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Determinants and Performance Effects of Social Performance Measurement Systems

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Abstract

This study investigates the performance measurement systems adopted by companies to manage their social responsibility activities, a theme that remains under-researched despite the important role that these mechanisms may play in helping firms control and improve their social performance. An integrative model is developed to examine how the three fundamental drivers of corporate social strategies, i.e., business motivations, perceived stakeholder pressures, and top management’s social commitment, influence the use of social performance indicators for internal decision-making and control and how such use impacts companies’ social and economic performance. The results from a survey of 97 Italian companies suggest that economic motivations and top management’s commitment are associated with a more intensive use of social performance indicators for decision-making and control, whereas perceived pressures from stakeholders do not represent a significant determinant of such use. The use of social performance indicators, in turn, is found to directly influence a firm’s social performance and, indirectly, its bottom line.

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Notes

  1. The possibility of a disconnect between the measures adopted by companies in response to external pressures and firms’ internal practices has been highlighted by various schools of thought, particularly by neo-institutional research (Baxter and Chua 2003). This is why the neo-insitutional perspective has so far been extensively applied within the social and environmental accounting research (see, e.g., Bebbington et al. 2009; Chen and Roberts 2010; Larrinaga-Gonzalez 2007) to investigate the ceremonial and symbolic roles CSR reporting may play in signaling ritual conformity to institutionalized myths (Meyer and Rowan 1977).

  2. Indeed, sophisticated models and tools have been developed for computing companies’ carbon or water footprints (see, e.g., Pinkse and Kolk 2009, 2010), despite the undeniable complexities of measuring many firms’ environmental impacts (Unerman and Chapman 2014; Hartmann et al. 2013). The European Union Emissions Trading System also represents an attempt—albeit limited—to quantify in monetary terms companies’ environmental externalities.

  3. An exemplary list of SPI is provided by the Global Reporting Initiative (GRI) G3 guidelines, the most widely adopted standard for corporate responsibility reporting (KPMG 2011). More details on GRI SPI are provided in “SPI Use” section.

  4. The decision-making use refers to, e.g., goal setting, capital investment decisions, or suppliers’ selection, whereas the control use refers to, e.g., performance evaluation and rewarding. By investigating the extent to which SPI are used by managers for a variety of different purposes pertaining to both the decision-making and the control roles of management accounting information, this paper contributes to extant performance measurement literature that tends to examine only one or a few uses of performance measures (e.g., compensation) while ignoring other potential uses (Ittner and Larcker 2001). More details on the definition and operationalization of SPI use are provided in "SPI Use" section.

  5. Some thoughts on the implications of such a definition, and related limitations, are offered in the final section.

  6. Indeed, this study investigates the use of SPI at the corporate level of analysis, consistently with prior environmental management accounting literature (e.g., Henri and Journeault 2010; Perego and Hartmann 2009).

  7. The score for each respondent on the multi-item scale is based on the weighted factor score calculated in the final PLS measurement model.

  8. Injury rate was chosen as an objective, proxy measure of social performance for two reasons. First, it represents a particularly relevant, albeit limited, aspect of a company’s overall social performance. In addition, it emerged as the social performance indicator most frequently measured by firms during the pre-tests of the questionnaire.

  9. I use Smart PLS 2.0 (Ringle et al. 2005).

  10. Chin’s (1998) rule of thumb suggests that the sample size for a PLS study should be 5 to 10 times for either: 1) the largest number of formative indicators for a particular construct in the measurement model; or 2) the largest number of structural paths directed at a particular construct in the structural model. In this study, the dependent latent variable with the largest number of structural paths directed at it is SPI use, with seven independent variables (namely, expected competitive advantage, perceived stakeholder concern, top management’s social commitment and the four control variables). Thus, the sample size of 97 cases satisfies this requirement.

  11. Given that the estimation of path coefficients in the PLS structural model is based on OLS regressions of each endogenous latent variable on its predecessor constructs, these coefficients might be biased in the presence of high levels of collinearity among the predictor constructs. Therefore, collinearity diagnostics were assessed as a preliminary test of the structural model (Hair et al. 2014). Because the VIF values for all the predecessor constructs are well below the threshold value of 5, it seems possible to conclude that collinearity does not represent a threat to the robustness of the study’s results.

