The association between the balanced scorecard perspectives and corporate sustainability within a sustainability balanced scorecard framework.

Transcription

1 The association between the balanced scorecard perspectives and corporate sustainability within a sustainability balanced scorecard framework. Submitted by: Ms Kirsten Rae, Bachelor of Business (Honours) A thesis submitted in fulfilment of the requirements for the degree of Doctor of Philosophy Faculty of Business University of the Sunshine Coast, Queensland, Australia February, 2011

2 Keywords Balanced scorecard Corporate social responsibility Corporate sustainability Customer Empowerment Environmental Financial Human capital Human resource management Internal process Organisational commitment Sustainability Balanced Scorecard ii

3 The association between the balanced scorecard perspectives and corporate sustainability within a sustainability balanced scorecard framework. Abstract Corporate sustainability is a business approach currently being adopted by organisations in industry and government that requires management to consider not only economic needs of shareholders, but also environmental and social needs of other stakeholders. It has been argued that the adoption of the corporate sustainability business approach is the opportunity for businesses to improve profitability, competitiveness, and market share without compromising resources for future generations (Wilson, 2003). The present study examines corporate sustainability performance outcomes within the balanced scorecard framework. In particular, the study seeks to understand how the three lower level balanced scorecard perspectives may contribute to organisations achieving corporate sustainability outcomes. Corporate sustainability involves three main outcomes: performance on economic (financial), environmental and social issues (Carroll, 1991; Figge, Hahn, Schalteffer and Wagner, 2002). The theoretical model developed in Kaplan and Norton s (2004a) balanced scorecard argues for an indirect relationship between learning and growth and financial performance. Kaplan and Norton suggest that the relationship between learning and growth and financial performance is sequentially mediated firstly by the internal process and secondly, by the customer perspective; and that there may also be a direct association between the internal process and financial performance. Prior studies have produced mixed and inconclusive results because they have examined either the indirect association between the balanced scorecard perspectives and financial performance or the direct association between the internal process and financial performance. No previous study has empirically tested whether such balanced scorecard associations hold true for an organisation s social as well as environmental outcomes, rather than for financial outcomes alone. Therefore, further investigation is warranted to determine how the balanced scorecard perspectives interrelate with one another to produce sustainability and whether these associations differ according to whether the desired organisational outcome is financial, social or environmental. Finally, this study focuses on an examination of the indirect association between employee empowerment, organisational commitment and human resource management (which have been identified as components of human capital within the learning and growth perspective) and each of the three corporate sustainability outcomes: economic (financial), environmental and social performance. More specifically, the study determines which dimensions of employee empowerment, organisational commitment and human resource management are most influential in describing the associations between the balanced scorecard perspectives and the associated corporate sustainability outcomes. iii

4 Three conceptual models were developed, one for each sustainability outcome variable (financial, social and environmental). Three structural equation models (SEM) were used to test the indirect and direct paths between the balanced scorecard perspectives and the three corporate sustainability performance outcomes. The results suggest that, although the overall model fit was not good for any of the three SEM models, some significant paths exist for each component of human capital. In all three SEM models, there was one significant path between autonomy (a dimension of empowerment) and each corporate sustainability dependent variable (financial, social and environmental performance). This path was indirect, mediated by first, the internal process and second, the customer perspective. Similarly, in all three SEM models, there was also one significant path between affective commitment (a dimension of organisational commitment) and financial, social and environmental performance, mediated by first, the internal process and second, the customer perspective. Also, in all three SEM models there was one significant path between training (a dimension of human resource management) and financial, social and environmental performance, mediated by first, the internal process and second, the customer perspective. In addition, significant direct paths were found in the association between the internal process perspective and each of the three dependent variables (financial, social and environmental performance) within each of these three SEM models described above. Three alternative SEM models using only the significant structural paths were subsequently constructed. One model was constructed for each corporate sustainability outcome. The overall model fit of each alternate SEM model was a good fit. Based on the results, this study is expected to contribute to the literature by providing evidence that specific dimensions of human capital components are key factors influencing an organisation s ability to enhance its performance in each of the three arms of corporate sustainability: financial, social and environmental performance. In particular, the major dimensions of the components of human capital that are significantly associated with sustainability balanced scorecard outcomes are autonomy, affective commitment and training. These results also have implications for managerial practice as organisations that strive to enhance their corporate sustainability performance may achieve more success by focussing on developing their employees autonomy, affective commitment and training. The findings for the specific dimensions of each human capital component within the alternative models has implications for future research about which specific variables need to be examined when developing future sustainability balanced scorecard models. iv

