The influence and pressure from stakeholders on sustainability management control systems

The influence and pressure from

stakeholders on sustainability

management

control systems

Master Thesis

MSc Business Administration

Organizational and Management Control

June 2015

University of Groningen, the Netherlands

Supervisor: Dr. H. J. van Elten

Co-assessor: B. van der Kolk

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Content

2.2 Sustainability Management Control Systems ... 8

2.2.1 Formal SMCS ... 9

2.2.2 Informal SMCS ... 9

2.3 Stakeholders’ Pressure and influence ... 9

2.4 Stakeholder theory ... 10

2.5 Classification of stakeholder groups ... 10

2.6 Hypotheses ... 11

2.6.1 Influence of organizational stakeholders ... 12

2.6.2 Pressure of regulators ... 13

2.6.3 Pressure of the market ... 13

2.6.4 Pressure of suppliers ... 14

3 Methodology ... 16

3.1 Design and Sample ... 16

3.2 Variable measurement ... 18

3.2.1 Formal SMCS ... 18

3.2.2 Informal SMCS ... 19

3.2.3 Influence of organizational stakeholders ... 19

3.2.4 Pressure regulators... 19

3.2.5 Pressure markets ... 20

3.2.6 Pressure suppliers ... 20

3.3 Data analysis... 21

3.4 Controllability, validity and reliability ... 22

4 Results ... 23

4.1 Descriptive statistics ... 23

4.2 Results multiple regression analysis ... 24

4.3 Results interviews ... 26

5 Discussion ... 28

5.1 Formal SMCS ... 28

5.2 Influence organizational stakeholders ... 28

5.3 Pressure regulators ... 29

5.4 Pressure markets ... 29

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6 Conclusion ... 31

7 References ... 33

Appendix 1 ... 38

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Abstract

The concept of sustainability has become an unavoidable factor in organizations. The main reason to integrate sustainability practices comes from stakeholders’ pressure. Different stakeholder groups exert pressure on formal and informal management control systems regarding sustainability. Previous literature largely focus on formal control systems. This study investigates the influences and pressures from different stakeholder groups on both formal and informal control systems. Taking the assumption that all stakeholder groups had a positive influence or pressure on the sustainability management control systems. 28 business unit managers filled out a survey to test this assumption. The results do not support the assumption of influences and pressures on formal control systems, but do demonstrate a positive influence and pressure from organizational stakeholders and regulators on informal systems. No evidence was found of market stakeholders’ pressure, whereas negative pressure was found from suppliers. These results show considerable differences between formal and informal management control systems which are important to take into account.

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1 Introduction

The concept of sustainability has become an unavoidable factor in organizations. Sustainability practices are adopted due to several issues such as global warming, scarcity of resources, air and water pollution. Organizations are trying to understand and solve these sustainability issues, because they know that active sustainability participation is necessary for the acceptance and future development of organizations within the society (Moon, Grubnic and Herzig, 2011). Managers recognize the need to integrate sustainability strategies into the organization, but they often find it difficult to define and implement the role of sustainability in organizations (Epstein and Roy, 2001).

Organizations experience pressure to integrate sustainability into their internal processes. It is claimed that the largest pressure comes from stakeholders (Rodrigue, Magnan and Boulianne, 2013; Sarkis, Gonzalez-Torre and Adenso-Diaz, 2010; Smaliukiene, 2007). They want the organization to integrate sustainability in order to be more social and environmentally friendly (Adams and Frost, 2008). To manage the stakeholder’s pressures, the literature often uses the stakeholder theory. This theory argues that managers should control the organization for the needs of all stakeholders (Freeman, Harrison and Wicks, 2010).

Benefits of stakeholder pressure are the stimulation of sustainability practices in the organization and improvement of the relationship between stakeholders and the organization (González-Benito and González-Benito, 2006). Organizations implement sustainability to different degrees, dependent on the extent of stakeholder pressure. Some organizations adopt a reactive sustainability strategy because of governmental pressure, while others adopt a more proactive strategy because of shareholder pressure (González-Benito and González-Benito, 2006). The pressure implies that stakeholders influence the integration of sustainability into organizations in some way. How it is influenced is not clear in literature. In addition, stakeholders are often treated as one group, whereas it is important to classify different stakeholder groups (Crane and Ruebottom, 2011). This classification makes it possible to understand the societal values and expectations of stakeholders and improves stakeholder relationships.

5 Previous research extensively discussed the integration of sustainability issues in external organizational reports (Adams and Frost, 2008; Durden, 2008; Gray, 2010).These external sustainability reports are seen as one of the main communication interfaces between organizations and their stakeholders (Adams and Frost, 2008). Sustainability reports are used by stakeholders for benchmarking purposes, to compare performances of different organizations or to compare the performance of a single company over time. However, the external reports are often used for public relations and do not really improve the sustainability integration. Whereas the importance of sustainability is well-discussed in the literature, an important literature gap can be found in the internal processes within a organization, by which sustainability gains a deeper integration (Gond, Grubnic, Herzig and Moon, 2012). This thesis will investigate the role of management control in this.

To facilitate sustainability integration within organizational strategy, Sustainability Management Control Systems (SMCS) are used (Moon, et al., 2011). SMCS are management control systems that are used to identify configurations of control systems and theorize on the organizational capacity to integrate sustainability into strategy (Gond et al., 2012). Appropriate use of SMCS requires a full understanding of the internal process of sustainability activities and the relationship with other internal business processes (Arjaliès and Mundy, 2013). Managers have to use the appropriate SMCS for sustainability integration and decision-making in the organization (Gond, et al., 2012). To support managers in the sustainability integration process, a distinction is made between formal and informal SMCS. Formal SMCS are the written procedures and policies regarding sustainability, whereas informal SMCS are the shared values, beliefs and traditions regarding sustainability (Norris and O’Dwyer, 2004). Many studies solely focus on the formal SMCS and neglect the informal SMCS (Gond et al., 2012; Malmi and Brown, 2008; Arjaliès and Mundy, 2013). Arjaliès and Mundy (2013) exclude informal processes in their research, but they recommend to consider the use of both formal and informal SMCS because of the underestimated impact of informal processes. Chenhall (2013) argues that studies could report spurious findings within their research method, if they exclude or do not check for informal elements of control. Therefore, this study focuses on both formal and informal SMCS.

