The integration of sustainability and externalities into the “corporate DNA”: a practice-oriented approach

• DOI: https://doi.org/10.1108/CG-06-2020-0244
• Published date: 01 November 2020
• Date: 01 November 2020
• Pages: 479-496
• Subject Matter: Strategy,Corporate governance
• Author: Juliana Walkiewicz,Jenny Lay-Kumar,Christian Herzig

The integration of sustainability and

externalities into the “corporate DNA”:a

practice-oriented approach

Juliana Walkiewicz, Jenny Lay-Kumar and Christian Herzig

Abstract

Purpose –This paper aims to present a methodology to establish and integrate formal sustainability

control systems (SCS) into management control systems (MCSs). The innovative approach aims at

contributing to the needfor SCS integration by permeating and transformingMCSs so that positive and

negativeexternalities can be internalizedinto the financial performance measurementand reporting.

Design/methodology/approach –In an exploratory process,control systems were closely connected

with financial accounting within four interrelated –ecologic, social, financial and knowledge-related –

dimensions. Building on the action design research, multicriteria key performance indicators (KPI) for

these dimensions were developed. Four value-based small and medium-sized enterprises of the food

sector developedKPIs in interactive and participativeworkshops and interconnected their own business

model with their sustainability principles. Constantly revising conformity, specific S.M.A.R.T. goals and

related activities were defined, thereafter being used for KPI measures and for input in financial

accounting.

Findings –The workshop series reveals the importance of including relevant stakeholders, multiple

feedback loops and permanent dialogue to abolish cognitive barriers. The approach enables the

development of multicriterial KPIs and identification of costs and benefits for an integrated financial

accounting.

Originality/value –The paper contributes to practice and research in the field of SCS by providing

insights into the process of an explorative workshop series developing multicriteria KPIs for controlling

and financialaccounting.

Keywords Management control systems, Economic sustainability, Key performance indicators,

Action research, Financial accounting, Sustainability control systems

Paper type Case study

1. Introduction

Multiple research paths analyze corporate sustainability accounting from different

angles. The managerial research path differentiates between the parties addressed

through sustainability accounting. The approaches, known as “Inside-out,” “Outside-in”

and “Twin-track” (Burritt and Schaltegger, 2010) focus on the varying requirements of

sustainability accounting, arising from the respective management strategy regarding

the target group. In the “Inside-out” approach, sustainability accounting supports

management decisions to implement their corporate sustainability strategy by

representing the necessary information through, i.e. sustainability performance

measurement or reporting. The focus of the “Outside-in” approach is on strategic

management of the sustainability performance expectations of external parties regarding

the corporate contribution to sustainability through sustainability control systems (SCS).

Data collection, measurements and reporting are supposed to create transparency and a

communication base with third parties. The “Twin-track” approach is a combination of

Juliana Walkiewicz is based

at the Section of

Management in the

International Food Industry,

University of Kassel,

Witzenhausen, Germany

and Innovation Center

Network –Academic

Partnerships, SAP SE,

Walldorf-Wiesloch, Germany.

Jenny Lay-Kumar is based

at the Department of

Research, Regionalwert

Corporation Freiburg,

Eichstetten, Germany.

Christian Herzig is based at

the Section of Management

in the International Food

Industry, University of

Kassel, Witzenhausen,

Germany.

Received 19 June 2020

Revised 29 October 2020

4 November 2020

6 November 2020

Accepted 6 November 2020

This case study was conducted

in the context of a project

funded by the German Federal

Ministry of Labor and Social

Affairs, which ends in 2021. The

project is conducted within the

context of the initiative INQA

(Initiative New Quality of Work)

and professionally supported

by the German Federal Office

for Occupational Health and

Safety. Any opinions, findings,

conclusions or

recommendations expressed in

this paper are those of the

authors and do not necessarily

reflect the views of the funder or

project members.

DOI 10.1108/CG-06-2020-0244 VOL. 21 NO. 3 2021, pp. 479-496, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 479

these two approaches. Sustainability accounting ultimately includes both perspectives

with their reciprocal influence and represents a process in which the flow of information is

structured and processed in relation to different requirements and interest groups. The

approach presented in this paper is positioned within “Inside-out” at the crossing to

“Twin-track.” It aims at permeating management control systems (MCSs) with

sustainability controls and at internalizing externalities into corporate financial

performance and accounting. In doing so, a new comprehension of economic activity

shall be built. Negative externalities shall be internalized similar to the “user-pays

principle” by assumption of risks and omitted sustainability activities, represented in a

negative position in the financial accounting of the enterprise in charge. Positive

externalities shall be incurred by the enterprise in charge through the financial benefits of

sustainable economic activities. This leads to economically reasonable decisions.

Through accrediting limited resources and related preserving activities, free of charge

within the current accounting system, with a financial value, they are integrated into

balancing. Conversely, depletion imposes entrepreneurial risks, which contribute

negatively to the outcome. This reveals that sustainability is not just a societal issue, but

the foundation for economic success. Activities in favor of sustainability increase the

economic profit as they are capitalized in the balance sheet, while unsustainable

behavior is decapitalized.

Establishing this new comprehension of economics requires a rethinking of corporate

management and its controls. Multicriterial key performance indicators (KPIs) shall be

developed to address the new entrepreneurial and sustainable determinants of economic

success. Also, an extended financial reporting system shall contribute through enhanced

information and transparencyto profound reports for external stakeholders.

In addition to the “traditional” social, ecological and financial dimension, this paper

accounts for knowledge as well. It is determined as a separate dimension. Knowledge and

the associated information technology are conceived as an important non-physical

resource and asset that needs to be preserved, updated and developed further regularly

(Powell and Snellman, 2004;Anandet al.,2007;Felin et al.,2009).

The presented approach addresses several gaps within SMCS research. It accounts for

multicriteria sustainability, regarding the interconnectedness of the sustainability

dimensions within all stages of the workshop process. Objectives in all four dimensions are

defined and supported with goal-oriented activities, transferring entrepreneurial

sustainability rhetoric into action (Lueg and Radlach, 2016). Recurrent reflections between

goal-oriented activities and activities out of the business model carve out and, where

possible, dissolve possible tensions. Study subjects are small and medium-sized

enterprises (SMEs), being the largest part of businesses globally but are underrepresented

in research (Ghosh et al., 2019). In the workshop process, employees of the relevant

divisions as well as managing directors of four SMEs take part, as it is assumed that

training, education and a shared vision and cognition regarding sustainability is of high

importance in transferring decisions into actions (Maon et al.,2009;Gond et al.,2012;

Lindsay, 2015).

The study sets forth an action research approach, aiming at a collaborative development of

sustainability controls between practitioners and scientists (Chevalier and Buckles, 2019),

accounting for the importance of examining and understanding immanent processes of

sustainability accounting and its impact on corporate performance (Adams and Larrinaga-

Gonz

alez, 2007).

After presenting the state of art of sustainability accounting research, the conceptual

framework of this study is presented, followed by the researchmethodology and tools used

in the workshop series. The paper concludes with an elaboration of results, analysis and

discussion.

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