Sustainability Management Control Systems. Towards A Socially Responsible Planning And Control Framework

2009 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-1

Sustainability Management Control Systems. Towards a Socially Responsible Planning and Control Framework

Erika Cresti Department of Business Administration - University of Florence Via delle Pandette, 9 50127 Florence. Phone (0039) 0554374735; Fax (0039) 0554374910 E-mail: [email protected]

Contents – 1. Introduction – 2. The adoption of CSR principles as a new way of doing business – 3. From disclosure to measurement: the role of Management Control Systems (MCS) and Performance Measurement Systems (PMS) – 4. Sustainability performance management and measurement systems: a literature review – 5. Towards a framework for the integration of CSR through planning and control process – 6. Discussion and conclusion.

ABSTRACT Today’s companies face new community expectations about the social role of business. They must pay attention not only to the economic consequences of their activities, but also to social impacts, environmental impacts, and stakeholders’ claims. In order to be considered socially responsible, companies must effectively implement sustainability principles by aligning their strategy, structure, and management systems with stakeholders’ needs. This means incorporating social, environmental, and stakeholder concerns into corporate strategy, company management systems, business processes, and day-to-day decision making. This is the only way to remain competitive in the current global environment and to ensure long-term business success. The role played by management control systems is essential to fulfilling strategic objectives. This paper discusses the need to adopt a “strategic approach” to Corporate Social Responsibility (CSR), which is to give substance and credibility to a company’s commitment to sustainability principles by integrating economic, social, and environmental concerns with the planning and control process. After reviewing the literature on sustainability performance management and measurement systems, this paper offers a “socially responsible planning and control” framework as a strategic path for the implementation of CSR concerns into the business organization.

1. INTRODUCTION

Today’s companies, as economic entities acting in a specific social and environmental setting, face challenges from new community expectations about the role they play in society.

Communities are asking them to broaden their scope and the way they act, as well as to be aware of the needs of a wider number of people, the so-called stakeholders (Freeman, 1984).

Companies, in this way, are in the middle of a complex web of relations with various and different groups of people who have interest and influence in the way businesses act

(Atkinson A.A., Waterhouse J.H. and Wells R.B., 1997).

June 24-26, 2009 1 St. Hugh’s College, Oxford University, Oxford, UK 2009 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-1

The growing concerns about firms’ environmental and social effects, the attention to world climate change, the creation of a new, more responsible and critical consumer, and the birth of a global society informed in real time, confront companies with new competitive challenges. Firms have a duty that goes beyond the narrow borders of the creation of value for the shareholders. They must pay attention not only to the economic consequences of their activities, but also to social and environmental impact. Businesses should accept the idea that they play more than just an economic role in society, that firms have a wider responsibility for their own impact on society and on the natural environment. The key word, in the international debate about the role of businesses in the society, is Corporate Social

Responsibility (CSR). This buzzword involves a new way of doing business that extends legal and economic responsibilities to satisfy the legitimate social and environmental expectations of multiple groups of stakeholders. Corporations should use their resources to help alleviate a wide variety of social problems, to give more toward society’s well-being, and to help address environmental preservation.

With the explosion of interest in this subject on the part of the business, academic and policy communities, a huge number of definitions have been proposed (Carroll, 1999). There is no agreed definition, but one of the most important and frequently used (Dahlsrud, 2008) defines CSR as “…a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with stakeholders on a voluntary basis” (Commission of the European Communities, 2001, p. 6). This definition encompasses the key features of the CSR concept. One key feature is CSR’s voluntariness: companies should fulfil the stakeholders’ legitimate claims beyond the minimum legal requirements. “Social responsibility begins where the law ends. A firm is not being socially responsible if it merely complies with the minimum requirements of the law, because this is what any good citizen would do” (Davis, 1973, p. 313). This is what Carroll (1979, 1991)

June 24-26, 2009 2 St. Hugh’s College, Oxford University, Oxford, UK 2009 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-1 defined as discretionary and ethical responsibility. The boundary between governmental regulation of business versus business self-regulation to achieve socially responsible behaviour is both fleeting and confusing. Yet there is a general agreement that CSR should be popularised but not imposed (Robins, 2008). Another key feature of CSR is its stakeholder viewpoint and its multidimensional, balanced perspective (a focus on economic, social and environmental outcomes of companies’ activities): these are the core issues of CSR philosophy and practices, and they characterize how companies should implement principles of social responsibility.

Through the integration of social, ethical and environmental concerns into business activities (that is, through the adoption of CSR principles), companies provide a considerable contribution towards the achievement of sustainable development goals (World Commission on Environment and Development, 1987). In order that a company be defined as socially responsible, it is required to be economically and financially reliable, to minimize negative environmental impacts coming from carrying out its tasks and to act according to social expectations1.

Economic, social and environmental concerns must be evenly integrated into the company’s everyday operations. The adherence to CSR principles must be a proactive and sincere commitment, not just a public relations exercise or a way to improve the company’s image and reputation. For this purpose, the social and environmental issues, like the economic one, should be integrated in the strategy as well as in the practices of the firm.

