The relation between sustainability control and reporting, and the effect
of corporate motives for sustainability.
An integrated view on sustainability in management control and reporting and the effect of various motives, conducted by triangulated research among Dutch companies.
S2196433 Mariëlle de Lange
Potgieterstraat 41, 3532 VP Utrecht a.m.de.lange.1@student.rug.nl
MSc Accountancy and Controlling Faculty of Economics and Business
University of Groningen
Supervisor: Dr. H.J. van Elten Co-assessor: Dr. Y. Karaibrahimoglu
Date: January 23, 2017
ABSTRACT
This study empirically examines the relation between Sustainability Management Control Systems (SMCS) and the quality of sustainability reporting, and how these constructs are affected by various motives for sustainability. Face-to-face surveys are conducted among 36 large Dutch companies, and these survey data is triangulated with data about the quality of sustainability reporting, retrieved from the Transparency Benchmark 2015. Contradictory to the expectation of this study, a PLS-SEM analysis shows no significant effect of using SMCS on the quality of sustainability reporting. However, the findings indicate that sustainability motives are positively related to formal and informal SMCS, and legitimacy motives are positively related with the quality of sustainability reporting. The findings show that profitability motives have no effect on SMCS or the quality of sustainability reporting. Concluding, the results of this study indicate that various motives to engage in sustainability, may lead to a different extent of using SMCS and a different quality of sustainability reporting.
Keywords: sustainability management control systems, sustainability reporting, sustainability motives, profitability motives, legitimacy motives
1. INTRODUCTION
There is a growing interest of society and organizations in social and environmental responsibility (Arjaliès and Mundy, 2013; Maas et al., 2016; Zwetsloot and van Marrewijk, 2004). Because of this growing interest, companies increasingly disclose non-financial information related to sustainability in their reports over the past few decades (Dhaliwal et al., 2011). By the increase in sustainability reports, there is also an increase in independent assurance on these reports, either from assurers from inside the audit profession as from assurers outside the audit-profession (Simnett et al., 2009). In November 2015, the Dutch Ministry of Security and Justice published a consultation for implementation of the EU directive 2014/95/EU for non-financial reporting. This EU-directive obliges organizations with more than 500 employees to report about their non-financial performance (The European Parliament and the EU Council, 2014). By means of implementing this EU-directive the Dutch government aims to foster transparency in the areas of environmental, social and working conditions and to improve the performance of organizations in these areas (Dutch Ministry of Security and Justice, 2015).
Besides the growing amount of interest by society and organizations for sustainability, there is also a growing interest in academic research which focusses on sustainability and environmental accounting, control and reporting (e.g.: Arjaliès and Mundy, 2013; Gamerschlag et al., 2011; Pondeville et al., 2013; Maas et al., 2016). Considering this, Maas et al. (2016) argue that sustainability reporting has to be examined together with accounting and control, instead of in an isolated manner. While there is a lot of research concerning the separated areas of sustainability reporting (e.g. Daub, 2007; Kolk, 2003; O’Dwyer and Owen, 2005) and sustainability control (e.g. Gond et al, 2012; Henri and Journeault, 2010; Schaltegger, 2011), these concepts are rarely examined in an integrative way. Ferreira and Otley (2009) argue that the current isolated approach in the research field on sustainability practices hampers improvement of accounting for sustainability. This thesis addresses this call from existing literature by investigating the link between sustainability management control and the quality of sustainability reporting. In addition, this thesis examines the effect of various motives to engage in sustainability activities on sustainability control and reporting.
Investigating the link between sustainability reporting and the extent of using sustainability in Management Control Systems (MCS) is also relevant because of the growing criticism on sustainability reports. As mentioned before, the majority of sustainability reporting practices are still voluntary disclosures, even though there is some regulation on this topic. This voluntary nature of reporting can result in a tension to only disclose good news and omit the bad news (Thijssens et al., 2016). Concerns arise about the relation between reporting and true accountability, which is discussed by O’Dwyer et al.
(2005) and Owen et al. (2000). Owen et al. (2000) argue that the production of sustainability reports is subject to high involvement of corporate management, which tends to share information only when it will enhance corporate image, rather than seeking for true accountability. Thereby, media and scholars address the concern that sustainability accounting and reporting are sometimes tools for window-dressing, which derives from pressure of the society and government, and which seems to disappear when this pressure no longer exists (Kolk, 2003; Schaltegger and Burritt, 2010). In addition to the accountability concerns, there is also criticism that sustainability reporting is not integrated in the day-to-day decision-making and activities of management or that sustainability reporting does not enhance sustainability performance (Gray, 2010; Thijssens et al., 2016). Van Marrewijk (2003) stated in his study, based on a worldwide research among 114 organizations from the Global 1000, that 73% say that corporate sustainability is a topic of interest on the board’s agenda, but only 11% is implementing a corporate sustainable strategy. Some researchers suggest that managers use this kind of reporting for ‘greenwashing purposes’ and state that the sustainability reporting of an organization is decoupled from the internal systems of management accounting and management control (Laufer, 2003; Walker and Wan, 2012). Walker and Wan (2012) argue that when organizations do not even have the intention to integrate sustainability reporting in their internal systems, sustainability reporting is just a tool for greenwashing and improving corporate image. Maas et al. (2016) argue that when an organization wants to improve their sustainability performance, it is important to address accounting, control and reporting systems in an integrated way, rather than as isolated tools. Consequently, Schaltegger and Wagner (2006) argue that a shift is needed to a more comprehensive view of sustainability in the organization whereby sustainability accounting and reporting can contribute together to behavioral change in the organization, which will result in improved sustainability performance. Considering the above, it is interesting to examine whether an organization that reports about sustainability also integrates sustainability into its internal systems and how various motives influence sustainability control and reporting. The purpose of this study is to empirically assess the effect of using Sustainability Management Control Systems (SMCS) on the quality of sustainability reporting and also to examine the effect of various motives to engage in sustainability on the practices of control and reporting. This thesis addresses these topics by the following research question:
What is the effect of SMCS on the quality of sustainability reporting, and how are these constructs influenced by various motives?
This research question is examined by using survey-data from 36 Dutch companies to assess the extent of using SMCS and the motives of organizations for sustainability. Archival data from the Transparency Benchmark 2015 is used to measure the quality of sustainability reporting (Dutch Ministry of Economic Affairs, 2015). This study examined the extent of sustainability information in both formal and informal control systems. Based on the study of Brønn and Vidaver-Cohen (2009), the effect of three types of motives on SMCS and sustainability reporting is examined, which contains sustainability, legitimacy, and profitability motives. The PLS-SEM analysis shows that SMCS have no significant effect on the quality of sustainability reporting. Besides, the results show that sustainability motives are positively related to formal and informal SMCS, and that legitimacy motives are positively related to the quality of sustainability reporting. The results imply that sustainability motives leads to more internal management control on sustainability, and that external sustainability reporting is of major importance to companies that are driven by legitimacy motives. The latter is consistent with the legitimacy theory (Deegan, 2007).
