Conceptual Background and Relationships between SR and MCS: Comparison
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The movement for corporate sustainability reporting (SR) came into the spotlight in the middle of the 1990s when the South African first king code of corporate governance, widely known as the “King I” report, was published. The focus of SR is on value creation through intellectual, human, social, and natural capitals. In order to ensure that sustainable value creation is connected to the different types of capital, companies need to manage and control for such value creation. This point emphasises the link between value creation and management control systems (MCS).

  • sustainability report
  • integrated report
  • management control system

1. Introduction

The movement for corporate sustainability reporting (SR) came into the spotlight in the middle of the 1990s when the South African first king code of corporate governance, widely known as the “King I” report, was published (Dumay et al. 2016; Gleeson-White 2014)1. The stakeholder notion grabbed quick attention in the business world for its durable business growth without compromising stakeholders’ interests. Later, in 2002, the King II report introduced the concept of integrated reporting as a means of non-financial reporting in addition to financial reporting. This integrated reporting underpinned frameworks, such as the current Global Reporting Initiative (GRI), the Sustainability Accounting Standard Board (SASB), and the triple bottom line (Dumay et al. 2016; Gleeson-White 2014). Since then, organisations have been progressively motivated to report in line with such standards.
The SR aims to increase transparency in companies and their contribution to sustainable development (Elkington 1997; Herzig and Schaltegger 2006; Traxler et al. 2020). However, there are many reasons beyond transparency, pointing to the demands of the sustainability report, such as performance improvement, legitimacy, accountability, control, and stakeholder management (WBCSD 2015; Maas et al. 2016a, 2016b; Gond et al. 2012; Joseph 2012; Nigri and Del Baldo 2018). Direct and indirect pressure from stakeholders has sped up the disclosure process (Gleeson-White 2014; Jollands et al. 2018). For the sake of protecting shareholders and other stakeholders’ interests, the European Parliament issued the directive (European Union Directive 2104/95) on non-financial disclosure and diversity (La Torre et al. 2018). This new regulation requires larger companies with more than 500 employees and public interest entities to produce annual corporate reports with information on their social, environmental, human rights and anti-corruption policy, risks, and performance (European Union 2014). Thus, now many European countries, such as Sweden, Denmark, and Germany (Hoffmann et al. 2018), amend their voluntary disclosure, turning to higher degrees of mandatory disclosure.
There is a growing recognition that contribution to sustainable development requires organisations to embed considerations of the triple bottom line or ESG along with financial considerations into their managerial decision-making and organisational control process (Bonacchi and Rinaldi 2007; Perego and Hartmann 2009; Rahi et al. 2022b). Meanwhile, accounting scholars diverge in their opinions on whether SR and management control systems (MCS)2 should or should not be mixed into the same frameworks and clearly reflected in the sustainability report. Some scholars argue that SR is a mirror of managerial decision-making and control processes (Biswas and O’Grady 2016). In line with this, they provide frameworks of sustainability reporting management control systems (SRMCS) for bridging the relationship between them (i.e., Laughlin 1991; Morioka and de Carvalho 2016; Traxler et al. 2020; Tilt 2006). Researchers even warn of the risk of greenwashing if sustainability data solely is integrated into sustainability reports but not embedded in companies’ internal decision-making (Gray and Milne 2004; Milne and Gray 2013; Traxler et al. 2020). In contrast, other scholars see the links between SR and MCS as dangerous, risking direct management focus apart from the sustainability practice involving internal decision and management control processes (Bebbington et al. 2007; Riccaboni and Leone 2010; Maas et al. 2016b).
Despite the mixed scholarly views on the integration of sustainability reporting and management control, as well as how it spills over into companies’ sustainability practices, (i.e., what companies do and how they work), there is a growing consensus that SR should reflect the managerial motivations and attitudes within the company, as they respond directly to stakeholders’ demands. The development of sustainability reporting may, in line with this reasoning, be orientated towards improving sustainability practice in terms of management decision-making and work processes. Producing extensive sustainability reports may be considered inconsistent, with companies thereby claiming accountability and transparency while not linking sustainability to the company’s sustainability practice and MCS. Researchers see the effective implementation of successful sustainability strategies as requiring comprehensive MCS to ensure integration of sustainability into an organisation’s core operations and to push it towards transparency, performance improvement, legitimacy, accountability, control, and stakeholder management together (Epstein 1996; Epstein and Wisner 2005; Gond et al. 2012; Moon et al. 2011). In addition, empirical studies further identified that there is a clear linkage between sustainability reporting and financial performance (Oncioiu et al. 2020; Jones et al. 2007), and a proper contract of executive compensation helps in this regard (Al-Shaer and Zaman 2019). This means that sustainability reporting, employee motivation, financial performance, and stakeholder prosperity are endogenously and exogenously related to each other. There is a growing number of literature reviews focusing on sustainability and MCS separately. Their primary focus is performance management (i.e., Morioka and de Carvalho 2016) or MCS for sustainable development in general (i.e., Lueg and Radlach 2016), while neglecting the linkage between SR and MCS. A recent systematic review by Traxler et al. (2020) limits the review to a specific management control (MC) framework known as the Malmi–Brown framework.