6 influences, because SMCS facilitate sustainable decision-making and provide information about environmental and social performance (Arjaliès and Mundy, 2013). Subsequently, managers can communicate this information back to their internal and external stakeholders.

Therefore, the aim of this study is to provide a comprehensive understanding of the process in which different stakeholder groups influence the integration of sustainability into formal and informal SMCS. This aim addresses the following research question:

What are the influences and pressures of different stakeholder groups on formal and informal sustainability management control systems?

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2 Literature Review

This section will explain the most important concepts of this study. Current literature will be addressed in order to provide background information for the research question. The meaning of sustainability is explained first; then SMCS in general, formal and informal; the section closes with the development of the hypotheses.

2.1 Sustainability

To clarify the concept of SMCS, it is important first to explain what is meant by sustainability. A universally accepted definition of sustainability does not exist. It is difficult to define because sustainability is an evolving concept with different meanings for different people (White, 2013). Furthermore, it is difficult to understand because several terms, such as corporate social responsibility (CSR) and sustainable development, are used interchangeably for sustainability. Marrewijk (2003) uses the following definition of corporate sustainability and CSR: “company activities, voluntary by definition, demonstrating the inclusion of social and environmental concerns in business operations and in interactions with stakeholders.” This definition recognizes the importance of stakeholders, which is important for this thesis. However, Marrewijk (2003) emphasizes the vagueness of this definition because CSR could be seen as a part of corporate sustainability where organizations are trying to balance the economic, environmental and social dimensions.

Another well-known definition of sustainability was developed by the World Commission on Environment and Development (WCED, 1987). They defined sustainability (actually sustainable development) as follows: “sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs (Brundtland et al., 1987).” Many important articles normally refer to this definition and this definition is also applied in this study (Contrafatto and Burns, 2013; Sharma and Henriques, 2005).

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2.2 Sustainability Management Control Systems

This study focuses on the integration of sustainability, with the use of the management control system. Management control includes all the devices and systems used by managers to ensure that the decisions and behaviors of employees are consistent with the objectives and strategies of the organization (Malmi and Brown, 2008). Traditional management control only focuses on economic goals (Milne, 1996). Due to societal and stakeholder pressure, organizations feel forced to incorporate environmental and social goals into their internal processes. Management Control Systems (MCS) are used in this integration process to facilitate the management of sustainability activities (Gond et al., 2012). MCS are often defined as formal, information-based routines and procedures that managers use to maintain or alter patterns in the organizational activities to help ensure the achievement of organizational objectives (Simons, 1995). However, the focus of this definition is on formal control whereas this study focuses on both formal and informal control. Hence, the definition of Chenhall (2003) is applied: “Management Control Systems are tools designed to assist the manager’s decision-making consisting of both formal and informal forms of control.” These systems shape the practices of actors, support strategies and translate the sustainability principles into action. Therefore, they can push organizations in the right sustainability direction (Gond et al., 2012).

Previous research often focuses on environmental MCS (Paulí and André, 2015; Pondeville et al., 2013; Perego and Hartmann, 2009). Perego and Hartmann (2009) argue that these environmental MCS are characterized by a high level of information flows within the company and between the companies and its external stakeholders in order to support planning and control. Important to note is the difference between environmental MCS and SMCS. SMCS includes all three dimensions, while environmental MCS neglects the economic and social aspects (Moon et al., 2011). Hence, environmental MCS can be seen as a part of SMCS. Essential characteristics of SMCS are the systematic and broader way of capturing the three dimensions within the organization. Furthermore, they are often operated by non-financial or accounting groups (Moon et al., 2011). According to Epstein and Roy (2001), appropriate MCS should give information about social and environmental impacts, sustainability performance (at different organizational levels), stakeholder reactions and corporate financial performance. The information provided by SMCS is especially useful to business control managers in the process of decision-making. It gives managers an insight into the possible risks and opportunities regarding the sustainability policy (Arjaliès and Mundy, 2013).

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2.2.1 Formal SMCS

Formal MCS are the written procedures and policies that direct employee behavior to achieve organizational goals (Ouchi, 1977). Formal SMCS focus on sustainability policies and procedures to achieve economic, environmental and social goals and are characterized by standardization. Paulí and André (2015) suggest that formal, standardized MCS give more internal control than informal MCS because the effort is more observable and more rules are formulated in contracts. The drawback of the use of formal SMCS is that it introduces some degree of rigidity in standardization (Christmann, 2005). Formal measurement and control assure managers that stakeholder groups and social responsibility goals are considered relevant and important in the organization (Durden, 2008).

2.2.2 Informal SMCS

Informal MCS are the shared values, beliefs and traditions that guide the behavior of a group of employees (Norris and O’Dwyer, 2004). An informal SMCS identifies how sustainability goals should be imbedded as a part of the organizational culture and it is therefore a pervasive component of operations (Norris and O’Dwyer, 2004). Informal controls are important for the focus of employees towards strategic and operating goals and for the involvement and participation in environmental decisions (Pondeville et al., 2013). It helps the managers to translate the perspectives of stakeholders to managerial actions (Rodriques et al., 2013). Informal MCS includes more flexibility and gives the manager more freedom in decision-making (Paulí and André, 2015). Moreover, it controls the behavior of employees in unexpected and ambiguous situations (Falkenberg and Herreman, 1995). A benefit of informal systems is that decisions can be made more quickly without restrictions of standardized rules. The drawback of informal MCS is the difficulty for the survival of shared values and beliefs, because they should conform to the established rules (Norris and O’Dwyer, 2004). Sarkis et al. (2010) argue that organizational culture could be an obstacle in the integration process of SMCS. In contrast, Moon et al. (2011) argue that shared values, understandings and a common organizational culture of sustainability facilitate the integration of SMCS. They argue that shared cultural values promote managerial initiatives regarding sustainability, which will improve the SMCS. These arguments indicate the importance of informal SMCS in organizations.

