Appunti Advanced Management control and Sustainable Development

Advanced management control and sustainable development

Lezione 1: Introduction

From business as usual to business 2030: Why and how

The traditional development model is leading our planet and our communities to a huge sustainability crisis. There is an increasing awareness of people and NGOs about world sustainability issues and challenges. To help deal with them, in September 2015 many governments worldwide agreed to pursue 17 Sustainable Development Goals (SDGs). Promoted by the United Nations, these SDGs define global priorities and aspirations for 2030 and rely on the important and value-creating role of business organizations in delivering on the promise of sustainable and inclusive development.

The evolution of sustainable development

• 1978: Sustainable development, conceptualized as the means to achieve sustainability, was defined by the United Nations' Brundtland Report as "development that meets the needs of the present without compromising the ability of future generations to meet their own needs."
• 1997: The GRI (Global Reporting Initiative) is formed by the United States-based non-profits Ceres and Tellus Institute with the support of the United Nations Environment Programme (UNEP).
• 2002: The World Summit in Johannesburg extends the definition of "sustainable development" to embrace not only environmental aspects but also social inclusion and economic development.
• 2011: The Sustainability Accounting Standards Board (SASB) is created to develop and disseminate sustainability accounting standards.
• 2013: The International Integrated Reporting Council (IIRC) releases its framework based on the concept of multi-capitals to support the integration of financial and pre-financial data.
• 2015: The U.N. General Assembly adopts the 2030 Agenda for Sustainable Development, accompanied by a list of Sustainable Development Goals (SDGs), namely, 17 objectives and 169 targets.

Agenda 2030: Clear path to tackle sustainability issues

Building on a series of case examples — Unilever, Barilla, and EasyJet — we suggest that by aligning corporate purpose to a sustainable, value-creating strategy, companies will be ready to move from "Business as usual" to what we call "Business 2030."

Business2030 is a reference to Sustainable Development Goals (SDGs), which can provide a clear signal that a business takes seriously its broader societal role as a positive force rather than saying that recognition of the SDGs is a definition of a purposeful company per se (Busco et al., 2018).

Business call to action

1. Which contribution businesses can give to implement Agenda 2030?

The major drivers for the implementation of Agenda 2030 in which business have a crucial role:

• Clear and strong commitment by leaders
• Technological, organizational, and social solutions
• Pressure from the bottom

2. Why should businesses be actively engaged in the implementation of Agenda 2030?

• It's fair toward communities and environments
• International and national regulations – Regulatory risk
• Sectors affected by new regulations: Cars, agriculture…
• Operational & reputation risks – severely hit or get stuck (ex: protest) to be not in line with sustainable regulation
• New opportunities from changes in consumers' attitude towards more sustainable and healthier products
• Investors' preference for more responsible business – higher returns because future in line with sustainability
• Saving financial and natural resources -> circular economy
• Better governance thanks to transparency, diversity, reporting – promoting trust and commitment for your company
• Keep and attract talents and valuable human resources
• Better risk management

3. What should business do in practice to implement Agenda 2030?

Three conditions should be fulfilled:

• Integrate its strategy, business model and decision-making process with its environmental and social goals.
• Be open to innovation and partnerships.
• Ensure a sustainable supply chain.

3.1. Integrate its strategy, business model and decision-making process with its environmental and social goals

We need to go beyond economic value creation, starting from an organization’s reason for being or corporate purpose:

• Environmental and social goals
• Decision-making process
• Strategy
• Business model

Purpose is an organization’s enduring reason for being. It defines the organization’s existence and societal contribution in a way that aligns the long-term financial performance with benefits to all stakeholders and society. The purpose is the "why" and reflects something more aspirational—it isn’t about just rephrasing the business model. It can become a way to understand where strategy comes from and what kind of outcomes and performance are being sought (Busco et al., 2018).

A well-defined corporate purpose legitimizes a company’s activities (Aula and Heinonen, 2016) and increases the success of the organization and its performance (Basu, 2017).

"Sustainable development towards a future where every human being can unfold his or her individual potential; where mankind is living together in social forms reflecting human dignity; and where all economic activity is conducted in accordance with ecological and ethical principles."

"PepsiCo is focused on delivering sustainable long-term growth while leaving a positive imprint on society and the environment - what we call Performance with Purpose. Our focus includes transforming our portfolio and offering healthier options while making our food system more sustainable and communities more prosperous. In doing so, we believe we will pave the way for PepsiCo's future growth and help others thrive. Our Corporate Purpose states that to succeed requires 'the highest standards of corporate behavior towards everyone we work with, the communities we touch, and the environment on which we have an impact.' We believe what we do matters – to our business and beyond. In every country in which we operate, we have an impact on the lives of consumers, our employees and communities. This brings a wider responsibility – a wider purpose for our business. That purpose is to bring togetherness, spread happiness and inspire a better future."