2. Conceptual Background of SR and MCS and Their Relationships

2.1. Sustainability Reporting (SR)

A combination of financial and non-financial information is critical both for managers and for external stakeholders, such as investors (Koellner et al. 2005; Milne and Chan 1999; Reimsbach et al. 2018). Similar to financial reporting, sustainability reporting plays a crucial role for external decision-makers, such as in investment-related decisions (Bernow et al. 2019; Arvidsson and Johansson 2019). Here, SR refers to a non-financial report aimed at providing stakeholders with high-quality sustainability information in accordance with the three sustainability dimensions, namely governance, social, and environmental (White 2016; Arvidsson and Dumay 2021). Disclosure of SR is a major channel for companies to ensure transparency and legitimacy in front of stakeholders (Ditlevsen et al. 2013; and Beck et al. 2017). Nonetheless, a company’s degree of sustainability depends on the company’s true actions. From the beginning, companies published sustainability reports according to their own frameworks, and these frameworks often changed over the years. The lack of uniformity caused incomparability between organisations and even between years within the same company (Haller et al. 2018). In many countries, SR is still considered a voluntary practice, lacking uniform frameworks (Bhasin 2017). One reason for the lack of attention to SR from the beginning was the difficulty in transforming sustainability actions into accounting terms. However, the Global Reporting Initiative (GRI) and Sustainability Accounting Standard Board’s (SASB) frameworks have been widely practiced by a large number of companies, also aligning sustainability and accounting. Over the years, the focus of SR is now on value creation through intellectual, human, social, and natural capitals as emphasised by Gleeson-White 2014. In order to ensure that sustainable value creation is connected to the different types of capital, companies need to manage and control for such value creation. This point emphasises the link between value creation and MCS (Chenhall et al. 2010; Skoog 2003).

2.2. Management Control Systems (MCS)

The term management control was introduced in Anthony’s (1965) theoretical work, where MC was separated from strategic planning and operational control. The concept of management accounting and control was, until this time, limited to cost accounting control, a perspective failing to take technological progression, organisational structure, and environmental changes into account (Otley 1994; Birnberg 2011). However, through Anthony’s work, MCS was theoretically developed into the notion that accounting is an integral part of planning and control. Scholars started to emphasise that design of the management control systems (MCS) needed to be shaped in line with organisational strategies, since the contemporary business environment and acceptance of changes are unavoidable when designing a MCS (Otley 1994). Over the years, researchers followed this framework of management control and developed the notion of contingency approaches in management accounting and control (i.e., Hopewood, Govindarajan, Gordon-Miller, Hayes, and Otley). Accordingly, sustainability strategies, goals, discourse, and mission statements are expected to be reflected within formal management control systems, while also communicated to stakeholders formally through reporting (Gond et al. 2012; Narayanan and Boyce 2019). This is in line with an “inside-out” perspective (Maas et al. 2016b; Schaltegger and Wagner 2006). The inside-out perspective is based on the business strategy and an analysis of issues that are important for the effective implementation for these strategies.

2.3. Relationship between SR and MCS

The conceptualisation is based on the theoretical discussion mentioned above. In this, SR in the middle is surrounded by the MCS, stakeholder’s expectation, and institutional expectations, since SR is the interest of all the stakeholder, internally and externally. The four circles illustrate different parts of an MCS, including (1) informal control, (2) formal control, (3) stakeholders’ expectations, and (4) transparency and legitimacy requirements. To meet regulatory and stakeholder requirements, SR is considered a cardinal approach to decision-making based on both an “inside-out” and an “outside-in” perspective (Maas et al. 2016b). The inside-out perspective spans the informal and formal control systems and captures business areas, such as strategy, mission, vision, and analysis of issues that are relevant for the implementation of strategies (Maas et al. 2016b; Chiucchi et al. 2018). Here, the choice of KPIs, performance measurement, as well as what is reported externally, are based on internal decisions from an inside-out perspective (Maas et al. 2016b; Schaltegger and Wagner 2006; Nigri and Del Baldo 2018). That is, internal control and strategy-related information are highly linked to external reporting (Bui and Villiers 2017). This outlines a clear linkage between management accounting control and sustainability reporting. The outside-in perspective derives from external stakeholders’ requirements and expectations of the company’s sustainability impacts and operations (Bebbington et al. 2007; Clarkson et al. 2011; Gray 1992). The link between control and reporting is, thus, strongly influenced by societal expectations, regulatory requirements, and standards. Management control is, as such, guided by the “required” and the “expected.” Therefore, many authors argue that sustainability reporting reduces information asymmetry between organisations and key stakeholders, also facilitating improvement of corporate governance (Riccaboni and Leone 2010; Wulf et al. 2014; Chen et al. 2007; Heflin et al. 2005). The outside-in or inside-out perspectives, or both, can be used in an integrated manner for performance measurement and the reporting of sustainability issues (Maas et al. 2016b). Sustainability reporting initially came into action for external stakeholder purposes, but there is also increasing awareness of the potential of this communication channel to support managerial decision-making and internal control processes (Chiucchi et al. 2018). The rising attention on internal control through the preparation of sustainability reports has led many researchers to focus on the effects of SR design and implementation on MCSs (Chiucchi et al. 2018). Many authors have argued that SR can improve MCS through the successful implementation of intended strategies; following the assumptions that guiding principles for SR can help and develop control measures, this in line with the company’s strategic directions (Montemari and Chiucchi 2018). As such, SR may improve the capacity of MCSs.

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