy. The purpose is to identify the gap between achievements to date and past plans. This is done by managing operational activities in relation with the CSR strategy and activities. MCS that are used to achieve this could include, for instance: energy management systems, standardized CSR reporting processes and the use of key performance indicators (KPI’s) to monitor intended strategies. Gond et al. (2012) argue that the diagnostic system primarily supports provision of a continuous record and disclosure of sustainable information and therefore it constrains the process. However, although this system is viewed as a negative force, it is not expected that it negatively affect the integration because this system provides standards for minimal performance. By setting challenging standards which are used as handholds for performance, it should not constrain the process.

2.4.4 Interactive systems and sustainability

Interactive systems play an important role in companies that develop CSR strategy through a combination of intended and emergent plans (Arjaliès and Mundy, 2013). Regular and formal meetings are held between CSR directors or senior management and operational staff to identify innovations, opportunities and strategic uncertainties. Additionally, external stakeholders provide input for discussion about the CSR strategy. Arjaliès and Mundy (2013) argue that the management and control processes regarding CSR activities are facilitating the transformation of business operations. Furthermore, Gond et al. (2012, p. 207) describe interactive systems as

‘‘control systems that stimulate and guide emergent strategies in response to opportunities and/or threats within an organization's operation environment’’. In response to this, and in the context of

sustainability, new strategic initiatives are developed which contributes to the integration of sustainability. In both the strategic and sustainability domains, this positive force creates vison for future development (Gond et al. 2012) which is important for attaining sustainability. Since the interactive lever allows new strategies to emerge it is expected it contributes to the integration of sustainability.

2.4.5 Collective power of the levers

Although it is meaningful to know how each individual lever operates, it is also important to discuss how these levers coexist. Moreover, the power resulting from levers that work together, or even influence each other, have a greater impact on performance than the individual controls (Widener 2007). Simons (2000) argues that the four systems should work together to attain an effective control environment. This integrative control environment supports competitive sustainability and strategy implementation. He states (2000, p. 301): ‘‘Control of business strategy

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systems, and interactive control systems. The power of these levers in implementing strategy does not lie in how each is used alone, but rather in how the forces create a dynamic tension..’’

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3 Methodology

Now that the constructs of this research are clarified by means of the literature review, this chapter addresses the method of research. The research design will be discussed in a controllable manner by describing the appropriate research type, the unit of analysis and the way the data is analyzed. Finally the validity and reliability of this research will be discussed. By using this research methodology, it has been made possible to conduct the research in a proper wayand it eventually enables to answer the research question.

3.1 Unit of analysis

The scope of this research is limited to the Dutch banking industry. The functions that banks perform have a huge impact on society (Scholtens,2009) and since the financial crises, there is increasingly paid attention to (sustainable) performance of banks. Banks increasingly are involved with financing economic activities that aims at sustainable development and it appears CSR activities of banks has significantly improved in recent years (Scholtens, 2009). More and more banks are aware of the importance of sustainable performance. The increased attention to sustainable activities of banks indicates that conducting research in this particular industry is well suited and most interesting.

Within this study, ‘traditional’ banks as well as a ‘sustainable’ bank were examined. By selecting cases that are all at a different level in the process of integration of sustainability, efforts were made to obtain a clear picture of the Dutch banking industry. An overview of the cases can be found in table 1.

3.2 Data collection

This study is of exploratory nature since there is not much known about the use of MCS in attaining sustainability. In response to recent calls in the literature for more exploration concerning this concepts, this study elaborates on this field of research (Arjaliès and Mundy, 2013; Gond, 2012). For examination of the research question, a case study approach is used as research strategy. This approach focuses on understanding the dynamics present within single settings (Eisenhardt, 1989). Otley & Berry (1994) argue that it is not possible to understand the role of accounting and control in isolation. Therefore a case-based approach needs to be adopted. Similarly, Humphrey & Scapens (1996) claim that these kind of studies cannot be isolated from the influence of the wider social and political contexts.