  12. Statistical significance is determined using the reported original PLS estimates and bootstrapped standard errors.

  13. As reported in Table 5, the path coefficient between SPI use and economic performance is β = 0.050 (p > 0.1).

  14. As noted by Hair et al. (2014), this approach is particularly suited for PLS settings, as it makes no distributional assumption, unlike the Sobel (1982) test. It also exhibits higher levels of statistical power.

  15. Interestingly enough, the findings from the complete model (see Table 6, panel B) indicate a positive and slightly significant direct path between perceived stakeholder concern and social performance (β = 0.253, p < 0.1). Some thoughts on this result are offered in the final section.

  16. The statistical significance of the indirect path is again computed by applying the bootstrapping procedure suggested by Preacher and Hayes (2008).

  17. More specifically: (i) the path between expected competitive advantage and SPI use is positive and strongly significant for both the decision-making and the decision-control components; (ii) perceived stakeholder concern is not a significant predictor of either component; (iii) top management’s social commitment is a weak determinant of both components; and (iv) both the decision-making and the decision-control components have a strong and positive influence on social performance.

  18. An exemplary case is Enron, which “looked like an exceptional corporate citizen, with all the corporate social responsibility and business ethics tools and status symbols in place” (Basu and Palazzo 2008, p. 123).

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Funding

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Author notes

  1. Irene Eleonora Lisi

    Present address: , via Bigiogera 13, 20128, Milan, Italy

Authors and Affiliations

  1. Università Cattolica del Sacro Cuore, largo A. Gemelli 1, 20123, Milan, Italy

    Irene Eleonora Lisi

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  1. Irene Eleonora Lisi
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Correspondence to Irene Eleonora Lisi.

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Appendices

Appendix 1: Questionnaire

Section I: Firm’ S Social Performance Measurement Systems

In this section you will find questions on your firm’s social performance measurement systems. The adjective social is related to: labor practices (i.e., occupational health and safety), human rights (i.e., child labor), society (i.e., relations with local communities), product responsibility (i.e., customer health and safety).

  1. 1.

    Amongst performance indicators measured within your firm on a regular basis (i.e., at least once a year), are there indicators of social performance (i.e., injury rates)? (yes/no).

  2. 2.

    Indicate to what extent (1 = not at all, 2 = to a very small extent, 3 = to a small extent, 4 = to a moderate extent, 5 = to a large extent, 6 = to a very large extent, 7 = totally) your firm uses social performance indicators for each of the following purposes:

    • Evaluate managers’ performance

    • Incentivize and reward managers (e.g., determine salary increases, set annual bonuses, and/or career advances)

    • Establish formal strategic objectives (or goals)

    • Evaluate and approve capital expenditures

    • Make product decisions (e.g., product price, product mix, new product development)

    • Define standards for the selection/retention of external suppliers

    • The daily management and operational decisions (e.g., assess make-or-buy alternatives, assess the manufacturing process to use)

    • Prepare and issue the corporate financial and/or sustainability report

    • Disclose information to the public through the firm website, conference calls, press releases

    • Provide information to analysts and/or rating agencies

    • Provide information to government officials for compliance to legislation

    • Provide information to local communities and non-governmental organizations

    • Other uses not mentioned (please specify) —————

  3. 3.

    Rank the three most important uses for social performance indicators within your firm among the following (put a 1 in the box for most important use, 2 in box for second most important use and 3 in box for third most important use):

    • Evaluate managers’ performance

    • Incentivize and reward managers (e.g., determine salary increases, set annual bonuses and/or career advances)

    • Establish formal strategic objectives (or goals)

    • Evaluate and approve capital expenditures

    • Make product decisions (e.g., product price, product mix, new product development)

    • Define standards for the selection/retention of external suppliers

    • The daily management and operational decisions (e.g., assess make-or-buy alternatives, assess the manufacturing process to use)

    • Prepare and issue the corporate financial and/or sustainability report

    • Disclose information to the public through the firm website, conference calls, press releases

    • Provide information to analysts and/or rating agencies

    • Provide information to government officials for compliance to legislation

    • Provide information to local communities and non-governmental organizations

    • Other uses not mentioned (please specify) —————

  4. 4.

    Indicate your agreement (1 = completely disagree, 2 = mostly disagree, 3 = somewhat disagree, 4 = neither disagree nor agree, 5 = somewhat agree, 6 = mostly agree, 7 = completely agree) on the following statements:

    • Overall, managers are satisfied with the quality (relevance, timeliness, accuracy and format) of social information provided by our firm’s measurement and internal reporting systems

  5. 5.

