The interplay of sustainability reporting and management control – an exploration of ways for dovetailing to develop reporting beyond accountability

2.1 Background on sustainability reporting and control

According to the Global Reporting Initiative (GRI), the publisher of the most widely used SR framework, SR is “[…] an organization's practice of publishing information on its economic, environmental, and social impacts” (GRI, n.d.). Therefore, it can compensate for the deficits of conventional accounting, namely the failure to take sustainability issues into account (Burritt and Schaltegger, 2010). However, SR cannot be reduced solely to the disclosure of sustainability information. Beyond satisfying external accountability demands, SR supports internal information needs, facilitates decision-making and thus can be used for controlling and enhancing CS performance (Hahn and Kühnen, 2013; Joshi and Li, 2016; Maas et al., 2016).

Companies usually have various controls in place to align individuals' behavior with corporate goals (Malmi and Brown, 2008; Merchant and Van Der Stede, 2017). While in the past, MC literature was focused on traditional corporate objectives such as increasing profitability or growth (Anthony, 1965; Merchant, 1985; Simons, 1995), attention is now increasingly shifting to how companies can exploit MCS to foster their contributions to SD (Lueg and Radlach, 2016). Consequently, various approaches to control CS performance, encompassing different types of control, are explored or developed: from the incorporation of sustainability aspects within an organization's strategy (e.g. Gonda et al., 2012) to the integration of sustainability measures in specific cybernetic control systems such as the balanced scorecard (e.g. Hansen and Schaltegger, 2016) or embedding sustainability issues in the organization's culture (e.g. Linnenluecke and Griffiths, 2010), to the effects of corporate governance structure on the organization's sustainability performance (e.g. Naciti, 2019), to name but a few.

However, literature on traditional MCS suggests that the investigation should be done by considering the different control types as a package rather than in isolation (Chenhall, 2003; Malmi and Brown, 2008), although it does not deny that this is a complex undertaking (e.g. Grabner and Moers, 2013; Mahmoudian et al., 2022). Accordingly, it is hardly surprising that studies regarding the management of CS performance also follow this package approach and show how the different types of control interact (e.g. Riccaboni and Leone, 2010; Arjalies and Mundy, 2013; Ditillo and Lisi, 2016; Sundin and Brown, 2017).

In the literature, several approaches to classifying MCS can be identified. A widely used framework is the MCS package by Malmi and Brown (2008), which follows a holistic perspective and differentiates between cultural controls, planning, cybernetic controls, reward and compensation and administrative controls (see Table 1). It covers formal and informal controls as well as institutional and processual elements and consolidates other present MCS approaches. Thus, it can be considered – besides the conceptual model of Broadbent and Laughlin (2009) – as the broadest MCS understanding to date (Günther et al., 2016).

Although many studies have been able to show, that each of the five types of control can be used to manage CS performance or what interactions are possible, to date our understanding of the effect of MCS on SR and vice versa is still very limited (Maas et al., 2016; Traxler et al., 2020; Hsiao et al., 2022). Most of the few available studies devoted to this interplay of controlling and reporting focus only on individual types of control rather than on a holistic view. Nevertheless, they have already been able to provide evidence of positive effects from the interplay (Traxler et al., 2020).

For example, there is literature that suggests that a corporate culture that incorporates values and beliefs that create space for sustainability can have a positive impact on reporting (e.g. Herremans and Nazari, 2016; Rezaee, 2017), and conversely, that engagement with SR can promote awareness of sustainability and thus lead to a change in corporate culture (e.g. Eccles and Serafeim, 2013; Maas et al., 2016). Such positive effects, which suggest an appropriate linking of SR with the MCS, can also be identified for planning (e.g. Arjalies and Mundy, 2013; Palmer and Flanagan, 2016; Hosoda, 2021), cybernetic controls (e.g. de Villiers et al., 2016; Mio et al., 2016; Shabana and Ravlin, 2016), incentive systems (e.g. Oliver et al., 2016; Tamimi and Sebastianelli, 2017; Hu and Loh, 2018) and administrative measures (e.g. Frostenson and Helin, 2017; Laine et al., 2017; Blackburn et al., 2018).

