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Corporate Social Responsibility and Environmental Management Corp. Soc. Responsib. Environ. Mgmt. (2010) Published online in Wiley InterScience (www.interscience.wiley.com) DOI: 10.1002/csr.240

Readability of Corporate Social Responsibility Communication in Malaysia Aishah Sheikh Abu Bakar and Rashid Ameer* University Teknologi MARA, Shah Alam, Selangor, Malaysia

ABSTRACT This study examines the readability of Corporate Social Responsibility (CSR) communication (disclosure) for a sample of listed companies in Malaysia. The study employs Readability Formulae and finds that the extent of syntactic complexity making it difficult to comprehend the CSR communication of the listed companies varies from very difficult to fairly difficult. There is a relationship between the readability of the CSR communication and companies’ performance. Our findings imply that management of poorly performing companies deliberately choose difficult language in CSR communication which supports the obfuscation hypothesis. Our study contributes significantly to research in CSR literature by enumerating the syntactical difficulties in the corporate annual CSR communications. Copyright © 2010 John Wiley & Sons, Ltd and ERP Environment. Received 22 January 2010; revised 24 March 2010; accepted 30 March 2010 Keywords: CSR; social responsibility communication; stakeholder engagement messages; disclosure; Malaysia

Introduction

T

HERE ARE THREE IMPORTANT ELEMENTS OF CORPORATE DISCLOSURE: CONTENT

(WHAT), TIMING (WHEN) AND presentation (how) (Courtis, 2004), the usefulness of which, depends upon their readability and understandability. Firms may manipulate the content and presentation of information in various ways, essentially using what is known as ‘impression management’ (Godfrey et al., 2003). Using this practice, firms can manipulate verbal information through the reading ease manipulation (e.g., to make the text difficult to read) or through the rhetorical manipulation method/practice (e.g., using persuasive language). The reading ease manipulation method is used with the intention to hide bad news, and given the fact that corporate disclosures attract much attention, there have been numerous studies on the reading ease of firms’ annual reports (Smith and Taffler, 1992b; Jones and Shoemaker, 1994; Courtis, 1998; Rutherford, 2003; Smith et al., 2006). This paper examines the readability of the Corporate Social Responsibility (CSR) communications of listed companies in Malaysia. A small number of studies (Nik Ahmad et al., 2003; Haron et al., 2006) have investigated CSR in Malaysia, finding the general level of CSR to be low, and the existence of a gap in stakeholder knowledge. The focus of the present study is the readability of the CSR disclosure in the annual report. Specifically, the study’s objectives are to enumerate the readability of the CSR disclosure, and to test the relationship between the readability of the CSR communications (disclosures) and companies’ performance.

Correspondence to: Rashid Ameer, University Teknologi MARA, Accounting Research Institute, Faculty of Accountancy, Menara SAAS, Shah Alam, Selangor, Malaysia 40450. E-mail: [email protected] Copyright © 2010 John Wiley & Sons, Ltd and ERP Environment