This study contributes to the field of sustainability research in several ways. Firstly, it responds to the call for further integrated research into the link between accounting, control and reporting (Maas et al., 2016) and research into the use of sustainability information in MCS (Arjaliès and Mundy, 2013). Since there is not much mature developed theory about SMCS in relation to sustainability reporting (Epstein and Buhovac, 2014), this thesis is a high contribution to this part of sustainability research. However, this also causes that the hypotheses and the direction of the relations are not as well-grounded in the literature as preferred. This study uses a unique research approach by linking archival data to data retrieved from surveys, and therefore it highly contributes to the academic field of sustainability in MCS and reporting. Where most studies that address the motives to engage in sustainability are of qualitative nature (Brønn and Vidaver-Cohen, 2009), this study contributes to the field of sustainability research by conducting empirically quantitative research to address this topic.
This thesis is structured as follows: the next chapter explains the examined concepts by providing an overview of existing literature. Based on this literature review, the hypotheses and a conceptual model are developed. Chapter 3 involves the research method and an assessment of validity and reliability considerations. Thereafter, the results of the PLS-SEM analysis and bootstrapping of the hypothesized paths are presented. This thesis concludes with a discussion and conclusion of the results, limitations of this study and some recommendations for further research.
2. THEORY AND LITERATURE REVIEW
2.1 Sustainability
Companies are an important player in the welfare of society on different aspects, like the economic welfare of society, but also environmental and social welfare (Schaltegger et al., 2006). The way of doing business by organizations impacts the society in either a positive or a negative manner. To serve long-term sustainability of the society, companies have to engage in sustainability practices (Schaltegger et al., 2006). If an organization wants to subsist and survive, they are even forced to meet the expectations of society by serving its long-term interests (Adams and Frost, 2008). Therefore, while several years ago being profitable was almost the sole purpose for companies, nowadays also environmental and social aspects are included in the strategies, activities and reports of organizations (Cramer, 2001).
In the current literature, there are a lot of different definitions circulating, and there is no ‘one solution fits all’ regarding the definition of sustainability (Van Marrewijk, 2003). Many concepts are used, separated or interchangeably, to address sustainability, like ‘the three P’s: People, Planet and Profit’, also referred to as the ‘Triple bottom line’ (Elkington, 1997) or ‘Corporate Social Responsibility (CSR)’ (Göbbels, 2002). Van Marrewijk (2003) states that corporate sustainability and CSR refers to the voluntary activities of an organization, which involves social and environmental considerations in its business activities and in relation to the organization’s stakeholders. The most often used and widely accepted definition in the current research field of sustainability is the Brundtland definition of the WCED (Sneddon et al., 2006). The WCED states that sustainability can be defined as ‘meeting the needs of the present without compromising the ability of future generations to meet their own needs’ (World Commission on Environment and Development, 1987). Dyllick and Hockerts (2002) state, based on the WCED definition, that “To achieve this goal, companies need ‘to maintain their economic, social and environmental capital base” (p. 132), and this definition is in accordance with the Triple Bottom-line principle of Elkington (1997). In this study, the Brundtland definition of the WCED is used when addressing the concept of sustainability, and following Dyllick and Hockerts (2002) sustainability in this study includes economic, environmental and social aspects.
The shift to ‘People, Planet and Profit’ is boosted by pressure of different stakeholders for more corporate transparency and openness (Cramer, 2001). But in addition, sustainability can also have a positive effect on the financial performance of an organization (Tsoutsoura, 2004) and may create new business opportunities (Jenkins, 2009). Considering this, organizations can be driven by various motives to engage in sustainability activities (Brønn and Vidaver-Cohen, 2009). To achieve sustainability
performance-goals, organizations integrate sustainability in their MCS (Schaltegger, 2011) and communicate about their sustainability performance by means of their sustainability reporting (Perrini and Tencati, 2006).
2.2 Sustainability reporting
An organization is subject to various stakeholders with different interests, who all try to influence the organization (Buchholz and Rosenthal, 2005). The organization, in turn, wants to communicate to their stakeholders about these interests and an important way to do this is via their corporate reporting. A so-called sustainability report presents the environmental, social and economic performance of an organization and explains whether and how the organization deals with social and environmental aspects (Carroll and Shabana, 2010; Daub, 2007). According to Schaltegger and Wagner (2006), a sustainability report is public and provides the reader information about how the company attempts to meet sustainability-challenges. Sustainability reporting can appear in various forms, like a paragraph in the conventional annual report, a stand-alone sustainability report or an integrated report which combines financial information with information regarding environmental and social topics (Hahn & Kühnen, 2013).
Although regulation regarding non-financial disclosures has emerged in the past few years, sustainability reporting is still quite voluntary in nature. A lot of companies nowadays report in accordance with the Global Reporting Initiative (GRI). These voluntary GRI directives assist companies to report on sustainability topics, but there are no generally accepted standards or legislation regarding CSR reports yet (Kolk, 2003). This results in a wide variety in reports, given the length, approach, scope and depth of accountability (Fortanier et al., 2011). In order to be useful as a source of information for the company’s stakeholders, it is important to disclose sustainability reports of high quality (Cormier and Magnan, 2004; Daub, 2007). Quality of sustainability reporting involves the relevance, clearness and the reliability of the information disclosed as well as the responsivity to stakeholders and contextual consistency of the sustainability reports (Dutch Council for Annual Reporting, 2009).
Some stakeholders (e.g. governments) expect that sustainability reports lead to more accountability of organizations (Hahn and Kühnen, 2013), and that sustainability reporting might cause internal change (Adams and McNicholas, 2007). Sustainability reporting can support internal change by internal communication of this information, because of the increased awareness and the creation of internal legitimation among employees (Bennet et al., 2013; Schaltegger and Wagner, 2006). While currently the main focus of reporting is to increase transparency to stakeholders, there is a shift towards linking reporting to internal managerial decision-making (Adams and Frost, 2008). Integrated reporting
is one way of external sustainability disclosure, which integrates financial information and sustainability information in one single report and at the same time in the company’s management dashboard (PwC, 2015). Nowadays, a major increase exist in the amount of companies using integrated reporting to disclose sustainability information (Maas et al., 2016). Montecchia et al. (2016) argue that this type of reports can improve the integration of sustainability in the culture and identity of the organization. When an organization wants to disclose sustainability information via their external reporting, the organization has to set up goals and targets and has to monitor and control the progress with respect to the preset goals and targets (Ness et al., 2007). Therefore, the company’s MCS can play a role in the generation of, and directing on information that is meant for sustainability reporting.