Nevertheless, most studies do not approach the issue of the interplay between MCS and SR from a holistic perspective and thus do not take up the package idea of Malmi and Brown (2008). The few studies that take up this package thinking either do so with a focus on environmental sustainability, do not include the individual control types in their studies in a balanced way, or focus only on specific institutions (e.g. Adams and Frost, 2008; Kerr et al., 2015; Mahmoudian et al., 2022). Considering that more and more companies are publishing sustainability reports (KPMG, 2022), either voluntarily or due to the expansion of sustainability disclosure obligations (e.g. CSRD), and consequently a lot of information is collected, and many employees and departments are involved in the reporting process, there is great potential here. The holistic linking of MCS and SR can bring great benefits. By systematically dovetailing various control instruments or mechanisms with reporting, it is possible to develop a reporting whose benefits go far beyond accountability.

2.2 Theoretical perspectives on sustainability reporting and control

From a theoretical point of view, the distinction in SR between an external or accountability perspective and an internal or control perspective suggests that there will be different drivers or motives for linking SR and MC or the design of the interplay. To understand these differences and the associated roles that instruments or mechanisms used in the context of CS can play within organizations, Hansen and Schaltegger (2016) introduced a classification that distinguishes between an instrumental, a social/political and a normative perspective. The instrumental perspective focuses on the contribution of CS performance to conventional corporate objectives (Hansen and Schaltegger, 2016), a rational notion that can be found, for example, in the strategic branch of stakeholder theory (Donaldson and Preston, 1995). Stakeholders can influence organizations and their actions in various ways, depending on the power they have (Mitchell et al., 1997; Neu et al., 1998). Hence, from a strategic perspective, expanding the shareholder focus and considering a wider range of powerful stakeholders is crucial for an organization's success (Freeman et al., 2004).

Given their dispersed ownership structure, LC are confronted with many different stakeholders and therefore a wide range of information needs (Khan et al., 2013). SR can contribute to satisfying these needs and hence provide transparency for organizations' CS performance (Hahn and Kühnen, 2013). In addition to publishing information, companies must also implement proper control mechanisms to ensure that the expectations of the stakeholders, particularly the strategically relevant ones, are reflected in the actions taken (Durden, 2008; Özsözgün Caliskan, 2014; Lueg and Radlach, 2016). Otherwise, companies run the risk of SR being perceived as a public relations practice that does not positively affect CS performance (Durden, 2008).

Dispersed ownership structure is also a driver or motive for SR according to a further instrumental theoretical perspective, principal-agency theory. In line with principal-agency theory, a dispersed ownership structure leads to high information asymmetries between a LC and its shareholders (Brammer and Pavelin, 2008; Hahn and Kühnen, 2013). Signaling the company's contributions to SD by publishing a sustainability report can reduce such information asymmetries and lower investors' costs of screening, which in turn can lead to better access to capital (Albers and Günther, 2011; Gholami et al., 2023). This is particularly relevant considering that investors are increasingly incorporating the sustainability commitment of companies into their decisions (Reimsbach et al., 2020).

Hence, from an instrumental perspective, one might expect that the SR and MCS of LC are linked because they want to improve their CS performance to achieve conventional corporate objectives and ensure long-term success. Therefore, they are willing to create a well-developed interplay encompassing a whole range of different control types to exploit the full potential of SR rather than simply using it as a communication tool without any significant impact on CS performance. In contrast to the instrumental perspective, which reflects on CS from a functionalistic point of view, the social/political perspective considers how organizations deal with society's expectations (Hansen and Schaltegger, 2016). While stakeholder theory emphasizes different stakeholders and their importance for a firm's success (Freeman et al., 2004), legitimacy theory focuses on society's expectations at large. Companies must demonstrate that their actions are in line with the prevailing social norms, beliefs and values. If a substantial gap between the actions and the expectations occurs, legitimacy is threatened . SR can be seen as an instrument to reduce this gap or to show that the company's actions are congruent with societal expectations to gain, maintain, or defend legitimacy (Suchman, 1995; Hahn and Kühnen, 2013; Comyns and Figge, 2015). LC are under particular pressure to demonstrate this congruence since they face more public awareness and are often subject to strong regulatory pressure (Gallo and Jones Christensen, 2011; Khan et al., 2013).