Electronic copy available at: http://ssrn.com/abstract=1572131

A. Sheikh Abu Bakar and R. Ameer

Theoretical Framework Agency Theory and the Concept of Readability Jensen and Meckling (1976) argued that there always exist conflicts of interest between the owners (principals) and their managers (agents) which result in agency costs, such as agency costs of equity and agency costs of debt. Thus, to mitigate this problem, any cost incurred in monitoring of managers’ activities and in bonding them are necessary (Morris, 1987). Furthermore, Morris (1987) stated that producing accounting reports, covenants in debt contracts, and management bonus plans geared to report profits are among the devices used in monitoring and bonding the managers (agents). Today, managers are required to produce more non-financial information, such as corporate governance, social, and environmental responsibility information. Disclosure of this information is required as it may present all the stakeholders with more detail for decision-making purposes. In turn, shareholders and other stakeholders will be able to better understand the environmental and social impact of a firm’s operations. However, management honesty and sincerity in the explanation of all aspects of firm performance are questionable, since there are conflicts of interest between owners and managers (Jensen and Meckling, 1976), which it is argued would not be solved even if everyone practised more altruism (Jensen, 1994). As an agent of the owners of a firm, management may be motivated to disclose information that only conveys positive performance and conceal negative information that might harm the firm’s performance. Consequently, information asymmetry can be seen to exist between management and the public. Indeed, Adelberg (1979) states, ‘management knowingly or unknowingly introduces an interpretive bias into annual reports and that it is plausible that some managers would obfuscate their failures and underscore their successes’ (p. 187). According to Merkl-Davies and Brennan (2000), managers’ motives can be classified into concealment and attribution. Concealment can be achieved in various ways, such as by (1) reading ease manipulation (i.e., making the text more difficult to read) or rhetorical manipulation (i.e., using persuasive language). Other ways to emphasize positive news can be seen in the manipulation of verbal and/or numerical information: (1) thematic manipulation by emphasizing positive words and themes, or emphasizing positive financial performance; (2) visual and structural manipulation by using visual emphasis or ordering of verbal/numerical information); and/or (3) performance comparisons by choosing benchmarks that portray current financial performance in the best possible light.

Signalling Theory Managers send signals to investors to reduce information asymmetry (Morris, 1987). According to Keasey and Short (1997), there are various possible actions that firms will take in order to signal their value to potential shareholders. The signal must be costly to be imitated by other firms. This theory is usually applied to corporate finance decisions such as dividend policy, but we argue that it could also be applied to the readability issue. Indeed, Rutherford (2003) contends that in the event of information asymmetry, firms with good performance will try to find ways of signalling the superiority of their performance such as by disclosing it in greater clarity, whereas, those firms with poor performance will obfuscate the bad information by using complex and difficult words.

Corporate Social Responsibility (CSR) CSR is essentially a concept relating to firms’ decisions to voluntarily contribute toward the development of a better society and a cleaner environment, and it has become increasingly important for firms to demonstrate their commitment to CSR in order to counteract the growing public scepticism caused by corporate wrongdoings (Birth et al., 2008). According to Sacconi (2004), CSR is a model of extended corporate governance whereby who runs a firm (entrepreneurs, directors, managers) have responsibilities that range from fulfilment of their fiduciary duties towards the owners to fulfilment of analogous fiduciary duties towards all the firm’s stakeholders (p. 6). Copyright © 2010 John Wiley & Sons, Ltd and ERP Environment

Corp. Soc. Responsib. Environ. Mgmt. (2010) DOI: 10.1002/csr

Electronic copy available at: http://ssrn.com/abstract=1572131

Readability of CSR communication in Malaysia CSR is not mandatory and is very subjective in nature. Hence, there are no universally accepted CSR models to be adopted by firms. Some organizations have developed their own framework based on the Global Reporting Initiatives (GRI) Sustainability Reporting Guidelines, which recommend that firms inform stakeholders of whatever CSR activities they undertake. Hooghiemstra (2000) noted that firms use CSR as a means to influence public perceptions. In addition, CSR acts as a tool in legitimizing a firm’s actions, and protecting and enhancing its reputation and image. Given the increasing importance attached to the protection of the environment by business, there is a widespread concern about how firms discharge their social responsibility, and it is no longer only the financial performance and position of firms that is of interest to readers of annual reports, but also the matter of how firms discharge their responsibilities toward society. Whilst CSR reports were originally voluntary disclosures, some countries such as France and Spain have made it mandatory to report in this way even though such mandatory regulations do not exist in the European Union (Birth et al., 2008). Likewise, in Malaysia, CSR disclosure has become an integral part of Bursa Malaysia’s listing requirement which states that all listed firms whose financial year ended on or after 31 December 2007, must disclose all the CSR activities undertaken by them or their subsidiaries, or if there are none, they must include a statement to that effect (Bursa Malaysia, 2010). In addition, the Institute of Corporate Responsibility of Malaysia (ICR, 2010) has objectives to promote sustainable development, and to initiate and embed CSR best practices among Malaysian companies that would provide a competitive edge.

