Ownership and Board Structures and CSR Disclosure

Ownership and Board Structures and CSR Disclosure: An Empirical Investigation of Malaysian Top 100 Largest Companies Elinda Esa University Tenaga Nasional, Department of Accounting Sultan Haji Ahmad Shah Campus, 26700 Muadzam Shah, Pahang, Malaysia [email protected] Juliana Anis University Tenaga Nasional, Department of Accounting Sultan Haji Ahmad Shah Campus, 26700 Muadzam Shah, Pahang, Malaysia [email protected] Azrinawati Remali University Tenaga Nasional, Department of Accounting Sultan Haji Ahmad Shah Campus, 26700 Muadzam Shah, Pahang, Malaysia [email protected] ABSTRACT Appear as crucial governance mechanisms to drive greater reporting disclosure, this paper attempts to investigate whether concentrated ownership and board structures have significant influence on the extent of corporate social responsibility (CSR) disclosure of Malaysian companies. Taken with a sample of top 100 companies (ranked by revenue), a content analysis of corporate annual reports has been undertaken to measure the reporting of CSR disclosure. Since the findings produce mixed results, it is evident that only two board variables have statistically linear association with CSR disclosure at 1% level, while family-owned companies is found negatively associated with such disclosure level at 5% level. However, the other governance variables fail to find any relationship with the dependent variable. The conclusion will be further discussed in this paper. Keywords: Corporate Social Responsibility, Disclosure, Ownership, Board. •

INTRODUCTION

In the era of globalization, which requires intense competition and significant changes for company’s value creation, has led to the growing interest and awareness among the industry players to enhance their corporate accountability via engagement in activities that related to societal and environmental concerns. In environmental statistics published by Department of Statistics, it was reported that a significant amount of environmental expenditure at RM2,106 million has been spent on overall environmental compliance by the companies in 2010 and the amount has shown an increase to RM2,328.9 million in 2011 (Department of Statistics, 2014). Given the increasing amount spent, the rationality of the

organizations to incur such higher expenditure amounts by engaging in environmentally responsible activities was seen as one of the organizations’ ongoing efforts that has been put in to upholding the government roadmap to achieve Vision 2020, which contains four challenges that are related to Corporate Social and Responsibility (CSR)1. In fact, the developments of the National Integrity Plan (NIP) in 2004 and 10th Malaysia Plan (spanning from 2011-2015) also to support the attainment of Vision 2020 and vigorously encourage the private sector companies to build their continuing commitment towards CSR programmes for the nations (UNICEF, 2009). In fact, the emergence of corporate governance (CG) reforms in Malaysia during a last decade was as a part of Malaysian government significant efforts in fostering the Malaysian public listed companies (PLCs) to be ethically responsible in doing business instead of rigorously making money. This fruitful initiative can be witnessed through the reason lies behind the passage of the Malaysian Code on Corporate Governance (MCCG, or ‘the Code’) in 2001 was to boost the investors’ confidence and enhance their long-term value after the repercussion of the Asian financial crisis in 1997 through providing a set of CG guidelines towards the path to improving the best practices of CG and transparency disclosure among PLCs. Even though the compliance is hybrid in nature, however, in Para 4.48 (XVII), MCCG highlighted on the roles of the board to ensure that the PLCs in which they positioned should account for other nonfinancial performance indicators such as customer satisfaction, product and service quality, market share and environmental performance (MCCG, 2001). This implies that the board of directors plays a powerful role to exert significant influence towards the company management to engage in socially responsible activities and providing extensive CSR-related disclosure in annual reports. Hence, annual reports are recognized as an avenue for the company to disclose and publish all matters that pertaining to its financial and non-financial information to the relevant shareholders and stakeholders (Amran, Rosli and Mohd Hassan, 2009). Realising the importance of MCCG guidelines, acting as a complementary to MCCG, Bursa Malaysia (formerly known as Kuala Lumpur Stock Exchange, KLSE) has integrated the Code recommendations in the Listing Requirements to impose such requirements for those companies which listed on it. Moreover, the Bursa Malaysia also plays their proactive role in making their way to strengthen the capital market by promoting greater transparency disclosure of CSR practices among listed companies which the business operations inevitably connected with the CSR elements. While CSR activities may essentially delivering significant core and humanity values to the environment and community at large, according to Minister of Finance II, Tan Sri Mohd Nor Yakcop (2006) in his speech during Bursa Malaysia CSR framework launching ceremony, he had highlighted that this triple bottom-line activities are crucial to assist in catalyzing the firm financial values, including boosting the firm profitability and thrive more new market opportunities. Realising of such benefits, the companies are expected to enhance their social and philanthropic activities as a firms’ strategy to create attractions and positive perceptions in the eyes of existing and potential shareholders and other stakeholders. Therefore, reporting of such CSR practices through disclosure in corporate annual reports is deemed essential since this approach is useful to demonstrate to the stakeholders of companies’ awareness and its accountability to the stakeholders by behaving in socially responsible manner. In past studies, many researchers have put much attention on empirically examining the determinants of extent of CSR disclosure in developed countries (Gray, et.al., 1995; Hackston and Milne, 1996; Deegan, 2002; Deegan and Rankin, 1999; Deegan, Rankin and Tobin, 2002; Chau and Gray, 2002; Branco and Rodrigues, 2008; Reverte, 2009) and in emerging economies (Haniffa and Cooke, 2002; Kuasirikun and Sherer, 2004; Mohd Ghazali, 2007; Said, Zainuddin and Haron, 2009; Barako and Brown, 2008; Amran and Suseela, 2008; Esa and Mohd Ghazali, 2012), of which these prior studies excluded the sample of non-financial companies (i.e banking and insurance companies) since this kind sample of companies subjects to comply with different banking acts and regulations. Unlike the prior studies in Malaysia which have investigated CSR involving PLCs across different sector of industries (Haniffa and Cooke, 2002;