Companies have to undertake such a path for the effective implementation of the sustainability principles, the path of aligning the strategy, structure and management systems with stakeholders’ needs. In this effort, the role played by management control systems as a means to fulfilling strategic objectives is essential.

1 The concepts of corporate social responsibility and sustainability will be used here synonymously.

The purpose of this work is to analyse characteristics and role played by management control systems, and in particular by performance measurement systems, for a real integration of CSR principles into business practices. The remainder of the paper is organised as follows.

First, it presents an analysis of the growing interest in the implementation of the corporate social responsibility principles and the integration of stakeholders’ concerns into the strategy and actions of the company. Second, given the changes required by the implementation of a sustainability strategy, the role of management control systems and performance measurement systems, as levers to translate the strategy into action, will be outlined. Third, an analysis of the main sustainability performance management and measurement models found in the international literature will be done. Fourth, I will try to delineate a framework for the integration of the CSR concerns into the company, involving the entire planning and control process.

2. THE ADOPTION OF CSR PRINCIPLES AS A NEW WAY OF DOING BUSINESS

Today, a firm, to act and to operate legitimately, needs to respond to a variety of social, ethical and environmental issues varying from safety and job stability expected by employees to the focus on the environmental impact of production processes. Giving heed to all of these questions as part of corporate operations and functions is critical to business success.

The debate on Corporate Social Responsibility took place roughly in the second half of the 20th century with the publishing of Bowen’s book (1953), “Social Responsibilities of the

Businessman”. Bowen is considered the father of Social Responsibility. Since then, a fervent debate has begun, and a large number of works have been published. The huge number of

CSR definitions proposed and theories, approaches and models suggested shows the attention to this subject paid by the academic and business worlds, as well as by governments and communities in general. From now on, CSR is expected to be an essential concept in business

June 24-26, 2009 4 St. Hugh’s College, Oxford University, Oxford, UK 2009 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-1 language and practice because: “…it addresses and captures the most important concerns of the public regarding business and society relationships” (Carroll, 1999, p. 292).

The adoption of CSR principles and the fulfilment of stakeholders’ expectations may be justified by the company’s desire to behave as a good citizen, that is guided by high moral and ethical principles. This view fits normative or ethical theories. On the other hand, CSR adoption may be guided by the acknowledgement that paying attention to social and environmental issues can result in superior economic performance and improved creation of value in the long term. This view is compatible with instrumental or managerial theories

(Donaldson and Preston, 1995; Smith, 2003; Garriga and Melè, 2004). According to the normative or ethical approach, firms must satisfy stakeholders’ needs and pay attention to social and environmental concerns because of moral duties and ethical principles. The relationship between business and society is embedded with ethical values (Hasnas, 1998).

Management should fulfil stakeholders’ expectations because it’s “the right thing to do”.

According to the managerial or instrumental theory, better stakeholder relations are functional to better economic and financial performance and overall success. There could be many other motivations, variously combined, driving the increasing concern with stakeholders’ needs and social and environmental issues. Notably, the company’s desire to receive the legitimacy to act from the community, the so-called “community licence to operate”, is one of the main reasons to comply with CSR principles (Deegan, 2002).

Regardless of the reasons to be concerned about societal and environmental expectations, the implementation of CSR principles in the organization entails several benefits. According to Waddock (2003), an effective management of stakeholders’ relations is an essential requirement for improving economic and financial performance. Increased employee productivity and reduced staff turnover rely often on employee satisfaction with safety and working conditions. A worker who is satisfied thanks to the job carried out, responsibilities

June 24-26, 2009 5 St. Hugh’s College, Oxford University, Oxford, UK 2009 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-1 assigned and economic rewards and benefits received is usually more productive, and this could lead, in the long run, to superior economic and financial results. Moreover, the more motivating the working environment, the better the company’s reputation within the labour market. This could affect its ability to attract and retain better talent, leading to better results over time (Pfeffer and Veiga, 1999). Better-quality products, services and production processes concerned with environmental and societal expectations can result in increasing customer fidelity, in higher rates of customer retention and satisfaction, and growth of market share. This enhances brand value and company image, leading to better economic performance over time. The establishment of trust-based and collaborative relationships with suppliers is a potential source for long-run value creation. Giving attention to community needs contributes to the establishment of a good environment for business activities. Finally socially responsible behaviour decreases the risk profile associated with the company and could lead to better relations with the capital market, governments and all other groups that have a stake in the company.

