11.vol 0002www.iiste.org call for paper no. 2_h fauzi_pp233_259_n

Issues in Social and Environmental Accounting
Vol. 2, No. 2 Dec 2008/Jan 2009
Pp. 233-259

The Determinants of the Relationship of
Corporate Social Performance and Financial
Performance: Conceptual Framework1

Hasan Fauzi
Faculty of Economis
Sebelas Maret University, Indonesia

Abstract

The objective of this paper is to investigate relationship between CSP and CFP using contin-
gency perspective derived from the strategic management domain. The investigation will be
done using lens of slack resource and good management theory. This study is expected to pro-
vide a new insight on the link between corporate social performance and corporate financial
performance using contingency perspective as suggested in the strategic management and ac-
counting literature, an area has not been examined in the prior studies. The result of this study
can resolve the existing conflict in the literatures by developing an integrated model of the link
between CSP and CFP and the notion of corporate performance which, in strategic manage-
ment, is highly affected by four factors: business environment, strategy, organization structure,
and control system. The model will explain in what condition the relationship of CSP and CFP
is valid

Keywords: Corporate social performance, corporate financial performance, slack resource
theory, good management theory, contingency theory, and moderating effect.

Introduction 2001; Murphy, 2002; Simpson &
Kohers, 2002; Griffin & Mahon, 1997;
So far the relationship between CSP and McWilliams & Siegel, 2000;
CFP has been investigated by research- McWilliams & Siegel, 2001; Moore,
ers and produced inconsistent results: 2001; and Wright & Ferris, 1997; Fauzi
positive, negative, and inconclusive (see et al., 2007). Some attempts have been
for example Worrell, et.al., 1997; Wad- conducted to explain the conflicting re-
dock & Graves, 1997; Frooman, 1997; sults. According to some previous stud-
Roman et.al., 1999; Orlitzky, 2001; Or- ies (Wagner, 2001; Ruf et.al, 2001;
litzky & Benjamin, 2001; Ruf et al., Husted, 2000; Orlitzky et al., 2003), the

Hasan Fauzi is Director of Indonesian Center for Social and Environmental Accounting Research and Development
(ICSEARD) and Head of International Partnership, International Office, Sebelas Maret University and can be reached
at: hfauzi2003@gmail.com. He is very grateful to the committee of AAA 2008 Annual Meeting for their review, to
two reviewers (Dr. Ku and Dr.Wan of Universiti Utara Malaysia) as well as to participants of Working Paper Forum of
Faculty of Economics, Sebelas Maret University for their critical and constructive review and suggestion of earlier
draft of the paper

234 H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259

conflicting results had been caused by the relation of CSP and CFP, but they
two main factors: lack of theoretical fail to provide clear answer (Aupple et
foundation and methodological problem. al., 1985; Ullman, 1985; Wartick and
Cochran, 1985; Wood 1991; Wood and
The absence of sound theoretical foun- Jones, 1995; Pava and Krausz, 1996;
dation to explain CSP construct has con- Griffin and Mahon, 1997; Husted,
tributed to the conflicting result of the 2000). One reason is due to the neglect-
relationship between CSP and CFP. ing of the contingency aspect (Ullman,
From the theoretical ground perspective, 1985). Other researchers also do sug-
basically theories used in defining CSP gest that variations in the result of the
construct have been derived from relationship between CSP and CFP be
thought of neoclassical economic theory solved by using contingency theory per-
and stakeholder theory. Those who de- spective (Wagner, 2001; Husted, 2000;
veloped CSP construct using neoclassi- Margolish et al., 2003; Orlitzky et al.,
cal economics paradigm found a nega- 2003). Due to the fact that CSP and
tive result of the CSP and CFP relation- CFP are not related under all condition,
ship, while proponents of the stake- the contingency perspective needs to be
holder theory showed the positive result. used to examine under which condition
Furthermore, variation in the stakeholder the relation will be valid (Hedesström
theory itself in defining CSP such as and Biel, 2008). In addition, Orlitzky et
Carroll’s and Wood’s model has contrib- al., (2003) found that strong of the rela-
uted to the conflicting result due to mis- tionship will be dependent upon contin-
matching of the theory in empirical stud- gency such as reputation and construct
ies (Wood and Jones, 1995). One of operationalization. Some other re-
causes for the mismatching is due to the searchers also have shown that CSP and
fact that in empirical studies researchers CFP relation is positive using resource-
operationalize the CSP construct based based view (strategy) as contingent vari-
on certain type of industry and it leads to able (Hilman and Keim, 2001; Orliztky
the contribution to the inconsistent result et al., 2003; Pos et al., 2002).
(Rowley and Berman, 2000). To solve
the weakness, it is suggested to opera- So far the use of contingency perspec-
tionalize the construct in terms of com- tive in explaining the relationship of
pany’s relationship with its stakeholders CSP and CFP has been argued by some
(Clarkson, 1995a and 1995b; Husted, researchers that CSP is the result of the
2000; Rowley and Berman, 2000; Wood fit between endogenous organization
and Jones, 1995). In this regard, Husted variables of CSP and exogenous contex-
(2000) defines CSP as “the ability of the tual variables (Russo and Fouts, 1997;
firm to meet or exceed stakeholder ex- Rowley and Berman, 2000; McWilliam
pectations regarding social issues”. and Siegel, 2001; Husted, 2000). For
example, Russo and Fout (1997) found
In addition, some previous reviews and that the type of industry will determine
theories2 have been proposed to explain 2
For example The extended values and principles of
1 the CSR (Aupple et al., 1985), social issues management
The initial draft of this paper had been accepted for
(Wartick et al., 1985), institutional, organizational, and
presentation at International Conference of American
individual level of CSP theory (Wood, 1991a and
Accounting Association (AAA), Anaheim, CA, 3-6
1991b), Mismatching stakeholder (Wood et al., 1995),
August, 2008
and paradox of social cost (Pava et at., 1996)

H. Fauzi / Issues in Social and Environmental Accounting 2 (2008/2009) 233-259 235

the relationship of CSP and CFP, while and Keim, 2001; Husted, 2000; Pos et
Husted (2000) argues that the relation- al., 2002; Orliztky et al., 2003; Neville,
ship of CSP and CFP depend upon 2005) did not clearly relate their contin-
stakeholder issues. gency variable (strategy) to the corpo-
rate performance in the context of TBL.
Despite the importance of the use of The variable (strategy) specifically is
contingency perspective proposed by focused on handling social issues not
previous studies, there is still the follow- integrated into business strategy. Fur-
ing one major gap. They do not inte- thermore in the level of empirical per-
grate the contingency factors into the spective, the contingency variables used
important determining variables in cor- are beyond the TBL factors. Rather, they
porate performance both in the concep- use industry type and company size as
tual framework level and in the empiri- moderating variables, that is, variables
cal perspective. This effort is needed affecting other relationship, to explain
because CSP is an extended corporate the relationship between CSP and CFP
performance in the context of Triple (Fauzi, 2004; Brammer & Pavelin, 2006
Bottom Line (TBL) concept. and Fauzi et.al, 2007).