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16 interviews is to get in-depth insights into the functionality of MCS in integrating sustainability into business. Hence semi-structured interviews are best-suited to obtain these insights. These on-site interviews use pre-determined questions which provides uniformity but does not limit respondents to a set of pre-determined answers. This method allows interaction and results in in-depth insights of the concerning constructs. The questionnaire is based on insights from the literature review and is used to test the expectations of this research. The respondents were people who are closely related to the concepts and have knowledge of the functioning of MCS in relation to sustainability obje ctives within the organization. The interviews were conducted in Dutch and the quotes used in this study are translated to English. An overview of the conducted interviews is provided in table 1.

Organization Department Function respondent(s) Duration

ABN AMRO Sustainable development ⦁ Head of business development, reporting and engagement ⦁ Employee reporting and engagement

55 minutes

SNS retail bank CSR CSR project leader/advisor 50 minutes ASN Bank Sustainability & Research ⦁ Employee sustainability

⦁ Sustainability analyst

45 minutes

NIBC CSR Team Sustainability manager 60 minutes

Table 1: Overview interviews

In addition to the interviews, data was collected by using other documents and information of the case. Nowadays, most large organizations provide sustainability reports next to ‘traditional’ annual reports. These reports, together with annual reports, were examined to get insights in the efforts the case-organizations perform with regard to sustainability. Next to these reports, other information is derived from codes of conducts, (sustainable) strategies and other valuable documentation of each organizations. By using multiple data collection methods, efforts were made to achieve triangulation of evidence. This process, and further attention regarding validity and reliability is discussed in section 3.4.

3.3 Data analysis

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17 impressions (Eisenhardt, 1989). In this way, attempts were made to find patterns or mechanisms across the different cases.

The results derived from the case study analysis were compared to existing literature. By looking for similar findings which are found in a different context, attempts are made to strengthen the results. Linking results to the existing literature is especially important in this theory building research because the findings rest on a limited number of cases (Eisenhardt, 1989).

3.4 Validity and Reliability

According to Yin (2009), there are four criteria commonly used to judge the quality of the research design: construct validity, internal validity, external validity and reliability. Construct validity refers to the extent to which a measuring instrument measures what it is intended to measure. The construct validity in this study is quite high because the constructs and relationships that were investigated within the case studies are corresponding to the meaning of this concepts constructed in the literature review section. Furthermore, to increase the construct validity, multiple sources of evidence were used (Yin, 2009). Multiple methods facilitate triangulation of the data and therefore contribute to strengthened constructs (Eisenhardt, 1989). Internal validity concerns conclusions about the relationship between two phenomena (van Aken et al. 2012). Since this study is more of exploratory nature, this issue is less applicable to this study. On the other hand, external validity is of more importance in this study. This criterion refers to the generalizability or transferability of results and conclusions to other people, organizations, countries, and situations (van Aken et al. 2012). The use of multiple case studies is making the study more generalizable. Yin (2009) argues that having more than two cases could strengthen the results even further. A limitation regarding external validity is that this research is limited to the banking industry. It cannot simply be stated that the results are representative for other industries. In order to partially cope with this drawback, the findings of this study were compared to findings of similar studies that were conducted in a different context. According to Eisenhardt (1989) this results into wider generalizability of the results.

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4 Results

In this section the results of the different case studies will be discussed separately. The conducted interviews provide the largest input for these results. Additionally, company documents such as (sustainable) annual reports and codes of conducts are used to complement this information and complete each case. The four cases are discussed on the basis of each lever of the LoC framework and is followed by an explanation of how these systems work together in an collective fashion. This chapter concludes with a summary of the findings supported by table 2 that provides an overview of the results.