Responsible management can result in good management (The Economist, 2005) and consequently in better results for both society and company. It’s a win-win situation. This is what Drucker termed “...to do good in order to do well, that is to convert social needs and problems into profitable business opportunities” (Drucker, 1984, p. 59). If social and environmental programs are put in place solely because “it’s the right thing to do”, they are vulnerable to changes and uncertainty from bad economic performance or new management priorities. However, if a company is concerned with social and environmental issues and stakeholders’ needs in a comprehensive and determined way, CSR involvement can lead to both long-term business success and social well-being. This is the so-called “business case” for CSR (World Business Council for Sustainable Development, 2002) that is “…a strategic and profit-driven corporate response to environmental and social issues cause through the

June 24-26, 2009 6 St. Hugh’s College, Oxford University, Oxford, UK 2009 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-1 organization’s primary and secondary activities” (Salzmann, Ionescu-Somers and Steger,

2005, p. 27).

Companies must understand the contribution of CSR initiatives to the creation of value in the long term, identifying activities and projects that can ensure the greatest benefits to both enterprise and society (Epstein and Roy, 2003a). This is the challenge to managing social, environmental and economic issues, as well as stakeholders’ expectations, in a well- integrated and balanced way. This is the only way for an effective and lasting commitment to socially and environmentally responsible initiatives, as suggested by the several studies searching for a causal relationship between financial and social-environmental performance

(Wood and Jones, 1995; Griffin and Mahon, 1997; Preston and O’Bannon, 1997; Waddock and Graves, 1997; Margolis and Walsh, 2003; Orlitzky, Schmidt and Rynes, 2003).

Consequently, CSR is not to be considered a mere cost, but rather an investment that, if well integrated into company operations and activities, as well as into governance, positively influences economic performance and business success. Sustainability principles must be part of good business management and not some peripheral afterthought or an “add-on” activity.

“CSR is about daily management of social and environmental issues in every department of a company. Enterprises are not expected to adopt CSR practices for marketing or philanthropic reasons but because CSR makes sense for their competitiveness. It should not be just a public relation exercise, but should lead companies to reassess and reorganize their core business activities, and ensure that they manage risk and change in a socially responsible way” (Perrini, Pogutz and Tencati, 2006, p. 17).

Incorporating social and environmental issues, as well as stakeholders’ needs, into corporate strategy (Porter and Kramer, 2006; Werther and Chandler, 2005; Molteni, 2006), culture, management systems, business processes and day-to-day decision making is the only way to remain competitive in the current global context and to ensure long-term business

June 24-26, 2009 7 St. Hugh’s College, Oxford University, Oxford, UK 2009 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-1 success. Companies must be conscious of the strategic importance of developing systematic and integrated responses to stakeholders’ expectations as being crucial to long term competitive advantage and wealth creation.

In order that the implementation of CSR principles into business organization succeed, it is necessary to adopt a convincing, wholehearted, integrated and balanced approach in the management of the company. Only with this kind of commitment it is possible to obtain meaningful and lasting results from the attention to sustainability issues and stakeholders’ concerns. For all of these reasons, a company must follow a path integrating CSR principles into the organization, starting from the shifting of business culture, values, strategic priorities and objectives, up to changing management systems and day-to-day activities. Essentially, this means translating sustainability values into meaningful programs and putting them on the business agenda. Social and environmental concerns, as well as stakeholders’ needs, must be embedded in all business processes and functions, must shape the vision and the mission of the newly responsible company committed with sustainability principles. Management control systems (MCS) and performance measurement systems (PMS) in particular, play a major role in the effective integration of sustainability concerns into business management

(Rouse and Putterill, 2003; Norris and O’Dwyer, 2004; Durden, 2008; Rahbek Pedersen and

Neergaard, 2008).

3. FROM DISCLOSURE TO MEASUREMENT: THE ROLE OF MANAGEMENT

CONTROL SYSTEMS (MCS) AND PERFORMANCE MEASUREMENT SYSTEMS

Developing a sense of social and environmental responsibility can go through a learning curve, starting from defensive or compliant responses that evolve into strategic and comprehensive conduct (Zadek, 2004: Mio, 2005). In order for CSR to be a structural

June 24-26, 2009 8 St. Hugh’s College, Oxford University, Oxford, UK 2009 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-1 component of business management rather than a philanthropic or marketing ploy, sustainability principles should become an integral part of corporate strategy and should be embedded in the business organization and in the existing management systems. The implementation of CSR frequently begins with the disclosure of economic, social and environmental information within triple bottom line (TBL) external reports (Elkington,

1997). This reflects the growing interest shown by the academic and business world and the large number of publications on social, environmental and sustainability accounting and reporting (Mathews, 1997; 2004; Gray, 2002; Parker, 2005). The literature in the CSR area is too focused on sustainability accounting for external reporting purposes, with still much left to be said about the alignment of social and environmental external reporting with management accounting and management control systems (Parker, 2005; Durden, 2008).

Despite the increase in social and environmental disclosure, the quality of these reports has not improved much. Too often, they are mere public relations exercises aimed at improving corporate reputation and image. They may not be evidence of a company's real social and environmental commitment. This happens when sustainability is not well integrated into business strategy and operations, nor into management systems. For this reason, there has been a call for a more integrated, systematic and wholehearted approach to

CSR that makes stakeholders’ expectations, as well as social and environmental concerns, one of the most important strategic priorities, consequently shaping the tools, systems and activities that help company to translate strategy into action (Epstein, 2004).