5 Table of Contents Chapter Subject Page Keywords ii Abstract iii Table of Contents v List of Figures x List of Tables xii Statement of Original Authorship xiv Acknowledgements xv Chapter 1 Introduction Motivation and Aims of the Study Research Questions An Overview of the Study Contributions of the Study Organisation of the Study 11 Chapter 2 Literature Review Introduction Intangibles Resource-Based View of the Firm The Balanced Scorecard Intellectual Capital and the Balanced Scorecard Learning and Growth Perspective Corporate Sustainability Stakeholder Theory Measuring Organisational Performance Prior Studies Examining the Role of Human Capital in Corporate 31 Sustainability Outcomes The Association Between Human Capital and Financial 31 Performance The Association between Human Capital and Corporate Social 39 Responsibility The Association between Human Capital and Environmental 41 Performance 2.5 Chapter Summary 43 Chapter 3 Theoretical model and proposition development Introduction Background to Research Problems Research Problems Research Questions Overall Theoretical Model and Proposition Development Human Capital Employee Empowerment 56 v

6 Chapter Subject Page Organisational Commitment Human Resource Management Corporate Sustainability Outcomes Theoretical Model of Human Capital and Financial Performance 59 - Model One Employee Empowerment and Financial Performance The Theoretical Sequential Effects within a Balanced Scorecard 62 Model Empirical Evidence of the Sequential Effects within Balanced 63 Scorecard Models Organisational Commitment and Financial Performance Human Resource Management and Financial Performance Internal Processes and Financial Performance Theoretical Model of Human Capital and Corporate Social 68 Responsibility - Model Two Employee Empowerment and Corporate Social Responsibility 70 Performance Empirical Evidence of Sequential Effects within a Balanced 71 Scorecard Model Organisational Commitment and Corporate Social Responsibility 72 Performance Human resource management and Corporate Social 73 Responsibility Performance Internal Processes and Corporate Social Responsibility 75 Performance 3.7 Theoretical Model of Human Capital and Environmental 78 Performance - Model Three Employee Empowerment and Environmental performance Organisational commitment and Environmental performance Human resource management and Environmental performance Internal Processes and Environmental Performance Chapter Summary 85 Chapter 4 Research Method Introduction Rationale for the Research Method Sample Selection Participants Demographic Data of Participants Testing for Bias within the Sample Survey Administration Response Rate 93 vi

7 Chapter Subject Page Non-Response Bias Survey Design Pilot Study Inclusion of Pilot Study Feedback into Final Questionnaire Instrument Components and Tests Reliability and Validity Common Method Bias Variable Measurement and Tests Human Resource Management Measures Psychological Empowerment Measures Organisational Commitment Measures Measures for the Remaining Three Traditional Balanced 118 Scorecard Perspectives Measures for the Two Perspectives of the Sustainability 125 Balanced Scorecard 4.8 Summary 131 Chapter 5 Results Introduction The Structural Path Model: Rationale and Advantages Results for the Full Model One: Financial Performance 136 Correlation Matrix Empowerment and Financial Performance: 141 Proposition Organisational Commitment and Financial Performance: 143 Proposition Human Resource Management and Financial Performance: 144 Proposition Internal Process and Financial Performance: 145 Proposition Summary of results for Propositions 1 to Results for the full Model Two: Corporate Social Responsibility 147 Performance Empowerment and Corporate Social Responsibility Performance: 150 Proposition Organisational Commitment and Corporate Social 152 Responsibility: Proposition Human Resource Management and Corporate Social 153 Responsibility Performance: Proposition Internal Process and Corporate Social Responsibility 154 Performance: Proposition Summary of results for Propositions 5 to vii

8 Chapter Subject Page 5.4 Results for the Full Model Three: Environmental Performance Empowerment and Environmental Performance: 158 Proposition Organisational Commitment and Environmental Performance: 160 Proposition Human Resource Management and Environmental Performance: 161 Proposition Internal Process and Environmental Performance: 162 Proposition Summary of Results for Propositions 9 to Summary of the Results for the Three Alternate Models The Parsimonious Models Using Significant Structural Paths: 165 Alternate Model One Financial Performance Alternate Model One: Goodness of Fit Analysis Autonomy and Internal Process Affective Commitment and Internal Process Training and Internal Process Internal Process and the Customer Perspective Results of Customer Perspective and the Financial Performance 169 Perspective Results of Internal Process and Financial performance Alternate Model Two Corporate Social Responsibility 170 Performance Alternate Model Two Goodness of fit Analysis Internal Process and the Customer Perspective Customer Perspective and Corporate Social Responsibility 173 Performance Internal Process and Corporate Social Responsibility 173 Performance 5.8 Alternate Model Three Environmental Performance Alternate Model Three Goodness of fit Analysis Results of Customer Perspective on Environmental Performance Results of Internal Process on Environmental Performance Summary of Results of the Alternate Models Conclusion 177 Chapter 6 Discussion, Limitations and Conclusions Introduction Summary of the Results of the Full Models Summary of Results for Model One Summary of Results for Model Two Summary of Results for Model Three 187 viii