4.1 Bank A

Within this case, an employee of the CSR department of the bank is interviewed. She is CSR project leader/advisor and personally very involved with sustainability. Together with her colleague she is concerned with the sustainable policy within the bank. Recently, the bank was restructured and a whole new policy with regard to sustainability is developed and implemented at the moment. Before the restructuring of the bank and insurer, it was quite difficult to make progress. There was no clear picture of the strategy and ambitions with regard to sustainability performance. Now the bank is a separate entity, there are more possibilities to improve this performance. Although, sustainability is still not top priority of the board due to the reorganization, more and more steps are taken towards a new sustainable policy. The bank is an umbrella organization that coordinates 4 retail banks. An overarching policy for each brands is developed by using a manifesto. Additionally, the brands have their own sustainable policies as well.

4.1.1 Belief system

Although the respondent herself is very involved with sustainability, the overall belief in the bank is not that strong yet. Due to the reorganization, priorities are more focused on different issues. The objectives and ambitions of the bank are not clear yet. The respondent notes:

‘‘Because the objectives and ambitions of the bank are not really clear yet, it is difficult to involve people and to communicate about it. This makes it hard to get everyone in one line’’

However, efforts are being made to improve this, an example is their core value CARE!, that guides their conduct. The bank describes these core value as follows:

‘‘With CARE! we are calling upon everyone in our organization to re-establish the connection: with our customers, with one another, with the results and with the society of which we are part.’’

This manifesto is written to encourage employees to put customer’s interest first when providing financial services. It describes the connection between the different brands of Bank A and addresses sustainability issues as well. The manifesto communicates the core values through the organization and consists of four themes:

- Sustainability: our contribution to society; - Utility: our value for the customer;

- People to people: our view on banking;

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19 Together with the manifesto, attempts are made to increase the involvement towards sustainability. Regarding the internal business operations, considerable attention is paid to sustainability. Because employees are personally involved or notice that the bank is concerned with these practices, the awareness with regard to sustainability increases. Examples include: recycling, conscious choices for catering and the ability for employees to personally develop themselves. Next to this, employees can fill out forms to specify what kind of efforts they personally want to made with regard to CSR. Furthermore, the bank has foundations where employees can voluntarily teach children and youngsters about how to handle money. These relatively small activities all contribute to increasing the involvement of employees towards sustainability.

The belief lever is not very supportive in the process because the ambition and strategy of the bank is not clear enough yet. The respondent is convinced that employees should be involved in the process of policy development from the start. By involving employees in this process, more engagement is created. She argues:

‘‘A stupid story is useless if people aren’t involved in the process. If the board just signs an agreement, but the rest of the organization has no feeling with it, it will not work. In that case it doesn’t become rooted among the people.’’

4.1.2 Boundary system

The boundaries that are set with regard to sustainability within the bank are limited to formal documents and procedures. Their code of conduct, called; ‘Common sense, clear conscience’, gives employees tools to take responsibility ensuring a responsible organization. Additionally, the code of conduct together with a set of measures should guarantee integrity in the conduct of its business. Next to this, the bank has a moral-ethical statement that must be filled out en signed off by every new employee. By signing this agreement, employees swears that they will perform their duties with responsibility, integrity and care. Whether or not these conducts contribute to the process of integrating sustainability is questionable according to the respondent. She notes:

‘‘ A section in the code of conducts addresses for example environmental responsibilities of the bank. However, I think most of the people who work here, never have read the conducts completely.’’

Furthermore, the bank applies the Global Reporting Initiative (GRI) for external reporting. The non-financial key figures are prepared in accordance with the these reporting criteria and promotes the use of sustainability reporting as a way for organizations to become more sustainable and contribute to sustainable development.

With regard to the investment policy, that sets limits on certain investments the respondent mentions following:

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20 4.1.3 Diagnostic system

Before the reorganization, the organization provided guidance for both the bank and insurer. There were several projects in line with this guidance and key performance indicators (KPI’s) were attached to these projects. Regarding the old situation the respondent notes:

‘‘These KPI’s did not really make sense and were only focused on customer interests. Nowadays, the purpose is to integrate sustainability more in the services the bank provides. Proper mission, vision, ambitions and objectives are defined which make it easier to communicate about it and enables better monitoring.’’