Readability of CSR Communication As stated in the Concepts Statement No.1 of the FASB, in order to predict future cash flow, investors need information, which includes financial information (or non-narrative information such as Income Statement, Balance Sheet, etc.); and non-financial information such as the Corporate Governance and CSR reports. Milne and Chan (1999) show that analytical investors perceive CSR disclosure to be important in making investment decisions. And quantified social information (in monetary value), does, in some way, improve their decision-making. Most of the time, firms use electronic and printed media to inform the public about their CSR activities, and it is always done in written form. Baghi et al. (2008) argue that cause-related marketing (CRM) is a strategy that is used by companies to communicate a company’s CSR and to improve brand image. In two experiments, they investigated how much vivid messaging might increase the effectiveness of CRM strategy. They argue that a vivid description of the cause could influence consumers’ preferences and trust in the effective use of the money collected by selling the product. They found that individuals prefer products associated with a vivid message of the social cause rather than the products associated with a pallid message. Ziek (2009) argues that an assessment of how organizations explicitly communicate the behavior that constitutes CSR should be understood in the context surrounding the organizations. He found that communicating CSR is limited to large organizations and the information is conveyed through those choices of words that could portray accepted responsible and virtuous behaviors. According to Sen et al. (2009) CSR communication should be factual and avoid the impression of bragging. Previous studies on the readability of annual reports have either used the Chairman’s Statement (Courtis, 1998; Smith et al. 2006), Management Review (Hossain and Siddiquee, 2008), Management Discussion and Analysis (Schroder and Gibson, 1992) and Letter to the Stockholders (Subramanian et al., 1993). Most of these studies used readability formulas, especially the Flesch readability formula, as a prediction of readability. Moreover, most of them show that the annual reports are classified as ‘very difficult’ or ‘difficult’ to read by average readers. However, it is actually very hard to determine the vocabulary load/word length, and in consequence, other readability formulas such as Kincaid, Automated Readability Index (ARI), Coleman-Liau, Flesch Index, FOG Index, Lix, and Simple Measure of Gobbledygook (SMOG) Grading, have been developed (Hossain and Siddiquee, 2008). According to Courtis (1998), readability formulae are the quantitative method of predicting whether the target audience is able to read the written passage. This can be seen in the Flesch readability formula that takes into consideration two important variables that affect the style of writing: sentence length and word length (Flesch, 1960). The Flesch Formula remains the most popular formula used in readability studies such as those of Courtis (1998), Schroder Copyright © 2010 John Wiley & Sons, Ltd and ERP Environment

Corp. Soc. Responsib. Environ. Mgmt. (2010) DOI: 10.1002/csr

A. Sheikh Abu Bakar and R. Ameer and Gibson (1990), Hossain and Siddiquee (2008), and Smith et al. (2006), primarily because it is simple, quick, and easy to apply. Some studies reveal a relationship between the readability of the narrative section in the annual report, and the performance of firms. However, Courtis (1986) found no evidence to support a relationship between the readability of the narrative section (the Chairman’s Address and the footnotes) and the corporate risk-return. Thus, good or poor readability scores are not associated in any particular direction with corporate profitability and risk. Subramanian et al. (1993), however, found a positive relationship between readability and profitability, and Smith and Taffler (1992b) found a significant relationship between readability and firm performance, their findings being consistent with the obfuscation hypothesis, i.e., good financial performance was significantly associated with ease of readability and poor financial performance with poor readability. On the other hand, Rutherford (2003) did not find empirical evidence to support the obfuscation hypothesis. And Smith et al., (2006) also found little support for the obfuscation hypothesis in respect of the readability of the Chairman’s Statement and firm performance.