2.3 Sustainability Management Control Systems
Management Control Systems (MCS) in general contain the creation and use of controls to make sure that behavior and decisions throughout the organization are congruent with the strategy and objectives of the organization (Malmi and Brown, 2008). Malmi and Brown (2008) state that MCS include ‘those systems, rules, practices, values and other activities management put in place in order to direct employee behavior’ (p. 290). This definition shows that MCS are more than just systems that support decision-making, but include the whole package of systems which are used by managers to make sure that employees act in a way that is congruent to the organizations’ objectives (Malmi and Brown, 2008). Widener (2004) states that the aim of an organization’s MCS is to support the intended strategy. MCS can be categorized in two different groups of control: formal and informal MCS (Anthony et al., 1989). Because of the function of supporting the organization’s strategy, and by influencing employees’ and managers’ actions, MCS can drive an organization towards sustainability (Ahrens and Chapman, 2007; Langfield-Smith, 1997). MCS play a major role in the integration of sustainability in the organization’s strategy, by supporting the process of the development and implementation of a company’s strategy (Gond et al., 2012; Henri, 2006; Mundy, 2010). Considering the above, when a company wants to improve its sustainability performance, it has to integrate sustainability in its strategy, and consequential in its MCS. Following this, the development of Sustainability Management Control Systems (SMCS) emerged (Schaltegger, 2011). The current literature on SMCS supports the use of both formal (Perego, 2005) and informal control systems (Durden, 2008; Henriques and Sadorsky, 1996; Newman & Breeden, 1992). Pondeville (2013) argues that because research in this area is still in a developmental stage, both types of systems have to be examined. Therefore in this study, formal SMCS and informal SMCS are both included in the hypothesized model as shown in Figure 1.
Formal MCS in general involve written rules, procedures, policies, routines and structures and include for example result controls and budgeting (Langfield-Smith, 1997; Maciarello and Kirby, 1994; Ouchi, 1977). Regarding formal controls, Langfield-Smith (1997) argues that ‘these are the more visible, objective components of the control system’ (p 208). Formal controls make sure that predetermined targets are met by the use of intensive monitoring and making adjustments for inappropriate actions or behavior (Langfield-Smith, 1997). Therefore, in order to improve sustainability performance, it is important to integrate sustainability in formal control systems (Riccaboni and Luisa-Leone, 2010). Furthermore, sustainability has to be integrated into investment-decisions (Capron and Quairel, 2004), sustainability rules and procedures can be set up, and sustainability results have to be compared with preset goals (Pondeville et al., 2013). Sustainability objectives can also be integrated into the organizations’ planning systems and performance and rewarding systems (Daily and Huang, 2001; Judge and Douglas, 1998).
Informal controls are less visible than formal controls and contain unwritten policies (Langfield-Smith, 1997). Informal controls are often deduced from organizational culture and involve shared values and beliefs (Ouchi, 1979). Informal SMCS are used to enhance the support of sustainability by managers and employees (Pondeville, 2013), because informal SMCS aim to attain active participation of employees and commitment of managers. Also working in teams to solve sustainability problems, within a business unit or across the organization, is part of a company’s informal SMCS (Capron and Quairel, 2004). Informal SMCS contain systems which encourage employees to actively participate in and contribute to decisions about sustainability and is therefore important for improving sustainability performance (Pondeville, 2013). Top management involvement and responsibility of employees play an important role in achieving sustainability goals (Boiral, 2000; de Villiers et al., 2016). Riccaboni and Luisa-Leone (2010) also emphasize the importance of informal controls, in the way of cultural controls.
Crutzen and Herzig (2013) argue that SMCS play an important role in the design and implementation of a sustainability strategy and that SMCS improve the decision-making process. The development of SMCS is a prerequisite for successful change of organizations to act in a more sustainable way towards the society (Bebbington and Thomson, 2010). Schaltegger and Wagner (2006) mention that SMCS, like a Sustainability Balanced Scorecard, can be used as an approach to set strategic information from management into the organization. Consequently, sustainability reporting can be used to communicate and report this sustainability information to external stakeholders (Schaltegger and Wagner, 2006). Information about performance measures regarding sustainability, which is needed for external reporting, could be collected and controlled by the use of SMCS (Maas et al., 2016). Schaltegger and Wagner (2006) argue that an organization should not address sustainability in an
isolated way by setting up a sustainability department, which is parallel to the “normal business” departments, but has to involve sustainability in the organization’s business strategy, accounting and control systems and external reporting practices. Therefore it is important to integrate sustainability in MCS and external reporting in a consistent manner. De Villiers et al. (2016) found support for the integration of a company’s sustainability reporting and its MCS. De Villiers et al. (2016) subsequently argue that if an organization integrates its sustainability reporting with its MCS, it will provide advantages to the organization, like a better understanding and operationalization of the concept of sustainability within the organization. This improved internal knowledge about sustainability-related topics, might cause an improved process of information collecting and control, and therefore lead to better external communication. A better external reporting about sustainability performance might be achieved, since it is backed by the company’s internal systems. When organizations include sustainability performance information into their sustainability report, but do not include this information in their managerial decision-making, no value for society is created and sustainability development will not be improved (Frankental, 2001, Margolish and Walsh, 2003). When sustainability performance information is not integrated and used, it also decreases the business value of sustainability for companies (Maas et al., 2016, Ramos et al., 2013; Vance, 1975). Thus, MCS and sustainability reporting have to be integrated because an organization’s MCS can serve as a mechanism to implement external sustainability reporting objectives (de Villiers et al., 2016). Based on the above described discussion about the relation between a company’s MCS and its external reporting, it is predicted that a larger extent of using SMCS leads to a higher quality of sustainability reporting. Therefore the following hypotheses are formulated:
H1a: Formal SMCS are positively related to Quality of sustainability reporting H1b: Informal SMCS are positively related to Quality of sustainability reporting
2.4 Motives
Due to the fact that organizations increasingly integrate sustainability in their MCS and reporting systems as mentioned before, and the fact that these practices heavily differ between organizations, it is interesting to investigate the underlying motives to engage in sustainability (Adams and Frost, 2008; Gond et al., 2012; Kolk, 2008). Because of the voluntary nature of sustainability reporting, motives of organizations to engaging in sustainabilitymay have effect on the quality of sustainability reporting (De Waard, 2014). Herzig and Schaltegger (2006) argue that an organization would report about sustainability to create more transparency and to improve the legitimacy and reputation of an organization, but also to motivate employees to engage in sustainability activities and to find support
for internal sustainability information and control systems. Previous research mentions that an organization may be driven by self-regard, internal values and ideas, or external pressures from different stakeholder groups to engage in sustainability activities at all (Aguilera et al., 2007; Brønn and Vrioni, 2001; Mohr et al., 1998). Brønn and Vidaver-Cohen (2009) mention that organizations engage in activities that benefit society, driven by the pressures that they impose on themselves or by the external pressures they experience from different institutional actors in their environment. Brønn and Vidaver-Cohen (2009) argue in their research that various motives play an important role in how an organization deals with social initiatives and recognize three main motives for organizations to engage in this kind of activities: sustainability, legitimacy and profitability motives. Although the research of Brønn and Vidaver-Cohen (2009) is limited to social initiatives, these motives are also useful in the broader context of sustainability activities.