Mohd Ghazali, 2007; Said, et.al., 2009; Amran and Suseela, 2008), industrial companies (Janggu, Joseph and Madi, 2006) and government-linked companies (GLCs) (Esa and Mohd Ghazali, 2012), the present study attempts to fill the gap by examining whether ownership and board structures may have significant influence towards the extent of CSR disclosure of Malaysian top 100 largest companies ranked by revenue, wherein to the best of our knowledge, none of similar studies have been undertaken with the specific sample of companies. This study is also expected to provide some useful insights to the extant studies that related to the corporate governance and CSR reporting disclosure. Besides the inclusion of different specific sample of companies (top 100 PLCs ranked by revenue) into the matter, the novelty of the current study also can contributed by examining several variables to be tested (structures of ownership concentration and board attributes) to gather evidence whether the nature of Malaysian business environment, its people and regulations which govern the modern corporations may affect the way companies to behave in socially responsible manner. The remainder of the paper is organized as follows. Section 2 reviews the past literatures with regards to the CSR disclosure, ownership structures and board characteristics, while Section 3 outlines the research design and instrumentation, samples and sampling procedures. Section 4 presents the analysis of findings and the discussion of results. Ultimately, Section 5 concludes and sets out the limitations and provides directions for future research. 2. BACKGROUND OF THE STUDY AND LITERATURE REVIEW 2.1 CSR Disclosure This study attempts to examine the association between the ownership and board structures and the level of CSR reporting disclosure involving specifically Malaysian top 100 companies ranked by revenue. The reason for the inclusion of the specific sample of companies, which rare to find in other existing studies in regards to the corporate governance matter, is due to larger corporations are believed to have sufficient financial and non-financial resources (i.e. employees) to deliver its efforts through CSR activities and also are subject to public scrutiny since most of these top ranked companies are closely held and owned by larger shareholdings companies and are bound to government intervention. The growing issues on CSR reporting disclosure have drawn many researches being undertaken to explore to which extent the CSR reporting has been disclosed to the relevant stakeholders and this regime disclosure is viewed as welldeveloped. The Bursa Malaysia CSR framework stated that the CSR activities are not about telling the people how the companies spent the money on it, but how to thrive the business from such practices (Bursa Malaysia, 2006). The Bursa Malaysia CSR framework defined CSR as ‘open and transparent business practices that are based on ethical values and respect for the community, employees, the environment, shareholders and other stakeholders. In a nutshell, the CSR framework was designed to allow the acceptance and recognition of community for firm long-term sustainability by supporting the economic, social and environmental bottom-line wellness (Triple bottom-line reporting). Hence, as far as the CSR disclosure is concerned, this study can be related with the concept of legitimacy theory (Patten, 1992; O’Donovan, 2002; Hackston and Milne, 1996; Deegan, Rankin and Voght, 2000) which emphasizes on the importance of such CSR practices disclosure in gaining the societal approval in every firm activity engagements for its long-term survival. This is based on the conception that the company’s activities in which it operates may expose to risky activities and hence may give significant effects on the environments and people surroundings. 2.2 Ownership Structures Being a part of emerging countries, Malaysia is of interest due to its unique characteristics and has different business environment than its counterparts. Unlike in the developed countries especially in Anglo-Saxon countries (i.e. the United States, the UK, Australia, etc.) which their business environment