Hypothesis Development There are many prior studies investigating the relationship between the readability of the corporate narrative and firm performance, and hence this study is motivated to test some of hypotheses that have been developed in this respect. The variables that represent the firm’s financial performance are profitability, liquidity and gearing. Thus, the hypotheses are: H1: There is a positive relationship between the readability of CSR communication and companies’ profitability. H2: There is a positive relationship between the readability of CSR communication and companies’ liquidity. H3: There is a negative relationship between the readability of CSR communication and companies’ financial gearing. Besides these three financial performance measures (profitability, liquidity, and gearing), this study also includes the market-based performance measurement. According to Yammeesri and Lodh (2004), there is a lack of attention given to market measures such as the firm’s market performance, as many studies have used accounting measures to determine performance. The adequacy of these accounting measures as a true indicator of firm performance is arguable, however, and the issue has been debated in a number of studies (Chakravarthy, 1986; Oswald and Jahera, 1991). It was said that the accounting measures were based on historical values (Demsetz and Villalonga, 2002) and that management could manipulate those figures (Wiwattanakantang, 2001). Since there is a lack of research on market-based performance measures in connection with readability issues, this study will use TOBIN_Q (measured as the market value of equity at the end of the accounting year plus the book value of liabilities divided by the book value of total assets or the price-to-book value) as a market-based performance measurement for the firm’s performance (Wiwattanakantang, 2001). It is expected that growing firms ensure their corporate narratives can be easily read, and thus, hypothesis 4 is: H4: There is a positive relationship between the readability of CSR communication and companies’ TOBIN_Q. Size (for example, measured by total assets, sales turnover and market value) has been used as a proxy for complexity of operation in some studies (Jones, 1988; Baker and Kare, 1992; Smith et al., 2006). Regarding the relationship between size and readability, there are contradictory outcomes in Jones (1988) and Courtis (1995). Jones (1988) found a significant negative relationship between size and readability, while Courtis (1995) reported the opposite. Courtis (1995) explained that larger firms had more resources available with which to ensure better corporate communications that in turn could result in improved readability. These studies motivate hypothesis 5, which is: H5: The readability of the CSR communication is positively related to companies’ size. Copyright © 2010 John Wiley & Sons, Ltd and ERP Environment

Corp. Soc. Responsib. Environ. Mgmt. (2010) DOI: 10.1002/csr

Readability of CSR communication in Malaysia

Sample and Methodology Sample The population consists of all listed companies whose financial year-end fell on 31December 2007. We selected financial year-end 31 December 2007 because Bursa Malaysia’s listing requirement states that all listed companies whose financial year-end is on or after 31 December 2007 must disclose any CSR undertaken by them or their subsidiaries in their annual reports. The total number of companies falling into this category was 454. Table 1 shows that the final sample consisted of 333 companies representing six industry sectors – Construction, Property, Plantation, Industrial Product, Consumers Product, and Trading and Services. This study focuses on the CSR disclosure in a company’s annual report. In some of these studies such as that of Subramanian et al. (1993), a passage of 200 words was randomly selected from the Letter to the Stockholders section of each annual report to be tested for readability, rather than the whole section. In Courtis (1998) and, however, three passages were taken from the beginning, middle, and end of the Chairman’s Address. Most of the companies had a separate section on the CSR disclosure in their annual reports but some disclosed the CSR information in the Chairman’s Statement or elsewhere. We chose only the English version of the annual report because whilst English is not the national language, most of the sample companies produce their annual reports in English, quite likely for the benefit of international investors.