    Amongst the objectives formally assigned to managers within your firm, are there any targets related to social issues (i.e., work-related injury rates, absenteeism rates, health and safety costs and investments, average number of training hours per employee, number of third-party social audits on suppliers) (yes/no)?

  6. 6.

    If yes:

    • how many managers (in percentage) such social targets are assigned to formally? (%)

    • what percentage (if any) of managers’ variable compensation (annual bonus and/or annual salary increase) depends upon the achievement of such social targets on average? (%)

  7. 7.

    Rate your firm’s overall performance for the last fiscal year, compared to other competitors across the industry, on each of the following objectives (1 = much worse, 2 = worse, 3 = slightly worse, 4 = neither worse nor better, 5 = slightly better, 6 = better, 7 = much better):

    • Complying with social (i.e., health and safety, human rights) regulations

    • Limiting social impact beyond compliance

    • Preventing and mitigating social crises (i.e., work-related fatal injuries, incidents of discrimination, incidents of human rights violations across the supply chain)

    • Educating employees and the public about social issues (i.e., health and safety, human rights)

Section II: Firm’s Social Responsibility Approach

In this section you will find questions on your firm’s approach to social responsibility, in terms of beliefs, practices and structure.

  1. 8.

    Indicate your agreement (1 = completely disagree, 2 = mostly disagree, 3 = somewhat disagree, 4 = neither disagree nor agree, 5 = somewhat agree, 6 = mostly agree, 7 = completely agree) on the following statements:

    • Our stakeholders feel that social responsibility is a critically important issue facing the world today

    • The public is very concerned about social problems (i.e., work-related injuries, human rights violations, corruption)

    • Our customers are increasingly demanding healthier and safer products and services

    • Our stakeholders expect our firm to be socially responsible

    • Being socially conscious can lead to substantial cost advantages for our firm

    • Our firm has realized significant cost savings by experimenting with ways to reduce the social impact of our products and processes

    • By regularly investing in research and development on healthier and safer products and processes, our firm can be a leader in the market

    • Our firm can enter lucrative new markets by adopting social strategies

    • Our firm can increase market share by reducing the social impact of our current products

    • Reducing the social impact of our firm’s activities will lead to a quality improvement in our products and processes

  2. 9.

    Indicate your agreement (1 = completely disagree, 2 = mostly disagree, 3 = somewhat disagree, 4 = neither disagree nor agree, 5 = somewhat agree, 6 = mostly agree, 7 = completely agree) on the following statements:

    • The top management team (President/Chairman, Chief Executive Officer, Chief Operating Officer) in our firm is committed to social issues

    • Our firm’s social efforts receive full support from our top management

    • Our firm’s social strategies are driven by the top management team

  3. 10.

    Does your firm issue a social (or sustainability) report (yes/no)?

  4. 11.

    If yes, in which year did your firm publish its first social (or sustainability) report?

  5. 12.

    Does your firm have a Corporate Social Responsibility (or Sustainability) manager (i.e., a person formally in charge of managing social and/or environmental responsibility issues) (yes/no)?

  6. 13.

    If yes:

    • Which department does the CSR (or Sustainability) manager belong to?

      • Communication and/or Public Relations

      • Marketing

      • Human Resources

      • Finance and/or Accounting

      • Risk Management and Compliance

      • CSR (or Sustainability) unit, reporting directly to the CEO

      • Other (please specify) —————

    • How many levels/tiers (according to your firm’s organization chart) separate the CSR (or Sustainability) manager from the CEO? (indicate 0 if the CSR manager is the CEO, 1 if the CSR manager directly reports to the CEO and so on)

    • How many times a year does the CSR (or Sustainability) manager interact with the top management team (President/Chairman, Chief Executive Officer, Chief Operating Officer)?

      • Never

      • From 1 to 2

      • From 3 to 6

      • About once a month

      • About once a week

      • More than once a week

  7. 14.

    Indicate the importance of each of the following practices in your firm (1 = not important at all, 2 = very slightly important, 3 = slightly important, 4 = somehow important, 5 = important, 6 = highly important, 7 = exceptionally important):

    • Use of social arguments in marketing

    • Social aspects in administrative work

    • Periodic social audits

    • Health & Safety training for firm’s employees

    • Total quality program with Health & Safety aspects

    • Sponsorship of social events

  8. 15.

    Indicate whether the majority of your firm’s facilities is certified according to the following standards:

    • OHSAS 18001

    • SA8000

Section III: Personal Details of the Respondent

In this section you will find questions on you.