First, Brønn and Vidaver-Cohen (2009) mention sustainability motives as a determinant to engage in sustainability activities. Sustainability motives concern moral arguments of managers to pay as an organization attention to sustainability. It involves managers’ personal belief that organizations have to actively endeavor to have a positive impact on future society (Brønn and Vidaver-Cohen, 2009). Thus, sustainability motives primary contain of personal moral grounds to emphasize sustainability in the organization. Hahn and Scheermesser (2006) argue that just the internal desire to ‘act in a good way’ is the most powerful motive for sustainability practices. This moral belief corresponds to the Brundtland-definition which is mentioned before, which state that the way of doing business now, should not harm future requisites and desires. Sustainability motives also contain the desire to share companies’ resources with for example foundations and associations, by means of sponsoring initiatives that positively impact the environment and social community (Bansal and Roth, 2000). Overall, sustainability motives derive from the conviction to moral behavior, and from this belief a company wants contribute to a better future world (Brønn and Vidaver-Cohen, 2009). If this belief is shared by the entire organization, it will also be reflected in the company’s strategy. To achieve total embedding of this belief and strategy in the organization, it is expected that sustainability will be integrated in both formal and informal MCS (Riccaboni and Luisa-Leone, 2010). If moral beliefs to engage in sustainability are represented at the core of the organization, organizations also want to communicate externally about their activities and performance in this field. Due to the integration of sustainability into the organization’s formal and informal MCS, there will be information available for external reporting and therefore it is expected that sustainability motives are positively associated with the quality of sustainability reporting. Therefore, the following hypotheses are formulated and tested in this study:
H2a: Sustainability motives are positively related to Quality of sustainability reporting H2b: Sustainability motives are positively related to Formal SMCS
H2c: Sustainability motives are positively related to Informal SMCS
Beside sustainability motives, Brønn and Vidaver-Cohen (2009) also describe the importance of legitimacy motives, which means that managers are driven to engage in sustainability activities to create legitimacy in the perception of the stakeholders. Brønn and Vidaver-Cohen (2009) also argue that organizations have to record sustainability topics on their boards’ agenda to address and satisfy the expectation of their stakeholders (Brønn and Vidaver-Cohen, 2009). Many scholars argue that because of the changing climate and society, organizations are required to pay attention to sustainability in order to preserve the legitimacy of society (Moir, 2001). By the increasing role of media and the internet in uncovering business scandals and failures, organizations are compelled to pay attention to sustainability to protect the company’s reputation in society (Cormier and Magnan, 2004; Zyglidopoulos et al., 2012). Another motivation for managers is that engaging in sustainability activities may enhance the company’s “reputational capital” and thereby improving the ability to gain new resources (Fombrun et al., 2000). De Leaniz and del Bosque (2013) also found that sustainability is a key determinant to improve corporate reputation in society. De Villiers et al. (2016) state that: “Building relationships with stakeholders is regarded as a very important component of sustainability reporting as a means of both enhancing and protecting the company’s reputation and public relations”(p. 82). Because of the broad focus of sustainability reporting, stakeholders may influence and change the focus of the organization to sustainability (de Villiers et al. 2016).
The legitimacy theory is an important and frequently used theory in the research field regarding sustainability reporting (Deegan, 2002; Wilmshurst and Frost, 2000). This theory states that an organization is a small entity involved in a greater system, the society, and therefore companies seek for legitimacy in society (Dowling and Pfeffer, 1975). Legitimacy in society provides a company of a so-called ‘license to operate’ and allows the organizations to use the resources that are needed for doing business (Hahn and Kühnen, 2013). So, legitimacy theory states that organizations exist because of the legitimacy served by society. In order to obtain this legitimacy, the organization has to conduct business in a way that society accepts and has to contribute to society by means of sustainability activities. Consequential to this, when a company fails to act with integrity and in a sustainable way the existence of the company is at stake (Hahn and Kühnen, 2013).
By the increased consciousness of stakeholders regarding sustainability, organizations proactively seek for measures to ensure that their operations are in compliance with stakeholders’ expectations (Wilmshurst and Frost, 2000). External sustainability reporting is most commonly used to demonstrate
to society how well the organization deals with sustainability related issues, and sometimes also to distract the attention of bad environmental or social performance (Wilmshurst and Frost, 2000). Therefore, the company’s external sustainability report is of major importance for managing the perception of society and acquiring legitimacy. It is expected that legitimacy motives are strongly positively associated with the quality of sustainability reporting, because legitimacy theory is seen as the foundation for sustainability reporting (Deegan, 2002; O’Donovan, 2002). De Villiers et al. (2016) argue that external stakeholders do have influence on what managers include in their MCS. In line with this, Henri & Journeault (2010) argue that external pressure from stakeholders, including governmental and regulatory bodies, has a positive effect on formal SMCS. Stakeholders, such as employees, suppliers or customers, are often very closely linked to the daily business of an organization. Therefore, it is important that organizations driven by legitimacy motives have sustainability integrated in their corporate culture and their values, and thus in their informal SMCS. Considering the above, sustainability is important in the external reporting to achieve legitimacy in society. Besides, the organization also has to include sustainability in the internal strategy and MCS to ensure a consistent picture of the organization. Therefore, a positive relation is expected between legitimacy motives and SMCS, and between legitimacy motives and the quality of sustainability reporting, resulting in the following hypotheses:
H3a: Legitimacy motives are positively related to Quality of sustainability reporting H3b: Legitimacy motives are positively related to Formal SMCS
H3c: Legitimacy motives are positively related to Informal SMCS
The third consideration of managers to engage in sustainability, which will be examined in this study, contains profitability motives. There are several studies that argue that sustainability reporting and practices do have a direct positive effect on companies’ financial performance by increasing sales and revenues, and sustaining and insuring a certain profit level (Ameer and Othman, 2012; Chen and Wang, 2011; Peloza, 2006; Tsoutsoura, 2004). Some scholars argue that sustainability can create a competitive advantage and improve competiveness of an organization from a resource-based perspective (Carroll and Shabana, 2010; Kurucz et al., 2008). A recent investigation of the Boston Consultancy Group (BCG) and MITSloan Management Review, demonstrates that sustainability has become a key factor in the investment decisions of investment companies (MITSloan and BCG, 2016). Consequently, attracting more capital might be one of the reasons for organizations to engage in sustainability activities and then subsequently increase the external reporting about these topics. Since the company’s annual report is originally the primary source of information to shareholders and
H1a H1b H2a H2b H3a H3b H4a H4b H4c H2c H3c
creditors, it is important to provide high quality sustainability information in external reporting in order to attract capital (Neu et al., 1998; Zeghal and Ahmed, 1990). Furthermore, some researchers argue that customers prefer sustainable products and services (Brønn and Vidaver-Cohen, 2009; Young et al., 2010).