Making disclosure of social responsibility information the first step toward implementing sustainability principles might be termed a “communicational approach” to CSR (Bergamin

Barbato and Mio, 2004). For sustainability principles to become effective, and to show the company’s authentic commitment to stakeholders’ concerns, this first stage must be followed by a shift that involves corporate strategy, company processes, activities, and management

June 24-26, 2009 9 St. Hugh’s College, Oxford University, Oxford, UK 2009 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-1 systems. According to Epstein: “If current activities are intended to be more than external reporting for public relations purposes, then they must be part of a comprehensive sustainability strategy that is driven through the organization” (Epstein, 2004, p. 25).

Social and environmental reporting could also be the beginning of increasing a company’s commitment to sustainability concerns and stakeholders’ expectations. According to Molteni (2007), CSR could be integrated into corporate strategy thanks to a path made up of five development steps. In the first stage, called “informal CSR”, the social and environmental initiatives carried out are usually sporadic and tied to the values, beliefs and culture of entrepreneurs or managers (Hemingway and Maclagan, 2004; Perrini and Minoja,

2008). In the second stage, named “current CSR”, companies attempt typical social and environmental activities such as the drawing up of ethical codes and sustainability reports, the achievement of social and environmental certifications. At this point, the company should be ready to move on to the third stage, called “systematic CSR”. In this phase, the top management, persuaded by the managerial effectiveness of a social and environmental orientation, could decide to redesign business activities and operations. The fourth stage,

“innovative CSR”, defines a more original approach, usually based on the establishment of collaborative relationships with company stakeholders. In the meantime, the company seeks to develop a more comprehensive approach to social and environmental issues for the achievement of a long-lasting competitive advantage. This level, termed by the author as

“social-competitive synthesis”, is the best response to stakeholders’ needs and the best way to balance the fulfilment of social-environmental objectives and economic-competitive goals

(Molteni, 2006). The last phase, “dominant CSR”, is the more radical and unusual approach for the implementation of sustainability principles into the firm’s structure and processes.

Social and environmental issues and stakeholders’ expectations are the “heart” of the company’s identity and strategy, affecting all business decisions. This could be possible only

June 24-26, 2009 10 St. Hugh’s College, Oxford University, Oxford, UK 2009 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-1 in those companies with a heightened sustainability sensibility in which a deep cultural change has occurred.

In order that a company be defined as socially responsible, an integrative and systematic approach to CSR is required, including the alignment of external and internal sustainability accounting information (Lamberton, 2005). In addition, it is required a balanced approach between initiatives with a prevailing internal focus (such as changes in business vision and mission, formulation of social and environmental strategic objectives, shifts in management systems already in use) and activities with a more external focus (such as accountability through disclosing social and environmental reports and the realisation of programs and initiatives in favour of local community or of other relevant groups of stakeholders) (De

Colle and Gonella, 2002; 2003).

Before disclosing sustainability information, the company must be able to manage, measure and monitor economic, social and environmental performance. Formulation and communication of objectives, monitoring performance through measurement and motivating employees to achieve company goals are the main tasks traditionally assigned to management control systems (Merchant, 1985; Anthony and Govindarajan, 1998) through the implementation of suitable performance management and measurement systems (Otley,

Broadbent and Berry, 1995; Otley, 1999).

The inclusion of stakeholders’ concerns into corporate strategy implies the appropriateness of the systems employed to measure the achievement of the company’s objectives. According to Epstein and Hanson (2006, p. XIII): “As companies move forward to better integrate CSR into the fabric of the organization, the focus has become how to improve the formulation of a social responsibility strategy and how to develop the plans, programs, structures, systems, performance evaluations, rewards, and culture necessary to implement the strategy effectively”. Traditional performance measurement systems, focused

June 24-26, 2009 11 St. Hugh’s College, Oxford University, Oxford, UK 2009 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-1 on economic and financial values, must be intelligently integrated with social and environmental impacts as well as measures of stakeholder satisfaction, in order to lead to a proactive adoption of sustainability principles and to track potential improvements to sustainability performance. Performance management and measurement systems can play an essential role in incorporating economic, social and environmental targets into company mission, strategies and actions, spreading the sustainability principles throughout the organization. A well-designed PMS can help managers to formulate economic, social and environmental objectives and to achieve a more comprehensive understanding of sustainability performance and its business impact on stakeholders’ expectations. Embedding social and environmental issues into corporate strategy as well as into management control systems is necessary for a strategic, comprehensive, integrated and effective implementation of sustainability principles, moving social responsibility commitment beyond mere public relations, philanthropy and marketing exercises. As stated by Rahbek Pedersen and

Neergaard (2008, p.10): “CSR is unlikely to permeate the organisation unless social and environmental concerns are integrated in the management frameworks and measurement tools of the business mainstream”.