9 Chapter Subject Page 6.2 Summary of the Results for the Alternate Models Alternate Model One Alternate Model Two Alternate Model Three Implications for Theory and Practice Research Implications Implications Related to the First Aim Implications Related to the Second Aim Implications Related to the Third Aim Implications for Practice Limitations and Future Research Limitations Future Research Conclusions 203 References 205 Appendix A: Stakeholder Groups and their Contributions and 224 Interests Appendix B: Human Capital, Information Capital, and 225 Organisational Capital Appendix C: Thesis Survey Instrument 229 Appendix D: Pearsons Correlation Matrix 237 ix

10 List of Figures Figure Subject Page Figure 1.1 Figure 2.1 Figure 2.2 Model of the Sustainability Balanced Scorecard with the Three Corporate Sustainability Performance Dependent Variables The Balanced Scorecard Framework Associations between Each of the Four Perspectives The Balanced Scorecard Framework Connecting the Four Perspectives and expanding the Learning and Growth Perspective Figure 3.1 The Overall Theoretical Model for the Sustainability Balanced 54 Scorecard Figure 3.2 Human Capital and Financial Performance 61 Figure 3.3 Internal Processes to Customer Value 62 Figure 3.4 Human Capital and Corporate Social Responsibility 69 Figure 3.5 Human Capital and Environmental Performance 79 Figure 4.1 Confirmatory Factor Analysis: 2 nd Order Human Resource Management (HRM) Measurement Model 103 Figure 4.1(a) Figure 4.2 Figure 4.2(a) Figure 4.2(b) Figure 4.2(c) Figure 4.2(d) Figure 4.3 Figure 4.4 Figure 4.5 Figure 4.6 Figure 4.7 Figure 4.8 Confirmatory Factor Analysis: 1st Order HRM Measurement Model Confirmatory Factor Analysis: 2 nd Order Empowerment Measurement Model Confirmatory Factor Analysis: 1 st Order Competence Measurement Model Confirmatory Factor Analysis: 1 st Order Meaningfulness Measurement Model Confirmatory Factor Analysis: 1 st Order Influence Measurement Model Confirmatory Factor Analysis: 1 st Order Autonomy Measurement Model Confirmatory Factor Analysis: 1 st Order Affective Commitment Measurement Model Confirmatory Factor Analysis: 1 st Order Continuance Commitment Measurement Model Confirmatory Factor Analysis: Internal Process Perspective Measurement Model Confirmatory Factor Analysis: Customer Perspective Measurement Model Confirmatory Factor Analysis: Financial Performance Perspective Measurement Model Confirmatory Factor Analysis: Corporate Social Responsibility Performance Measurement Model x

11 Figure Subject Page Figure 4.9 Figure 5.1 Figure 5.2 Figure 5.3 Figure 5.4 Figure 5.5 Figure 5.6 Confirmatory Factor Analysis: Environmental Performance Perspective Measurement Model Model 1. The Overall Structural Equation Model with Financial Performance as the Dependent Variable. (The significant paths and their coefficients are shown) Model 2. The Overall Structural Equation Model with Corporate Social Responsibility Performance as the Dependent Variable Model Three. The Overall Structural Equation Model with Environmental Performance as the Dependent Variable Alternate Model One - Significant Structural Paths using Financial Performance as the Dependent Variable Alternate Model Two - Significant Structural Paths using Corporate Social Responsibility as the Dependent Variable Alternate Model Three - Significant Structural Paths using Environmental Performance as the Dependent Variable xi

12 List of Tables Table Subject Page Table 4.1 Summary of Participants Demographic Data 91 Table 4.2 Participants Response Rates 94 Table 4.3 Rotated Component Matrix a for Human Resource Management 102 Table 4.4 Confirmatory Factor Analysis Human Resource Management (HRM) 105 Measurement Model Statistics Table 4.5 Confirmatory Factor Analysis Goodness of Fit for the Human 105 Resource Management (HRM) Measurement Model Table 4.6 Rotated Component Matrix a for Employee Empowerment 109 Table 4.7 Confirmatory Factor Analysis Empowerment Measurement Model 111 Statistics Table 4.8 Confirmatory Factor Analysis: Goodness of Fit for the Empowerment 112 Measurement Models Table 4.9 Rotated Component Matrix a for Organisational Commitment 114 Table 4.10 Confirmatory Factor Analysis Affective Commitment Measurement 116 Model Statistics Table 4.11 Confirmatory Factor Analysis Continuance Commitment 117 Measurement Model Statistics Table 4.12 Confirmatory Factor Analysis: Commitment Measurement Models 118 Table 4.13 Rotated Component Matrix a for the three BSC perspectives 121 Table 4.14 Confirmatory Factor Analysis Internal Process Perspective 123 Measurement Model Statistics Table 4.15 Confirmatory Factor Analysis Customer Perspective Measurement 123 Model Statistics Table 4.16 Confirmatory Factor Analysis Financial Performance Perspective 123 Measurement Model Statistics Table 4.17 Confirmatory Factor Analysis for the Measurement Models for 125 Internal Process, Customer Perspective and Financial performance. Table 4.18 Rotated Component Matrix for Social Responsibility 127 Table 4.19 Confirmatory Factor Analysis Corporate Social Responsibility 128 Performance Perspective Measurement Model Statistics Table 4.20 Rotated Component Matrix for Environmental Performance 129 Indicators 23 Table 4.21 Confirmatory Factor Analysis Environmental Performance 130 Perspective Measurement Model Statistics Table 4.22 Confirmatory Factor Analysis for the Corporate Social Responsibility 131 and Environmental Measurement Models Table 5.1 Model Fit Summary for Model One Financial Performance 140 Table 5.2 The Results for Model One: The Structural Paths Between Empowerment, Commitment and Human Resource Management and Internal Process, Customer Perspective and Financial Performance 143 xii