Based on the review of accounting and Thus, this paper will address the gap by
strategic management literatures, it can using the variables affecting (moderating
be found that corporate performances variables) the corporate performance as
are matching of business environment, contingency factors to explain the rela-
strategy, internal structure, and control tionship of CSP and CFP. More explic-
system (Lenz, 1980; Gupta and Govin- itly, how variables such as business en-
darajan, 1984; Govindarajan and Gupta, vironment, business strategy, organiza-
1985; Govindarajan, 1988; Tan and tional structure, and control system can
Lischert, 1994; Langfield-Smit, 1997). affect the relationship between CSP and
Thus it can be argued that corporate per- CFP.
formances referred to the notion of TBL
should be affected by some important
variables: business environment, strat- Relationship between CSP and CFP
egy, structure, and control system.
Therefore, better attempts to seek expla- There are two important issues in the
nation of the relationship between CSP relationship between CSP and CFP: di-
and CFP need to be conducted using the rection and causality of the relationship
integrated model as suggested in the ac- (Preston and O’Bannon 1997). The di-
counting and strategic management lit- rection of the relationship refers to posi-
eratures and considering the suggestions tive, negative and neutral of the relation-
of Savage et al (1991), Husted (2000 and ship. The positive direction of the rela-
2001), Orlitzky (2002), Rowley & Ber- tionship of CSP and CFP is that increase
man (2000), Orlitzky et.al. (2003), in CSP results in increase in CFP as
Itkonen (2003), and Brammer & Pavelin well, while the change in CSP leading to
(2006). the change in CFP in different way is
negative direction of the relationship. If
In the level of the conceptual frame- a change in CSP does not affect the
work, some previous studies (Hilman change in CFP, neutral effect direction


of the relationship will occur. The cau- that the relationship of CSP and CFP
sality of the relationship denotes which will be contingent upon four variables:
one between CSP and CFP will be be- business environment, business strategy,
coming independent or dependent vari- organization structure, and control sys-
able. In this case, there are two possi- tem.
bilities: CSP as independent variable and
CFP as independent variable. If CSP as The second issue that Griffin and Mahon
independent variable, it come first to raised is about the causality of the rela-
affect CFP, while if CSP as dependent tionship of CSP and CFP. Waddock and
variable, CFP will come first to affect Graves (1997) and Dean (1999) put for-
CSP. ward two theories to explain the causal-
ity: Slack resource theory and good
Based on the literature review, the rela- management theory. Under the slack
tionship between corporate social per- resource theory, a company should have
formance and corporate financial per- a good financial position to contribute to
formance could be positive, negative, or the corporate social performance. Con-
neutral. But most of the result of stud- ducting the social performance needs
ies indicated the positive relationship some fund resulting from the success of
and very few provided the negative and financial performance. According to
neutral relationship (Worrell at al., 1991; this theory, financial performance comes
Preston et al., 1997; Waddock et al., first. Therefore, CFP is independent
1997; Frooman, 1997; Roman et al., variable to affect CSP. A good manage-
1999; Orliztky, 2001; Orlizky et al., ment theory holds that social perform-
2001;Rufel et al., 2001; Murphy, 2001; ance comes first. Based on the theory,
Simpson et al., 2002; Griffin et al., CSP is independent variable resulting in
1997; McWilliam et al., 2000 and 2001; CFP and a company perceived by its
Moore, 2001; Wright, 1997; Itkonen, stakeholders as having a good reputation
2003). will make the company easier) to get a
good financial position (through market
The conclusion that can be drawn from mechanism). The two theories can be
the previous findings is that the relation- diagrammed in the figure 1 (see the next
ship between CSP and CFP is not under page).
all condition. The use of contingency
perspective is needed to understand un- The two theories will be used to model
der which condition the relationship will contingency perspective to explain the
be valid (Hedesström and Biel, 2008). relationship of CSP and CFP using the
This paper study will address the gap of variables of business environment, strat-
unsound theory on the relationship of egy, internal structure, and control sys-
CSP and CFP by developing the inte- tem as contextual variables or moderat-
grated model derived from accounting ing variables (Lenz, 1980; Gupta and
and strategic management literature. Govindarajan, 1984; Govindarajan and
The model to be developed, derived Gupta, 1985; Govindarajan, 1988; Tan
from Langfield-Smith’s (1997) proposi- and Lischert, 1994; Langfield-Smit,
tion on corporate performance, explains 1997).


Slack Resource Theory

Corporate Financial Corporate Social
Performance (CFP) Performance

Good Management Theory

Corporate Social Per- Corporate Financial
formance Performance
(CSP)