is characterized by diffused shareholdings, Malaysian business firms are seen more dominated by concentrated ownership (La Porta, Shleifer and Vishny, 2000; Claessens, Djankov and Lang, 2000). This concentration of ownership denotes that there is number of major (large) shareholders who hold significant rights and control in an organization, and may be owned by a number of ownership concentration identity categories such as family ownership, government ownership, institutional investors and company ownership (Dogan and Smyth, 2002; La Porta, et.al., 2000; Claessens, et.al., 2000; Mohd Sehat and Abdul Rahman, 2011). Understanding the Malaysian is a multi-ethnic group’s country, in the event of concentrated ownership can be attributed to the history of Malaysian government in their concerted effort to introduce National Economic Policy (NEP) due to inequitable distribution of wealth among the ethnic communities, particularly Malays and Chinese (Haniffa and Cooke, 2002; Jomo and Gomez, 1999; Abdul Rahman and Mohd Ali, 2006). As far as separation of ownership and control is concerned, the rationale behind the ownership concentration to be associated with the disclosure of CSR reporting is in the premise that the from an agency perspective, concentrated ownerships have some degrees of power to control and protect the shareholders from the management unscrupulous behavior and hence the agency problem occurs between owners and agent (management) can be mitigated (Jensen and Meckling, 1976). With this mitigation of agency problem, thus concentrated ownership is presumed to be an effective impetus to put some pressures on management actions by providing greater transparency disclosure of corporate reporting, especially on CSR-related activities (Shleifer and Vishny, 1997; Mohd Ghazali, 2007). This can be evident from several prior studies suggesting the effectiveness of monitoring mechanisms by concentrated shareholdings and the level of corporate reporting disclosure (Mohd Ghazali, 2007; Said, et.al. 2009; Esa and Mohd Ghazali, 2012;Eng and Mak, 2003) and firm performance (Rahayu and Rashidah, 2011; Abdul Wahab, How and Verhouven, 2007). 2.3 Board Structures The apex of corporate governance lies on the shoulders of the board of directors. The board of directors is perceived as an effective governance mechanism in monitoring the management to in managing business to ensure the allocation of fund resources by the shareholders is in place for their maximization of wealth. Board structures can be divided into two; demographic and cognitive profiles. The former refers to gender, race, position; etc. while the latter signifies the intellectual capabilities and skills of a director such as independence, qualifications, training and education, etc. Additionally, corporate governance inherently is divided into two categories; statutory and self-regulation. The former category refers to given corporate governance framework legislated by regulatory authorities; while the latter relates to the human elements that difficult to legislate, such as independence of a director (Shanmugam and Perumal, 2005). Board of directors plays crucial roles to ascertain the check and balances of corporate governance practices in a firm (Abdul Rahman, 2007). This study includes the measurement of board size, board independence and board qualification. Prior studies provide mixed findings of board variables and its association with corporate disclosure (Haniffa and Cooke, 2002; Mohd Ghazali, 2007; Said, et.al. 2009; Esa and Ghazali, 2012; Eng and Mak, 2003), which suggesting that what has been ‘communicated’ in the annual reports may not be the same as what ‘actual’ being practiced (Haniffa and Hudaib, 2006) and this board characteristics are subject to self-regulation.