Therefore, it is suggested that companies that are driven by profitability motives, will show their engagement in sustainability to shareholders and customers. Since these companies use sustainability to increase profits, sustainability will be reflected in their formal MCS, such as their budgets and KPI’s, and sustainability results will be frequently compared with objectives to ensure that projects are profitable. Furthermore, it is expected that these companies will less emphasize on the creation of a ‘sustainable culture’, because the sustainability ideology in itself is of less importance than making profit. Based on this discussion on profitability motives, reporting and control, the following hypotheses are formulated:
H4a: Profitability motives are positively related to Quality of sustainability reporting H4b: Profitability motives are positively related to Formal SMCS
H4c: Profitability motives are not related to Informal SMCS
Summarizing the aforementioned hypothesis development, this study examines the influence of using formal and informal SMCS on the quality of sustainability reporting. In addition, to explore why organizations engage in sustainability, this study examines the effect of sustainability, legitimacy and profitability motives on the constructs of formal SMCS, informal SMCS, and the quality of sustainability reporting. The above described reasoning leads to the conceptual model as showed in Figure 1, which is empirically tested in the remainder of this study.
Sustainability motives Quality of sustainability reporting Legitimacy motives Profitability motives Informal SMCS Formal SMCS
3. RESEARCH METHOD 3.1 Data collection
The relation between the various motives, SMCS and sustainability reporting is analyzed at firm level, since this is the best way to measure external sustainability reporting practices. Companies provide external sustainability information by using their annual reports, sustainability reports, integrated reports or another way of external reporting (Kolk, 2003). However, the best way to analyze the use of sustainability in formal and informal MCS and the motives of organizations to engage in sustainability, is to measure these constructs on Business Unit (BU) level. The reason for this is that BU-managers are highly involved in the design and use of MCS and they direct and control the use of MCS on lower levels in the organization. Conducting a study about sustainability in MCS on BU-level is in accordance with several previous studies in the field of MCS (e.g. Arjaliès and Mundy, 2013; Morsing and Oswald, 2009; Speklé and Verbeeten, 2014).
In this study, a survey is conducted to understand the motivations of organizations to engage in sustainability activities and to measure the level of sustainability management controls in an organization. Using a survey-method can provide insight in the role of MCS in multiple organizations at one point in time (Arjaliès and Mundy, 2013), and is a more often used approach in the field of MCS research (Henri, 2006; Widener, 2007). All surveys were conducted in person by meetings of approximately one hour. Face-to-face surveys enhance the validity of the interpretation of the survey-questions, because the interviewer can explain unclear questions if necessary (Speklé et al., 2014). However this explanation is restricted to the survey protocol and the instructions of the research supervisor in order to avoid response bias. As described before, the survey is conducted at BU-level managers, which implies managers who are active at higher or middle-level in the organization and who have responsibility for the tasks and process of a BU in the context of a larger organization (Cavalluzzo and Ittner, 2004; Speklé and Verbeeten, 2014). At the end of the face-to-face-survey, 9 of the respondents were asked, by use of in-depth questions, how sustainability reporting and control are linked in their organization and whether or not a strong link between these constructs is desirable. These interviews are used in order to explain the results of this study.
To address the research question of this study, the survey-results are triangulated with archival data from the Transparency Benchmark (TB) 2015. The TB is used to measure the quality of sustainability reports of organizations (Dutch Ministry of Economic Affairs, 2015). The TB, an initiative of the Dutch Ministry of Economic Affairs, assesses the quality of the sustainability reports by asking the largest 485 companies of the Netherlands to rate themselves by using an online self-assessment. After the self-assessment, the results of the companies are critically reviewed for accuracy
by a team of experts and researchers (Dutch Ministry of Economic Affairs, 2015). The TB of 2015, which is used in this study, consists of 245 organizations that actually retrieved a score. This study is conducted among Dutch companies, due to the constraint that the TB only includes companies from the Netherlands. However, most of the current research in the field of sustainability is concerning US or UK companies, and therefore it might be interesting to address another geographic area (Brammer and Pavelin, 2006). The sample size of this study contains 36 organizations, which have at least 100 employees and are included in the Transparency Benchmark 2015. The survey-data is collected by a group of 5 research students, who use their professional networks to get in touch with the organizations for participating. In Table 1, descriptive information is included of the companies that are subject to research, like the company’s size and the size of the participating BU, but also information about the BU-manager is included. The average company size (measured in amount of FTE’s) of the participating companies is 15.055 employees, and the BU which is directed by the participating BU-managers, involves on average 414 employees. The BU-managers are on average well-experienced in their role as a BU-manager, as their experience is on average slightly more than six years and their total experience in the organization is on average more than 14 years. Based on the two before-mentioned measures of experience, it can be assumed that this managers are well-informed about the company’s structures and activities. Therefore, it is expected that they will provide a reasonable representation of the organization (Speklé and Verbeeten, 2014).
Table 1 General descriptive statistics
Industry Total N Frequency Percentage
Agriculture, Forestry and Fishing 36 3 8.3%
Construction 36 2 5.6%
Finance, Insurance, and Real Estate 36 8 22,1%
Manufacturing 36 3 8,3%
Mining 36 1 2,8%
Retail trade 36 4 11,1%
Services 36 6 16,7%
Transportation, communication, electric, gas and sanitary services
36 3 8,3%
Wholesale trade 36 2 5.6%
Non-classifiable establishments 36 4 11,1%
Table 2 Industry classification
Minimum Maximum Mean Std. deviation
Company Size (FTE) 120 104.500 15.055 27.236
BU Size (FTE) 23 5.000 426 911
Experience as BU Manager (years) 0.5 25 6.10 5.76
Table 2 provides an overview of the different industries in which the participating organizations operate. The companies which are subject to this study operate in 10 different industries. Most of the participating companies are active in the ‘Finance, Insurance and Real Estate-industry’, this industry covers 22,1% of the total sample size.
3.2 Measurement of the variables
The hypothesized model of this study consists of multiple-item reflective measurement models. Hair et al. (2017) state that reflective measurement models consist of: “Measures that reflect the
underlying construct” (p. 46). In case of reflective measures, the relationship points from the construct
to the related indicators, instead of causality from the indicators to the construct, which is the case with formative measures (Hair et al., 2017). The indicator reliability is assessed by means of indicator outer loadings in SmartPLS. Based on the assessment of outer loadings, some indicators are excluded to enhance the internal reliability and to assure convergent validity. Outer loadings should preferably exceed the threshold of .7, however weaker loadings are often found (Hulland, 1999). Removal of items with a loading below .7 should be carefully executed, because it may negatively influence the composite reliability (Hair et al., 2017). To test whether the outer loadings are sufficient, the outer loading relevance test of Hair et al. (p. 114, 2017) is followed. First, all indicators that show an indicator loading below .4 should be removed (Bagozzi et al., 1991; Hair et al., 2011). Thereafter, for outer loadings greater than .4 but smaller than .7, it is tested whether or not removal improves the internal consistency and reliability of the construct, by means of the Average Variance Extracted (AVE) and Cronbach’s Alpha (α)(Hair et al., 2017). Convergent validity is tested by means of the AVE, which has to exceed the threshold value of .5 (Fornell and Larcker, 1981; Hair et al., 2017). In the end of this chapter, the conducted reliability and validity tests are presented. Because the analysis of the indicator loadings determines which items are included in the measurement of the variable, this test is included in the description of the measurement variables as described hereafter.