  1. 16.

    Current role (job title)

  2. 17.

    Years of experience in the current role

  3. 18.

    Years of experience within the firm

  4. 19.

    How many levels/tiers (according to your firm’s organization chart) separate you from the CEO? (indicate 0 if you are the CEO, 1 if you directly report to the CEO and so on)

  5. 20.

    Education level:

    1. 1.

      High school

    2. 2.

      Professional education or university degree

    3. 3.

      Master degree

    4. 4.

      Doctorate degree

  6. 21.

    Gender

    • Male

    • Female

  7. 22.

    Age (years)

Section IV: Health and Safety Information

In this section you will find questions on Health and Safety data within your firm.

  1. 23.

    Total number of full-time employees (personnel) at the end of the last fiscal year

  2. 24.

    Total number of hours actually worked in the last fiscal year

  3. 25.

    Total number of work-related injuries in the last fiscal year

Section V: Firm’s Financial And General Information

In this section you will find questions on your firm and on its financial performance.

  1. 26.

    Rate your firm’s overall performance for the last fiscal year, compared to other competitors across the industry, on each of the following objectives (1 = much worse, 2 = worse, 3 = slightly worse, 4 = neither worse nor better, 5 = slightly better, 6 = better, 7 = much better)

    • Return on investments (ROI)

    • Operating profit (EBIT)

    • Cash flow from operations

  2. 27.

    Sales (in thousand euros or thousand pounds) in the last fiscal year

  3. 28.

    ROI (Return on investments) in the last fiscal year

  4. 29.

    Country where your firm is located

  5. 30.

    Type of business

    • Food and beverages

    • Other light industries such as textiles, pulp and paper, printing, furniture, plastics, and other packaging materials

    • Chemical products including pharmaceuticals, oils, detergents, and cosmetics

    • Heavy manufacturing and machinery

    • Natural resources

    • Other sectors such as wholesale distribution, construction, transportation, and utilities

  6. 31.

    Main product(s)/service(s)

  7. 32.

    Indicate whether your firm is

    • 1 = Listed 2 = Non-listed

    • 1 = Parent company 2 = Local subsidiary

Appendix 2: Item Cross Loadings for the Main Variables (n = 97)

 

SPI use

Expected competitive advantage

Perceived stakeholder concern

Top manag. social commitment

Social performance

Economic performance

SPI use

Item 1

0.724

0.306

0.211

0.259

0.357

0.184

Item 2

0.744

0.272

0.136

0.243

0.318

0.184

Item 3

0.704

0.129

0.180

0.225

0.195

0.050

Item 4

0.731

0.219

0.150

0.070

0.193

0.046

Item 5

0.778

0.422

0.190

0.111

0.242

0.124

Item 7

0.662

0.247

0.245

0.230

0.381

0.150

Expected competitive advantage

Item 1

0.300

0.783

0.393

0.240

0.233

0.149

Item 2

0.310

0.706

0.362

0.407

0.173

0.073

Item 3

0.188

0.623

0.396

0.331

0.176

0.145

Item 4

0.367

0.846

0.353

0.163

0.188

0.093

Item 5

0.319

0.863

0.417

0.141

0.124

0.162

Item 6

0.199

0.698

0.290

0.087

0.091

0.116

Perceived stakeholder concern

Item 1

0.212

0.438

0.826

0.440

0.308

0.086

Item 2

0.099

0.184

0.580

0.412

0.386

0.098

Item 3

0.255

0.402

0.784

0.322

0.261

0.101

Item 4

0.202

0.404

0.888

0.409

0.299

0.146

Top management’s social commitment

Item 1

0.291

0.286

0.415

0.965

0.365

0.177

Item 2

0.261

0.300

0.547

0.954

0.335

0.151

Item 3

0.234

0.262

0.451

0.965

0.344

0.140

Social performance

Item 1

0.296

0.160

0.260

0.256

0.855

0.260

Item 2

0.317

0.077

0.279

0.381

0.843

0.259

Item 3

0.402

0.187

0.343

0.307

0.829

0.147

Item 4

0.350

0.289

0.361

0.265

0.791

0.242

Economic performance

0.188

0.157

0.136

0.164

0.274

1.000

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Lisi, I.E. Determinants and Performance Effects of Social Performance Measurement Systems. J Bus Ethics 152, 225–251 (2018). https://doi.org/10.1007/s10551-016-3287-3

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