Corporate purpose represents a multi-dimensional guide "for daily decision making." It is embedded into actions and connected to day-to-day decision-making and tasks (Gartenberg et al., 2016), and "unifies and motivates relevant stakeholders" (Ebert et al., 2018).

The Performance Measurement System (PMS) can play a key role in assessing the state of achievement of corporate purpose and strategies, constantly measuring company performance in an integrated perspective. From almost exclusively economic and financial indicators, it advances towards measurement that also takes into account non-financial aspects. The use of both monetary and non-monetary information is reflected, for example, in the Sustainability Balanced Scorecard (SBSc) (Maas et al., 2016), which underlines the interconnection between social, environmental and conventional business performance (Figge et al., 2002; Hansen and Schaltegger, 2016).

The process of formulating an SBSC (Figge et al., 2002):

Matrix to determine the strategic relevance of environmental and social aspects (Figge et al., 2002):

Following the continuous evolution of the economic context and related PMS, nowadays a new way of thinking, called Integrated Reporting & Thinking, is emerging. This new trend encourages companies to integrate sustainability issues in their purpose, strategies, management control & accounting, and reporting (Maas et al., 2016).

3.2. Be open to innovation and partnerships

Innovation can play a crucial role in encouraging the transformation of companies from profit-oriented to sustainability-oriented, through both technological (new products, processes, and services) and organizational (new business models) innovations.

In this context, firms are expected to go beyond their boundaries, to engage with diverse stakeholders, including NGOs, governments, and research institutions (Adams et al., 2016).

3.3. Ensure a sustainable supply chain

A sustainable supply chain implies that all its members are compliant with social and environmental criteria, without compromising their competitiveness or financial performance (Seuring and Miller, 2008). The issues of sustainability and profitability in agro-food are particularly relevant. As a consequence, the Agro-food System plays a crucial role in achieving SDGs in terms of employment, job creation, rural and community development, human welfare, consumers’ health, hunger, food waste, and food loss.

Within the agro-food sector, a key role is played by Food Value Chains (FVCs).

• Complexity and heterogeneity (Metopoulos et al., 2007);
• High level of vertical and horizontal fragmentation (Bowman et al., 2013; Collado and Jack, 2017), and also lack of relationships with other actors (i.e., banks, research institutions, innovators);
• Cultural barriers in changing managerial approach (Menozzi et al., 2015);
• Lack of entrepreneurial skills due to the small size of firms (Deakins et al., 2016; Al-Sharafat, 2016);
• Low levels of education and training (Kahan, 2012);
• The adoption of technological or organizational innovations is usually slow (Drucker, 2014).

A key role in fostering sustainable FVCs can be played by smart chain leaders. A committed FVC leader can:

• Promote a sustainable vision;
• Align business culture, strategy, and actions with a sustainable-oriented purpose;
• Support education to implement an integrated approach;
• Balance environmental and social impacts with supply chain profitability.

Other initiatives to promote sustainability and profitability along the value chain:

• Use of protected designations of origin;
• Development of alternative commercial food networks;
• Adoption of innovative solutions/tools allowing customers to track the farm-to-shelf journey of food;
• An increase in investments, from both private and public actors, in training and education of small farmers, to improve their entrepreneurial skills and support rural development;
• New international regulations on non-financial information.

Conclusion

• New business opportunities are opening for companies that can operate true to a purpose that drives them to be a force for good in the societies in which they seek to prosper. An integrated approach—Business2030—can take into consideration how the interests and the contributions of a series of stakeholders that participate in the execution of the strategy are linked in the business model through innovation, partnership, and sustainable supply chain. Mind-sets, measures, and conversations are levers that need to be managed carefully to get there.
• Business2030 builds on Integrated Thinking, which is about understanding, measuring, and connecting a comprehensive set of relationships and performances with corporate purpose. It involves identifying, executing, and monitoring business decisions and strategies for long-term value creation. But how can this happen?
• Accounting and reporting practices offer tools and engagement platforms that can go beyond communication of the initiatives of sustainability through a set of ad hoc targets and key performance indicators. Management accountants can lead the search for comprehensive performance by suggesting pragmatic solutions to monitor, improve, and communicate the ways in which such an inclusive business purpose may be converted into added value for stakeholders.
• What Management Accountants Can Do to Implement SDGs:
• Win board and senior management commitment on a selection of SDGs (focus only on those that the business organization can impact).
• Understand how key sustainability drivers and initiatives contribute to achieving business and financial strategies and goals.
• Integrate key sustainability drivers and the SDGs into the organization’s strategy and business model.
• Ensure that the SDGs and their connection with the organization’s strategy are understood cross-functionally in the business organization.
• Break down SDG targets and objectives for the organization as a whole into targets and objectives that are meaningful for individual subsidiaries, divisions, and departments.
• Make SDGs a central element of the process of planning, budgeting, and performance measurement, and include sustainability targets and objectives in performance appraisal.
• Connect SDGs and sustainability drivers with day-to-day decision-making.
• Monitor and report sustainability initiatives and performance toward the SDGs in an integrated way.