13 Table Subject Page Table 5.3 Model Fit Summary for Model Two - Corporate Social Responsibility Performance 150 Table 5.4 The Significant Structural Paths for Model Two, Corporate Social 152 Responsibility Performance Table 5.5 Model Fit Summary for Model Three - Environmental Performance 158 Table 5.6 The Significant Structural Paths for Model Three, Environmental 160 Performance Table 5.7 Results for the SEM Fit for Alternate Model One Financial 167 Performance Table 5.8 Results for Alternate Model One: the Structural Paths between Human 168 Capital, Internal Process, Customer Perspective and Financial Performance. Table 5.9 Results for the SEM Fit for Alternate Model Two Corporate Social 171 Responsibility Performance Table 5.10 Results for Alternate Model Two - The Structural Paths between Internal 172 Process, Customer Perspective and Corporate Social Responsibility Performance Table 5.11 Results for the SEM Fit for Alternate Model Three Environmental 174 Performance Table 5.12 Results for the Structural Paths between Internal Process, Customer 175 Perspective and Environmental Performance Table 6.1 Results for Model One (Full Model) 182 Table 6.2 Results for Model Two (Full Model) 185 Table 6.3 Results for Model Three (Full Model) 187 xiii

14 Statement of Original Authorship The work contained in this thesis has not been previously submitted to meet requirements for an award at this or any other higher education institution. To the best of my knowledge and belief, the thesis contains no material previously published or written by another person except where due reference is made. Signature: Date: 14 February, 2011 xiv

15 Acknowledgments I would like to acknowledge the invaluable assistance and advice provided by my two supervisors. Without their guidance, this thesis would not have been a meaningful and purposeful piece of research. Firstly, my greatest thanks go to my principal supervisor, Associate Professor John Sands, who not only advised and guided my efforts, but also guided and groomed me towards developing a successful career as an academic. Also, I would like to thank him for all of his unfailing encouragement and support. Secondly, my earnest thanks go to my co-supervisor, Professor Gadenne, who provided his insightful comments, and whose employment of the English language is indeed a work of genius. I am grateful to Associate Professor John Sands and Professor Gadenne for their willingness to accept these supervisory roles and, despite their heavy workloads, the hours that they devoted to reading and guiding my efforts. Also, I wish to thank my original supervisors, Professor Jenny Stewart and Professor Nava Subramaniam from Griffith University, who assisted and guided my PhD efforts pertaining to my first research topic. The successful completion of my doctoral program has been possible with the help of many individuals and organisations. Firstly, I wish to thank the managers who participated by voluntarily providing their responses to my large and time-consuming survey. The responses of these managers of Australian businesses have provided substantial information that will be useful for analysis and may provide insight into many areas of business management. Secondly, I wish to thank the staff of the Faculty of Business, University of the Sunshine Coast for their financial and administrative support in the production of my thesis. Thirdly, I am grateful for my APA scholarship, and I wish to initially thank Department of Accounting, Finance and Economics, Griffith University, and I also wish to thank the Faculty of Business, University of the Sunshine Coast for awarding me such a coveted scholarship. I thank the Department of Education and Training and for allocating such scholarships, which provide extremely beneficial financial support to doctoral students. Finally, I wish to thank my husband, mother and father for their enduring love and support, which has assisted me with completing my PhD. I particularly wish to thank my husband, whose penchant for housework, cooking and child-raising during my thesis production is the sole reason for my timely completion of the PhD project. I also wish to thank my children, Justin, Juliette and Charlie whose understanding of my absence is very much appreciated; particularly Justin, whose assistance with minding the other two children was awesome. xv