2.3 Stakeholders’ Pressure and influence

10 Organizations are able to manage the stakeholder pressure if they can manage the different perspectives and conflicting interests of their stakeholders (Sarkis et al., 2010). Organizational learning capabilities are also required to respond to stakeholder pressure (Sarkis et al., 2010).

2.4 Stakeholder theory

Research about stakeholders’ influences and pressures is mainly based on the stakeholder theory. This theory is the most frequently used approach in environmental, social and sustainability management research (Hörisch, Freeman and Schaltegger, 2014). The stakeholder theory developed by Freeman (1984) aims at creating value for all stakeholders involved (Freeman et al., 2010). In this theory, stakeholders are defined as any individual or group who can affect or is affected by an organization’s actions connected to value creation and trade (Freeman, 1984). Stakeholder theory does not focus on the organization itself, but it focuses on the relationship between the organization and its stakeholders (Hörisch et al., 2014). From the managerial perspective, the stakeholder theory identifies the (lack of) connections between stakeholders and the achievements of organizational goals (Donaldson and Preston, 1995). It recognizes that efficient stakeholder management is needed to gain long-term profitability and survival in the market (Plaza-Úbeda, Burgos-Jiménez, Vazquez and Liston-Heyes, 2009). Stakeholder theory provides the basis for considering and analyzing relationships among sustainability, stakeholders and MCS and it expects that the sustainability goals are in line with the stakeholder needs (Durden, 2008). A proactive stakeholder dialogue is needed to satisfy the stakeholder demands and to implement effective sustainability (Park, Chidlow and Choi, 2014; Cramer, 2002). Moreover, they should be involved in different areas of sustainability practices. Stable stakeholder relationships are maintained by tight communication and strong ethical business values (Park et al., 2014). The admission of stakeholders in this process leads to mutual respect and improves the image and reputation of the organization (Cramer, 2002). From the management control perspective, organizations should have SMCS that reflect this stakeholder focus. Managers should regularly monitor the MCS to see if the organization is operating in accordance with sustainability and stakeholder goals (Durden, 2008).

2.5 Classification of stakeholder groups

11 This distinction is necessary in the development of environmental proactivity and audits (Darnall et al., 2009). External stakeholders are the stakeholders who have limited control and less interest in the organization (Darnall et al, 2009). The effect of external stakeholders on environmental performance is dependent on the relationship and involvement of the external stakeholders with the organization (Fernández, Junquera, and Ordiz, 2006). The classification of primary and secondary stakeholders is a second classification often used in literature (Park, et al., 2014; Buysse and Verbeke, 2003). Primary stakeholders have a formal contractual relationship with the company, whereas the secondary stakeholders do not have this relationship. Differences should be made between the degree of influence and pressure of the different stakeholder groups (Darnall et al., 2009). In this study the classification of Zhu, Sarkis and Lai (2007) is applied. They make a distinction between the pressure of external regulations, market and suppliers. However, this classification excludes the internal stakeholders. Therefore, the organizational stakeholder group influence is added based on the research of Pondeville et al. (2013).

2.6 Hypotheses

Current literature often fails to make a distinction between different stakeholder groups and their effect on formal and informal SMCS. However, there is evidence that all stakeholders have a positive influence on both forms of internal controls (Park et al., 2014; Pondeville et al., 2013). The following paragraphs will analyze the pressures and influences per stakeholder group based on previous literature. Table 1 provides an overview of the different stakeholder groups including subgroups and definitions.

Table 1

Overview stakeholder groups

Stakeholders groups

Subgroups Classification Definition

Organizational stakeholders

Employees, managers, shareholders

Internal Stakeholders who are directly linked to managing the organization (Pondeville et al., 2013).

Regulators Legislators, enforcement agencies

External Stakeholders who imposed laws and

directives on firms (Pondeville et al., 2013). Markets Buyers,

competitors, trade associations

External Stakeholders in the market in which the organization operates (Pondeville et al., 2013). Suppliers Strategic partners, long-term close operators, contractors

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2.6.1 Influence of organizational stakeholders

The organizational stakeholders are the stakeholders who are directly linked to (the management of) the organization (Pondeville et al., 2013). They have the ability to directly impact the bottom line of the organization. This group includes all employees, managers, shareholders and owners. Organizational stakeholders are internal stakeholders, because they have a direct interest in the organization (Darnall, et al., 2009). The interest of managers and employees is their work within the organization. They are the source of organizational success and their participation is required for successful environmental procedures and policies (Henriques and Sadorsky, 1999). In addition, they are essential for SMCS because they are the initiators of sustainability activities in the organization (Sarkis et al., 2010). However, top management support is needed to ensure commitment to sustainability and to provide a positive influence on formal SMCS (Darnall et al., 2009). Henriques and Sadorsky (1999) argue that the organizational stakeholders have the greatest influence on these formal SMCS. Also Park et al. (2014) indicate that employees and managers have a great and continuous influence on sustainability practices, and they should voluntarily encourage socially responsible behavior and attitude.

