Sustainability control system components, reporting and performance

• DOI: https://doi.org/10.1108/CG-06-2020-0208
• Published date: 15 December 2020
• Date: 15 December 2020
• Pages: 633-652
• Subject Matter: Strategy,Corporate governance
• Author: Fereshteh Mahmoudian,Jamal A. Nazari,Irene M. Herremans

Sustainability control system components,

reporting and performance

Fereshteh Mahmoudian, Jamal A. Nazari and Irene M. Herremans

Abstract

Purpose –Drawing on the natural resource-based view and the literature on management control

systems as a package, this study aims to investigate organizations’ sustainability control systems

designedto achieve the interrelated sustainabilityobjectives of performance and reporting.

Design/methodology/approach –The authors use three-stage least squares regressions on archival

data for a largesample of international companies.

Findings –Better environmental performance and sustainability reportingquality are related to certain

control system components, and the dual objectives of sustainability performance and reporting are

interrelated.

Originality/value –This study provides theoretical contributions and practical implications by

demonstrating how a set ofsustainability control components can enable bettersustainability reporting

and performanceoutcomes.

Keywords Management control systems, Sustainability control system, Sustainability reporting,

Environmental performance

Paper type Research paper

1. Introduction

Failing to embed sustainability responsibilities in firms’ strategic decision-making can

jeopardize their ability to achieve social and environmental objectives (Mehralian et al.,

2016). Integrating sustainability into firms’ day-to-day operations requires implementing

strategic thinking through systems that support organizational behavior to move toward

achieving related objectives (Gutie

´rrez-Martı

´nez and Duhamel, 2019;Laszlo and

Zhexembayeva, 2011). According to the natural resource-based view (NRBV) of the firm,

unique environmental resources and capabilities should be developed to achieve superior

social and environmental performance (Hart, 1995). A management control system (MCS)

adapted to accomplish a firm’s sustainability objectives is generally referred to as a

sustainability control system (SCS) because it helps to develop unique and valuable social

and environmental capabilities that are conducive to improved sustainability performance

(Journeault, 2016). Therefore, an adapted MCS is instrumental in changing the firm’s

direction and making the operations align with firm’s sustainability objectives (Arjalie

`sand

Mundy, 2013;Ghosh et al.,2019)1. Along these lines, this research investigates which

control components aid in achieving the interrelated sustainability objectives of

performance and reporting.

Malmi and Brown (2008) defined an MCS as a package that entails all the “devices and

systems managers use to ensure that the behaviours and decisions of their employees are

consistent with the organisation’s objectives and strategies” (p. 290). The extant literature

provides support for applying this definition of an MCS to SCS research (Ditillo and Lisi,

2014;Lueg and Radlach, 2016). Lueg and Radlach (2016) argued that examining an SCS

Fereshteh Mahmoudian

and Jamal A. Nazari are

based at the Beedie School

of Business, Simon Fraser

University, Vancouver,

Canada.

Irene M. Herremans is

based at the Haskayne

School of Business,

University of Calgary,

Calgary, Canada.

Received 4 June 2020

Revised 15 October 2020

11 November 2020

Accepted 11 November 2020

DOI 10.1108/CG-06-2020-0208 VOL. 22 NO. 4 2022, pp. 633-652, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 633

as a package of controls can help to gain a better understanding of how the components

contribute to corporate sustainable development.

An SCS can be defined as a combination or group of controls that managers use to

ascertain that the behavior and decisions of organizational actors are congruent with the

organizational sustainability strategies and objectives (Crutzen et al.,2017). Recently, a

growing body of research has emphasized the importance of control systems in achieving

sustainability performance outcomes (Bui and de Villiers, 2017;de Villiers et al.,2016;

Guenther et al.,2016) and reporting objectives (Herremans and Nazari, 2016;Maas et al.,

2016;Nazari et al.,2015). However, little empirical evidence exists in this field to explain

how a group of controls influences sustainability outcomes. Therefore, drawing on the

literature that considers an MCS as a package of controls, this study investigates

organizations’ control systems designedto achieve the interrelated sustainability objectives

of performance and reporting.

This study contributes to the sustainability literature in multiple ways. First, it provides

empirical evidence of the effects of several components in the controls package on

sustainability outcomes. The SCS literature thus far has relied heavily on case studies,

interviews and surveys; however, it has also called for more archival cross-sectional

analysis (Lueg and Radlach, 2016). This study is among the first archival large-sample

studies to take a more comprehensive approach to an SCS. Second, unlike many earlier

studies that chose either sustainability reporting or performance as an outcome, this study

uses an improved research design that elucidates the interrelatedness of performance and

reporting. It assumes that reporting is not only an outcome of performance but also

provides information that is usefulin improving performance.

The remainder of this paper is organizedinto five sections. In Section 1, the MCS- and SCS-

related objectives are reviewed, and in Section 2, the research questions and hypotheses

are developed. In Section 3, the research methodology is explained. In Sections 4 and 5,

the findings are reportedand discussed, followed by the conclusions.

2. Conceptual framework and hypotheses development

2.1 Theoretical framework

A systematic approach to addressing sustainability issues requires a broad constellation of

strategic and operational organizational functions and controls (Russo and Fouts, 1997).

Such control systems comprise detailed procedures, practices and methods that are

structured to enable organizational activities to be targeted toward sustainability outcomes.

An improved MCS and how it can provide advantages for firms can be explained through the

lens of the RBV. The NRBV of the firm, which is an extension of the RBV, suggests that

differences in implementing organizational strategy are the result of the development of

unique and valuable internal resources and capabilities (Barney, 1991;Rugman and

Verbeke, 2002;Teece, 1986;Wernerfelt, 1984). Variations in perfor mance depend on firms’

abilities to obtain or develop resources and capabilities (Bowen et al., 2010;Grunig and Hunt,

1984;Hart, 1995;Herremans et al., 2009;Morsing and Schultz, 2006;Pedersen and Gwozdz,

2014). Journeault (2016) argued that even though there is ample theoretical and empirical

support for how proactive environmental capabilities and strategies lead to environmental

performance, limited empirical evidence exists to show how such organizational capabilities

are developed.

Building upon the earlier work that used an NRBV to demonstrate an MCS (Henri, 2006),

Journeault (2016) maintained that an MCS, and more specifically an SCS, can foster the

development of unique and valuable resources that are necessary to achieve sustainability

performance. Although resources might exist in isolated pockets within the firm, they need

to be molded into a control system that starts with planning for improved performance and

ends with reporting on the performance to various stakeholders, both internal and external,

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