The rapid diffusion of the publication of environmental and social information can also be explained from an institutional perspective or through isomorphic mechanisms (Shabana et al., 2017). Neo-institutional theory differentiates between three mechanisms – coercive, mimetic and normative isomorphism – that will result in homogeneity within an organizational field (DiMaggio and Powell, 1983). Thereby, the institutional approach suggests that the change or alignment in reporting behavior is motivated by companies' efforts to respond to the prevailing pressure in order to gain or maintain legitimacy (DiMaggio and Powell, 1983; Larrinaga-González, 2007).

If one assumes, as the social/political perspective proposes, that companies mainly use SR to shape society's expectations or to adapt to them for the sake of legitimation (Bravo et al., 2012), then one will expect that the interplay between SR and MCS is not particularly developed. Companies are not interested in SR as a useful instrument to enhance CS performance, but they do appreciate it as a valuable tool to react to society's expectations. Therefore, SR and MCS are only linked to the extent that is necessary to create the impression that the company undertakes reasonable efforts to control and improve CS performance. Companies will consequently selectively use only control instruments or mechanisms that are necessary to achieve this impression or to fulfill institutional requirements, such as legal obligations.

In contrast, the normative perspective regards the consideration of sustainability issues to a satisfactory extent as a moral obligation (Hansen and Schaltegger, 2016). Unlike the strategic branch of stakeholder theory which stresses rational considerations behind a company's stakeholder management, normative stakeholder theory is based on philosophical or moral considerations (Donaldson and Preston, 1995). Accordingly, companies should not only focus on strategically relevant stakeholders but consider all stakeholders that have morally grounded claims, no matter whether this approach contributes to the achievement of traditional corporate objectives or not (Hasnas, 1998; Sundin et al., 2010).

Consequently, under the normative view, one might assume that the interplay between SR and MCS is well-developed, since organizations accept the need to contribute to SD as given and, therefore, want to exploit the full potential of SR regarding the improvement of CS performance.

3.1 Research strategy

To answer the outlined research questions, we used a qualitative research approach by conducting 20 in-depth semi-structured expert interviews. Since research exploring the interplay of SR and MCS is still at an early stage (Maas et al., 2016; Traxler et al., 2020; Hsiao et al., 2022), expert interviews are a reasonable method to access the research field in an explorative way (Bogner et al., 2009). Using a semi-structured interview guideline allowed us to gain more flexibility during the interviews to get a close view in the areas of interest and to identify new issues which might have an impact on the research questions (Brinkmann, 2013; Qu and Dumay 2011).

3.2 Sample selection

As research objects, we selected companies listed on the Austrian ATX and the German DAX. In LC, SR is a well-institutionalized practice, and many of these companies have long-standing experience gathering and publishing sustainability information (KPMG, 2022). Furthermore, capital market-oriented companies have particularly high incentives to align their business models toward sustainability, as investors are increasingly demanding this. Accordingly, LC should not only have extensive experience in reporting, but also know what options are available for managing CS performance.

Variations in corporate social responsibility (CSR) or CS can often be traced back to differing institutional framework conditions. The two chosen countries share important commonalities concerning CSR or CS, such as the legal framework conditions or the prevailing approach to CSR (Matten and Moon, 2008; Directive 2014/95/EU). Of the companies listed on the two indexes in the year 2017, 10 listed on each the ATX and on the DAX took part in our study, yielding 21 persons who are actively involved in SR by virtue of their function or position as interview partners (see Table 2). In most cases, the interviewees were working in sustainability management, corporate communication, or the investor relation department. Hence, they can be viewed as experts on the relevant topic.

The companies included represent a wide range of industries, including the automotive industry, energy supply industry, plant engineering and financial institutions.

