Management Control of Sustainability: Integrating Sustainability in a Performance Management System with Practical Examples from Philips

The paper highlights the growing need for sustainability reporting due to impending EU legislation and the increasing focus of chief executives on sustainability. It discusses the practical steps taken by Philips to integrate Environmental, Social, and Governance (ESG) factors into their performance management system. This includes incorporating ESG into Key Performance Indicators (KPIs), goal setting and cascading, performance review processes, and linking them to incentives. Philips uses a dashboard with Core KPIs, including ESG as a separate pillar with its dedicated KPIs, and employs an ESG index to manage a wide range of ESG metrics without overcomplicating the dashboard. Ensuring these goals and KPIs cascade through all organizational layers and are included in performance reviews is crucial. The paper emphasizes that the strength of a management control system in delivering ESG objectives lies in the comprehensive scope of controls, combining both formal and informal mechanisms.