Figure 1: Causality of the Relationship of CSP and CFP

Contingency Approach to Study on salistic view is common and applied in
CSP and CFP Link any setting of management practices
(Alexander and Alan, 1985; Gerdin and
Generally contingency theory states that Grave, 2004) and also in corporation
organization’s effectiveness will be con- social performance (see for example
tingent upon some factors often called Husted, 2000). One of the reasons of
contextual variable (see for example the commonly used contingency ap-
Hamberick and Lei, 1985; Gerdin and proach is due to the focus on the organ-
Grave, 2004). Furthermore, focus in izational effectiveness, a general and
contingency theory will be on fit be- important organizational goal-related
tween organization characteristics or concept.
management practices and the contex-
tual variable in achieving the organiza- In the context of CSR, there are some
tion effectiveness (see for example previous studies suggesting the contin-
Alexander and Alan, 1985; Doty et al, gency approach (Ullman, 1985; Husted,
1993; Gerdin and Grave, 2004). The 2000; Wagner, 2001; Margolish et al.,
organizational effectiveness can include 2003; Orliztky, 2001). Ullman (1985)
economic or financial performance and argued that one reason of failure of stud-
other criteria such social and environ- ies on CSP and CFP to explain the con-
mental performance as referred to the flict results is due to the neglecting of
concept triple bottom line (TBL). The the contingency aspect. Other research-
use of the contingency view as an alter- ers also do suggest that variations in the
native view to extreme view of business result of the relationship between CSP
in both situations: specific and univer- and CFP be solved by using contingency


theory perspective (Wagner, 2001; Some important studies had been con-
Husted, 2001; Margolish et al., 2003; ducted to investigate the relationship of
Orlitzky et al., 2001 and 2003). Due to business strategy, control system, and
the fact that CSP and CFP are not related organizational structure and environ-
under all condition, the contingency per- mental and social performance (Gerde,
spective needs to be used to examine 1998; Pondeville, 2000; Husted, 2000,
under which condition the relation will and Husted, 2001). In an effort to inves-
be valid (Hedesström and Biel, 2008). In tigate stakeholders and organization de-
addition, Orlitzky et al.(2001 and 2003) sign, Gerde (1998) used business strat-
found that strong of the relationship will egy, control system, and organizational
be dependent upon contingency such as structure as the predictors of corporate
reputation and construct operationaliza- social performance including the envi-
tion. Some researchers also have shown ronmental aspect. His findings were that
that CSP and CFP relation is positive the variables did not increase the social
using resource-based view (strategy) as performance. In his deductive study,
contingent variable (Hilman and Keim, Pondeville (2000) synthesized that con-
2001; Orliztky et al.,, 2003; Pos et al., trol system and business strategy, as
2002). well as organization design (structure)
have contributed to the environmental
Concept of Fit in contingency theory in performance. In an effort to get good
the context of CSP can be traced the in understanding of corporate environ-
accounting and strategic management mental and social performance, Husted
literatures. Based on the review of the (2000) had constructed contingency
literatures, it can be concluded that cor- model of corporate social performance.
porate performances are matching of The fit between social issues and busi-
business environment, strategy, internal ness strategy and structure had been pre-
structure, and control system (Lenz, dicted to affect the corporate social per-
1980; Gupta and Govindarajan, 1982 formance. Husted et al. (2001) in his
and 1984; Govindarajan et al.,1988; Go- deductive approach of another study de-
vindarajan, 1988; Tan and Lischert, veloped a model called integrated view
1994; Langfield-Smit, 1997). Thus cor- of business and social strategy. In the
porate performances referred to the no- model, business strategy had been pre-
tion of TBL should be affected by some dicted to affect financial and social per-
important variables: business environ- formance.
ment, strategy, structure, and control
system. Therefore, better attempts to
seek explanation of the relationship be- Business Environment and CSP-CFP
tween CSP and CFP are needed to con- Link
duct using the integrated model as sug-
gested in the accounting and strategic Investigation on why an organization or
management literatures and considering corporate has higher performance than
the suggestions of Savage et al.(1991), other organization can be found in three
Husted (2000 and 2001), Orlitzky bodies of research: industrial organiza-
(2000), Rowley & Berman (2000), Or- tion, business policy, organization the-
litzky et al. (2003), Itkonen (2003), and ory research (Lenz, 1980). Based on
Brammer & Pavelin (2006). review of the bodies of research, it can


be found that performance variation in to market condition in which a company
an organization or corporation can be has to compete with. In the absence of
explained using the variables of environ- competition, a company can perform
ment, strategy, and organization struc- well with no significant effort as the cus-
ture used (Lenz, 1980; Gupta and Go- tomers have no choice or alternative to
vindarajan, 1984; Govindarajan and satisfy their need. However, in the high
Gupta, 1985; Govindarajan, 1988; Tan competition indicated by so many alter-
and Lischert, 1994; Langfield-Smit, natives for customers to satisfy their
1997). In addition, accounting litera- want, a company has to devote its best
tures also contributed to explanation of effort to satisfy the customers. There-
the organization’s performance variation fore, the competitive intensity is ex-
(Gupta and Govindarajan, 1984; Govin- pected to relate positively to organiza-
darajan and Gupta, 1985; Govindarajan, tion performance. The last aspect of
1988; Langfield-Smit, 1997; Albernetty business environment is the technologi-
et al., 2004 and 2005). cal turbulence that is meant simply as
the rate of technological change. For a
As one of the factors affecting the high company having characteristic of sensi-
of organization performance, organiza- tive to technological change, innovation
tion or business environment can be de- resulting from the technological change
fined as conditions that are normally can be alternative to increase the com-
changing and unpredictable an organiza- pany’s competitive advantage without
tion is facing. Lenz (1980) included having to focus more on the market ori-
market structure, regulated industry, and entation. By contrast, for the company
other relevant environments in the con- with no innovation in technology, it
cept of the business environment as the should strive to focus more on market
factors to be affecting the corporate per- orientation. Therefore, the technological
formance defined as corporate financial change is relating negatively to organi-
performance (CFP). Jaworski and Kohli zation performance. This concept of
(1993) extended the definition of busi- business environment is in line with
ness environment as including market Simons’ (2000) concept of strategic un-
turbulence, competitive intensity, and certainty including technological de-
technological turbulence. The market pendence, regulation and market protec-
turbulence that is understood as the rate tion, value chain complexity, and ease of
of change in the composition of custom- tactical response. Technological de-
ers and preferences can be a predictor of pendence has been close to the technol-
business performance (Jaworski and ogy turbulence, while regulation and
Kohli, 1993). An organization operating market protection can be referred to
under market turbulence will tend to competition intensity. The strategic un-
modify its product or services continu- certainty variables of value chain com-
ally in order to satisfy its customers. plexity and ease of tactical response par-
Adversely, if the market is stable indi- allel the concept of market turbulence.
cated by no change in customers’ prefer- Furthermore, based on review of organi-
ence, the organization is not likely to zation environment literature, it can be
change its product or service. Therefore, found that business environment can be
the market turbulence is expected to re- defined in general way as the source of
late positively to organization perform- information (Duncan, 1972; Lawrence
ance. Competitive intensity is referred and Lorsch, 1967; Tung 1979 and cited