Regarding informal SMCS, Pondeville et al. (2013) argue that only organizational stakeholders enhance the development of informal environmental MCS. In contrast, Fernández et al. (2006) argue that sustainability attitudes of managers are generally negative, because managers feel the pressure of environmental regulation. As a result, managers have a negative influence on informal SMCS. Nevertheless, the experienced pressure could bring about activities which, in turn, can effects the entrepreneurial motivation of managers (Fernández et al., 2006). This entrepreneurial motivation can result in a positive influence on informal SMCS.

The interest of shareholders and owners is their property or share in the organization. Previously, it was argued that the only responsibility of managers was to maximize the profits of the owners or shareholders (Carroll, 1991). As a consequence, the owners or shareholders had the most influence on MCS. However, the influence of other stakeholder groups has grown and these groups also claim the attention of the managers (Carroll, 1991). Nevertheless, managers have the ability to assess the importance and relevance of other stakeholder groups. They select which issues should be considered and select which stakeholder groups participate in the decision-making process in these processes, managers positively influence SMCS (Park et al., 2014). Therefore, the following hypotheses are proposed:

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2.6.2 Pressure of regulators

Regulators are the stakeholders who imposed sustainability regulations, law and directives on organizations (Pondeville et al., 2013; Henriques and Sadorsky, 1999). This group of stakeholders consists of legislators and enforcement agencies (government) and are considered as external stakeholders to the organization. The research of Rodrique et al. (2013) shows that the case company engages in initiatives with governments to achieve sustainability objectives. The government exerts political pressure on the organization to adapt its SMCS because of changes in sustainability regulations. The organization has to implement these sustainability regulations, otherwise government could levy fines or penalties or take legal actions (Darnall et al., 2009). In this way, government provides a basis for the sustainability strategy and MCS in the organization (Pondeville et al., 2013). Moreover, governmental regulations contribute to the sustainability development (Henriques and Sadorsky, 1999). Qu (2007) views governments as one of the most important change agents on the organizations rules. The research of Park et al. (2014) indicates that governments and local authorities pay close attention to the environmental systems of the organization if the customer pressure is lower or absent.

However, there is a difference of governmental pressurebetween organizations. The regulatory pressure will be larger in organizations with a reactive attitude towards sustainability strategy and MCS than in organizations with a proactive attitude towards sustainability strategy and MCS (Henriques and Sadorsky, 1999). On the other hand, proactive organizations could have influence over the development processes of new sustainability regulations. These organizations should form collaborative relationships with the government, because this promotes the sustainability improvements and trust between government and organizations (Darnall, Henriques and Sadorsky, 2008; Buysse and Verbeke, 2003). Previous studies focus on the regulatory pressure on formal SMCS and neglect the informal SMCS. However, it could be assumed that sustainability regulations from the government have a positive pressure on informal SMCS. Changes in regulations have an impact on the shared values and beliefs within an organization. Therefore, the following hypotheses are proposed:

H2a: Regulatory stakeholders exert positive pressure on formal SMCS H2b: Regulatory stakeholders exert positive pressure on informal SMCS

2.6.3 Pressure of the market

14 Sharma and Henriques (2005) shows that customers have a positive and significant impact on sustainability practices in the forest products industry. Rodrique et al. (2013) indicate that customers have a mediated influence on environmental MCS. In this case, customers ask for certifications and external acknowledgement of the SMCS. These requests improve the formal SMCS. However, customers’ and creditors’ influence is limited to the formal, strategy level. They do not have a direct influence on the sustainability tools used at the internal level (Rodrique et al., 2013).

Competitors are less important than customers because they are not the active target of a specific intervention by the organization (Hills and Sarin, 2003). However, the pressure from competitors should not be undervalued, because they can set new industry norms and legal mandates through their use of innovations and can become leaders in the field of sustainability (Barrett, 1992). In order to address sustainability issues, some organizations form strategic alliances with their major competitors (Buysse and Verbeke, 2003). These strategic alliances will have a positive pressure on SMCS.

Trade associations provide centralized information and coordination about current and future legislation that are required by industries (Henriques and Sadorsky, 1999). The obtained information has a positive and significant impact on sustainability practices (Sharma and Henriques, 2005). They are important for the development of SMCS, because they can disseminated the best sustainability practices within industries (Sharma and Henriques, 2005).

Regarding informal SMCS, the pressure of market stakeholders has not been studied yet. It is assumed that the pressure on informal SMCS is less high than the pressure on formal SMS, because it is more difficult for an external stakeholder group to exert pressure on an informal SMCS than for an internal stakeholder group to put pressure on an informal system (Buysse and Verbeke, 2003). However, it is still assumed that these pressures on formal and informal SMCS are both positive. This argument leads to the following hypotheses:

H3a: Market stakeholders exert positive pressure on formal SMCS H3b: Market stakeholders exert positive pressure on informal SMCS

2.6.4 Pressure of suppliers

15 manner that it damages the image of the supplier (Henriques and Sadorsky, 1999). Suppliers can also force the organization to employ more sustainable substitutes.

Previous studies notice the importance of supply chain stakeholders. These stakeholders are involved in the fulfillment of customer requests, including suppliers, transporters and retailers. Lambert, Cooper and Pagh (1998) expect that the competition between supply chains will increase. Therefore, the suppliers of suppliers are becoming more important to an organization and they could exert a positive pressure on SMCS. Darnall, et al. (2009) indicate that supply chain stakeholders have been exerting increasing influence on companies to adopt proactive sustainability practices and to improve their sustainability performance. The pressure on sustainability practices will have a positive influence on formal SMCS. The pressure of proactive attitudes will have a positive influence on informal SMCS.

Hence, the following hypotheses are proposed:

H4a: Suppliers exert positive pressure on formal SMCS H4b: Suppliers exert positive pressure on informal SMCS

Based on the abovementioned hypotheses the following conceptual model is developed. All the influences and pressures are proposed to be positive. The results will indicate which of the stakeholder groups has the highest pressure or influence on formal and informal SMCS.