Motives of managers to engage in sustainability activities are measured based on the study of Brønn and Vidaver-Cohen (2009), as described in the theory section. In this study, the same distinction is made between various motives namely: sustainability, legitimacy and profitability motives. These motives are measured by using previously validated survey-questions of Brønn and Vidaver-Cohen (2009) and the respondents answered on a 7-point Likert scale varying from 1 (‘strongly disagree’) to 7 (‘strongly agree’). In the study of Brønn and Vidaver-Cohen (2009) it remains unclear whether the item ‘Prevent future business problems’ belongs to sustainability motives or profitability motives. Therefore, in this study it is assessed to which motive the item has the highest indicator loading and
based on that, this item is included in the variable profitability motives. When assessing the indicator loadings of sustainability motives, none of the indicators shows a loading below .4. However, the item ‘No good reason not to’ shows a loading of .486 and the item ‘Strengthen global networks’ shows a loading of .461. Removal of both items results in a satisfactory AVE score as shown in Table 3. The remaining items which measure sustainability motives, are presented in Table 3, and these items are internally consistent (α=.799) and show all a loading above .7. The assessment of indicator reliability for legitimacy motives demonstrates that the item ‘Improve image’ shows a particular low indicator loading of .202, therefore this item is removed. Removal of this item results in a satisfactory AVE and indicator loadings above .7 of the remaining items, as presented in Table 3. The remaining items show an internal consistency of .677 which is below the Cronbach’s alpha threshold of .7, however this score is accepted because it is marginal to the .7 threshold and removal of one more item would heavily decrease the content validity of the variable legitimacy motives. For profitability motives, the item ‘Solve social problems better’ is removed based on an indicator loading of .375. The item ‘Avoid regulation’ shows an indicator loading of .486 and is also removed, because after removal the AVE shows a satisfactory score of .570. The remaining four items are internally consistent (α= .757) and are presented in Table 3. Although the item ‘Remain competitive’ shows an indicator loading below .7, the AVE is already above threshold and therefore, removal of this item would not be necessary.
Formal SMCS is measured by nine various elements based on the study of Pondeville et al. (2013), meaning that the survey is conducted with beforehand validated questions. Similar to the measurement of the motives, all nine indicators are measured on a seven-point Likert scale, ranging from 1 (‘to a small extent’) to 7 (‘to a large extent’). Assessment of the indicator loadings demonstrates that all indicators show a loading above or close to .7, and since the AVE score is satisfactory, no items are removed. The items which reflect formal SMCS are presented in Table 3 and the internal consistency is reliable (α=.888).
Informal SMCS is also measured on a 7-point Likert scale ranging from 1 (‘to a small extent’) to 7 (‘to a large extent’) and retrieved from beforehand validated survey-questions from the study of Pondeville et al. (2013). Informal SMCS in the study of Pondeville et al. (2013) consist of eight elements which are assessed for indicator reliability. The item ‘BU management has enough freedom to manage BU sustainability issues’ shows a very low indicator loading of .185, and is therefore removed from the measurement model of informal SMCS. After removal of this item, not all remaining indicators show an indicator loading above .7, however because of the sufficient AVE and a Cronbach’s alpha of .863, which can be found in Table 3, no further removal of items is necessary.
Quality of Sustainability Reporting is measured by the use of the total score of a company on the Transparency Benchmark 2015 (TB). In this study the data of TB 2015 is used, because the data of TB 2016 was not yet available at the time of research. The TB is an important ranking tool in the Netherlands to measure the current state of sustainability reporting and to show which areas leave room for improvement. The total score of the TB consists of eight criteria which can be divided in quality-related criteria and content-quality-related criteria. The quality-quality-related criteria consists of three elements, namely: ‘Organization and business model’, ‘Policy and results’ and ‘Management approach’. The content-related criteria involve: ‘Relevance’, ‘Clearness’, ‘Reliability’, ‘Responsiveness’ and ‘Consistency’ (Dutch Ministry of Economic Affairs, 2015). All items, which are presented in Table 3, demonstrate an indicator loading above .7, resulting in a sufficient AVE and a Cronbach’s alpha of .967. The components that are used in the TB to measure these criteria and the wages of each criteria and each component are included in Appendix B. The maximum score a company can achieve on the total TB ranking is 200 points. The total TB-ranking consists of 245 companies, for this research only the 36 companies are selected that were available to participate in the face-to-face-survey.
3.3 Data analysis
A Partial Least Square (PLS) analysis is conducted, using SmartPLS, to test the relations between various motives, formal and informal SMCS and the quality of sustainability reporting. Prior studies in the field of management accounting and control have also used a PLS-analysis (e.g. Anderson et al., 2002; Lee et al., 2014; Mahama, 2006; Pondeville et al., 2013). SmartPLS is a technique which can be used to test a component-based structural equation model (Lee et al., 2014). PLS is a highly appropriate technique for studies with small samples and it does not require a normal distribution of the data (Chin, 1998a; Hair et al., 2017; Pondeville et al., 2013). The PLS technique is often used for complex models, since it is a more suitable technique for model-estimation with multiple indicators, mediators and relationships in comparison to Ordinary Least Square-regression (OLS) (Hayes, 2013; Iacobucci et al., 2007). Computing the PLS-algorithm results in the path-coefficients, which can be seen as regression results (Pondeville et al., 2013). After conducting the PLS-analysis, bootstrapping is used for computing the T-statistics and p-values to test the significance of these coefficients (Chin, 1998b; Lee et al., 2014). The bootstrapping-technique produced 500 random samples of observations, with no sign changes and replacement of missing values with the mean. The method of analysis and the format of the presentation of the results follows the example of the study of Pondeville et al. (2013).