Methodology According to Courtis (1995), more than 80 elements of writing are related to readers’ comprehension, such as content, format, organization, and style. However, only two variables have emerged as good indices of estimating readability difficulty: word length and sentence length (Courtis, 1995). In this study, the Flesch Readability score was used as a readability measurement of the CSR disclosure, since the formula takes these two important variables into account (Flesch, 1960). Therefore, the readability score is represented by the formula is as follows: Readability Score = 206.835- 1.015SL – 0.846WL Where: SL = Average sentence length (Number of words/number of sentence) WL = Average Word Length (Number of syllables/100 words) (Source: Flesch, 1960, p. 309) This formula was chosen for the following reasons. First, it is the most widely used technique in previous readability studies (Courtis, 1986; 1998; 2004; Schroeder and Gibson, 1990; 1992; Smith and Taffler, 1992a; Subramanian et al., 1993; Smith et al., 2006). Secondly, due to the fact that it is a widely accepted method, it is

N Firms whose year-end is on 31 December 2007 Less: – Financial services and technology – Having an unfriendly user format of CSR disclosure – Not having CSR disclosure – Having missing variables

454 (30) (31) (20) (40) Final = 333

Table 1. Sample Copyright © 2010 John Wiley & Sons, Ltd and ERP Environment

Corp. Soc. Responsib. Environ. Mgmt. (2010) DOI: 10.1002/csr

A. Sheikh Abu Bakar and R. Ameer

Reading ease rating

Description of style

Educational attainment level

Typical style of magazine

0–30 31–50 51–60 61–70 71–80 81–90 91–100

Very Difficult Difficult Fairly difficult Standard Fairly easy Easy Very easy

Postgraduate degree Undergraduate degree Grade 10–12 Grade 8–9 Grade 7 Grade 6 Grade 5

Scientific Academic Quality Digest Slick fiction Pulp fiction Comic

Table 2. Flesch Reading Ease Rating (Source: Courtis, 1995, p. 7)

FRE Rating 0–29 30–49

Very difficult Difficult

Main Board

Second Board

Total

59.2% [197] 20.1% [50]

20.1% [67] 20.2% [17]

79.3% [264] 20.1% [67]

Table 3. Flesch Reading Ease Rating. This table shows the sample companies’ CSR disclosures Flesch Reading Ease (FRE) rating categorized into very difficult, difficult or fairly difficult. The number of companies is shown in square brackets.

possible to compare the findings with prior studies. Thirdly, the formula generates a readability score on a scale ranging from 0 to 100. The higher the point scale, the easier to read the text, whereas the lower the point scale, the greater the reading difficulty (Table 2). In computing the Flesch Reading Ease score, the Review tool in Microsoft Words 2007 was used since the Flesch Reading Ease score is available in a computerized format. The use of the computer program to compute the score has been introduced in a few studies (Subramanian et al., 1993; Smith and Richardson, 1999). Furthermore, the computation of the readability score is considered as more accurate and reliable when achieved via the computer programme than by human calculation (Harrison, 1980). In addition, we also used Deloitte’s (2003) Bullfighter Composite Index (BCI), which measures the readability and the usage of jargon in corporate narratives (also used in Smith et al., 2006). This software is able to identify texts with jargon and generates a score ranging from 0 to 10, where a score of 10 indicates the text as jargon-free. Moreover, according to Smith (2004), there is no difference in the explanatory power between the Flesch Readability Score and the BCI score since their correlation is very high. The measurements for the companies’ performance are Profitability (EBIT/Total assets), Liquidity (Current Assets/Current Liabilities); Financial Gearing (Total Liabilities/Total Assets), and TOBIN_Q. The financial data was downloaded from the Thomson One Banker database.

Results Table 3 shows that out of 333 companies, CSR disclosure of 264 companies (79.3%) was classified as very difficult to read. Similarly, irrespective of the nature of the different industrial sectors, most of the companies demonstrated very difficult to read CSR disclosure. The worst situation was found in the Industrial Product sector, Trading & Services sector, and the Consumer Product sector, whilst the best were reported by Mega First Corporation Berhad and Linear Corporation Berhad as follows: During the financial year, the Group carried out its CSR through various activities which include donations and ecofriendly land management practices. Mega First Corporation Berhad (Annual report 2007, p. 13). Copyright © 2010 John Wiley & Sons, Ltd and ERP Environment