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3 Methodology

This section starts with an explanation and justification of the design and sample. The second part consists of the explanation about variable measurements. Thereafter, the data analysis will be explained. This section ends with a short discussion about the controllability, validity and reliability of this study.

3.1 Design and Sample

Theory testing is used because the research question is a ‘what’ question and does not cover the underlying ‘how’ and ‘why’ reasoning (Bacharach, 1989). Because of the fact that current literature does not fully explain the specific influences and pressures on formal and informal SMCS, theory testing is used to address these issues. Hypotheses built on existing literature are tested by means of a survey research method. In this method, surveys are used to produce quantitative and numerical descriptions about some aspects of the study population (Floyd and Fowler, 2008). In addition, surveys are a useful way to identify and explore the role of MCS in sustainability strategy across a group of organizations (Arjaliès and Mundy, 2013). The survey questions are mainly based on valid instruments from previous studies, i.e. Pondeville et al. (2013); Zhu et al. (2007) and Marrewijk (2003). A seven-point Likert scale is used to measure the attitude, belief or opinion of the managers. In addition, it allows respondents to sit on the fence. The Likert scale provides varying degrees of endorsement of or agreement with the statement which increases the available statistical analysis (Pallant, 2011).

The survey is divided into five sections. The first section contains general questions about the manager and the organization. Section two is about general management information. Section three focuses on sustainability management information, in which the questions includes economic, environmental and social aspects. The fourth section includes sustainability considerations. The last section contains questions about performance and stakeholders. For this study, section three is especially important for the data about the dependent variables, while section four and five are providing data about the independent variables. The beginning of each section starts with a brief explanation about the questions to avoid confusing respondents. The target of the survey are business unit (BU) managers who operate at the middle and higher levels of an organization. A business unit is a unified entity within a larger organization for which the manager has direct responsibility (Speklé and Verbeeten, 2014; Lanen, 1995). The business unit level is the appropriate level to analyze the SMCS because BU managers could facilitate and control incremental changes in the sustainability practices (Zhu et al., 2007). The complete survey is provided in Appendix 1.

17 provided in Appendix 2. The interview questions were organized in a semi-structured interview, because this type of interviews is well suited for exploration of the opinions and perceptions of respondents regarding complex issues. In addition, it enables the researcher to probe for more information and clarification of answers. Besides the surveys and interviews, several organizational documents were used for more background information. Examples of these organizational documents are annual reports and sustainability reports.

The data was collected by a group of four students. Therefore, the sample in this study is not random. The selection criteria were organizations with at least 150 employees, because these medium and large size organizations are better accessible than multinational organizations. Within the sample, the average size of organizations is 16,161 employees. Furthermore, most of the organizations are Dutch companies or companies located in the Netherlands, except one German company. The organizations are from nine different industries. Table 2 provides more information about the number of organizations among the industries. In total, 28 managers were asked to fill out the survey. The majority of these managershave full profit-and-loss responsibility, which means that they take responsibility for both revenues and costs. This responsibility is preferred because it means that the managers have considerable control in the organization. On average, the managers are working nearly six years in their current position. This suggests that they are well informed about the measurement practices in their business unit (Speklé and Verbeeten, 2014). Table 3 provides further general information about the organizations, business unit (BU) and managers.

Table 2

Industries of interviewed organizations

Industry Number of organizations

Agriculture, forestry and fishing 1

Construction 3

Manufacturing 4

Transportation, communication, electric, gas, and sanitary services 5

Wholesale trade 3

Retail trade 2

Finance, insurance and real estate 2

Services 4

Non-classifiable establishments 4

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Table 3

Respondents and their organizations

Mean Std. dev. Minimum Median Maximum Size organizations 16,161 27,267 120 2,200 100,000 Size BU 954 2,246 1 45 10,000 Experience organization 15.8 10.2 2 13.8 35 Experience current position 5.8 4.4 0 5.8 18

3.2 Variable measurement

This study includes two dependent variables (FORMAL SMCS; INFORMAL SMCS) and four independent variables: the influence of organizational stakeholders (INFL ORG STH), pressure of regulators (PRESSURE REGULATORS), pressure of markets (PRESSURE MARKETS), and the pressure of suppliers (PRESSURE SUPPLIERS).

3.2.1 Formal SMCS

19 should be above .7 to be reliable. However, values above .8 are preferred (Pallant, 2011). The Cronbach’s alpha of the formal SMCS is .758, which is satisfactory.

3.2.2 Informal SMCS

The use of informal SMCS is the second dependent variable and defined as the shared values, beliefs and traditions regarding sustainability (Norris and O’Dwyer, 2004). The measurement of informal SMCS is comparable to the measurement of formal SMCS. Informal SMCS is measured by eight variable items derived from the research of Pondeville et al. (2013), shown in table 4. Again, these measurement items were derived from an extensive literature review and adjust to SMCS. The measurement items together give an indication of the existence of informal SMCS in the business unit of an organization. The managers were asked to score the extent to which informal SMCS are used based upon a seven-point Likert scale (1- to a small extent; 7- to a large extent). The significance of BTS and the KMO value are checked to assess the suitability of the data for the factor analysis. The BTS significance is .000 and the KMO value is .832, which are both acceptable. Thefactor analysis shows that all the variable items load strongly (above .4) on the first factor. Therefore, the eight variable items are summarized into one variable (INFORMAL SMCS) by taking the mean of the scores on variable items. The Cronbach’s alpha of this variable is 0,931 which is sufficiently reliable. More information is provided in table 3.