The bank is in the process of developing KPI’s based on well-defined objectives. The respondent stresses:

‘‘You should develop KPI’s Based on well-defined objectives. You have an ambition and then you investigate how you can realize this ambition. A KPI is only a useful KPI if it is in line with your objectives, and you objectives are in line with your ambition. You should develop a KPI based on the possibilities to measure it. You should not develop a KPI if you are not sure whether it is possible to measure it or not. Based on these KPI’s we will monitor and make adjustments. It is not completely clear how this will be done in practice but probably one board member will be responsible for this. Additionally, a steering group will monitor this and keep record of the KPI’s. These KPI’s should be developed on retail bank level. Objectives should be formulated and someone who is responsible for these KPI’s should be appointed for each bank. Those banks are, in consultation with bank A, free to fill in those objectives so that it is consistent with the bank. The steering group should monitor and take care that everyone contributes and achieves a minimum performance.’’

Additionally, the respondent indicates that transparency also plays an important role in this process.

‘‘Transparency is key for me. It takes less effort and makes it easier to monitor if you are transparent. If your story is clear and solid it is easy to be transparent. It shows that your plan is well thought.’’

4.1.4 Interactive system

Currently, the bank is involving its stakeholders to shape the new CSR policy in order to investigate what is important for them. A stakeholder analysis is conducted to investigate which themes the bank will be focusing on and what ambitions are attached to these themes. According to the respondent, the dialog with stakeholders is essential:

‘‘The bank should not develop the policy by themselves. Internal inputs are also important but it is particular important to investigate what the expectations of others are.’’

Next to this stakeholder involvement, it is important to connect the board of the organization with the employees. This is done by for example a steering group. This group consists of different people from different business units of the bank in order to get insights from different perspectives. Furthermore, a director of the board is participating in this group. The respondent is a proponent of a decisive steering group with a mandate.

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‘‘If you want to ensure that things will work out as planned people should be involved at the formulation of your framework. Of course, you should use your own knowledge base so you provide boundaries. Involvement! Involvement! Involvement! Also with regard to the formulation of objectives and KPI’s. Otherwise someone comes up with a plan which is implemented top-down and then people don’t know how to deal with it and think: why should I do this? where is this about?’’

4.1.5 Summary of results bank A

Currently, the bank is taking small steps toward the integration of sustainability in their strategy. Although the focus of the bank is primary on the reorganization at the moment, the use of the different levers regarding sustainability issues are clearly visible. The belief lever still needs to be developed a bit more by increasing the involvement of the employees. If the objectives and ambitions become clear it will be easier to involve people, which supports the process of integrating sustainability into the strategy. The boundary system seems not really to support the integration process. These systems are not particular focused on promoting sustainable issues within the strategy. The steering group and the stakeholder dialog are important aspects in order to integrate sustainability successfully. The steering group has an interactive and diagnostic function. The bank is giving shape to the KPI’s they want to use for monitoring and measuring the integration process. The following statement clearly illustrates the simultaneous functioning of the different systems.

‘‘Of most importance is that the content is meaningful. By using a materiality assessment you get insights in the preferences of your stakeholders. On the basis of that assessment you should choose themes where you want to focus on and you formulate objectives within these themes. Subsequently you develop your KPI’s in order to track an monitor the progress towards these objectives. If you want to ensure that your KPI’s function properly, you need your employees from the start. Furthermore this whole system must be reflected in the governance structure. Currently, we have a lot of discussions to design this process appropriately.’’

Due to the reorganization the bank is still a bit struggling to give form to the MCS that should support the integration of sustainability into their strategy. Because the process has only just started the bank has progressed not far in this process yet, but currently developments are taking place that should lead to a complete MCS that addresses sustainability issues.

4.2 Bank B

Within this case, an interview is conducted with an employee who is responsible for the sustainable policy, together with one colleague and her supervisor, the head of sustainability and compliance. She started five years ago in this position and at that moment there existed only some initiatives regarding sustainability. Since then they started to combine and cluster those activities and made efforts to align this with the strategy of the bank. This relatively small Dutch bank developed their sustainable strategy over the years, but their primary focus was to get this strategy in line with the rest of the bank. The respondent stated:

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world around you. What we always have done is ensuring that our sustainable policy closely matches to the core activities and pillars we have within the organization.’’