3.3 Data collection and analysis

The interviews, with a length between 30 and 90 min, took place in the summer of 2017. To enhance the credibility of the study (Lincoln and Guba, 1985; Patton, 2002; Eriksson and Kovalainen, 2008), all interviews were recorded and transcribed. In line with our research questions, the interview guide asked how cultural controls, planning, cybernetic controls, reward and compensation and administrative controls affect SR and vice versa (see Appendix).

Data analysis was conducted using an abductive approach based on both deductive categories from the literature and inductive subcategories that emerged from the data (Dubois and Gadde, 2002). Thus, the five control types proposed by Malmi and Brown (2008) served both to construct the interview guide and as deductive categories for data analysis. The assignment of the text passages to the different control types was done – in terms of our research questions – in both possible directions. Within these categories, a further differentiation was made by means of an inductive procedure, i.e. subcategories were developed directly from the text material. In the following, the results of the interviews are presented along with the deductive categorization. The inductive categories, on the other hand, provide the structure within the individual control types and the two research questions. Finally, the findings obtained are summarized in Table 3 also following this structure (see Section 5. Discussion).

4.1 Cultural controls

Concerning the question of how corporate culture affects SR (RQA), the interviews yield a clear picture: in all 20 companies, the interviewees stated that a control effect of cultural aspects on SR is likely. The sustainability report is seen as a summary or reflection of corporate culture (4A), especially of the basic values (2, 5), beliefs, and principles that prevail in a company (2, 11–20). Values and norms already anchored in the corporate culture are reported on (6, 8, 9). The important role of corporate culture for SR is perfectly described by the following statement of interviewee 16:

First of all, I think the prerequisite for this is that I have a culture in which I give a certain space to the topic of sustainability, so to say. Otherwise, you will not be able to reach anyone anywhere with the sustainability report. That is the case with us. We say that our culture is an open culture and the issue of sustainability in all its facets plays a role for us.

Corporate culture, therefore, acts as the basis for SR and influences the type of reporting and the topics that are included in the sustainability report (17). It strengthens organizational learning (16, 17) and thus leads to a common view in the company of how comprehensive the sustainability report should be developed (20). Moreover, changes in corporate culture also lead to changes in SR (3) and by having a look at previous sustainability reports, the change process or development of corporate culture becomes visible (7).

Many interviewees also qualified the impact of SR on corporate culture (RQB) as significant and positive (12–19). Respondents stated that SR positively influences organization's beliefs, values and norms (12, 14, 18) and can demonstrate what sustainability means to the organization (14, 18). In terms of creating a shared vision or understanding of sustainability, two interviewees mentioned that employees' understanding of sustainability is improved through reporting, with the sustainability report itself demonstrating why the topic has a high priority in the company and is thus an integral part of daily work (3, 16). However, the cultural effect that was most frequently mentioned is the increase in awareness of sustainability issues among employees (11–16, 18, 19) and even among top management (1), which is reflected by the following statement:

The topics that we deal with in the sustainability report and the way we address these topics have an internal impetus, which in turn affects one or the other employee. (12)

The change of awareness is also described by interviewee 14:

But now you can already see that through the fact that we are making the sustainability report, specific internal employees […] are getting more sensitive and are looking at where it refers to my area of responsibility and what we need to change [ …].

Consequently, a change in the specific attitude and behavior toward sustainability-related topics (15) can increase employee motivation (8, 19). Moreover, employees are proud of the sustainability engagement in their company (3), they feel more committed to their company (8) and would rather identify with a company that addresses sustainability issues (18).

However, some interviewees are quite skeptical about the effects of SR on corporate culture. In their view, the sustainability report merely represents a summary of sustainability activities and does not influence corporate culture (2, 10). Instead, corporate culture should be solid enough not to be changed by a report (4, 10). The report and the processes required for it must be aligned with the strategy and not the other way around. The following quote from respondent 9 illustrates this aspect:

[…] it is important to me that the reporting is also authentic. And it would not be a good sign if you only say just based on the report, okay, we have to think towards sustainability now and have to act socially and ecologically. So that's either anchored in the company, in the strategy or in the culture, and you can report on it. I think the other way around it is very difficult.