4. SUSTAINABILITY PERFORMANCE MANAGEMENT AND MEASUREMENT

SYSTEMS: A LITERATURE REVIEW

In order for a company to reflect sustainability and stakeholder focus in daily activities and to constantly monitor the attainment of social responsibility goals, a performance management and measurement system should be put in place. Social and environmental concerns, as well as stakeholders’ expectations, must be integrated with traditional financial and economic goals, developing a multidimensional and balanced performance measurement system (PMS).

This allows sustainability performance to be appreciated in a holistic, systematic and

June 24-26, 2009 12 St. Hugh’s College, Oxford University, Oxford, UK 2009 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-1 balanced sense, helping managers to guide decision-making and corporate behaviour. Since the formulation and implementation of the sustainability strategy can lead to a remarkable improvement in competitive and economic performance, companies should make use of appropriate systems to manage, measure and monitor the strategic objectives and results achieved in economic, social and environmental terms. A sustainability performance management and measurement system could be defined as: “the measurement and management of the interaction between business, society and the environment” (Schaltegger and Wagner 2006a, p. 3). In order that sustainability goals become an effective and valid motivating influence on employee behaviour, managers must also provide feasible objective- parameters able to affect business decisions and employees’ conduct. This is essential for inducing people in the company to accomplish strategic goals, because “What gets measured and inspected, gets done”.

A socially responsible company must implement management, measurement and communication systems that can really integrate economic, social and environmental concerns in a well-balanced and consistent framework. As stated by Schaltegger and Wagner

(2006b, p. 682): “Management of sustainability performance in all of its perspectives and facets requires a sound management framework which, on the one hand, links environmental and social management with the business and competitive strategy and management and, on the other hand, integrates environmental and social information with economic business information”. For this reason, a theoretical groundwork in the most relevant contributions to management and measurement systems attempting to integrate social, environmental and economic concerns has been laid.

A growing number of scholars and managers agree on the relevance of identifying and fulfilling stakeholders’ needs, expectations and desires. These shape performance measurement systems’. For this purpose, the performance prism model was developed

(Neely, Adams and Kennerley, 2002)2. The framework is made up of five interrelated components. First, the company must be able to identify stakeholders and their needs because the starting point for deciding what to measure is the answer to this question: “Who are our

[company] key stakeholders and what do they want and need?” (Neely, Adams and

Kennerley, 2002, p. 160). Second, managers must comprehend that stakeholders’ contributions to the company are different from stakeholders' satisfaction. The former highlights what a company expects to get from its stakeholders, the latter points out what stakeholders need from the company to keep them on board. Third, the firm must formulate strategies that suit both business and stakeholder expectations. This stage of the model leads to the formulation of consistent performance measures helpful in tracking the achievement of strategic objectives and in ensuring the desired employee conduct. In order for a company to attain the successful implementation of strategy, managers must identify the right performance drivers. This is the purpose of the two remaining components of the model.

Fourth, the company must recognize and monitor the more critical business processes. Fifth, capabilities, knowledge, infrastructures and procedures needed for the operation of business processes must be examined. Measurement needs to focus on these critical elements that typify the business model and distinguishes a company from its competitors. Agreeing to stakeholder theory, the performance prism puts the stakeholders’ explicit needs and contributions in the middle of managers’ awareness. However, this says nothing about assessing trade-offs among conflicting stakeholder expectations.

Socially responsible companies seek contributing to sustainable development goals through the integrated and simultaneous achievement of good economic, social and environmental results. Many scholars have therefore suggested integrating sustainability

2 “Now – and increasingly in the future – the best way for organizations to survive and prosper in the long term will be to think about the wants and the needs of all of their important stakeholders and endeavour to deliver value to each of them. Simply focusing on a subset of seemingly more influential stakeholders – typically the shareholders and customers – and ignoring the wants and the needs of the rest is short-sighted and naïve in today’s information-rich society.” (Neely, Adams and Kennerley, 2002, p. 1).

June 24-26, 2009 14 St. Hugh’s College, Oxford University, Oxford, UK 2009 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-1 concerns using the balanced scorecard (BSC) model. Although BSC was developed to implement strategies essentially aimed at maximize creation of shareholder value, the same authors recognize the need to broaden the model to include stakeholders’ interests and needs:

“All stakeholder interests, when they are vital for the success of the business unit’s strategy, can be incorporated in a Balanced Scorecard” (Kaplan and Norton, 2001, p. 35) or to include additional perspectives related to sustainability principles (such as regulatory and social processes) (Kaplan and Norton, 2004). However, according to them, the improvement of economic and financial performance remains the primary business goal. Moreover, the model leaves out some relevant stakeholders, such as suppliers and public authorities (Nørreklit,

2000). But if properly redesigned, the BSC model can be used by companies to implement a sustainability strategy aimed at simultaneously attaining economic, social and environmental objectives.