Corp. Soc. Responsib. Environ. Mgmt. (2010) DOI: 10.1002/csr

Readability of CSR communication in Malaysia Panel A

Main board Mean Std N Second board Mean Std. N

BCI

FRE

FKGL

PASSIVEST (%)

SENTPERPARA

WRDPSEN

CHARPWRD

4.6847 1.00872 249

23.76 9.829 249

15.5582 2.78490 249

15.2892 15.40046 249

2.2610 0.98380 249

22.4096 5.48246 249

5.5141 0.75723 249

4.6226 1.01996 84

22.94 9.873 84

15.6786 2.22884 84

15.0714 15.77995 84

2.2857 1.04791 84

22.5952 5.16503 84

5.6071 0.49132 84

Panel B

Mean Median Std. Deviation Minimum Maximum Kurtosis

FRE

PROFIT

LQ

DEBT

SIZE

FKGL

BCI

TOBIN_Q

23.55 25.00 9.83 0.00 52.00 0.57

0.0611 0.0679 0.1274 −1.3800 0.7280 52.2110

2.4957 1.7212 2.5249 0.17900 21.1730 18.4620

0.4240 0.4143 0.1981 0.0260 0.8780 −0.8940

2.5903 2.5372 0.5492 0.1520 4.6440 1.7930

15.5886 15.0000 2.6529 0.0000 38.0000 18.7410

4.6691 4.7000 1.0104 2.6000 7.9000 0.4340

1.4890 0.8900 2.4506 0.1909 34.0509 100.747

Table 4. Descriptive statistics for readability of CSR disclosure This table shows the descriptive statistics of the textual characteristic of the CSR disclosure in Panel A. BCI is a Bull Composite Index. FRE is a Flesch Reading Ease score. FKGL is a Flesch-Kincaid Grade Level. PASSIVEST (%) is the percentage of passive voice sentences. SENTPERPARA is sentences per paragraph in the CSR disclosure in the annual report. WRDPSEN is words per sentence and CHARPWRD stands for character per word. Panel B shows descriptive statistics for firms’ variables. PROFIT is earning before interest and tax over total asset, LQ which represent liquidity is total current assets over total current liability, DEBT is total liability divided by total asset, SIZE is represented by total asset and TOBIN_Q is price-to-book value.

FRE PROFIT LQ DEBT BCI TOBIN_Q SIZE

FRE

PROFIT

LQ

DEBT

BCI

TOBIN-Q

SIZE

1.0000 0.1470** 0.1280* −0.0702 0.9899*** 0.1180* 0.2160

1.0000 0.2832** −0.2221*** 0.1210* 0.5850*** 0.2809***

1.0000 −0.7210*** 0.1170* 0.1040* 0.0011

1.0000 −0.0532 0.0321 0.1300**

1.0000 0.0999 0.0501

1.0000 0.3678***

1.0000

Table 5. Spearman Correlation Coefficient This table shows the correlation of coefficients obtained by using the Spearman method. The Spearman test is used rather than the Pearson test because these variables have high kurtosis which means that they are not distributed normally. PROFIT is earning before interest and tax over total asset, LQ which represent liquidity is total current assets over total current liability, DEBT is total liability divided by total asset, SIZE is represented by total asset and TOBIN_Q is price-to-book value. *, **, *** show statistical significance at 10, 5 and 1 % level.