In addition, one person (20) mentioned that the main target groups for a sustainability report are the capital market and related critical stakeholders. Consequently, it is difficult to sensitize employees through the report in such a case.

If I want to sensitize employees, I have to consider what is the best format [ …]. But direct awareness-raising among employees cannot work via this channel [ …]. (20)

4.2 Planning

When asked about the impact of planning on SR (RQA), some respondents want to identify one, while others do not share this view. Especially at a strategic level, some respondents see an influence on SR (11, 13, 17, 19). For instance, the strategic orientation of the company can influence the topics of the sustainability report (17), as explained by one respondent (2):

If a company is changing the business strategy, this has an influence on SR; on the sustainability strategy and then on reporting.

So, strategically relevant topics are presented more frequently in the sustainability report. Changes in the planning processes or goal setting also lead to changes in SR (7, 9, 10, 14). If new goals are set, this leads to changes in the reporting content (1, 10). However, some persons see no effect of goal setting on reporting, or say that for them, simply summarizing the goals set in the report is not a control effect (2, 4B, 13, 17, 18), as illustrated by the statement of interviewee 2:

[…] of course we have long-term goals and they have been set. Sustainability reporting is only a summary of these sustainable goals or long-term, general goals of the company. I can't really see an impact.

In addition, most respondents recognized an effect of SR on planning (RQB). Overall, these companies already (partially) integrate the sustainability report into their strategic planning or are thinking about including the report in the future (11–16, 18, 19). Some of the interviewees indicated a concrete impact of the sustainability report on goal setting (12, 13, 14, 17, 18, 19). For example, new goals are set and then communicated to employees (12, 13, 15, 16, 18). The sustainability report is also used as a control instrument to drive the implementation of the goals (3, 5).

Two respondents stated that the strategic decisions of a company can be influenced by sustainability management as a whole, but not by the reporting itself (3).

When asked whether the sustainability report has an impact on the company's strategy, I would say that the sustainability report as an instrument itself has not, but the entire process of sustainability management. [ …]. It is the process and not the report itself. The report is part of the management process. (17)

This shows that some companies take a strategy-oriented approach to reporting. In contrast, the report itself may be disconnected from the corporate strategy or processes if it is used more as a reputational tool or external communication medium, resulting in insufficient integration (11, 14, 16).

4.3 Cybernetic controls

As with planning, an effect of cybernetic controls (RQA) on SR was perceived by most of the interviewees. Commonly, data that is already collected for (management) accounting purposes is also used and deduced for SR (14, 16, 19). In companies where management accounting is involved in the preparation of the sustainability report, the impact of this involvement on reporting can be identified. For example, performance management indicates when certain targets have not been achieved. In addition, regular updates of key performance indicators (KPIs) also result in changes to the content of the sustainability report itself (2, 4A, 7).

Also, most of the interviewees see an effect of SR on cybernetic controls (RQB), especially since reporting requires additional data and evaluations, and thus existing information systems and evaluation tools need to be adapted (13, 18). Sustainability is a very broad field with many different dimensions. Accordingly, it is hardly surprising that indicators that have not been measured before are coming into focus because of reporting. Due to the SR, indices, rankings and specific indicators, such as those required by the GRI guidelines, are becoming increasingly important (11, 12, 15, 17, 20), which suggests a reporting-driven approach to SR. However, as a result new information systems need to be introduced (8), such as integrated data solutions, which are becoming more and more important for the use of sustainability-related data (13, 14, 16, 17). Basically, it can be said that the performance measurement and monitoring of non-financial performance indicators has gained in importance because of reporting (1), which is underlined by the following statements:

Actually […] in my opinion, the non-financial information is now on a similar level to the financial information. (7)

[…] concerning the impetus effect of this discussion and also the scope of implementation; what will be done with it in the end, how has risk management changed, how have the information systems been improved to optimize internal monitoring; there is an incredible number of examples. (12)

However, some of the respondents do not see any impact of SR on management accounting or the cybernetic systems used, or do not have a clear opinion in this regard. The reason for this is that management accounting in these companies is focused on financial information. Non-financial information for SR is prepared and provided by other departments. However, it is assumed that management accounting will play a more important role in reporting in the future (2, 3, 5, 10).