in Tan and Lischert, 1994) and as source in turn, decreases the organization’s
of scarce resource (Tan and Lischert, ability to achieve the organization’s
1994). As source of information, busi- goal.
ness environment is focused on per-
ceived information uncertainty and sub- Based on the theory of slack resource,
jective in nature, as source of scarce re- the interaction or fit between business
source; business environment is resource environment and corporate financial per-
dependence (Tan and Lischert, 1994). formance (CFP) can affect the corporate
Based on the understanding, corporate social performance due to fact that in-
performance can be controlled by using crease in CFP resulting from business
management ability to control over the environment aspect enables the com-
resource. Meanwhile, the concept of pany has more chance to do the CSP.
business environment can also be Thus, it is reasonable to expect from this
viewed as multidimensional construct study that the business environment can
including three variables: dynamism, moderate or affect the relationship be-
complexity, and hostility (Duncan, 1972; tween CFP and CSP. The proposition
Lawrence and Lorsch, 1967; cited in for business environment of the relation-
Tan and Lischert, 1994). In the last con- ship of CSP and CFP is as follows:
cept, components of dynamism and P1a: Business environment moder-
complexity have been close to the per- ates the relationship between CFP
ceived information uncertainty, while and CSP based on the slack re-
hostility is similar to the resource de- source theory
pendence (Tan and Lischert, 1994). Fol-
lowing the concept of business environ- In relating to the corporate social per-
ment as multidimensional construct, formance, Higgin and Currie (2004) had
Scott in Tan and Lischert (1994) and identified some variables affecting a cor-
Jauch et al.(1980) had extended the con- porate to be ethical or legal behavior in
cept of business environment becoming running the company resulting in the
institutional environment including lar- high of corporate social performance.
ger components similar to stakeholder The factors are: business climate, human
concept. The dimensions covered in- nature, societal climate, societal climate,
clude: (1) competitors, (2) customer, (3) the competitiveness of the global busi-
suppliers, (4) technological, (5) regula- ness environment, and the nature of
tory, (6) economics, (7) social-cultural, competitive organization Performance.
and (8) international. Based on the con- Thus, arguments for business climate or
struct defined in the previous studies, environment discussed above, especially
The business environment will come up for the concept of business environment
with the increase or decrease in corpo- derived from the larger concept similar
rate performance as suggested by Dill to stakeholder concept can be applied to
(1958). Organization facing high uncer- the relationship between business envi-
tainty in business environment has less ronmental and corporate social perform-
ability to attain the organization’s goal. ance. Furthermore, in an effort to seek
This argument has been echoed by the relationship between CSP and CFP
Simons (2000) by asserting that the busi- derived from the good management the-
ness environment is one of the factors ory indicating that conducting CSP can
resulting in the strategic uncertainty and, affect CFP, this variable will be ex-


pected to able to moderate the relation- new strategy called emerging strategy
ship between the link between CSP and (Simons, 2000). The last, strategy as
CFP. ploy is a tactic a company can do to
fight with competitor. If the views of
Based on the arguments and finding strategy can be well implemented, then
from the previous studies, it can be con- strategy can be an important determinant
cluded that the link between CSP and of the company’s performance. Further-
CFP will be contingent upon the busi- more, in practical, strategy choice for a
ness environment variable. The follow- company is depending upon the environ-
ing is the proposition of the relationship ment faced by the company. In this re-
CSP and CFP moderated by business gard, Mitzberg (1973) defined the strat-
environment under a good management egy as patterns of stream of decision
theory: focusing on a set of a resource allocation
P2b: Business environmental mod- in an attempt to accomplish a position in
erates the relationship between an environment faced by the company.
CSP and CFP based on good man- Using focus on decision as developed
agement theory. Mistzberg (1973), Ventakraman (1989),
Miller and Frieson (1982), and Tan and
Lischert (1994) extended the concept of
Strategy and CSP-CFP Link strategy using dimensionality approach
including: (1) analysis, (2) defensive-
Concept of strategy is a complex con- ness, (3) futurity, (4) proactiveness, and
cept and it leads to proliferation of defi- (5) riskiness.
nition of strategy (Lenz, 1980). Mintz-
beg (1987 and cited in Simons, 2000) There are some studies on the fit be-
had classified the views on strategy, in- tween strategy and corporate perform-
cluding strategy as perspective, strategy ance (CFP) identified by Fisher (1995)
as position, strategy as plan, strategy as using the product life cycle as contin-
patterns of action, and strategy as ploy. gency factor and performance appraisal
Strategy as perspective refers to mission system as dimension control, (Simons,
and vision of a company to be a base for 1987) utilizing competitive strategy as
all activities of the company. This will contingency factor and budget flexibility
determine core value of the company. as dimension of control system, Govin-
Strategy as position indicates the way a darajan and Fisher (1990) employing
company will pursue to compete in the Porter typology as contingency factor
market. This view will lead to the use of and behavior and output control as di-
Porter’s typology of strategy: differen- mension of control system, Govindara-
tiation and low cost (Simons. 2000). jan (1988) exploiting Porter typology as
Strategy as plan suggests short-term plan contingency factor and budget evalua-
as series of long term plan in the strategy tion style and locus of control as dimen-
as position. In this view, a company can sion of control system, and Fisher and
evaluate the success of the implementa- Govindarajan (1993) applying Porter
tion strategy. Strategy as pattern in ac- typology and product life cycle as con-
tion is a company’s action plan to cope tingency factor and incentive compensa-
with the failure of the strategy imple- tion as dimension of control system.
mentation. It is in this view that emerge Except for Fisher and Govindarajan