3.

RESEARCH METHOD

Data from Malaysia’s 100 largest listed companies for year 2011 were used in this study. Nevertheless, the financial institutions in the list of Malaysia’s 100 largest listed companies are excluded due to the different regulation attached to this sector. This approach is consistent with other disclosure studies (e.g. Esa and Mohd Ghazali, 2012; Mohd Ghazali and Weetman, 2006; Haniffa and Cooke, 2005). Therefore, only 87 companies are included in the final selection. Table 1 shows the percentage of industry type included in the sample companies. The sample was restricted to the largest companies for two reasons. First, prior literatures on disclosure provide an accord that the largest companies are generally great

reporters. Secondly, the largest companies deal with more political and public pressures compare to the small companies due to the earnings and resources they generate. Therefore, in line with the legitimacy theory, the CSR topic is more salient in the largest companies. Furthermore, fixate only on the largest companies may help in controlling the effect of size on the CSR disclosure (see Hackston and Milne, 1996; Owen, 2007). Table 1: Industry Type Industry

Number of companies

%

Properties

3

3.45

Industrial products

21

24.13

Consumer products

17

19.54

Plantation

6

6.90

Trading/services

33

38.0

Technology & IPC

4

4.60

Construction

3

3.45

Total

87

100

The regression model is developed to regress CSR disclosure with variables relating to the board characteristics such as board size, board professional qualification, independent executive director and ownership structures and other control variables such as company size, profitability, leverage and industry type. The regression model is as follows:

Where: CSRD OwnTen GovtOwn ForOwn FamoB CoSize Lev Prof Ined IndType Bsize Prof_Q

= total CSR disclosure = ratio of shares owned by 10 largest shareholders = dummy variables = ratio of shares held by foreign shareholders = ratio of family members on the board = company size measured by total assets = leverage measured by total liabilities over total assets = profitability measured by profit before tax over total assets = proportion of independent non-executive directors on the board = 1 = properties, 2 = ind product, 3 = consumer, 4 = plantation, 5 = trade/service, 6 = technology/IPC, 7 = construction = number of directors on the board = professional qualification measured by proportion of directors who hold qualification in degree of accounting or accounting professional qualification by total directors.

This paper is designed to use content analysis method to determine the CSR practices through CSR disclosures in the company annual reports. This is due to widely use of content analysis of corporate reports in the social and environmental accounting literatures (Janggu et al., 2007; Mohd Ghazali 2007, Mohamed Zain et al., 2006 and Esa and Mohd Ghazali, 2012).A checklist instruments containing 17 items of CSR was constructed. In developing the checklist, reference was first made to the checklists derived from extensive review of prior literatures (e.g. Belkoui Karpik, 1989; Guthrie and Parker, 1989; Gray et al., 1995a, 1995b, Haniffa and Cooke, 2005; Mohd Ghazali, 2007). A checklist developed by Mohd Ghazali (2007) was adopted with some changes to suit with the latest development of CSR. Unweighted index or dichotomous scores was used to avoid subjectivity in judging the weight of relevance or importance of the items disclosed in the websites. The scoring was based on the existence of the items as the study was focusing on the extent of disclosure. A score of 1 is given to the company if the instruments in the checklist are disclosed in the corporate annual report. However, if no disclosure made in corporate annual report, a score of 0 was recorded. The CSR disclosure was computed by the ratio of the actual score obtained to the maximum possible score (e.g. 17 items) by particular company. 4.