Lezione 2: Management Control Fundamentals

Introducing to the concept (Ch 2-3 Merchant-Van)

Management control system: the current definition

The management control system can be defined as a "package" that includes the design and use of formally and informally control aimed to ensure that the behavior and actions of business actors are consistent with the organization’s objectives and strategies. (Merchant and Riccaboni, 2001; Malmi and Brown 2008)

Management control system and its several forms of control

Merchant and Riccaboni (2001) and Merchant and Van der Stede (2007) summarize the types of control on which the management control literature has progressively placed the emphasis:

• Action control: the physical and administrative activities and mechanisms capable of ensuring that employees perform (or do not) certain actions deemed beneficial (or harmful) for the organization. (important at lower level)
• Result control: the mechanisms which link remuneration to the performance achieved based on empowering individuals on the results of their activities. (link performance to rewards) (important at higher level)
• Personnel and cultural control: the initiatives, situations, and tools capable of ensuring that each employee controls its own behavior or that they control each other. (create the right value system, atmosphere, competences) (important for everybody)

Different categories of Management Control

• Results controls: aim to heighten employees’ awareness of the consequences of their actions by only rewarding them for generating results, which the organization deems beneficial. Example: achieving performance targets such as budgeting, sales growth, or market share
• Action controls: Involve ensuring employees avoid actions detrimental to the organization and perform those known to be beneficial. Example: employees accounting for their actions either to reviewers, superiors, or each other
• Personnel controls: Selecting and training employees in such a way that they understand the nature of their duties, have the capability to complete their tasks competently as well as performing to the best of their ability. Example: Employee training
• Cultural controls: Controls which shape the shared traditions, norms, beliefs, values, ideologies, attitudes, and ways of behaving in an organization. Example: Codes of conduct, socialization between employees, and inspirational leadership

Formal and informal controls

• Formal controls include rules, budgets, performance appraisal, reward criteria to control results through feedback and feedforward loops.
• Informal controls do not refer to verifiable objectives and explicit measures, having their roots in the shared systems of organizational beliefs and values.

In order to ensure that MCS would lead to the achievement of social and environmental goals, these two main dimensions have to work together. For example, for the implementation of environmental strategy: the formal side of controls is an important step in implementing environmental strategy through the development of a performance evaluation system to monitor and assess the value and the effectiveness of undertaken actions, BUT measurement and formal elements are not enough, since their effectiveness may be influenced by informal controls. The two elements of MCS should be consistent, working together in order to motivate the decision-maker in operating in a sustainable way! Tensions between formal and informal controls could emerge, due to difficulties in defining appropriate quantitative and "objective" measures for social and environmental corporate responsibility since they are often very judgmental or frothy.

Management control is expected to play a key role

in shaping processes of sustainability strategy formulation and implementation, often attributed with a high capability to support decision-making. Sustainability management control aims to continuously measure, manage and improve, in an iterative process, the interaction between business, society, and environment.

Management control systems for sustainability: introducing the concept

The concepts related to sustainability accounting and control began to spread from the early 2000s both in philosophical terms (e.g., Bebbington 2001, Bebbington and Gray 2001, Gray and Bebbington 2000) and in practical developments (e.g., Schaltegger and Wagner 2006, Schaltegger and Burritt 2006). The logic of sustainability has therefore progressively overlapped on traditional managerial practices. For this reason, the accounting, control, and reporting tools have been progressively reshaped in compliance with sustainability issues.

Traditional vs. sustainable accounting and control

Traditional Accounting: Identifying, accumulating, analyzing, preparing, interpreting, and communicating information that helps managers to address economic and financial business activities.

Sustainability Accounting: Identifying, recording, measuring, and communicating environmental and social information with the aim to balance these aspects with the economic dimension.

Traditional Management Control: The organic set of tools, processes, roles, and informal solutions aimed at driving the behavior of managers and business operators towards the achievement of business goals.

Sustainability Control: It should be built on the existing management control architecture and, including social and environmental aspects of business performance, it should ensure a balance.