(1993) proving with conflicting result, prices. The products, markets and ac-
they supported the fit relationship to the tivities that define organizational strat-
performance. In more recent studies, egy also define the organization’s stake-
Liao (2005) and Sandino (2005) contrib- holder set. Consequently, a firm pursu-
uted to the same finding as the prior ing socially responsible initiatives that
studies mentioned above. Using the lack consistency with its corporate strat-
same fit, but with different position for egy is not likely to meet the particular
the contingency factor, Abernethy and expectations of its stakeholders.
Brownell (1999) also provided the fit
relationship to the performance. In an effort to seek the relationship be-
tween CSP and CFP derived from the
Based on theory of slack resource, the good management theory, the strategy
interaction or fit between strategy and variable will be expected to able to mod-
corporate financial performance (CFP) erate the link between CSP and CFP.
can affect the corporate social perform- Based on the arguments and finding
ance due to fact that increase in CFP from the previous studies, it can be con-
resulting from strategy enables the com- cluded that the link between CSP and
pany has more chance to do the CSP. CFP will be contingent upon the strat-
Thus, it is reasonable to expect from this egy. The following is proposition on the
study that the strategy can moderate or effect of strategy of the relationship of
affect the relationship between CFP and CSP and CFP:
CSP. The proposition for strategy of the P2b: strategy moderates the rela-
CFP-CSP link is as follows: tionship between CSP and CFP
P2a: strategy moderates the rela- based on good management the-
tionship between CFP and CSP ory.
based on the slack resource theory

The conflicting results from empirical Organization Structure and CSP-CFP
studies into the CSP-CFP relationship Link
indicate to the need for a contingent per-
spective to determine the conditions that Study directly relating to organization
affect the nature of the CSP-FP relation- structure fit and performance is Sandino
ship (Rowley and Berman, 2000). (2005). He found that interaction be-
Husted (2000), for instance, proposed tween control system and organization
that the CSP-CFP relationship is a func- structure affected company’s perform-
tion of the fit between the nature of rele- ance. In addition, the insight regarding
vant social issues and the organization’s this fit relation to the performance can
corresponding strategies and structures. be predicted based on the direct relation-
Further, McWilliams and Siegel (2001) ship between organization structure and
proposed that the impact of socially re- job satisfaction variable (Ali and Ali,
sponsible actions on financial perform- 2005). If employees feel satisfied it can
ance would be contingent on the econo- be expected to increase the company’s
mies garnered from the organization’s performance.
size and level of diversification, product
mix, advertising, consumer income, gov- Corporate performance is highly deter-
ernment contracts and competitors’ mined by how effectively and efficiently


the company’s business strategy is im- fewer formal rules and procedures is
plemented (Walker et al., 1987 and cited referred to organic organization (Burns
in Olson, 2005). The success of the and Stalker in Olson et al., 2005). Or-
company’s strategy implementation is ganic organization enables people in a
highly influenced by how well the com- company to have vertical and horizontal
pany is organized (Vorhies et al., 2003; communication to manage the com-
Olson, 2005) and the use of strategic pany’s works. Therefore, benefit that
behavior such as customer focus, com- can be gained from using the organic
petitor analysis, and innovation (see for organization include rapid awareness of
example Chen, 1996; Gatignon, 1997; and response to the changes in competi-
Olson, 2005). The organization struc- tion and market, more effective informa-
ture is needed to manage the works in tion, reduced lag time between decision
organization that are divided into small and action (Miles et al., 1992; Olson,
parts to achieve the intended strategy. It 2005).
is the management of works leading to
the emergence of variety of alternative Centralization is a condition on whether
of organization structure and, in turn, autonomy of making decision is held by
can shape the company. The organiza- top manager or be delegated to the lower
tion structure can be defined using three manager. In management literature, this
constructs: formalization, centralization, construct includes two terms in the op-
and specialization (Walker et al, 1987; posite ends: centralized and decentral-
Olson et al., 2005). The three compo- ized organization (Olson, 2005). In cen-
nents are central points of Mintzberg’s tralized organization, autonomy to make
analysis of organization structure (Olson decision is held by top manager. Al-
et al., 2005). though fewer innovative ideas can be
created in centralized organization, im-
Formalization refers to the level of for- plementation of the decision is straight
mality of rules and procedures used to forward after the decision is made
govern the works in a company includ- (Ullrich and Wieland in Olson, 2005).
ing decision and working relationship However, the benefit can only be real-
(Olson, 2005). The rule and procedure ized in stable and in noncomplex envi-
can explain the expected appropriate ronment (Olson et al., 1995; Ruekert,
behavior in working relationship and 1985; Olson et al., 2005). In unstable
address the routine aspect of works. As a and complex environment indicated by
result, people and organization itself can rapid changes in competition and mar-
gain the benefit of using the rules and ket, the use of organization structure
procedures. In this regard, the use of the providing the lower manager with auton-
rules and procedures can lead to the in- omy of making decision is needed. In
crease in efficiency and the decrease in the decentralized organization, a variety
administrative cost especially in the nor- of views and innovative ideas may
mal environment situation characterized emerge from different level of organiza-
by simple and repetitive tasks (Ruekert tion. Due to the fact that autonomy of
et al., 1985; Walker et al., 1987; Olson making decision is dispersed, it may
el at., 2005). A company with highly take longer to make and implement the
formal rules and procedures is called decision (Olson et al., 1995; Olson et al.,
mechanic organization, while one with 2005). However, in the non routine task


taking place in complex environment, and CSP based on the slack the-
the use of decentralized organization is ory
more effective to achieve the organiza- P3a2: Decentralization moderates
tion goal as the type of organization em- the relationship between CFP
power managers who are very close to and CSP based on the slack re-
the decision in question and to make the source theory
decision and implement it quickly P3a3: Specialization moderates
(Ruekert et al., 1985). the relationship between CFP
and CSP based on the slack re-
Specialization is the level of division of source theory
tasks and activities in organization and
level of control people may have in con- As mentioned above, another factor af-
ducting those tasks and activities (Olson, fecting corporate financial performance
2005). Organization with high speciali- (CFP) is the use of strategic behaviors in
zation may have high proportion of spe- organization. In the context of corporate
cialist to conduct a well-defined set of social performance, the concept strategic
activities (Ruekert et al., 1985; Ol- behaviors can be extended using the
son,2005). Specialist refers to someone stakeholder theory to explain the fit be-
who has expertise in respective areas tween organization structure and corpo-
and, in certain condition; he or she can rate social performance (CSP). Accord-
be equipped with a sufficient authority ing to Chen (1996); Gatignon et al.
to determine the best approach to com- (1997); and Olson et al. (2005), the stra-
plete the special tasks (Mintzberg in Ol- tegic behaviors can be identified into
son, 2005). The expertise is needed by some components: customer-oriented
organization to quickly respond the behavior, competitor oriented behavior,
changes in competition and market in innovation-oriented behavior, and inter-
order to meet organization goal (Walker nal-cost behavior. The concept can be
et al., 1987). extended using components of stake-
holder as contended by Donaldson et al.
Based on theory of slack resource, the (1995). Supplier-focused behavior, em-
interaction or fit between organization ployee-focused behavior, society aspect-
structure and corporate financial per- focused behavior, and environment-
formance (CFP) can affect the corporate focused behavior are stakeholder-based
social performance due to fact that in- strategic behavior to be expected to im-
crease in CFP resulting from organiza- prove corporate financial performance.
tion design enables the company has Using the argument, CSP will affect
more chance to do the CSP. Thus, it is CFP.
reasonable to expect from this study that
the organization structure can moderate In the formalization aspect, typical bu-
or affect the relationship between CFP reaucratic structures normally may work
and CSP. The proposition on organiza- well. In the typical structure, Informa-
tion structure of the CFP-CSP link is as tion can be routed to the relevant spe-
follows: cialist who can make decisions on the
basis of standard corporate policies
P3a1: Formalization moderates (Thompson & Tuden in Husted, 2000).
the relationship between CFP However, Information is not dissemi-