Client focus is the guiding principle of this bank. Their vision, mission and ambition statement are fully reflecting this client centered strategy. Their strong focus on clients is also the heart of their sustainability activities. As quoted in their annual report (2013):

‘’Corporate responsibility is primarily reflected in our client business. We constantly stay on top of sustainability developments in the world around us, to understand the risks and opportunities these create for our clients.’’

The clients and sustainability within their client-business is the core of their operations. The respondent notes:

‘‘The policies we have had developed were initially focused on risk management. This means that you understand the social and environmental risks that are associated with the clients and the portfolios. To get a good understanding, employees should be involved in this process.’’

Several actions are undertaken to increase this involvement. For example; all new employees get a training about sustainability. Within this training there will be discussed what Bank B’s opinion is about sustainability, what their themes are, and how this is applied and what is happening in the world concerning this issue. Next to these training sessions, the bank has a few projects where employees voluntarily provide workshops for clients about debt counseling. This matches with the core activities of the bank and satisfies employees. Furthermore, a screening on sustainable risk issues of each new corporate client is mandatory. This creates awareness every time an account manager has to go through this process.

The respondent argues that the biggest impact is achievable in the services you provide to the client but at the other hand you have to have ‘your own house in order’ as well. The bank is measuring their carbon emissions, their footprint and investments in their building. Although the effects are less material, it gives a signal to the stakeholders and increases the awareness of employees.

The respondent is of the opinion that the sustainable vision is rooted within the bank. She thinks it works supportive that the bank is not very large and the communication lines are quite short. Moreover, she argues:

‘‘I think that nowadays everybody within this industry is well aware of the fact that taking care of sustainability is just an essential part.’’

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23 issues are documented in compliance policies and code of conducts. Within the code of conducts of bank B, corporate responsibility has a big influence. The title of their code of conducts - ‘We show responsibility’ – also indicates this. The bank describe their code of conduct as follows (Code of conduct bank B, 2013):

‘‘This Code of Conduct outlines the ethical standards at Bank B. It sets the framework for how we carefully balance the diverse interests of our stakeholders and show responsibility for our actions. The Code of Conduct is based on three core values - trust, professionalism and integrity - supported by our vision, mission and ambition, the Bank B’s 7 business principles’’

The respondent is not sure whether or not these conducts also actually contribute to the integration of sustainability. She thinks it is more a formality and states:

‘‘It is obviously just your basis. You cannot do without it but I am not sure whether this document actually adds something, but when you integrate it in you communication tools it may contribute. Everyone is aware of these conducts but I think if you put them on the table nobody will read them or is interested in it.’’

This system contributes to the integration of sustainability by making sure the bank’s internal activities are in order. Examples of internal boundaries that are set include: reduction of energy use, a minimum number of employees should undertake or participate in social citizen activities, an increased number of woman senior management positions and making sure to keep up-to-date with sustainability and regulatory developments.

Another boundary system at the bank concerns the investment policy and the use of an exclusion list in particular. Bank B takes environmental and social risk associated with a client or transaction into account. Their sustainable risk policy notes the following:

‘‘Bank B’s Sustainability Policy applies to all our clients and transactions. Bank B does not want to engage with activities as defined on the exclusion list in the sustainability policy, and Bank B will refrain from doing business/ not engage with clients who have consistently demonstrated to violate the sustainability standards mentioned in our policies and do not provide any level of commitment to improve.’’

With regard to disclosure of performance, the bank has standards for reporting and applies the GRI standards. Additionally, for project financing the Equator Principles (EP) are applied. These principles gives guidance and a framework for identifying environmental and social risks and the impacts of an project.

4.2.3 Diagnostic system

Several efforts are being made at the clients side (external activities) to support the integration of sustainability and are additionally used for risk management purposes. Performance measures can support this process and the respondent argues the following regarding these measures:

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conducted. The use of this toolkit is a part of our customer assessment process and must be filled out and signed off before a new customer is accepted.’’