* Complete description of measurement items as questioned in the survey are included in Appendix A
Table 3 Validity and reliability results
Variables and indicators* IL CR AVE
Formal SMCS .909 .526
Integrated sustainability objectives in planning systems .699
Integrated sustainability performance indicators in compensation/rewarding systems
.674
Integrated sustainability performance indicators in promotion/career advancements .715
Comparison of results to sustainability objectives .699
Environmental or social information on employees .724
Integrated sustainability criteria in investment decisions .700
Documented sustainability rules and procedures .816
Detailed description of sustainability functions .749
Procedures of external communication .744
Informal SMCS .893 .548
BU employee suggestions for sustainability improvements on primary process .557 BU employees suggestions for sustainability improvement on products/services .687
BU employees suggestions in the field of sustainability .741
BU management is really involved in the BU sustainability management process .775 Sustainability issues are discussed at periodic meetings at BU level .859 Work teams at the BU level are built to manage sustainability problems .793 Persons from different BUs work in teams to manage sustainability issues .735
Sustainability Motives .869 .624
Share resources with society .812
Concern for society’s future .864
Personal satisfaction .752
Learn from social agencies .724
Legitimacy Motives .823 .609
Serve long-term company interest .717
Fulfill stakeholder expectations .785
Be recognized for moral leadership .835
Profitability Motives .840 .570
Remain competitive .618
Meet shareholder demands .731
Create financial opportunity .826
Prevent future business problems .826
Quality of Sustainability Reporting .971 .805
Policy and Results .933
Reliability .804
Clearness .889
Management Approach .949
Organization and Business Model .907
Relevance .867
Responsiveness .922
Consistency .898
3.4 Validity and reliability
The content validity of the measurement variables is enhanced by using previously validated survey-questions, based on previous studies (Brønn and Vidaver, 2009; Pondeville et al., 2013) and by performing an indicator loading assessment, which results in a satisfactory internal consistence (α>.7) of the various items that measure the variables (Pallant, 2013). Convergent validity should be tested by AVE and Composite Reliability (Chin, 1998a). The AVE scores, which are discussed earlier, all exceed the cut-off value of .5, resulting in satisfactory AVEs ranging from .526 to .805. In addition to the AVE also the Composite Reliability is tested in order to assess the reliability of the measurement model (Chin, 1998a). As shown in Table 3, the composite reliability of all variables lies between .823 and .971 and are therefore sufficient regarding the required cut-off value of .7 (Nunnally and Bernstein, 1994). Therefore, this model meets the requirements for convergent validity and internal consistency to interpret the results of the model (Chin, 1998a).
Finally, the discriminant validity is tested to assess the extent to which the constructs are distinct from the other constructs in the measurement model (Hair et al., 2017). To examine the discriminant validity of the hypothesized model, the Fornell-Larcker Criterion analysis is used. This analysis measures whether the variables show more variance with its own indicators than with the other variables in the model. The Fornell-Larcker criterion states that the correlation between the variables must be lower than the square root of the AVE (Wong, 2013). Table 4 shows the results of the Fornell-Larcker test, and it can be concluded that none of the correlations exceed the square root of the AVE. In addition to the discriminant analysis, collinearity concerns are checked by means of the Variance Inflation Factor (VIF). All VIF values of the constructs are sufficient and range from 1.553 to 2.787, where a VIF value of 5 or higher reflects a concern of collinearity (Hair et al., 2011). These results show that the model is valid for interpretation of the PLS-coefficients and T-statistics, which are discussed in the next chapter.
Table 4 Correlations between variables and square root of AVE on the diagonal
Variables 1 2 3 4 5 6 1. Sustainability motives ,790 2. Legitimacy motives ,596 ,781 3. Profitability motives ,390 ,628 ,755 4. Formal SMCS ,635 ,540 ,376 ,725 5. Informal SMCS ,762 ,561 ,377 ,643 ,740 6. Quality of sustainability reporting ,119 ,374 ,151 ,298 ,142 ,897
4. RESULTS
4.1 Descriptive statistics
Table 5 presents the descriptive statistics of all variables which are examined in the model. The table involves, besides the mean and standard deviation, also an assessment of the distribution of the data by means of the Skewness and Kurtosis values, to demonstrate the extent to which the data is normally distributed. The variables show satisfactory values, since in the case of skewness a maximum value of 3.00 and for Kurtosis a maximum value of 10.00 is acceptable (Widener, 2007). PLS-SEM does not require a normal distribution of the data, however it remains important to assess whether the data is not extremely non-normal (Hair et al., 2017), because extreme deviation of normality can reduce the likelihood of finding statistically significant relations (Hair et al., 2011).
4.2 Partial Least Square-analysis and Bootstrapping
Since the validity and reliability of the measurement model are tested, which results in satisfactory values, bootstrapping with 500 samples is used to test the significance of the path coefficients. In Table 6 and Figure 2 the hypothesized paths are represented, including their coefficient and significance and the conclusion whether the hypothesis is supported or not. The R-squares (R²) of the dependent variables are used to assess to which extent the variance in the dependent variables is explained by the predicting variables (Hair et al., 2017). The R-squares of the dependent variables show that the model has reasonable explanation power. The R² of formal SMCS, informal SMCS and quality of sustainability reporting are also represented in Table 6.
First, the results show that both formal SMCS and informal SMCS have no significant effect on the quality of sustainability reporting. Therefore, no support is found for H1a and H1b, where it was expected that a larger extent of using formal and informal SMCS would have a positive effect on the quality of sustainability reporting. Furthermore, no significant relation is found between sustainability motives and the quality of sustainability reporting, so H2a is not supported. However, the model shows
Table 5 Descriptive statistics
Variables Mean Std. Dev. Minimum Maximum Skewness Kurtosis
Sustainability motives 4,657 1,037 1,00 7,00 -,713 ,313 Legitimacy motives 5,389 ,997 1,00 7,00 -1,284 2,846 Profitability motives 4,658 1,123 1,00 7,00 -,933 ,339 Formal SMCS 3,705 1,336 1,00 7,00 -,384 -,170 Informal SMCS 4,360 1,259 1,00 7,00 -,934 ,019 Quality of sustainability reporting 128,750 52,731 20,00 191,00 -,824 -,501
Table 6 Hypothesized PLS results
support for H2b and H2c, as a strong relation is found between sustainability motives and formal SMCS and between sustainability motives and informal SMCS. Based on this results, it can be argued that companies that are highly driven by sustainability motives, also really embed sustainability in the company’s internal systems of formal and informal management control. It seems that for these organizations, sustainability in external reporting is not of major importance, since no significance is found for H2a. It is interesting to note that although both formal and informal SMCS are significant on a .01 significance level, the coefficient of the relation between sustainability motives and informal SMCS is higher, than the relation between sustainability motives and formal SMCS. This implies that sustainability motives leads to a high involvement of management and employees to support sustainability ideas, even more than it leads to formal direction on sustainability performance.
Furthermore, a strong significant link is found for the relation between legitimacy motives and the quality of sustainability reporting, so hypothesis H3a is supported. These results show that companies that are more driven by legitimacy motives, present a higher quality of sustainability reporting, which is in line with the legitimacy theory. However, while there is no significant effect of legitimacy motives on the extent of both formal and informal SMCS in the organization, it can be assumed that companies driven by legitimacy motives are more focused on their corporate image than on implementing sustainability in their internal strategy and MCS. Although the latter argument should be assessed with caution, since no significance is found for H3b and H3c. The model also demonstrates that profitability motives have no significant effect on the quality of sustainability reporting, where it was expected that companies that are more driven by profitability motives would present a sustainability report of higher quality. It was also expected that companies that are highly driven by profitability
Hypothesized paths Coefficients Conclusions
H1a Formal SMCS → Quality of sustainability reporting (+) ,291 Not supported H1b Informal SMCS → Quality of sustainability reporting (+) -,087 Not supported
H2a Sustainability motives → Quality of sustainability reporting (+) -,241 Not supported
H2b Sustainability motives → Formal SMCS (+) ,484** Supported
H2c Sustainability motives → Informal SMCS (+) ,663** Supported
H3a Legitimacy motives → Quality of sustainability reporting (+) ,501* Supported
H3b Legitimacy motives → Formal SMCS (+) ,221 Not supported
H3c Legitimacy motives → Informal SMCS (+) ,151 Not supported
H4a Profitability motives → Quality of sustainability reporting (+) -,146 Not supported
H4b Profitability motives → Formal SMCS (+) ,048 Not supported
H4c Profitability motives → Informal SMCS ,023
R²= Formal SMCS 44,5%; Informal SMCS 59,9% and Quality of Sustainability Reporting 21,1%
*Correlation is significant at the .1 level (two-tailed) **Correlation is significant at the .01 level (two-tailed)
-,241 -,146 -,087 ,291 ,501* ,023 ,048 ,151 ,221 ,484** ,663**
Figure 2 PLS-model (Dashed lines= negative relation; Solid line= positive relation) * and ** indicate
significance of the path coefficient at respectively .1 and .01 level
motives would strongly involve sustainability in their formal SMCS, however the results show no significant support for H4b. Profitability motives also have no significant effect on informal SMCS, as no relation was expected.