nated widely, but directly to the individ- short is management tool to implement
ual decision maker. For example, rules the organization strategy. Of the typolo-
in the form of ethics codes can work gies in control system, Simons’ (2000)
effectively to resolve problems to the typology is complete and comprehen-
satisfaction of stakeholders where stake- sive, including: belief system, boundary
holders and the firm share similar values system, diagnostic control system, and
and understandings of what happened. interactive control system. In its devel-
To cope with the problems, companies opment stages, the control system had
create organization units undergone evolution in terms of ap-
(decentralization and specialization proach used and complexity of environ-
structure) to handle some tasks such as ment faced by a company. The evolution
environmental assessment, corporate included the use of direct control ap-
philanthropy, and public relations. It is proach focusing on manager’s observa-
usually the units that assume responsi- tion of what is going on the company till
bility of the companies’ ethics program indirect control approach relying upon
(Center for Business Ethics, 1986). Ac- accounting control. For the last evolu-
cording to Reed,Collin,Oberman, and tion, it included using static and flexible
Toy in Husted, (2000), the presence of budget till adopting the concept of profit
such routinized structures can have a or investment center (see for example
positive impact on corporate social per- Horngren, 1996). The concept of con-
formance. trol system centers on the concept of
bottom line (financial performance).
Based on the finding and the logic, the Not only did the concept have some
concern of this study is that the fit be- flaws on imbalances due to the domina-
tween organization structure and CSP tion of financial aspect, but also it cre-
will affect the financial performance. ated some paradoxical situation between
The proposition can be then developed: control and innovation, opportunity and
attention, and short term and long term
P3b1: Formalization moderates the goal, and human behavior. One reason
relationship between CSP and of the problems is that the old concept of
CSP based on good management control had been defined as diagnostic
theory control only. In that definition of con-
P3b2: Decentralization moderate trol, the control process had been fo-
the relationship between CSP and cused on the matter of routine mecha-
CFP based on good management nism or process of comparing some ex-
theory pected and realized performances. Ac-
P3b3: Specialization moderates the cording to Simons (1995a, 1995b and
relationship between CSP and 2000), to avoid the problem concept of
CFP based on good management control should be extended by adding
theory three more levers: belief system, bound-
ary system, and interactive control sys-
tem. The function of belief system is to
Control System and CSP-CFP Link3 inspire the people in an organization to
search for new ways and alternatives by
One important function of Management
Control system or control system for 3
This section is adapted from Fauzi et al. (2008)


providing them with the organization’s Simons, 1995b) supported the use of the
clear vision, mission, statement of pur- instrument by arguing that great leaders
pose, and credos through using format and competent managers understand the
and informal system. It is expected from power of symbolism and inspiration.
the belief system mechanism, creativity The benefit of using the symbolic instru-
and innovation in the organization will ment especially at individual level is
be continuously updated to meet the ex- also provided by Feldman et al. (1981)
pected growth. The use of boundary by delineating that symbols produce be-
system lever is meant to prevent un- lief and belief can stimulate the discov-
wanted impact of creativity and innova- ery of new realities. In this regard,
tion by setting some rules limiting peo- Westley (1990 cited Simons, 1994) con-
ple to do in the form of code of business tended that managers will not be very
conduct, strategic boundary, and internal eager to participate in search for oppor-
control. The role of interactive control tunities if they do not understand the
system is to provide an organization beliefs of organization and are not get
with solution to cope with emerging involved in converting the beliefs into
strategic uncertainty and with new strat- actions and strategies.
egy given that emerging situation.
There is a need for an organization to
The careful and consistent use of the formally communicate the core value,
control system typology, often called especially when it is facing the dramatic
levers of control, can lead to the im- change in business environment such as
proved performance (CFP). The follow- competition, technology, regulation and
ing is discussion on how the components other factors. The Change in the busi-
of levers of control can be associated ness environment creates a need for
with the performance and, therefore, the strong basic values to provide organiza-
expectation of the impact of the use of tional stability (Simons, 1995b). The
components of the control systems on importance of understanding the core is
the relationship between CSP and CFP also supported by study of Kotter (in
can be based upon. Simons, 1995b) concluding that inspira-
tional motivation can be created by (1)
Belief system is the one used in an or- communicating vision that can address
ganization to communicate an organiza- the value of people in an organization,
tion’s core value to inspire people in the (2) permitting each individual to be
organization to search for new opportu- pleased about how he or she can contrib-
nities or ways to serve customer’s needs ute to implementation of that vision, (3)
based on the core values (Simons, 1994, Providing eager support for endeavor,
1995, 2000). In an organization the be- and (4) promoting public recognition
lief system has been created using vari- and reward for all success.
ety of instruments such as symbolic use
of information. The instruments are The belief system can make people in an
used to communicate the organization’s organization inspired to commit to or-
vision, mission, and statement of pur- ganization goal or purpose. In this re-
pose such that people in the organization gard, commitment means believing in
can well understand the organization’s organizational value and willing to at-
core value. Westly et al. (1989; cited in tempt some efforts to achieve the organ-


