Publication in European Accounting Review on the interaction of formal and informal controlling as a driver of eco-innovation

The state of the ecological planetary boundaries of our planet advise firms to engage in environmental management. In today's more environmentally conscious world, businesses are increasingly pressured to develop eco-innovations that align with stakeholder demands and solve our environmental problems. However, achieving these innovations is not straightforward. The recent study of the Chair of Business Administration, esp. Management Accounting and Control “Exploring the Duality of Formal and Informal Controls in Driving Eco-Innovations”, published in the reputational European Accounting Review, sheds light on the complex relationship between stakeholder pressure and eco-innovation, focusing on how management controls—both formal and informal—can be effectively utilized to meet these challenges.

The Research Methodology
The authors conducted an empirical study involving 301 German firms across various industries. Based on the natural resource-based view, the paper explores how formal and informal environmental management control systems (EMCSs) mediate the relationship between perceived stakeholder pressure and eco-innovation. Formal controls, such as structured guidelines and policies, help in goal-setting and enforcement. However, informal controls, which rely on shared norms and intrinsic motivation, are crucial for fostering creativity and environmental commitment. The findings reveal that an increase in stakeholder pressure prompts firms to emphasize both types of controls, which, in turn, leads to a higher level of eco-innovation. Both, formal and informal controls partially mediate the direct relationship.

Key Takeaways and Practical Implications
The study unveils that EMCSs play a pivotal role in the process of translating external pressures into eco-innovations. Interestingly, while both formal and informal controls are effective, they do not interact or conflict with each other in the process, contrary to some earlier studies. This indicates that firms need to strike a balance between these controls, tailoring their approach to the unique demands of their organization.

For practitioners, this means recognizing the driving force of stakeholder pressure and implementing comprehensive management controls to channel this pressure into eco-innovations. Managers should be aware that both formal and informal controls have distinct roles within the firm. Formal controls should be used to clearly define goals and to monitor goal achievment, while informal controls can foster a culture of creativity and shared environmental values.

Contributions to the Literature
The study makes several contributions to the fields of accounting, environmental management, and general management. First, it offers a holistic view of EMCSs by integrating both formal and informal controls, reflecting the complex reality of organizational control systems. Second, it highlights the critical role of management controls in fostering sustainable development and achieving competitive advantage through eco-innovation. Third, our quantitative examination of formal and informal EMCSs expands on previous qualitative research, providing a more nuanced understanding of how these controls function in practice.

Full paper available here (open access):
Knels, V., Janka, M., & Guenther, T.W. (2024). Exploring the Duality of Formal and Informal Controls in Driving Eco-Innovations. European Accounting Review, https://doi.org/10.1080/09638180.2024.2400118