‘‘We report to the board regarding the outcomes of this framework. Next to these indicators, we also report on for example: how many employees have participated in social projects, the scores the bank receives on research of the Fair Bank Guide (Eerlijke Bankwijzer) and performance with regard to transparency.’’

For the development of the strategy and policies within the bank, a lot of interaction takes place within bank B. For example, for the development of the toolkit to assess sustainability risks, a lot of input from operational levels was used before it was implemented. Another example is the involvement of people from the industries in the development of policies.

‘‘We as bank are active in a limited number of industries and together with people from those industries we examine what the standards are with regard to social and environmental risks. For each industry several standards have been developed.’’

This intensive communication with external knowledge parties ensures the bank obtain a complete picture of this industry. The same kind of process is internally visible as well. Regarding the development of the code of conducts the respondent states:

‘‘These code of conducts have been developed through a very intensive process throughout the entire organization. The result of taking everyone’s input into account is that everyone is content with these conducts. If I read back the code of conducts nowadays, I see that they still fit within the organization’’.

Throughout the annual report the bank frequently claims that they want to make a contribution to the society. In order to give meaning to that, the bank has a lot of interaction with several stakeholders. Increased attention is paid to the stakeholder dialog in the recent years. Also the development and correct application of the GRI G4 standards is completed in consultation with stakeholders to see what are important issues for them.

‘‘We have talked a lot with our stakeholders. One of the outcome of these consultations is that the bank just should focus on the essence of a bank; be committed to society, provide funding and support companies in running their businesses.’’

Finally, an important part of the interactive system within bank B is a steering committee which exist next to the CSR team that already has a direct connection to the CEO. This committee consists of the CEO, who is chairman, the CRO, and every business unit has a member in this committee. Members from communication, consumer clients, corporate clients, young members of bank B, etcetera. The respondent indicates that this committee is influencing strategic choices regarding sustainability.

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25 4.2.5 Summary of results bank B

Bank B is quite advanced in linking their MCS to their strategy in order to address sustainability issues. The overall consensus regarding sustainability exists within the bank, and several policies and procedures make sure the strategy is being followed. KPI’s are used to monitor internal operations, but the bank is encountering difficulties with the development of KPI’s for external operations since this impact is hard to measure. The proper use of the MCS is mainly the result of intensive interaction between internal, as well as external stakeholders. Because their involvement in policy developing processes, it becomes clearer for the organization how sustainability should be integrated in the bank’s strategy. The sustainable risk policy of the bank is an extensive framework with a lot of different dimensions which clearly demonstrates how the different control mechanisms are used in parallel. This toolkit is developed in consultation with several internal and external stakeholders and implemented from the top of the organization. Every time the bank gets a new client, this client must be assessed by the account manager by using this tool, and must be signed off before the client is accepted. This is creating awareness because this process must be passed through every time. Hence, the limits that are set are monitored and the bank keeps control of their investments. Finally, reporting is done on the basis of the outcomes of this toolkit. This example shows how all four levers of the framework supporting the integration of sustainability within the strategy of the bank.

4.3 Bank C

At this bank, two people from the department Sustainable development were interviewed, The head of business development, reporting and engagement, and an employee reporting and engagement. They are responsible for the sustainability report and the preparation thereof. Furthermore, they are concerned with sustainability business developments and they ‘feel’ responsible for strategic choices regarding sustainability. Since the merger of this bank with another bank, about 3,5 years ago, a completely new strategy is developed. The sustainable strategy rests on 4 pillars which is used for internal and external communication:

- Sustainable business operations;

- Clients’ interests center stage and sustainable relationships; - Financial expertise for the benefit of society;

- Sustainable finance and investment services.

Currently the bank is translating the bank-wide strategic ambitions into concrete goals and key performance indicators.

The respondents indicate that they see an upward trend in the consciousness concerning sustainability.