16 CHAPTER 1 INTRODUCTION 1.0 Introduction As organisations strive for a more sustainable future, it is becoming increasingly important that they have appropriate managerial tools to assist in tracking and enhancing their performance. Performance measurement tools such as a sustainability balanced scorecard may help organisations to realise the benefits of developing and maintaining a green performance agenda (Presley and Meade, 2010). Within this context, sustainability practices would be expected to add value and enhance the long-term survival prospects of organisations (Jensen, 2001; Perrini and Tencati, 2006). A model of corporate sustainability, which combines economic prosperity, social responsibility and environmental protection, is consistent with the corporate objective of long-term value creation, indicating a need for new sustainability accounting systems (Perrini and Tencati, 2006). The balanced scorecard is developed to enhance an organisation s competitive positioning and strategy implementation (Kaplan and Norton, 2001b). Similarly, a sustainability balanced scorecard must also include the necessary steps to inculcate a sustainability-awareness throughout the whole organisation, so that organisational members would act according to its corporate social responsibility agenda (Leon-Soriano Munoz- Torres & Chalmeta-Rosalen, 2009). To better understand the role that business plays in enhancing corporate sustainability, it is important to reflect on connections between sustainable development and the balanced scorecard (Moller and Schaltegger, 2006). Hubbard (2009) favours an approach that builds on the well established traditional balanced 1

17 scorecard perspectives where corporate sustainability is captured using two separate and additional social and environmental perspectives. These two new social and environmental perspectives may, perhaps, be best incorporated within the existing balanced scorecard framework as outcome perspectives, so that they produce a Sustainable Balanced Scorecard model that integrates the triple bottom line and balanced scorecard frameworks. Others discuss how some organisations include two additional perspectives to measure their scorecard s performance: one for corporate social responsibility and the other for environmental outcomes (Horngren, Datar, Foster, Rajan, Ittner, Wynder, Maguire, & Tan, 2011). Managers who aspire to develop their sustainability balanced scorecards from conventional balanced scorecards may have to revamp many of their strategy maps and indicators. The financial perspective that described outcomes in conventional financial terms would subsequently need to be modified to inculcate the relevant corporate sustainability issues within the perspectives so that they could be linked to the outcomes of the additional social and environmental perspectives. Hahn and Wagner (2001) suggest that the starting point for developing a sustainability balanced scorecard is to identify adequate, appropriate indicators related to performance drivers within each perspective, so that the sustainability balanced scorecard can be implemented in an evolutionary process starting with conventional design patterns. However, there is a general lack of research in advancing the role of performance measurement systems that are designed to account for, and to motivate employees to achieve, an organisation s social and environmental performance outcomes. There is a need to examine which sustainability factors are perceived to be relevant for Australian businesses, particularly in relation to their business processes. Knowledge of which factors motivate business practice in relation to sustainability activities will inform academia and practice 2

18 about the linkages between sustainability balanced scorecard perspectives, and subsequently, assist in the development of sustainability balanced scorecards. In this study, a framework is developed to help identify factors within the traditional, well accepted balanced scorecard perspectives and their association with the three sustainability balanced scorecard outcomes: financial performance, social responsibility performance, and environmental performance. 1.1 Motivation and aims of the Study Prior to the late 1980s, many organisations operated in a stable business environment. However, during the past two decades, improvements in technology have caused increased competition and globalisation of the market for most organisations. This increased competition means that organisations need to respond to such pressures by focussing on key factors that contribute to developing successful organisational outcomes, which provided the impetus for the development of Kaplan and Norton s balanced scorecard. In particular, there is an emphasis for these measures to focus more detail on understanding the learning and growth perspective of the balanced scorecard framework (Kaplan and Norton, 1996a; 2001a). In their more recent works, Kaplan and Norton (2004a; 2004b) conceptualise the learning and growth perspective as comprising intangible assets that constitute a relatively large portion of the overall intangible assets of the firm, and which drive, sequentially, the remaining balanced scorecard perspectives. In addition, Kaplan and Norton (2001b) have identified a direct association between internal process 1 and financial performance within the balanced scorecard framework. However, there is little empirical research about the impact of 1 The term internal process perspective is used throughout this thesis because it is the term that is used by Kaplan and Norton in their 2004 book, Strategy Maps which coincides with the first instances where the learning and growth perspective was conceptualised as human capital (for example, see pg. 21). In Kaplan and Norton (1996b), the term internal business process perspective was previously used. In their 2001b book, The Strategy focused organization, the term Internal perspective was used, but was not associated with human capital. 3