FINDINGS AND DISCUSSION

Table 2 summarises the regression results. The Variance Inflation Factors (VIFs) of all independent variables are below 2. This indicates multicollinearity is not exist in the regression model as collinearity is considered a problem when VIF exceeds 10 (Gujarati, 1995). Thus, the results of the regression analysis can be explained with higher degree of confidence. The table also indicates an adjusted R2 of 0.275 (F = 3.970, p = 0.000), which means that 27.5% of the variation in CSR disclosure level in annual reports of companies investigated in this study can be explained by the 11 variables specified in the model. Table 2.Factors influencing CSR disclosure Adjusted R2 = 0.275 F statistic = 3.970 Significance = 0.000 N = 87 Beta .088

Sig .019 .448

1.585

OwnTen

.126

.238

1.322

ForOwn

-.041

.692

1.276

Cosize

.279

.021**

1.660

Lev

.089

.363

1.136

Prof

.185

.074*

1.238

FamoB

-.253

.023**

1.414

IndType

-.104

.319

1.275

Bsize

.324

.004***

1.391

Ined

.258

.019**

1.377

Prof_Q

.153

.139

1.245

(Constant) GovOwn

Note: ***, **, * are significant at 1%, 5% and 10% level respectively.

VIF

Two company characteristic variables (i.e. company size and profitability) used as control variable was found to be significant. Three corporate governance variables identified in this study (i.e. board size, independent non- executive directors and family members on board) were found to be significant at the 1% and 5% level respectively. Company size was found to be significant at 5% level and positively related to disclosure. This finding is consistent with most of prior studies (e.g. Mohd Ghazali, 2007; Abdul Hamid, 2004; Haniffa and Cooke, 2005; Ho and Wong, 2001). The finding implies that large companies are more tangible in the eyes of public. Furthermore, larger companies may also engage in more social activities as part of their brand reputation exercise. The significant of profitability at 10% level is consistent with previous studies (e.g. Singhvi, 1967; Haniffa and Cooke, 2005). The results appear to support the arguments that companies with good news are disclosed more information (Ross, 1979). As for board size, results indicate a significant positive relationship with 1% level. This result is in line with the findings of Esa and Ghazali (2012) and Zahra et al. (2000) where a large board may view as an effective mechanism to enhance the openness and disclosure. The significant result also implies that the greater number of board directors are likely to disclose more information pertaining to the CSR. The study also reports a positive association between independent non-executive directors on the board and the CSR disclosure. The result is similar with previous studies (see for example Fama and Jensen, 1983; Chen and Jaggi, 2000; Forker, 1992), while is inconsistent with Ho and Wong (2001). In the present study context, the companies in which there were larger proportions of independent directors disclosed more than others. This implies the engagement on CSR activities are the main concern of independent directors. Additionally, the finding also may have an important implication towards the regulators as they insist more independent directors on the boards. The association between family members on board and the level of CSR disclosure is negative and significant at 5% level, suggesting that family members on board disclose less information pertaining to CSR disclosure. This is consistent and similar with Chen and Jaggi (2000), Haniffa and Cooke (2002) Chau and Gray (2002). On the contrary, government ownership, ownership concentration, foreign ownership, leverage, industry type and professional qualification are not significant which means that decision to disclose CSR in the annual report is not influenced by these factors. 5.

CONCLUSION

This study examined the effect of two group variables; company characteristics (as control variables) and corporate governance (i.e. ownership structure and board characteristics) on the CSR disclosure by Malaysia’s 100 largest listed companies. The statistical results indicate that board size, independent non executive directors and family members on board as corporate governance attributes were found to be significant at the 1% and 5% level respectively. Furthermore, profitability and company size as company characteristics also were found significant at 10% and 5% level respectively. The significant of three corporate governance variables (board size, independent non - executive directors and family members on board) identified in this study indicates the importance of these variables as antecedents of CSR

disclosure. The study has some limitations, the study encompasses data of Malaysia’s 100 largest companies only. Thus the results of the study may not be generalised due to the sample size of 87 was relatively small especially for performing the regression analysis. Additionally, future studies in this area should use interview based research to provide richer insight into the quantitative statistical results. NOTE: •

4 challenges that comprised in Vision 2020 are: •

4th Challenge: establishing a fully moral and ethical society

•

7th challenge: establishing a fully caring society and a caring culture

•

8th challenge: ensuring an economically just society

•

9th Challenge: establishing a prosperous society, with an economy that is fully competitive, dynamic, robust and resilient.

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