3.2.3 Influence of organizational stakeholders

The influence of organizational stakeholders is an independent variable. Organizational stakeholders are stakeholders who are directly linked to (the management of) the organization (Pondeville et al., 2013). Their influence is the impact on formal and informal SMCS. Because of the fact that Zhu et al. (2007) exclude the pressure of internal stakeholders in their research, the influence of organization stakeholders from the research of Pondeville et al. (2013) are included in this study. Respondents were asked to indicate the degree of influence that organizational stakeholders have on: a. the sustainability rules and procedures of the business unit; b. on shared values, beliefs and traditions regarding sustainability within the business unit. Part A measures the influence on formal SMCS, while part B measures the influence on informal SMCS. A seven-point Likert scale is used to indicate 1-very little influence; 7- very much influence.

3.2.4 Pressure regulators

20 social dimension is added to the questions in order to change the environmental focus into sustainability.

The four variable items are combined into one question, which is also the case in the measurements of the pressures of other external stakeholders. These single-item measurements are less favorable than the multiple-items measurements of the dependent variables. However, the single-item questions are accurate and therefore useful for this study. Respondents were asked to indicate the pressure experienced on sustainability from external regulations in which the four variable items are used as examples to illustrate the question. The pressure of regulators is measured on a seven-point Likert scale (1-to a small extent; 7-to a large extent).

3.2.5 Pressure markets

The pressure of the market is another independent variable which measures the pressure from the market in which the organization operates including the customers (buyers), competitors and trade associations (Pondeville et al., 2013). Again, this variable measurement is based upon the research of Zhu et al. (2007). It includes the following four measurement items: export; sales to foreign customers; Chinese consumers’ environmental awareness; establishing company’s green image. The questions are adjusted to the sustainability and are not limited to the Chinese market. The managers indicated the extent to which they experience pressure on sustainability from the market on a seven-point Likert scale (1-to a small extent; 7-to a large extent). The four measurement items were used as examples to illustrate the question.

3.2.6 Pressure suppliers

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Table 4

Composition and reliability of variables

Variable Items Component loading FORMAL SMCS

Cronbach’s α = .758

Integration sust. objectives in planning systems (Q3.2a) .535 Integration sust. performance in rewarding systems (Q3.2b) .629 Comparison results to sust. Objectives (Q3.2c) .695 Environmental/social information of employees (Q3.2d) .948

Integration sust. criteria in investment decisions (Q3.2e) .610 Reference well-documented sust. rules/procedures (Q3.2f) .827 Detailed description of sust. functions (Q3.2g) .758 Procedure external sust. communication (Q3.2h) .845

INFORMAL SMCS

Cronbach’s α = .931 BU employees are encouraged to make suggestions for improvements in sust. of production process (Q3.3a)

.898 BU employees are encouraged to make suggestions for

improvements in sust. of the products (Q3.3b)

.854 BU employees are encouraged to make suggestions in field

of sustainability (Q3.3c)

.923 BU management is involved in sust. management process

(Q3.3d)

.872 Sust. issues are discussed during (in)formal periodic

meetings (Q3.3e)

.781 BU management has enough freedom to manage sust. issues

(Q3.3f)

.613 BU work teams are built to manage sust. problems (Q3.3g) .830 Persons from different BUs work in teams to manage sust.

issues (Q3.3h)

.787

INFL ORG STH

Influence of organizational stakeholders on BU’s sust. rules and procedures (Q5.3a)

Influence of organizational stakeholders on BU’s shared values, beliefs and traditions regarding sustainability (Q5.3b)

PRESSURE REGULATORS

Pressure on sustainability on external regulations (Q4.3f)

PRESSURE MARKETS

Pressure on sustainability on markets (Q4.3g)

PRESSURE SUPPLIERS

Pressure on sustainability on external suppliers (Q4.3h)

3.3 Data analysis

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3.4 Controllability, validity and reliability

Controllability, validity and reliability are the most important quality criteria in research, which provide a basis for inter-subjective agreement on research results (Van Aken, Berends and Van der Bij, 2012). Controllability requires that other researchers are able to replicate the research with the same outcomes. Moreover, the results should be presented as precisely as possible. This study provides appropriate and accurate SPSS results to provide other researchers the possibility to replicate this study.

Validity refers to the relation between research results and conclusions and the way it has been generated. A distinction is made between three types of validity. Construct validity is the extent to which a concept measures what it is intended to measure (Van Aken et al., 2012). Therefore, existing variable measurements are used based on previous studies to cover the concepts and their meanings in the survey. In addition, the use of several research instruments (survey, interviews and organizational documents) also add to construct validity of this research. Internal validity refers to the justification and completion of the conclusions about explained relationships. In the literature review multiple theoretical perspectives are explained in order to assess theoretical triangulation and to improve internal validity. External validity is the generalizability of research results and conclusions to other people, situations, organizations and countries (Van Aken et al., 2012). External validity is improved by analyzing different organizations from different industries, but limited to the Netherlands.

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4 Results

This section will present the results from the conducted survey of this study. It starts with an explanation about descriptive statistics in which statistical information and correlations of the variables will be shown. Thereafter, the results of the multiple regression models and interviews will be presented. Useful SPSS output from the multiple regression models will be reported in the tables.

4.1 Descriptive statistics

Table 5 provides a summary of statistical information about the dependent and independent variables. The mean, standard deviation, theoretical range, minimum, median and maximum of each variable are presented. The skewness and kurtosis were checked in the descriptive statistics to provide information about the distribution of scores on continuous variables (Pallant, 2011). The skewness indicates the symmetry of the distribution, while the kurtosis provides an indication of the shape of the data distribution (Pallant, 2011). The values of the skewness and kurtosis of all variables lie between -2 and 2. Therefore, there are no significant problems with the distribution of variable scores.