19 intangible assets (within the learning and growth perspective) on these sequential balanced scorecard perspectives. Much of the research literature based on the intellectual capital model, examining the association between human capital and financial performance relates only to the direct association between these variables; and provides conflicting results. For example, studies by Hitt, Bierman, Shimizu and Kochhar (2001), Bassi, Ludwig, McMurrer and Van Buren (2002) and Lopez (2003) found a positive association between human capital and financial performance, whereas Sáenz (2005) found no direct association, and Cater and Cater (2009) found only partial support for the association. These mixed results may infer that there are likely to be additional indirect variables, which more fully explain the relationship. The balanced scorecard framework postulates that indirect variables exist between human capital and financial performance through first, the internal process and second, the customer perspective (Kaplan and Norton, 2004a). In addition, Kaplan and Norton (2001b) have identified a direct association between internal process and financial performance within the balanced scorecard framework. Accordingly, the first aim of this study is to use the existing theoretical sequential linkage between the balanced scorecard perspectives to investigate the direct and indirect associations between human capital and organisational performance. It is interesting to investigate the indirect association between human capital and organisation performance within a balanced scorecard framework because the balanced scorecard provides a customised, yet structured performance measurement system that contains a performance management system embedded within it. Through its measurement and management systems, the balanced scorecard provides organisations with tools that may enhance their success in today s competitive environment. Prior research has empirically examined the relationship between human capital and financial performance. However, very little research has examined whether the components 4

20 of human capital are associated with corporate social responsibility and environmental performance using a sustainability balanced scorecard approach. At the time of writing, no study had considered the use of the theoretical sequential linkage between the balanced scorecard perspectives proposed by Kaplan and Norton (1996, 2001b, 2004a; 2004b) to develop a sustainability balanced scorecard framework. Accordingly, the second aim of this study is to use the theoretical sequential linkage between the balanced scorecard perspectives to develop a sustainability balanced scorecard model, and investigate whether this sequential linkage exists between the components of human capital, the traditional balanced scorecard perspectives, and financial, corporate social responsibility and environmental performance. In previous research that has empirically examined human capital, a very limited number of indicators have been used to measure the components of human capital. The construct of human capital is extensive by nature, and failure to capture the scope of its components and their dimensions is likely to mean that the variables measurement is underspecified. As it is one of the most influential components of intellectual capital, further study of human capital is warranted to gain an in-depth understanding of the nature of the construct. Accordingly, the third aim of this study is to identify which dimensions of the human capital components of the learning and growth perspective are associated with the other perspectives of the sustainability balanced scorecard framework. In addition to aim of examining the association between human capital and the remaining balanced scorecard perspectives, the current study acknowledges that the balanced scorecard may be a useful tool for organisations to use to measure and manage their corporate sustainability performance. As more attention is placed on organisational activities related to their corporate sustainability performance, organisations need to develop and report to stakeholders measures of their organisational performance. Apart from financial performance, more organisations are now reporting on the two other aspects of corporate 5

21 sustainability: social responsibility performance and environmental performance (Carroll, 1991; Figge et al., 2002). Two main reasons suggested for corporate disclosure on corporate social responsibility and environmental issues are legitimacy theory and managerial stakeholder theory (Chen and Roberts, 2010; Deegan, 2002; Deegan, Rankin and Tobin, 2002; Milne and Patten, 2002). The two theories are traditionally distinguished based on the audience to whom the disclosures are directed. Legitimacy theory focuses on legitimising organisational actions to society, whereas stakeholder theory focuses on reporting corporate actions in accordance with the needs and power of its separate stakeholder groups (Ullmann, 1985). A brief summary of stakeholder groups that may influence organisations are listed in Appendix A. Despite an increase in organisational reporting of corporate sustainability, to date, no generic parsimonious theoretical framework has been developed. Thus, the study s overall aims are to provide empirical evidence for an effective sustainable performance measurement and strategic management system for corporations. Performance measurement systems, such as the balanced scorecard are posited to be initiated by the learning and growth perspective of the Balanced Scorecard. Such performance measurement systems are considered by Kaplan and Norton (1996b) to be an important way for an organisation to measure and align its organisational resources to enhance the performance of their strategic goals. The scope of the present study is to extend the measurement of traditional balanced scorecard outcomes to include corporate social responsibility outcomes, within a broader balanced scorecard framework known as the Sustainability Balanced Scorecard (see Figge, Hahn, Schalteffer & Wagner, 2002). 1.2 Research Questions The present study examines corporate sustainability within the balanced scorecard framework. The theoretical model developed in Kaplan and Norton s (1996b; 2004b) 6

22 balanced scorecard argues for an indirect relationship between the learning and growth perspective and financial performance. Kaplan and Norton suggest that the relationship between the learning and growth perspective and financial performance is mediated by internal processes and the customer perspective. In addition, they also suggest that there is a direct association between the internal process perspective and financial performance (2004b). Kaplan and Norton (2004a) argue that the learning and growth perspective is foundational to the balanced scorecard model, and determines the effectiveness of achieving balanced scorecard outcomes. Human capital is one of the three capitals in the learning and growth perspective identified by Kaplan and Norton (2004a) 2, and as it is likely to make the greatest contribution to the learning and growth perspective (Tadic, 2010), it is the main focus of this study. The main components of human capital have been identified in the literature as employees psychological empowerment, organisational commitment and human resource management (Burr and Girardi 2002; Huselid 1995); and are therefore the focus for this study. 2 According to Kaplan and Norton (2004a), the other two main 'capitals' of the learning and growth perspective are information capital and organisational capital 7

