Advanced Management Control and Sustainable Development Lecture 3: Managing sustainable development with management control systems Prof. Angelo Riccaboni University of Siena Department of Business and Law angelo.riccaboni@unisi.it

Agenda Organizations and Sustainable Development Management Control Systems- formal and informal control Five controls with specific Sustainable Development Perspective Cultural control for Sustainable Development Planning for Sustainable Development Cybernetic control for Sustainable Development Reward and Compensation for Sustainable Development Administrative controls for Sustainable Development Interactions of controls and Sustainable Development SMCS Performance and Challenges

Organizations and Sustainable Development Sustainable Development is considered a strategic intangible asset- adopted to improve performance and create opportunities from innovations and internal changes Organizations that adopt SD becomes institutionalized through regulations and agreements Sustainable Development – Sustainability – sustainable –business- Corporate (social) responsibility

Management Control Systems Management Control Systems consist of formal and informal controls Formal controls – are contractual obligations that comprise rules, performance evaluations, reward criteria and budgeting systems Informal controls – comprise beliefs, shared values, norms, cultures, traditions and self-control.

Five types of control with specific Sustainable Development perspective Stable cultural controls – embrace the set of values, symbols and social norms within ‘clans’ that are shared by members of an organization. Planning controls – exert control by involving employees in long-range and action planning. Cybernetic control – are used to achieve accountability of employees for deviations in performance. They include budgets, (non-)financial measurement systems and hybrid systems Reward and compensation systems – aim to motivate individuals or groups to attain organizational goals Administrative controls – consist of governance structures, organization structures and policies and procedures

Cultural control for Sustainable Development Sustainable development is integrated into culture through initiatives communication engagement Cultural control provide the basis for Understand the Sustainable Development Understand formal control mechanisms Reaching suppliers beyond the boundaries

Planning for Sustainable Development Local and centralized planning regards: Short-term SD objectives Long-term SD objectives The integration of SD in planning process fails : If SD planning is done with Systems traditionally used for financial planning If specific action plans are not established If strategic planning is not adapted to local circumstances

Cybernetic control for Sustainable Development 3 major types of Cybernetic Control Present a flexible budgeting system to assess environmental indicators The Sustainable Balanced Scorecard with an environmental perspective Sustainability accounting approach

Reward and Compensation for Sustainable Development Organizations link reward and compensation to SD to ensure accountability and to influence decision making. Managers ask for higher compensation when: risk arises from environmental underperformance or non compliance Managers ask for lower compensation when: they can control risk exposure Incentives to managers – managers choose among SD objectives opportunistically, depending on the optimal input-reward-relationship Organization focus on environmental issues for the following reasons: Lower prioritization of SD compared to main business strategy The assumption that financial performance reflects SD Difficulties in assigning responsibilities

Administrative controls for Sustainable Development Top management commitment: Raises awareness for SD Provides a vision of SD goals Assures legitimacy New sustainable organization should be supported by: Transparent communication Formal statements (mission statements, policies, codes of conduct) Agents that convey the SD concerns

Interactions of controls and Sustainable Development Interactions of controls were found: From top management commitment to sustainability performance measurement From transformational leadership to intrinsic motivation Between cultural controls and training Between planning and cybernetic controls

SMCS Performance and Challenges Sustainability Management Control Systems performance : SD-performance – range from micro factors measuring individual achievements of a manager/department to macro factors that measure improvements in an eco-system or working conditions in an industry Economic performance – range from quantifiable accounting and market-related organizational measures to qualitative, even subjective measures Sustainability Management Control Systems Challenges: Picking and quantifying appropriate measures Relating a meaningful benchmark to those measures Allocating costs and revenues to accountable manager/unit Defining different performance measures that respond to different stakeholder demands