4.4 Reward and compensation

Regarding the question of how reward and compensation systems affect SR (RQA), the results indicate only a subordinate role. Respondents believe that reward systems can be used to encourage the implementation of sustainability goals in general, which in turn affects SR (1, 5, 7, 8, 9). The following quote reflects this:

So, incentive and reward systems can have an impact on the achievement of goals, and of course, if these are specific sustainability goals. The bottom line is to focus attention and effort on certain issues. (9)

To date, a few companies have linked reward systems to SR (2, 12, 16, 17). One challenge or limitation in linking is that often only those employees who are actively involved in the reporting process benefit from the incentives and rewards (16). However, several interviewees explicitly state that they see no impact (3, 4, 6, 10).

When asked if any effects of SR on incentive and reward systems could be identified, such as linking sustainability goals from the sustainability report to rewards and compensation (RQB), most interviewees could not identify a link in their respective companies (5, 7–11, 13, 15, 18, 19, 20). However, some interviewees mentioned that individual target agreements are set for individual departments, employees, or managers as part of the reporting process and are linked to individual compensation, which can create an incentive for organizational members to fully address the issue (12, 14, 16, 17).

Of all 5 MC types, reward and compensation is the one where the respondents see the least effects or interactions.

4.5 Administrative controls

Of all the MC types studied, interviewees see the greatest linkage in administrative controls. When asked about the impact of administrative controls on SR (RQA), all interviewees can identify an impact. Individual departments, as well as involved, responsible employees, influence the reporting to some degree. The influence ranges from determining the content to the wording of certain texts (11, 12, 13, 15, 16, 19). Moreover, the engagement of internal as well as external stakeholders affects SR. New improvement suggestions for sustainability activities and a lively exchange among the members of the organization are becoming increasingly important for the positive development of SR (4A, 6, 8, 12, 13, 15, 17, 19). In this context, the importance of internal communication mechanisms is highlighted, for example to base reporting on internal agreements and discussions (13, 14, 15, 20). In company 15, an annual stakeholder council has been installed to enhance the SR process:

[…] reporting is one thing but what is happening before and after is more important. We have, among other things, an annual stakeholder council where approximately half of the participants are employees whom we invite to different topics from different areas. […] there are many interfaces to employees in-house on these topics, which we try to integrate as best as possible and which we also need as multipliers.

Furthermore, a company's management or decision-makers play a crucial role. Management influences reporting by making suggestions for changes, regularly giving feedback to individual employees, and finally releasing the report (11–20). It also has become clear that the commitment of the board of directors has a major influence on SR by deciding how much budget is available for reporting (1, 2, 5, 7, 8, 9). One participant (9) describes this as follows:

Well, if the board does not back this and support it accordingly, then the topic has poor chances of really gaining attention in the company. So, it is very important that this is exemplified top-down by the board on the one hand, but also is demanded on the other hand.

Regarding the question how SR effects administrative controls (RQB), most of respondents note a control effect. In the sense of a continuous improvement or learning process, SR can lead to changes or optimizations in the company. Particularly in the initial phase of reporting, adaptations in the organizationalor operational structure may be necessary, since systems, processes, structures, or responsibilities must be introduced or adapted (3, 7, 9, 10). In most of the companies studied, a dedicated sustainability management or an independent department was installed, or separate sustainability committees were formed, because of SR:

[…] we have a sustainability management committee [ …]. It was definitely a result of sustainability reporting or the requirement for sustainability reporting [ …] (14)

In addition, SR can influence the content of company meetings or internal communication in general (11, 13–19). Interviewee 17 summarizes this succinctly:

The sustainability report is always the basis [ …]. We take measures […] and we then report on this in the sustainability report, which serves as a template for all further communication measures. It is like the Bible we read from. Everything that is communicated on this issue within the group, internally and externally, is based on the sustainability report. That is its central function.

However, some companies are skeptical about using SR as an internal communication tool because they assume that the primary target audience of the report is external stakeholders (12, 14, 17, 20). Still others, however, see no impact of reporting on administrative controls at all (1, 2).