Table 5

Descriptive statistics

Variable Mean St. Dev. Theoretical range

Minimum Median Maximum FORMAL SMCS 4.032 1.124 1-7 2.25 4.125 6.25 INFORMAL SMCS 4.292 1.504 1-7 1.63 4.375 7 INFL ORG STH FORMAL 4.89 0.956 1-7 3 5 6 INFL ORG STH INFORMAL 4.96 1.071 1-7 2 5 7 PRESSURE REGULATORS 4.96 1.708 1-7 1 5 7 PRESSURE MARKETS 4.31 1.668 1-7 1 5 7 PRESSURE SUPPLIERS 3.08 1.706 1-7 1 3 7

24 problems exist. With regards to formal SMCS, only the correlation between the pressure of regulators and formal SMCS exceeds slightly the .3 (.357). The same problem exists for informal SMCS. There is only one acceptable correlation between informal influence of organizational stakeholders and informal SMCS. To solve these problems, variation is brought into the model, which improves the significance and correlations. Further explanation about the variations is provided in the next paragraph.

Second, it is important that the correlation between independent variables is not too high (above .7) in order to avoid the existence of multicollinearity. The results do not indicate correlations between independent variables that exceeds .7. Therefore, no problems exist and the independent variable should not be omitted. Table 5 Correlations 1 2 3 4 5 6 7 FORMAL SMCS 1 INFORMAL SMCS .697 1 INFL ORG STH FORMAL -.291 -.272 1 INFL ORG STH INFORMAL -.007 .304 .141 1 PRESSURE REGULATORS .357 .269 -.144 -.297 1 PRESSURE MARKETS .110 .039 -.147 -.071 .187 1 PRESSURE SUPPLIERS -.201 -.235 .126 .214 .085 .455 1

4.2 Results multiple regression analysis

25 (Pallant, 2011). The tolerance value should be higher than .1, which is the case in model 1 and 2. The Normal Probability Plots and scatter plots of the models are checked for the presence of outliers and major deviations from normality. In both models the plots look normal.

The models are analyzed by viewing the R square of the model summary. The value of R square indicates the amount of variance in the dependent variable that is explained by the model (Pallant, 2011). The adjusted R square is more appropriate to this small sample data set. If R square is taken over a small sample, the estimation of the true population value would be too optimistic. Therefore, the adjusted R square is used to compensate for inflation due to the small sample size (Pallant, 2011; Yaffee and McGeen, 2000). The adjusted R square is .081 which means that 8.1% of formal SMCS is explained by the model. To reach statistical significance (p), the value of p should be lower than .05. F(5,18) = 1.28, p = .240 which suggests that the regression is statistically insignificant. Various model optimization methods have been used. First, various control variables are added to this model. The size of the organization and the size of the business unit are used as control variables. Unfortunately, the control variable of the size of the organization did not improve the significance (p = .374). Also the control variable BU employees did not improve the significance (p = .315). Secondly, the model was trimmed by omitting independent variables one by one. Neither method improve the significance of the model sufficiently. Therefore, the model had to be removed.

The second model tests the independent variables on informal SMCS. The results of this multiple regression are reported in table 6. The adjusted R square of this model is .284, which means that the total variance explained by the model is 28.4 %, F (4, 19) = 3.29, p < .05. The statistical significance of model 2 is .033 which means that this model reaches statistical significance (p < .05). The independent variables of the models are evaluated on their contribution to the prediction of the dependent variable (informal SMCS). Therefore, the beta of the standardized coefficients are analyzed. The informal influence of organizational stakeholders has the largest beta (β = .554) which means that this variable has the strongest contribution to the dependent variable. The significance values of the variables explain the statistical significant contribution to the equation (Pallant, 2011). Significance values lower than .05 are making a significant contribution to the dependent variable. In this model, three independent variables were statistically significant. The informal influence of organizational stakeholders recorded the highest beta value (β = .544, p < .05), which implies that organizational stakeholders have the highest, positive influence on informal SMCS. Therefore, support is found for hypothesis 1b.

26 It implies that the market stakeholders do not exert a positive pressure on informal SMCS. Therefore, the hypothesis is not supported.

Table 6

Results multiple regression: model 2

R square Adjusted R square Statistical significance

.409 .284 .033 Predicted sign Beta Standardized Coefficient Beta Unstandardized Coefficient Std. error Significance (two-tailed) Infl org sth informal H1b: + .554 .779 .271 .010 Press regulators H2b: + .434 .382 .166 .033 Press market H3b: + .221 .199 .183 .291 Press suppliers H4b: + -.490 -.432 .182 .029

*n = 26; dependent variable = informal SMCS

4.3 Results interviews

The interviews are used to provide qualitative information and meaning to the statistical results. A short summary of the interviews is given in which relevant quotes from the interviews will support or not support the abovementioned findings.

All managers indicate that they organize stakeholder dialogues of which the majority with customers. The dialogues are often only organized at the headquarter of the organization. Therefore, some subsidiaries do not talk directly to their stakeholders.

27 Four out of eight organizations were listed companies. The managers from these organizations emphasize that compared to the non-listed companies they experience more pressure from the press. The listed companies need a good image for their shareholders.

Seven out of eight organizations possess sustainability certifications. Two of these organizations emphasize that they achieved these certifications because of customer pressure.

In the future, six managers expect that the customers will gain more influence in the SMCS. Also two managers indicate that government will introduce more sustainability regulations.

Since the model regarding formal SMCS is removed, it is not possible to explain the underlying relationships with qualitative information. Possible explanations will be further explained in the discussion.

Regarding hypothesis 1b, most of the managers explain the importance of organizational stakeholders on informal SMCS. Organizations have developed several initiatives to stimulate the positive influence.

“We organize mandatory training for all our employees in order to ensure that they behave according to the organizational values”

“The employees are encouraged to make suggestions for improvements. Prior to this we established work teams to promote this encouragement.”