23 From the discussion provided in sections 1.0, 1.1 and the discussion above, the following three research questions have been developed for examination in this study. Research Question 1: Research Question 2: Research Question 3: Are the direct and/or indirect associations between components of human capital and financial performance outcomes mediated through the balanced scorecard perspectives (within the traditional balanced scorecard)? Are there direct and/or indirect associations between components of human capital and the two other sustainability balanced scorecard outcomes: corporate social responsibility and environmental performance (within the sustainability balanced scorecard)? Which key dimensions of human capital s components are associated with the three separate corporate sustainability outcomes (financial, social and environmental)? 1.3 An Overview of the Study The key focus of the thesis is to examine the effect of human capital on an organisation s financial, social responsibility and environmental performance within the context of a sustainability balanced scorecard framework. To investigate the association between the sustainability balanced scorecard perspectives more fully, this study will examine three components of human capital, together with the multiple dimensions of each human capital component. Therefore, it will be possible to identify which dimensions of each human capital component selected for this study contribute to the sequential perspectives of a sustainability balanced scorecard. There are three distinct models developed for the present study, based on one overall conceptual model, and which are tested using three structural equation models. The conceptual model is described and illustrated in Figure

24 Figure 1.1 Model of the sustainability balanced scorecard with the three corporate sustainability performance variables. Human capital components of Learning and Growth Three Corporate Sustainability outcomes 1. Employee Empowerment 2. Organisational commitment 3. Human Resource Management Internal process perspective Customer perspective 1. Financial 2. Corporate Social Responsibility 3. Environmental Each of these three structural equation models (SEMs) assess the sequential association between the balanced scorecard perspectives and each one of the outcome variables related to corporate sustainability 3. These outcome variables are financial performance (SEM Model 1), corporate social responsibility performance (SEM Model 2) and environmental performance (SEM Model 3). 1.4 Contributions of the Study It is considered that examining the association between the learning and growth perspective and other perspectives of the balanced scorecard will make a contribution to an understanding of its application within the context of corporate sustainability. Kaplan and Norton have consistently suggested that the learning and growth perspective is the 3 Terms and definitions used for Corporate Sustainability. It is important to note that within the stakeholder and corporate social responsibility literature, there have been various terms used to define these three aspects of organisational outcomes. These three aspects describe the types of outcomes that stakeholders desire to see evidenced by organisations. These have been referred to as corporate social responsibility (Carroll, 1991; Figge et al. 2002; McWilliam & Seigal, 2001), corporate sustainability (Marrewijk, 2003) as well as triple bottom line performance and reporting (Isaaksson and Steimle, 2009). For the present study, the term Corporate Sustainability is used to describe these abovementioned three organisational outcomes. Therefore, the term Corporate Social Responsibility, within the context of the present study, refers to a variable that is composed of strictly the social component of the three aspects of corporate sustainability. The remaining two organisational outcomes described by the term corporate sustainability will be referred to as financial performance and environmental performance. 9

25 foundational perspective of the balanced scorecard, and as such, is worthy of detailed investigation into its associations with the remaining perspectives. Kaplan and Norton s (2004a; 2004b) proposed framework of learning and growth, (incorporating the elements of human capital, information capital, and organisational capital) has not yet been systematically investigated, to assess whether it is truly integral to the new balanced scorecard model. More specifically, there is little empirical evidence on whether the level of psychological empowerment, organisational commitment and human resource management, is associated directly or indirectly (through the internal process perspective), with organisational financial performance. Furthermore, no studies to date have examined whether these components of human capital are associated with corporate sustainability outcomes. Since the learning and growth perspective is suggested to be the foundational perspective of the balanced scorecard, detailed examination of how the learning and growth perspective may be associated with corporate sustainability performance may enhance understanding of the role of the balanced scorecard perspectives. Therefore, the current study will examine whether the selected components of human capital are associated with balanced scorecard performance. Using a sustainability balanced scorecard framework, the present study will focus separately on financial performance, corporate social responsibility performance and environmental performance outcomes as dependent variables. The present research contributes to the social and environmental accounting literature (Chalmeta and Palomero, 2011; Dias-Sardinha, and Reijnders, 2005) because it provides insights into which dimensions of the components of human capital are significantly associated with the remaining sustainability balanced scorecard perspectives. This is achieved through a path model that is developed for each of the three corporate sustainability outcomes 10