The Group has contributed a fairly substantial amount to various charitable organizations ranging from orphanages to diverse religious groups during the financial year. Linear Corporation Berhad (Annual report 2007, p. 14). Table 5 shows that in general that all the relationships are very weak. The strongest correlation was between readability and PROFIT. This reveals a positive relationship between the readability of a company’s CSR disclosure Copyright © 2010 John Wiley & Sons, Ltd and ERP Environment

Corp. Soc. Responsib. Environ. Mgmt. (2010) DOI: 10.1002/csr

A. Sheikh Abu Bakar and R. Ameer and its profitability, with the correlation coefficient of 0.147 and 0.121 using both measures of readability FRE and BCI, respectively. The relationship was significant at 5% and 10%, respectively. Therefore Hypothesis 1 was supported. This result is in line with the finding of Subramanian et al. (1993) who achieved a positive relationship between the readability of the firm’s annual report and its performance. With respect to Hypothesis 2, we found a positive relationship between the readability measures (FRE and BCI) and LQ, the correlation of coefficients being 0.128 and 0.117 respectively with p-value of 0.051 and 0.068 respectively. Thus, Hypothesis 2 was also supported. However, we found a negative relationship between the readability of CSR disclosure and DEBT for both measures, FRE and BCI, although this was not significant, and hence, Hypothesis 3 was not supported. We also found that the relationship between the readability of CSR disclosure and the TOBIN_Q was positive at a significance level of 10%. Thus, Hypothesis 4 was supported, but Hypothesis 5 that CSR disclosure is positively related to firm size found no support.

Obfuscation Test In order to test the obfuscation, we selected those companies which had reported CSR activities, and segregated them into four headings as suggested by Bursa Malaysia; as a result, the sample was reduced to 131 companies. We argue that these companies had a clear stakeholder focus because they had reported according to their stakeholders’ expectations. Table 6 reveals some interesting findings. We found that the readability of the CSR disclosure (for both measures of readability, FRE and BCI) for companies that show high profitability was significantly

Variable FRE BCI FRE BCI FRE BCI FRE BCI FRE BCI

High PROFIT Low PROFIT High PROFIT Low PROFIT High LQ Low LQ High LQ Low LQ High DEBT Low DEBT High DEBT Low DEBT High SIZE Low SIZE High SIZE Low SIZE High TOBIN_Q Low TOBIN_Q High TOBIN_Q Low TOBIN_Q

N

Mean

Std.

t-test

p-value

80 49 80 49 67 62 67 62 63 66 63 66 82 47 82 47 76 53 76 53

25.73 23.35 4.83 4.59 26.09 23.45 4.88 4.59 24.33 25.29 4.68 4.80 24.56 25.28 4.72 4.78 25.75 23.49 4.83 4.62

7.80 6.92 0.83 0.73 7.56 7.34 0.83 0.75 6.50 8.45 0.70 0.88 7.66 7.40 0.79 0.83 7.74 7.11 0.83 0.74

1.7520

0.0820*

1.6940

0.0930*

2.0080

0.0470**

2.0630

0.041**

−0.7170

0.4750

−0.8110

0.4190

−0.5170

0.6060

−0.4260

0.6710

1.6860

0.0940*

1.4790

0.1420

Table 6. Obfuscation Hypothesis This table reports the results of the independent sample t-test. The companies are denoted as having high PROFIT, high LQ, high DEBT, high SIZE and high TOBIN_Q, if the value of earnings before interest and tax divided by total asset (EBIT to Total asset), total current assets divided by total current liability (current ratio), total liability divided by total asset (debt to asset ratio), total asset and price-to-book value, are higher than the value of median for the earnings before interest and tax divided by total asset (EBIT to Total Asset), total current assets divided by total current liability (current ratio), total liability divided by total asset (debt to asset ratio), total asset and price-to-book value. FRE is Flesch Reading Ease while BCI is Bull Composite Index. *, **, *** show statistical significance at 10, 5 and 1 % level Copyright © 2010 John Wiley & Sons, Ltd and ERP Environment

Corp. Soc. Responsib. Environ. Mgmt. (2010) DOI: 10.1002/csr

Readability of CSR communication in Malaysia different from companies that show low profitability at the 10% level (p-value 0.082 and 0.093, respectively). Also, we found that in highly liquid companies, the readability of CSR disclosures was higher than in less liquid companies, at a significance level of 5% (p-value of 0.047 and 0.041 respectively). Moreover, we also found that companies with high-growth opportunities had a significantly higher readability score (at the 10% level) for their CSR disclosure than low-growth companies, thereby indicating that the CSR disclosure for high-growth companies is easier to read than that for low-growth companies. These findings seem to imply that better performing companies are more concerned about their CSR activities (possibly because they want to maintain their image, reputation, and credibility), and consequently want their stakeholders to easily comprehend the messages in the CSR disclosures. With regard to the obfuscation hypothesis, the study finds empirical evidence of existence of obfuscation in the CSR disclosure. One possible explanation is that the management might obfuscate news, especially bad news, that has a negative impact on the companies’ performance.

