Adopting management control systems through CSR strategic integration and investigating its impact on company performance: evidence from Indonesia

• DOI: https://doi.org/10.1108/CG-04-2020-0150
• Published date: 11 December 2020
• Date: 11 December 2020
• Pages: 463-478
• Subject Matter: Strategy,Corporate governance
• Author: Esti Dwi Rinawiyanti,Xueli Huang,Sharif As-Saber

Adopting management control systems

through CSR strategic integration and

investigating its impact on company

performance: evidence from Indonesia

Esti Dwi Rinawiyanti, Xueli Huang and Sharif As-Saber

Abstract

Purpose –This paper aims to investigate the extent to which the management control systems (MCS)

adoption in corporate social responsibility (CSR) integration into business strategy has an impact on

companies’performance.

Design/methodology/approach –Using a sample of 435Indonesian manufacturing companies,partial

least squares structural equation modelling was used to investigate the impact of CSR strategic

integrationon companies’ performance basedon the contingency and stakeholder theories.

Findings –The findings reveal CSR strategic integration has a positive and significant impact on

companies’ performance, including employee, operating and financial performance and the company size

can positively moderate the impact of this integration on both its operating and financial performance.

Practical implications –The findings can encourage managers to adopt MCS byundertaking CSR at

the strategiclevel, resulting in superior performance,both socially and financially.

Social implications –Employee performanceand operating performance cansignificantly mediate the

effect of strategicintegration on financial performance.

Originality/value –The paper suggests that adopting MCS through CSR strategic integration could

improve company performancesocially and financially. This is the very first study on this issue from an

Indonesianperspective.

Keywords Manufacturing, Emerging countries, CSR integration, Strategic level

Paper type Research paper

1. Introduction

The World Business Council for Sustainable Development defines corporate social

responsibility (CSR) as a continuous business agreement to adopt ethical behaviour and to

promote sustainable economic development, and simultaneously to enhance the quality of

life of employees, their families, the local community, as well as the wider society (Moir,

2001). Although CSR in developing countries is emerging in management studies

(Jamali and Karam, 2018), substantial information about the CSR contribution and its

key performance measures in developing countries should be explored (Branco and

Rodrigues, 2006;Crifo et al.,2016).

As the world’s fourth most populous nation with more than 267 million population, Indonesia

has the largest economy in Southeast Asia (Worldbank, 2020). As one of the biggest

developing country, Indonesia has been trying to implement CSR for almost two decades

(Ridho, 2018). The Public Interest and ResearchAdvocacy (PIRAC) survey in 2001 showed

that CSR funds in Indonesia were $11.5m from 180 organizations endorsing 279 CSR

Esti Dwi Rinawiyanti is

based at the School of

Management, RMIT

University, Melbourne,

Australia and Department

of Industrial Engineering,

Faculty of Engineering,

University of Surabaya,

Surabaya, Indonesia.

Xueli Huang and

Sharif As-Saber are both

based at the School of

Management, RMIT

University, Melbourne,

Australia.

Received 23 April 2020

Revised 5 August 2020

22 September 2020

12 October 2020

Accepted 18 October 2020

The first author (EDR) would

like to acknowledge the

financial support of the

Indonesian Endowment Fund

for Education (LPDP), Ministry

of Finance, in collaboration with

the Directorate General of

Higher Education (DIKTI),

Ministry of Research,

Technology and Higher

Education, Republic of

Indonesia, under Beasiswa

Unggulan Dosen Indonesia-

Luar Negeri (BUDI-LN) Batch I

2016.

DOI 10.1108/CG-04-2020-0150 VOL. 21 NO. 3 2021, pp. 463-478, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 463

activities (PIRAC, 2002). That study highlighted the lack of a comprehensively legal

instrument to regulate CSR and foster CSR activities. The Indonesian government has

addressed this issue with the release of Law No. 40 2007 on Limited Liability Companies.

Under this law, companies with activitiesrelated to natural resources are obliged to practice

CSR and disclose their CSR activities (Ridho,2018;Waagstein, 2011).

In practice, most Indonesian companies undertake CSR only at the leve l of charitable activities

and corporate philanthropy (Joseph et al.,2016;Maulamin, 2017;Razafindrambinina and Sabran,

2014). This phenomenon indicates that we need a greater under standing of how Indonesian

companies control CSR implementation when they are expected to comply with regulations while,

at the same time, undertaking beneficial activities for their businessand community.

Several authors argue that CSR needs to be connected and integrated into business

strategy to enhance companies’ social and financial performance (Dey and Sircar, 2012;

Galbreath, 2006;Ganescu, 2012;Hasan et al.,2018;Porter and Kramer, 2011). However, a

common problem with the planning and implementation of CSR appears to be the lack of

alignment with business strategy (Rangan et al., 2012), and CSR remains separated from

the mainstream business strategy (Katsoulakos and Katsoulacos,2007).

Management controls can be defined as the systems, rules, practices, values and other

activities management put in place to direct employee behaviour (Malmi and Brown, 2008,

p. 290). Over the years, the concept of management control systems (MCS) has changed

from one that emphasizes providing more structured, financially quantifiable information to

support strategic decision-making to one that covers a much broader range of information

(Chenhall, 2003). MCS is essential for fostering CSR implementation, but there is little

research on the role of MCS in the strategic formulation, implementation and integration of

CSR (Arjalie

`s and Mundy, 2013;Hosoda and Suzuki,2015;Laguir et al., 2019).

With collected data from 435 Indonesian manufacturing companies, this paper aims to

investigate how companies adopt MCS by integrating CSR into business strategies and to

examine the impact of this integration on companyperformance. Using partial least squares

structural equation modelling (PLS-SEM) for data analysis, the findings show that CSR

strategic integration playsa fundamental role in achieving better performance, on employee

and operating performance. More precisely, the findings offer new understandings of the

mechanisms which mediate CSR and financial performance, as an employee and operating

performance can mediate the effect of strategic integration on financial performance. The

results also suggest that the company size can moderate the impact of CSR integration on

operating and financial performance.

The findings of this paper make significant theoretical and practical contributions. From a

theoretical perspective, this paper develops a conceptual framework by combining CSR

integration and its effect on company performance based on the strategy-context-performance

relationship according to the contingency and stakeholder theories. From a practical perspective,

the findings could increase the understanding of businesses about diverse CSR activities and

inspire these businesses to manage and control CSR integration into their business strategies.

This paper is organized as follows. Following a brief literature review of the management

control system (MCS) and CSR in Section 2, a theoretical framework and hypotheses are

presented in Section 3. The methodology is then discussed in Section 4, followed by the

findings in Section 5 and discussion in Section 6. Section 7 provides the conclusion,

limitations and suggestions for futurestudies.

2. Literature review

2.1 Management control systems

MCS is the “formal, information-based routines and procedures managers use to maintain

or alter patterns in organizational activities” (Simons, 1995, p. 5). To investigate how

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