izational goal (Simons, 1995). There- The manipulation is one of risks that can
fore, the goal commitment can lead to endanger the managers’ company.
improved corporate performance (Locke Therefore, the business conduct bound-
et al., 1988). The conclusion is consis- ary will be imposed in that situation to
tent with what Klein et al. (1998) found avoid the risk and, in turn, improve the
in their study on situation constraints corporate performance. The low in in-
including goal commitment and sales ternal trust can result in the absence of
performance. Chong et al.(2002) study- shared commitment to the organization
ing the effect of goal commitment and goal. No commitment to goal can affect
the information role of budget and job the corporate performance. The objec-
performance provides the same finding. tive of applying the business conduct
boundary is to maintain the employee’s
The resultant of belief system is new commitment to organization goal and, in
opportunities that may contain some turn, can improve the performance.
problems. The boundary system con-
cerns on how avoid some risks of inno- Strategic boundaries are defined as rules
vation resulting from the belief system and limitation applied to decisions to be
(Simons, 1994). The risks that possibly made by managers needing the organiza-
emerge can be operating, assets impair- tion’s resource allocation as response of
ment, competitive, and franchise risks opportunities identified in the belief sys-
(Simons, 2000). On the other hands, the tem (Simons, 1995b and 2000). Appli-
boundary system provides allowable cation of ROI of 20% as hurdle rate in
limits for opportunity seeker to innovate the capital budgeting decision is one
as conditions encouraged in the belief example. Updated of negative list on
system. business area that is not allowed to go
into is another example. In his study us-
There are two instrument used in bound- ing case approach in UK Telecommuni-
ary system to establish the limit in order cation company, Marginson (2002)
avoid the risks: business conduct and found that the boundary system-strategic
strategic boundaries (Simons, 1995b; boundary can motivate people in that
Simons, 2000). The business conduct company to search for new ideas or op-
boundaries are focused on behavior of portunities within the prescribed accept-
all employees in an organization. The able area. Thus, if well implemented,
source of the boundaries is of three this system can avoid the potential risks
folds: society’s law, the organization’s and, in turn, can improve the organiza-
belief system, and codes of behavior tion performance.
promulgated by industry and profes-
sional association (Gatewood and Car- Diagnostic control system is the one
roll, 1991; Simons, 1994). When uncer- used by management to evaluate the im-
tainty resulting from new opportunities plementation of an organization’s strat-
is high or internal trust is low, the busi- egy by focusing on critical performance
ness conduct boundary is highly needed variables, which is the ones that can de-
(Kanter in Simons, 1994). In the envi- termine the success of strategy imple-
ronment of high uncertainty, Merchant mentation and, at the same time, can
(1990) found that chances to manipulate conserve the management attention
the profit figures by managers is high. through the use of management by ex-


ception (Simons, 1995b and 2000). As a of management by exception tool
system relying upon the feedback (Simons, 1995b and 2000). With the
mechanism, the diagnostic control sys- tool, the control system reports to man-
tem is an example of application of sin- agement only if the deviation things hap-
gle loop learning whose purpose is to pen. Therefore, efficient aspect will be
inform managers of outcomes that are resulted from the use of the tool.
not meeting expectation and in accor- Simons (1991) also provided empirical
dance with plan (Argyris, 1977; evidence from the health care industry
Widener, 2006 and 2007). The single that managers feel overloaded with in-
loop learning is a part of organization formation if their attentions are focused
learning that indicates benefits of imple- on broad scope of control attributes and
menting management control system in concluded that diagnostic control system
general. Organizational learning origi- could facilitate the efficient use of their
nates in historical experiences that are attentions. According to Schick et al. (in
then encoded in routines (Levitt and Widener, 2006 and 2007), the informa-
March, 1988; cited Widener, 2006 and tion overload occurs when demand for
2007). Based on historical experiences, information exceeds its supply of time.
the organization adopts and formalizes To encourage the efficient use of man-
“routines that guide behavior” (Levitt agement attentions (time), the manage-
and March, 1998, 320). Therefore, con- ment attentions should be focused on the
trol system can be said to be a learning critical success factors and core compe-
tool. To support this conclusion, Kloot tence that are likely associated with im-
(1997), in his study using case study proved performance.
approach, investigated the link between
control system and organizational learn- In an attempt to implement the organiza-
ing and found that control system can tion strategy, it is necessary to note that
facilitate organization control. Based on strategy initially set in strategic plan-
organization theory literatures, organiza- ning, often called intended strategy, in
tion learning has impact on performance the classification of Mintzberg’s (1978)
(Slater and Narver, 1995; Levitt and typology of strategy, may not become
March, 1988). The argument underlying realized strategy due to the fact that any
the association is that organization learn- strategy has inherent strategic uncer-
ing is very critical to competitive advan- tainty defined as external factors result-
tage. Organization with learning orien- ing from market dynamics, government
tation will have improved performance regulation, and dramatic change in tech-
(Tippin and Soha, 2003). Chenhal nology triggering the intended strategy
(2005) provided support for the finding become invalid (Simons, 1995b;
by investigating the relationship of con- Simons, 2000). He proposed the use of
trol system and delivery service using Interactive control system to solve the
organization learning as mediating vari- obstacles. The control system will de-
able. tect the driver of invalidity of intended
strategy and follow them up by working
In addition to providing organization together between top managers and their
learning aspect, the use of diagnostic subordinates to create dialog and to
control system also can conserve man- share information in order to solve the
agement attention trough the application problems. This process, if well de-