Different approaches to the design of a sustainability balanced scorecard (SBSC) have been suggested (Johnson, 1998; Bieker, Dyllick, Gminder and Hockerts, 2001; Epstein and

Wisner, 2001; Figge, Hahn, Schaltegger and Wagner, 2002; Dias-Sardinha, Reijnders and

Antunes, 2002). First, economic, social and environmental issues, as well as stakeholders’ needs, could be included in some (partial approach) or all (transversal approach) pre-existing perspectives through the identification of consistent strategic objectives, targets and performance indicators3. Second, in order to strategically deal with sustainability concerns, an additional non-market perspective could be added4. This “additive SBSC” could be

3 For instance, Novo Nordisk placed social and environmental indicators into some of the existing perspectives; see “Customer & Society”, “People & Organisation” and “Internal Process” perspectives (Zingales and Hockerts, 2002). Instead, Bristol-Myers Squibb identified social and environmental indicators for every pre- existing perspective (Epstein and Wisner, 2001). 4 E.g., Royal Dutch Shell replaced the “Development and Growth” perspective with a new one called “Sustainable Development” pertaining to the integration of social and environmental concerns (Zingales and Hockerts, 2002). Another interesting example is represented by Hamburg Airport that has identified a fifth perspective concerning its location. “The location perspective which is a specific addition to the conventional Balanced Scorecard covers issues like legitimacy and legality of corporate activities as well as issues of politics including the freedom of actions for Hamburg Airport and its role as an engine of regional growth.” (Schaltegger and Wagner, 2006a, p. 9).

June 24-26, 2009 15 St. Hugh’s College, Oxford University, Oxford, UK 2009 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-1 implemented in companies actually exposed to sustainability issues or those in which CSR concerns are strategic imperatives (Bieker, Dyllick, Gminder and Hockerts, 2001; Epstein and Wisner, 2001). These two approaches are not mutually exclusive; rather they could be done together. Finally, a company could build an appropriate scorecard to deal with social and environmental aspects as new tool to complement the traditional BSC. This “derived environmental and social scorecard” (Figge, Hahn, Schaltegger and Wagner, 2002) could be useful for business units, departments or other functions truly committed and concerned with strategically relevant social and environmental issues. The process of SBSC formulation can lead to drawing a sustainability strategy map able to depict hierarchical causal chains for the attainment of strategic goals.

The prominence of economic and financial goals, or the instrumental use of social and environmental issues, as well as stakeholders’ needs, to improve the financial bottom line, is one of the major drawbacks of the SBSC model. In order to overcome this weakness, Woerd and Brink (2004) suggested an interesting framework, called “Responsive Business

Scorecard” (RBS). The purpose of the model is to improve, simultaneously, the results achieved from all three sustainability perspectives (here called “People, Profit and Planet”) and to integrate stakeholders’ expectations. According to a community-driven or synergy- driven strategic orientation, the framework should balance economic, social and ecological concerns as strategically relevant equals. The authors assessed the feasibility of the model in two industries, but further research is needed in order to test the theoretical soundness of the framework and its applicability to other sectors. Another notable framework for overcoming

SBSC’s shortcomings is represented by the DartBoards and Clovers of Sustainability model

(Bonacchi and Rinaldi, 2006; 2007). This multidimensional and multilevel model attempts to measure the three dimensions of sustainability, as well as stakeholders’ needs, through a set of connected primary and secondary measures able to manage and balance different and

June 24-26, 2009 16 St. Hugh’s College, Oxford University, Oxford, UK 2009 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-1 contrasting situations. The two managerial tools designed by the authors mark an interesting and innovative approach among CSR performance measurement instruments, but due to many conflicting claims and cause-effect assumptions, their effectiveness and practical feasibility need to be more deeply tested within business contexts.

One of the main challenges facing socially responsible companies is translating sustainability strategy into coherent action and daily decision-making, and forcing it into every level of the business’s organization. For this purpose, Epstein and Roy (2001; 2003b) suggested a framework that supports the formulation and implementation of a strategy aimed at balancing economic, social and environmental concerns.

The framework is made up of five interrelated components and, according to the authors, describes the drivers of corporate social performance. First, corporate and business-unit sustainability strategies must be developed, and social and environmental potential impacts, as well as stakeholders’ claims, must be identified. The second component, “sustainability actions”, includes the formulation of a sustainability strategy consistent with the social and environmental aspects of business activities, the development of plans and programs directed to satisfy social and environmental concerns and stakeholders’ expectations, and the design of appropriate managerial structures and systems. Thanks to these activities, the company should be able to integrate sustainability issues into their business strategy as well as into daily actions and operations, aligning strategy, structure and management systems. In this context, the utmost importance of performance measurement and evaluation systems comes out. During this stage of the model’s implementation, performance indicators to monitor progress towards attaining sustainability goals must be developed. Third, the company must assess the social and environmental performance achieved through the actions carried out.