4.3 Robustness check
In order to test the robustness of the data of the TB 2015, an additional test is performed with data from the TB 2014 and this results are included in Appendix C. This additional test verifies whether or not the results of the PLS and bootstrapping analyses are similar when using the data of the TB 2014 when no change in the other variables is made. Therefore the robustness test can prove the structural validity of the tested model (Lu and White, 2014). The data of TB 2014 consists of the same criteria as the TB of 2015, which are stated in Appendix B (Dutch Ministry of Economic affairs, 2014; Dutch Ministry of Economic affairs, 2015). The TB 2014 shows similar indicator loadings as the data of the TB 2015 and therefore the same indicators are used for the measurement variable quality of sustainability reporting. Therefore, the same measurement model can be used for the robustness check of the TB data. The PLS and bootstrapping analysis shows similar path coefficients and significance values. However, in the robustness test, hypothesis 3a shows a marginally less significant result than in the hypothesized model with data of the TB 2015. It still can be concluded that the results of the hypothesized model of this study are in general terms supported by the robustness check with the TB data 2014.
So, the results of the PLS analysis and bootstrapping imply that the use of SMCS both formal as well as informal does not lead to a higher quality of reporting, as was expected. This may imply that companies’ SMCS and external reporting systems are decoupled, however this argument should be
Sustainability motives Quality of sustainability reporting R²=22,1% Legitimacy motives Profitability motives Informal SMCS R²=59,9% Formal SMCS R²=44,5%
interpreted with caution since no significance is found, which can be due to many other reasons which are explained in the next chapter. The model shows that moral belief of sustainability leads to a strong attention of sustainability in the company’s MCS. When assessing legitimacy motives to engage in sustainability, a strong positive relation towards the quality of sustainability reporting is found, but no relation exist on SMCS. Finally, Profitability motives seems to have no effect on SMCS and the quality of sustainability reporting. Further implications and explanations of the results are discussed in the next chapter, where this results will be discussed in the context of the existing literature.
5. DISCUSSION AND CONCLUSION
This study examined the relation between formal and informal SMCS, the quality of sustainability reporting and the effect of various motives on these constructs. Based on a survey among 36 Dutch companies and data obtained from the Transparency Benchmark several interesting results are found. In the section below, the results are put into a broader context, however since there is not much well developed literature on this area yet (Epstein and Buhovac, 2014), theoretical explanation of the results is limited.
First of all, in contradiction to the expectation of this study, no significant relation is found between SMCS and the quality of sustainability reporting, which can be caused by several reasons. First, the results may be caused by the fact that the constructs of SMCS and sustainability reporting are decoupled in organizations. Some respondents argue in the in-depth interviews, that it is desirable that external sustainability reporting and internal SMCS are strongly linked, but also that it is very difficult to align these two concepts. For example, one of the respondents argued that: “The link between internal systems and external reporting is a struggle in our company, and when it is a struggle, there is no internal support” (Respondent 1). Another respondent argued that: “there is information, however really monitoring and control on this topic is quite difficult” (Respondent 8). Another reason that no relation is found is that companies can use large initial investments to improve their sustainability. These investments might be presented in the external reporting of the company, but are not integrated in SMCS, and therefore no relation arise. As an example, one of the respondents mentioned: “Eventually, we try to reduce our energy consumption, for example by imposing solar collectors on the buildings. In this way, we try to invest in the environment, so investing in sustainability happens (Respondent 9)”.Thirdly, respondents argue that the relation is not as strong as expected since integrating sustainability in reporting practices is much more developed than integrating sustainability in its control systems, especially when it comes to corporate culture and values, as one of them mentioned: “I think that monitoring on sustainability is
still heavily under construction, and it has not been strictly formalized” (Respondent 10). Besides, some respondents argue that these informal items are a prerequisite to integrate sustainability in formal control systems. As for example one of the respondents states that: “You must first ensure that sustainability is embedded in the organization and in the awareness of the employees (…) thereafter you can say: we are going to control on these topics by use of for example KPI’s (Respondent 3)”. Considering this, integrating sustainability in the company’s MCS might be still in a developmental stage and therefore a relation between SMCS and sustainability reporting cannot be found yet.
Secondly, while Brønn and Vidaver-Cohen (2009) argue that three different kinds of motives matter for companies relating to sustainability, the results of this study show that profitability motives do not lead to a larger extent of using SMCS or a higher quality of sustainability reporting. With regard to sustainability motives, it is interesting that a positive relation is found between these motives and the use of SMCS, and no relation is found with the quality of sustainability reporting. This may imply that companies that are driven by moral beliefs focus on integrating sustainability in their internal systems of informal and formal controls, but focus to a less extent on the quality of sustainability reporting. Thus, when an organization beliefs in the argument that companies have to contribute to a better world, they use formal and informal controls to achieve that the whole organization supports this idea. It is interesting to note that while both types of control show a positive relation with sustainability motives, this relation is stronger towards informal SMCS than towards formal SMCS. This is consistent with the argument that informal controls are more intended to create a certain culture and value-system within the organization (Henri, 2006). However, companies that are driven by this motive seem less intended to show their sustainability activities to their external stakeholders by means of their reporting. Consistent with prior literature, legitimacy motives are positively associated with the quality of sustainability reporting. This is consistent with the earlier discussed theory, which stated that legitimacy is by many scholars seen as the major driver for sustainability reporting practices (Deegan, 2007). However, it is remarkable that legitimacy motives are not significantly associated with formal and informal SMCS. Since a company’s legitimization is retrieved from the community in the broadest sense, this also includes stakeholders which are closely involved in the company’s activities and which can be expected to assess the internal processes (Carroll, 1991). However the results imply that companies driven by legitimacy motives are more likely to integrate sustainability into their reporting than into their MCS. Further research is needed to clarify why legitimacy motives are not associated with the company’s SMCS. Concluding the above, companies driven by the moral beliefs of ‘contributing to a better world’, are more focused on SMCS while companies that search for legitimacy, pay more attention to the quality of their external communication about sustainability.