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26 Several efforts are being made to involve employees more in the sustainability process. The four pillars of the bank are used to communicate the vision with regard to sustainability of the bank. Quoted from the sustainability report 2013:

‘‘In support of our aspirations, we want to inspire and engage our people in the bank’s drive to embed sustainability across the organization. These pillars are supported by involving employees in the sustainable strategy of bank C. Furthermore, the pillars are used to create awareness at the employees and stress the importance to take responsibility in order to carry out their work in a sustainable way.’’

Examples of how this is done are: several presentations are given, dialog sessions are held, and this year 10.000 people take part in an awareness campaign. Another example is the use of intranet to make employees aware. Now and then a sustainability issue ‘pops up’ in the screen of the employee on which he or she has to respond. Furthermore, the sustainability report of the bank reports that employees volunteer in community projects, which also increases the engagement. The report states (Sustainability report bank C, 2013):

‘‘The bank C Foundation gives form to our social commitment by encouraging bank employees to volunteer for community projects. In 2013 our employees volunteered 11,707 times on behalf of the foundation helping our social target groups.’’

The pillar ‘Sustainable Business Operations’ is about internal operations with regard to sustainability; get your own house in order. This concerns matters as reducing own energy, water and paper usage in order to set limits on harming the environment. On the other hand, to set limits on external operations, bank C is making use of an exclusion list. This list sets out the activities bank C is unwilling to support or be associated with.

‘‘We screen all our new clients at business banking and corporate clients by making use of an exclusion list. This is a standard part of the client acceptance procedure. Existing clients have already been screened against this list. Examples are activities involved in child labor and controversial weapons, but also organizations in the tobacco or mining industry will only be accepted if they meet specific certification requirements.’’

The respondents indicate that excluding clients can be a difficult dilemma because there is a grey area which is debatable. In such cases bank C gives special attention to clients. An example from the sustainability report illustrates this:

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27 Furthermore, the bank applies the GRI standards for reporting which has much impact. Bank C is closely watching the level of disclosure of the competition and compares their own disclosure standards against its competitors.

4.3.3 Diagnostic system

To report performance against standards, bank C uses sustainability criteria based on environmental, social and ethical (ESE) standards. This ESE policy is used for the assessment of clients, loan applications, and other transactions. Additionally, monthly integrated risks reports that explicitly address sustainability risks were introduced in all commercial business units . Also, the board is informed about the integration of sustainability into the strategy is also done. With regard to the measurement of sustainability performance, the respondents indicate that the use of KPI’s is not always easy.

The development of KPI’s that we use for consumer clients is not always ‘SMART’. Measurements that we use are for example employee commitment and customer satisfaction but it is difficult to address sustainability issues in this performance measurement. With regard to reporting, the use of KPI’s is more applicable because it is better visible how it contributes.

Regarding reporting to the board the respondents mentioning the following:

‘‘The department Sustainable Development reports to the board about progress towards sustainability objectives that are set. On one hand this increases the engagement of the board, on the other hand, this influences the decisions the board take regarding the integration of sustainability in the strategy the bank wants to follow.’’

The sustainability report of bank C provides an extensive overview of the objectives that were set for 2013 and the realized performance of these objectives. This gives a clear and transparent picture of what the bank has achieved last year.

‘‘We want to achieve a positively recognized position on sustainability and transparency. In order to become positively recognized it is of importance that you know where to focus on. Where do stakeholders care about? Stakeholders are highly involved in this process to find this out.’’

Stakeholders of the bank are for example: De Nederlandsche Bank, clients, NGO’s and rating agencies. Concerning this stakeholder dialogue the bank states (Annual report bank C, 2013):

‘‘As part of our sustainable banking strategy, we aim to communicate openly and transparently and to maintain our stakeholder dialogue. We apply the materiality principle in our dialogue with stakeholders. This means in practice that we focus on the issues that are most important to our key stakeholders – and hence to us – and that we are actually in a position to influence.’’

The use of management control systems to integrate sustainability within corporate strategy

Master thesis