Fourth, stakeholders’ reactions to the company’s strategies, plans and actions, must be monitored, as they potentially affect short- and long-term business success. Finally, the

June 24-26, 2009 17 St. Hugh’s College, Oxford University, Oxford, UK 2009 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-1 company should be able to evaluate the impacts of the previous components on long-term financial performance and value creation, through a cost–benefit analysis. The feedback process plays a significant role in the framework’s implementation, helping managers to evaluate the model’s reliability and to highlight possible room for improvement.

In subsequent work, the framework has been modified and put forward again as the

“Corporate Sustainability Performance Pyramid” (CSPP) (Epstein and Wisner, 2006). The most relevant contribution of the CSPP is how it points out the management levers required to pass from the lower to the upper level of the performance pyramid. The two frameworks presented here are still overly focused on the financial bottom line. The assumption of the models is that the company takes cares more about social and environmental issues and stakeholders’ claims because of their potential and ultimate impact on corporate profits and long term competitive advantage. According to the authors, this situation is mutually beneficial to the company's enduring success, stakeholders, society and environmental well- being. It helps to assure a durable corporate commitment to sustainability principles (Epstein and Roy, 2003a).

Rouse, Putterill (2003) and Durden (2008) developed two interesting contributions concerning the integration of MCS and PMS with social and environmental aspects, as well as with stakeholders’ needs. The “integral framework for performance measurement” (IFPM) proposed by Rouse and Putterill (2003) highlights the importance of stakeholders’ requirements and expectations when evaluating corporate performance in a balanced and holistic way. According to the authors, stakeholders’ claims define the organisation’s constraints and affect the company’s vision, mission and strategic goals. An appropriate performance measurement system should encompass stakeholder contributions (considered as the input of the company’s production processes) and stakeholder benefits (that are the values company delivers to satisfy stakeholders’ expectations). One of the main merits of Rouse and

Putterill’s framework is the fitting together of the stakeholder’s view with a strategic analysis of the company processes and activities. This is done through the adoption of a comprehensive and balanced performance measurement system. This recognizes the need to design management control systems that help the company to operate coherently, given stakeholder needs and sustainability goals.

In order for a company to define itself as a socially responsible organisation, an alignment of external sustainability disclosure and internal social and environmental information is needed5. Starting from this assumption, Durden (2008) proposes a framework that highlights the factors that the company should take into account to integrate sustainability concerns into its MCS. First, a company should identify its relevant stakeholders, including their expectations for corporate (social responsibility) goals. It is a process of reciprocal influence. Afterwards the social responsibility goals should be integrated into the MCS, linking formal and informal control systems. Both dimensions are essential to ensuring a proper and workable MCS. The third component of the framework, called “management actions”, points out the guiding role of MCS in company decision- making and operations. The integration of social and environmental goals into the MCS should lead to the expected sustainability outcomes aligning with the information externally reported to stakeholders. One of the main advantages of this framework is to highlight the significance of aligning external and internal accounting information, as well as formal and informal control systems, for a lasting and successful implementation of sustainability principles.

Many of the management and measurement models examined here are still too focused on the economic and financial dimension of performance; they consider social and

5 “An organisation’s MCS should support and orientate managers in their pursuit of social responsibility and stakeholder goals. In order for an organisation to operate in a socially responsible manner an integrative approach is required where there is alignment and fit of both external and internal social information needs .” (Durden, 2008, p. 677).

June 24-26, 2009 19 St. Hugh’s College, Oxford University, Oxford, UK 2009 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-1 environmental concerns to be subordinate to economic results and to the maximization of shareholder value. “It’s time to rebalance the scorecard” (Higgins and Currie, 2004, p. 297).

A well-balanced and multidimensional performance management and measurement system must be developed in order for the corporate sustainability strategy to succeed6 (Cramer,

2002).

5. TOWARDS A FRAMEWORK FOR THE INTEGRATION OF CSR THROUGH

PLANNING AND CONTROL PROCESS

The proliferation of sustainability reports, aimed at promoting socially responsible practices, has not been followed by a commensurate implementation of systems and processes for appropriately managing CSR concerns. It is a paradox: on the one hand, an increasing number of social and environmental reports are produced, on the other hand, this external reporting does not include the planning and control tools needed to manage and monitor sustainability, and which are needed before sustainability results can usefully be disclosed to external stakeholders. In order to avoid purely “cosmetic” disclosures for the improvement of a company’s reputation and image, social and environmental concerns should shape the whole planning and control process. Socially responsible activities and operations must be embedded into the strategic analysis process. They must be diffused throughout the business’s organisation in order to modify existing management systems. Starting with this principle, it is possible to depict a “socially responsible planning and control” framework as a strategic path for the implementation of CSR concerns into the business organization (Fig. 1).

Figure 1 – ABOUT HERE

6 “More than before, firms are now expected to account explicitly for all aspects of their performance, i.e. not just their financial results, but also their social and ecological performance. Openness and transparency are the new key words. This type of pressure is forcing an increasing number of firms to adopt ‘sustainable’ business practices, which means establishing a systematic link between their financial profitability and their ecological and social performance.” (Cramer, 2002, p. 99).