signed, can stimulate double loop learn- P4a4: reliance on interactive con-
ing in which the search, scanning, and trol system moderate the relation-
communication process allow the emer- ship between CFP and CSP based
gence of new strategies, strategy of on slack resource theory
which, in the Mintzberg’s (1978) strat-
egy typology, often called emerging As stated by Ouchi (1977) and Robbin
strategy. Levit and March (1988) ech- (2002), organization behavior refers to
oed that situation by stating that if the work related activities of member of
structural problems in organizational organization. That is the behavior of the
learning cannot be eliminated, they can organization members. Any company is
be mitigated. In their study in the hospi- very concerned about controlling the
tal area, Abernetty and Brownel (1999) behavior. That is done using a well de-
also support the conclusion that interac- signed control system (Snell, 1992).
tive control system can facilitate the or- One instrument to be used in the control
ganization learning. Considering the system is strategic behaviors that can
importance of organization learning as lead to the expected organization per-
mentioned above, the process in turn can formance. Chen (1996); Gatignon et al.
improve the organization performance. (1997); and Olson et al. (2005) listed the
strategic behavior including: customer
Based on theory of slack resource, the oriented behavior, competitor oriented
interaction or fit between control system, behavior, innovation oriented behavior,
including belief system, boundary sys- and internal/cost oriented behavior. The
tem,, diagnostic control system, and in- list can be referred to input-output model
teractive control system, as well as the of Donaldson et al. (1995). The list can
corporate financial performance (CFP) also be extended using the contingency
can affect the corporate social perform- theory. Thus, corporate social perform-
ance due to fact that increase in CFP ance is strategic behavior to be influ-
resulting from the appropriate use of enced using control system and, in turn,
control system components enables the to be expected to improve the corporate
company has more chance to do the financial performance.
CSP. Thus, it is reasonable to expect
from this study to formulate the proposi- Most prior literature considering the mo-
tion of current study as follows: tives for socially responsive decision
making derives from the business ethics
P4a1: reliance on belief system literature. Considerable attention has
moderates the relationship be- been given to determining the factors
tween CFP and CSP based on the that influence ‘ethical’ organizational
slack resource theory decision making (Soutar et al., 1994).
P4a2: reliance on boundary system For example, models of ethical behavior
moderates the relationship be- have been developed which indicate that
tween CFP and CSP based on the there is a set of situational variables
slack resource theory which interact with and influence ethical
P4a3: reliance on diagnostic control decision making processes (Bommer et
system moderates the relationship al., 1987; Stead et al., 1990; Trevino,
between CFP and CSP based on 1986). One set of situational variables
the slack resource theory deemed to influence ethical decision


making include work environment and on the good management theory
organizational factors (Bommer et al.,
1987; Falkenberg and Herremans, 1995; Based on the literature review and dis-
Singhapakdi et al., 2000; Verbeke et al., cussion in the previous section, concep-
1996). For instance, employee socializa- tual framework for explaining the deter-
tion processes aimed at internalizing minants of the relationship of corporate
socially responsive/ethical standards social performance (CSP) and corporate
within individual employees have been financial performance (CFP) under two
held to influence socially responsive theories can be diagrammed in figure 2
decision-making (Smith and Carroll, (see the next page).
1984; Soutar et al., 1994). Control sys-
tems are deemed to form an integral part
of employee socialization (Gatewood Conclusions and directions for future
and Carroll, 1991). They support the research
development of an organization’s cul-
ture, the system of shared beliefs, val- Investigations of the relationship of CSP
ues, norms, and mores of organizational and CFP have produced the conflict re-
members (Gands and Bird, 1989), which sults so far. There are some theories that
is deemed to be a primary determinant have been developed to explain the rela-
of the direction of employee behavior tionship, coming from neoclassical the-
(Robin and Reidenbach, 1987; Trevino, ory of economy and stakeholder theory.
1986). But they failed to clearly and satisfacto-
rily explain. The use of contingency has
Based on the finding and the logic, the been highly recommended to explain the
concern of this study is that the fit be- relationship. However, the contextual
tween control system and CSP will af- variables used in the previous studies are
fect the corporate financial performance. not related to the determinants of corpo-
Proposition on the control system of the rate performance as identified in the
CSP-CFP link can be then developed as strategic management and accounting
follows: literatures. As discussed in the previous
section, CSP is an extended corporate
P4b1: reliance on belief system performance and, therefore, some as-
moderates the relationship be- pects affecting the corporate perform-
tween CSP and CFP based on the ance should also apply to the CSP. The
good management theory failure to include the dimensions of cor-
P4b2: reliance on boundary system porate performance: business environ-
moderates the relationship be- ment, strategy, organizational structure,
tween CSP and CFP based on the and control system as contextual vari-
good management theory ables in the relationship of CSP and CFP
P4b3: reliance on diagnostic con- may add the reasons of the conflicting
trol system moderates the relation- results.
ship between CSP and CFP based
on the good management theory Others issues of the conflicting result of
P4b4: reliance on interactive con- the relationship are coming from meth-
trol system moderates the relation- odology aspects, including: (1) mis-
ship between CSP and CFP based matching measurement, (2) sampling


Figure 2
Theoretical Model of Determinants of the Relationship of CSP and CFP

error, and (3) measurement error. Mis- CSP principle and value (Orliztky,
matching measurement includes the 2003). The disclosure approach is con-
choice of CSP measurement that does ducted by using content analysis method
not fit CFP measurement. If the prob- of documented materials such as annual
lem cannot be resolved, the conflict re- report. The reputation rating is the ap-
sults will occur. Therefore, for direction proach to measuring CSP based on the
of future research, the use of CSP meas- company’s perception of one of stake-
urement that can be theoretically linked holders using single or multi-dimensions
to the corresponding CFP measurement of CSP. In so doing, it is assumed that
is highly needed. Sampling error prob- the perceived items represent a good
lem mainly resulted from the limitation reputation of the company. The next
of samples used in the previous studies. category of measurement strategy for
The measurement error of the constructs CSP is using social audit, CSP process,
of CSP narrowly defined can also lead to and observable outcome. This is a sys-
the error in the result of the relationship tematic way by third party to assess a
between CSP and CFP. company’s behavior of CSP, normally
using multi dimension measures to have
The construct of CSP can be approached a ranked index of CSP. The third party
by using four types of measurement includes KLD (Kinder Lydenberg
strategy: (1) disclosure, (2) reputation Domini) and CEP (Council on Eco-
rating, (3) social audit; CSP process; and nomic Priorities). The final approach to
observable outcome, and (4) managerial measuring the CSP is using managerial


CSP principle and value. Under this ap- between them, is coming first? Whether
proach survey research has been done to companies having strong in financial
assess a company’s activities using val- performance can improve their social
ues and principles of CSR developed performance based on slack resource
initially by Caroll (1979) and extended theory or whether practices of social
by Aupple (1984). The values and prin- activities done by companies can in-
ciples of the CSR include four dimen- crease the companies’ financial perform-
sions: economy, legal, ethics, and discre- ance as explained in good management
tionary. In the simple way, Cochran and theory. Therefore, to resolve the prob-
Wood (1984) contended that there are lem it is highly needed to use the two
two generally accepted methods to theories to be tested.
measure CSP: content analysis and repu-
tation index. Based on their argument,
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