26 (financial, social and environmental) that better explains the direction and linkages between perspectives. There is limited published research on these perspectives of the sustainability balanced scorecard (Islam and Deegan, 2010). The results of the current study will reveal the linkages between the components of human capital and the traditional balanced scorecard perspectives. In addition, the results will show the linkages between the human capital components, the internal process, the customer perspective and social as well as environmental performance. the knowledge gained from the results of the current study assists development of the literature about factors that influence corporate sustainability outcomes, and may also assist organisations to develop systems and procedures that enhance the components of human capital in areas that will generate greater corporate sustainability performance. 1.5 Organisation of the Study This chapter provided an introduction to the current study. The remainder of this thesis is organised in the following manner. Chapter Two reviews literature related to stakeholder theory, human capital, and social responsibility, and environmental issues. The salient components of human capital are identified as psychological empowerment, organisational commitment and human resource management. In Chapter Three, the research problems and questions are used as a basis to develop an overall theoretical model, and three separate models; one for each of the organisational outcomes described by the term corporate sustainability within the sustainability balanced scorecard framework. Chapter Four provides the rationale for the selection of a paper-based survey for the study. Furthermore, this chapter provides a discussion about the method used to select a random sample of Australian companies and a justification for choosing the targeted respondents. This is followed by a 11

27 description of the development and administration of the survey; measures used to operationalise the variables; and a justification for their choice. The fourth chapter concludes with the presentation and discussion of results of (1) the confirmatory factor analysis using structural equation modelling (measurement model), and (2) reliability and validity for each instrument used to measure variables in this research. Discussions are provided in Chapter Five about these techniques, their underlying assumptions, as well as the advantages and limitations of the path analysis. Additionally, results are provided for each analysis and the findings for each proposition are summarised. Chapter Six briefly discusses the results reported in Chapter Five, and presents implications for future research and practice and the limitations of the study. Finally, conclusions about the current research are drawn, including a discussion concerning how the objectives of this study were met and the contribution of the findings. 12

28 CHAPTER 2 LITERATURE REVIEW 2.0 Introduction The first objective of this chapter is to review the literature on the balanced scorecard. More specifically, this chapter will examine, in depth, the literature addressing the learning and growth perspective s contribution to the balanced scorecard. Kaplan and Norton (2004a; 2004c) refer to human capital, information capital and organisational capital as categories of learning and growth. Human capital, information capital and organisational capital, therefore, are described in this chapter to identify their role in the learning and growth perspective. This chapter will then focus on human capital (a type of intangible asset), as the most influential category within the learning and growth perspective. The purpose of this narrower focus is to reduce the scope of the model to components that are measurable, testable and have been validated through use in past accounting research. The second objective of this chapter is to review the literature on how the intangible assets of the learning and growth perspective contribute to an organisation achieving greater corporate sustainability outcomes. Corporate sustainability refers to three aspects of an organisation s performance: economic (financial), environmental and social performance (Figge et al., 2002). The corporate sustainability literature will be reviewed to examine the ways in which the learning and growth perspective has been found, so far, to contribute to enhancing the financial, social and environmental aspects of corporate sustainability. For the purpose of this thesis, an organisation s social performance refers to the narrower view of corporate social responsibility, involving mainly the social and community engagement 13

29 aspects of organisational performance; while corporate sustainability refers to the broader focus of environmental, social and financial performance. Therefore, the literature review will be focus on both the financial performance literature and the environmental and social performance dimensions of the corporate sustainability literature. 2.1 Intangibles In today's fast changing business environment, a primary way to create a competitive advantage is by managing intangibles (Seggie, Cavusgil & Phelan, 2007). An abundance of definitions exist for intangibles, which may be useful as they encompass an exhaustive list of terms, but perhaps confusing in that there may be little or no consensus (Kristandl and Bontis, 2007). The main terms related to intangibles include the following concepts: intangible assets, intellectual capital, intellectual property, knowledge capital and knowledge-based assets (Kristandl and Bontis, 2007). Although intangible assets have always been present, it is evident that there is a need for companies to record the value of assets that could not be accounted for by simply valuing the physical assets present within a company. The first recorded mention of intangible assets was in 1896 by Lawrence R. Dicksee (Wu, 2005). Since then, it has become increasingly important to disclose information related to intangible assets (Bontis, 2003) Resource Based View of the Firm One of the fundamental problems experienced by researchers investigating attributes of intangibles (and their related concepts; intangible assets and intellectual capital) is the lack of common terminology. As yet, there appears to be no mutually agreed definition of intangibles (Sveiby, 1997; Bontis et al. 1999; Andriessen, 2004). The company, along with its strategic resources, is the setting for the existence of intangibles. Since strategic resources are a subset of a company s resource portfolio (Wade & Hulland, 2004), this resource focus 14