Regarding hypothesis 2b, all managers explain that they experience pressure from governments. However, the pressure differs between industries and countries.

“The pressure from regulators is higher in countries were sustainability is more accepted.” The positive pressure is received from voluntary cooperation with the government.

“Recently, we were requested by the government to talk about our policy regarding cultural diversity among employees. The government know that they need us as people from the field, in the development of governmental policies.”

Most of the managers emphasize the importance of customers within the market stakeholder group. In contrast, competitors are less important. Also most of the organizational documents emphasize the importance of customers, whereas competitors and trade associations are less examined.

“Actually, I did not look at the competitors yet. We only look at our indirect competitors and not at our

direct competitors.”

The negative pressure from suppliers is explained by one manager. He explains that some suppliers are using components which are not environmentally friendly.

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5 Discussion

This section will explain the findings in relation to other studies. The hypotheses will be separately interpreted. Previous literature is used to support the findings. In addition, possible causes and effects are addressed to explain the findings.

5.1 Formal SMCS

This study initially presumed that different stakeholder groups exert pressure and influence on formal and informal SMCS. However, the multiple regression model regarding formal SMCS was insignificant. So the theoretical model of external pressures and influences on formal SMCS, is not consistent with the collected data. Therefore, the multiple regression model had to be removed. Subsequently, it is not possible to clarify the underlying relationships. However, previous literature could explain this result. The finding is contrary to the research of Park et al. (2014), Pondeville et al. (2013), Rodrique et al. (2013) and Henriques and Sadorsky (1999) who found that the different stakeholder groups exert pressure or influence on internal controls. Park et al. (2014) and Pondeville et al. (2013) emphasize the positive influence of stakeholders in their research. However, the results of this study could be different because of the focus on sustainability. The other studies solely focus on the environment or emphasize the environmental aspects more than the social aspects within the control systems.

Another possible explanation is the focus on different industries. This study uses case companies from nine different industries, whereas the other studies mostly focus on one single industry. The pressures from stakeholder groups could be totally different per industry, giving different results. In addition, the results from the interviews indicate that the pressures from governments differ per industry. Similarly, Sharma and Ruud (2003) indicate that between industries there are different impacts from stakeholders.

5.2 Influence organizational stakeholders

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5.3 Pressure regulators

A significant and positive impact from regulators on informal SMCS is indicated. Therefore, the hypothesis 2b is supported. These findings are similar to the research results of Pondeville et al. (2013) and Henriques and Sadorsky (1999). Pondeville et al. (2013) indicate a positive influence of regulatory stakeholders. Henriques and Sadorsky (1999) indicate the highest positive pressure from regulatory stakeholders on reactive firms. The interview results indicate voluntary cooperation with the government. This cooperation improves the informal SMCS. This finding is consistent with the research of Buysse and Verbeke (2002) and Darnall et al. (2008). Both studies indicate the importance of voluntary collaborative relationships with government to promote sustainability improvements. For managers it is important that they consider the regulatory pressure as a positive pressure and not as a negative pressure to meet the legal requirements. The effect of the positive pressure will further improve the informal SMCS.

5.4 Pressure markets

30

5.5 Pressure suppliers

31

6 Conclusion

This study has attempted to examine the pressures and influences of different stakeholder groups on SMCS. SMCS are divided into formal SMCS and informal SMCS. Formal SMCS focus on the rules and procedures regarding sustainability, whereas informal SMCS focus on shared values, beliefs and traditions regarding sustainability. To measure the impact from different stakeholder groups, a distinction was made between the influence of internal (organizational) stakeholders and pressures from external stakeholders. The last group is further divided into three stakeholder groups: regulators, markets and suppliers. To study the pressure and influence of these stakeholder groups, a survey was conducted over 28 organizations. The organizations are from nine different industries and are all located in the Netherlands, with the exception of one German company. It was hypothesized that the influences and pressures from all stakeholder groups have a positive influence on both formal and informal SMCS. The hypotheses were tested in multiple regression models. The first model regarding formal SMCS indicate no considerable support. So there is no positive influence from organizational stakeholders and no positive pressure from external regulators, markets and suppliers on formal SMCS.

Considerable support was found in the second multiple regression model regarding informal SMCS. So there is a significant relationship between the influence of organizational stakeholders and pressure from external stakeholders on informal SMCS. It was found that the organizational stakeholders have a positive influence on informal SMCS. Also regulators exerted a positive pressure on informal SMCS, which means that government contributes positively to informal SMCS of an organization. No evidence was found of the positive pressure from markets on informal SMCS. A possible cause for this finding is the differences between sub-groups of market stakeholders. Finally, it was found that suppliers exert negative pressure on informal SMCS. Possible cause for this finding is the suppliers’ use of coercive influence strategies. With these results, the research question is answered.

32 Despite these contributions, this study suffers from some limitations that affect the interpretations and demand consideration. First, the analyses were limited to the managerial level because the respondents in the sample were only BU managers. Therefore, the results indicate the pressure experienced from a managerial perspective which also determines the stakeholders’ role in the development of sustainability strategies and practices. It could not be said to what extent these perspectives are true. Related to this, the second limitation recognizes that the analyses relied on one single respondent per organization. Possibly, another BU manager in the same organization could have different ideas about SMCS, because of differences in the importance of sustainability among BUs.

The third limitation is sample size. Organizations within the sample are from different industries, which provides more general findings. However, the sample is too small to look at differences between industries. It is possible that influences of some stakeholder groups are completely different from other industries. Therefore, a larger sample size is needed.

The fourth limitation relates to the single-item measurement of pressure from external stakeholders. A multiple-item measurement of these variables will improve the measurement instrument.

A final limitation to this study is the limited time available. The limited time excluded the possibility to look at the pressures and influences of different stakeholder groups over time. It would be interesting to look at differences of importance of stakeholder groups over time.

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