Conclusion This study demonstrates that in the sample of Malaysian listed companies investigated, the CSR communication was very difficult to read according to the Readability formulae. Furthermore of the five hypotheses constructed to examine the relationship between the readability of CSR communications and firm performance, three were supported, showing a positive relationship with profitability, liquidity, and TOBIN_Q. These results suggest that companies with good financial performance report their CSR narratives in a manner that is easy to comprehend, by using simple words and sentences, and fewer technical terms than companies with poorer financial performance. In addition, the findings support the obfuscation hypothesis, demonstrating that high (low) performing companies, in terms of profitability, liquidity and growth, achieved high (low) CSR disclosures readability scores. Cho et al. (2010) also report that the degree of bias in the narratives of US corporate environmental disclosure is systematically based on firm environmental performance. Our findings imply that in the event of poor company performance, management make the CSR disclosure more prolix or syntactically complex in an effort to hide bad news. CSR disclosure that is more concise and syntactically simple can therefore be taken to indicate that the firm’s performance was good. Such behavior can be seen to result from the position of management as an agent whose remuneration and wealth depends upon the firm’s performance, or indeed the perception of that performance, and hence there is an encouragement for management to manipulate the CSR disclosure so that it reflects positively on them, i.e., it will be capable of being read easily if the company performance is good, but if the company performance is poor, the obfuscation hypothesis will come into play. In this latter event, the management will conceal bad news because it is not in its interest (as the agent) to reveal its shortcomings to the principal (the shareholders), and the concealment will be achieved by the use of more technical and operational terminology and more lengthy sentence constructions. Another inference that can be drawn from the results is that companies with good performance use their CSR disclosures as a marketing tool, signalling their success and superiority, and in order to do this, their message must be clear and unambiguous, especially for overseas investors who may be reading the annual report in a language which is not their own. By making the text more concise and syntactically simple, the management is indicating its strong financial condition and ability to perform. Such a strategy is important for a company in its attempt to secure stakeholder trust. Hence, everything is communicated and reported transparently and effectively, thereby laying the foundation for enhanced reputation. Given the precise focus of this study, there are naturally some limitations, which represent opportunities for further investigation. The CSR disclosure was only for a year for companies whose year-end was 31 December 2007, and it is recommended that future research work include a larger sample size and a longer period of observation since this may produce a more interesting explanation of the relationship between the readability of CSR disclosure and the company’s financial performance. As an extension of this, a larger sample over a longer period would also help in determining the relationship between readability of CSR disclosure and Corporate Social Performance. A second potential limitation might relate to the readability formula itself (Irwin and Davis, 1980; Courtis, 1986), and choice of CSR medium, hence a different instrument or medium might reveal different outcomes. There are a variety of communication channels through which information about a company’s CSR Copyright © 2010 John Wiley & Sons, Ltd and ERP Environment

Corp. Soc. Responsib. Environ. Mgmt. (2010) DOI: 10.1002/csr

A. Sheikh Abu Bakar and R. Ameer activities or record can be disseminated. Thus, future research should expand the list of CSR medium such as corporate websites, social networking sites (such as Facebook, Twitter), advertisements, press releases, TV, magazines, and product packaging used by companies to seek positive consumer attributions to their CSR activities.

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Corp. Soc. Responsib. Environ. Mgmt. (2010) DOI: 10.1002/csr