First, economic, social and environmental issues must shape the company’s strategic identity, consequently modifying the business vision and mission as well as corporate values and culture. The “identity” phase is the first, crucial stage in the CSR implementation process. Without a proper embedding of social and environmental concerns into the company values and mission, an effective and lasting implementation of sustainability principles is unlikely. The company should develop the strong socially responsible identity needed for an authentic commitment to sustainability principles.

Second, to make the socially responsible identity widespread within the company, top management must formulate an appropriate sustainability strategy. “Developing the right

CSR strategy requires an understanding of what differentiates an organization – its mission, values and core business activities” (Smith, 2003, p. 68). For the CSR strategy to become effective, managers should develop integrated and well-balanced social, environmental and economic goals and embed them in the company’s business plan. By doing so, the company assigns a strategic role to sustainability principles. During this stage, it is time to carry out stakeholder engagement initiatives to satisfy stakeholder claims, thus further contributing to the company’s lasting well-being.

Third, the dedicated adherence to CSR and the assignment of a strategic role to sustainability principles entail the adjustment of the pre-existing management systems. This change involves processes and systems of planning and control, of compensation and evaluation, of incentive and rewarding, of information and communication. In particular, thanks to the implementation of consistent and socially oriented planning and control systems, the company’s strategic goals can be translated into sustainability metrics and indicators, giving responsibility to the right organization members. Sustainability principles will thereby spread to every level of the business’s organization, driving company decision- making and activities. Sustainability performance measures can help managers establish

June 24-26, 2009 21 St. Hugh’s College, Oxford University, Oxford, UK 2009 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-1 whether they are going to reach the strategic goals they set out to achieve, and they can help employees to track whether they are moving in the right direction. The assignment of strategic relevance to social, environmental and economic concerns is a priority for an authentic, socially responsible company.

Fourth, social, environmental and economic results must be measured through the designed sustainability performance measures that are employed, on the one hand, for internal decision-making purposes and, on the other hand, to report CSR performance to external stakeholders. In doing so, internal accounting information and external disclosure can be aligned to develop an integrated and balanced sustainability performance management and measurement system.

Finally, analysis of the gap between sustainability goals and actual performance helps provide the company with insights into areas that have potential room for improvement.

During this stage, the company can draw on stakeholders’ suggestions for implementing sustainability initiatives aligned with the company’s strategic goals. The stakeholder engagement process can strengthen the sustainability values now underpinning the business’s identity, thus improving the company’s ethical commitment.

6. DISCUSSION AND CONCLUSION

An authentic, socially responsible company should voluntarily adopt a strategic and lasting approach based on the establishment of fiduciary relationships with its stakeholders and a real commitment to social-environmental concerns within the company’s processes and operations. Frequently, the implementation of sustainability principles can turn out to be a mere “public relations exercise” for the improvement of reputation and image. This can involve the distribution of “poor” sustainability reports, or philanthropic activities, rather than the real integration of social, environmental and economic concerns into the business.

If authentically integrated into a company’s identity, strategy, structure and management systems, CSR could provide a possible source of long-term competitive advantage, affecting the key factors of business success in the current competitive context. For this to happen, the company should adopt a “strategic approach” to CSR. A socially responsible identity and strategy must be developed; sustainability concerns as well as stakeholders’ needs must be embedded into strategic goals, business processes and activities, and existing management systems; social, environmental and economic performance measures must be developed and monitored. In this process, well-designed sustainability performance management and measurement systems play a major role. They help managers to identify opportunities for simultaneous improvements in all three dimensions of sustainability in order to achieve a strong contribution to CSR strategy implementation.

In summary, the literature review conducted revealed that only limited attention has been given to the development of PMS focused on the simultaneous and balanced improvement of social, environmental and economic concerns. Many of the frameworks analysed are too focused on enhancing the financial bottom line, and are too complex to be implemented in small-to-medium size enterprises (SMEs). Moreover, a global and comprehensive vision of a strategic approach to CSR is still missing. For this reason, a strategic path for the implementation and internalization of CSR principles was suggested. The proposed framework is not intended as a replacement for any existing managerial tools. Rather, it provides a possible inclusive path for the strategic implementation of sustainability concerns into the company. It could be usefully adopted by SMEs, which are often distressed by lack of human and financial resources. Furthermore, the use of the “socially responsible planning and control” framework could give substance and credibility to a company’s commitment to

CSR principles. Future research could investigate the application of the suggested framework, particularly in those SMEs interested in the implementation of a strategic and

June 24-26, 2009 23 St. Hugh’s College, Oxford University, Oxford, UK 2009 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-1 comprehensive approach to CSR, in order to become authentic, socially responsible companies.

TABLES AND FIGURES

Figure 1: Socially responsible planning and control framework

Identity

Feedback/ Planning Improvemen t

External Measurement Management reporting

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