Corporate social responsibility reporting (CSR) has been used as a process to carry out the duty of accountability in reporting to the stakeholders on the positive and negative effects to society as a whole.The objective of this paper is to analyze the level of CSR disclosure in company's annual report and the relationship between cultural values (Board of director's ethnicity as a proxy), corporate governance characteristics and CSR disclosure in Malaysian Public Listed companies for the year ended 2006. Content analysis has been used to construct the CSR disclosure index in companies' annual report. The findings of the study showed that the level of CSR disclosure in companies Annual Report Index is 8.45 percent. The non-disclosure companies are 33.3 percent. The relationship between corporate governance characteristics, culture and CSR disclosure showed that the audit committee independence, government ownership, foreign ownership and total number shareholders significantly influence the level of CSR disclosure of public listed companies in Malaysia for the year ended 2006.
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Corporate social reporting is one approach where companies published or disclosed their corporate social responsibility activities to their shareholders. Corporate social responsibility reporting has been used as a process to carry out the duty of accountability in reporting to stakeholders the positive and negative effects on society as a whole. Tilt (2004) showed that there was a link between environmental activities undertaken by organizations and their subsequent reporting. The statement implied that the link provides motivation for firms to report. As affirmed by Tilt (2004), that as managers becomes more aware of the environmental challenges and activities, they are likely to disclose more.
Corporate Social Disclosure in Malaysia is lagging far behind as compared to other Asian countries such as Singapore, Thailand and South Korea. Chambers, Moon and Sullivan (2003) investigated Corporate Social Responsibility (CSR) reporting in seven countries through websites analysis of the top 50 companies in Asia and found that there were fewer CSR companies in the seven selected Asian countries as compared to UK and Japan companies. The mean for the seven countries studied, show a score of 41% which is below half the score for the UK (98%) and Japan companies (96%). Their study found that only 25% of the companies provided extensive coverage with over ten pages of reporting its corporate social responsibility. They also found that another 50% of CSR companies provided about three to ten pages for CSR reporting. This finding demonstrated that CSR reporting in Malaysia is relatively low as compared to other Asian countries.
The focus on CSR in Malaysia has also received government's attention. The Government's has taken steps by implementation of Bursa Malaysia CSR Framework (2006) as a mechanism to further promote corporate social responsibility (CSR) among public listed companies (PLC) in Malaysia. These incentives are in line with international trends.
Past studies have shown that there are various factors that drive for CSR reporting and environmental reporting in Malaysia. According to ACCA (2002) among the driving forces for environmental reporting in Malaysia were the introduction of the Malaysian Code on Corporate Governance listing requirements, the National Annual Corporate Award (NACRA) and ACCA Award named as Malaysian Environmental Reporting Award (MERA), recently in year 2004 changed to Malaysian Environmental and Social Reporting Award (MESRA).Corporate governance is the process and structure that is used to direct and manage the business and affairs of the company towards enhancing business prosperity and corporate accountability .The practice of good corporate governance demands a sense of belief and commitment from the people who run the company, namely the board of directors and senior management. These factors supported by the Malaysian government encouragement and motivations for Malaysian companies to report environmental information in their annual report in the speech budget of the year 2007 and 2008.
There are several studies that describe the culture influences on accounting systems and financial disclosure (Archambault and Archambault, 2003; Gray, 1988; Haniffa and Cooke, 2002; Haniffa and Cooke, 2005; Jaggi and Low,2000 ; Salleh, Stewart and Manson,2006; Sudarwan and Fogarty, 1996 and Tsui, 2001; ). As cited in Haniffa and Cooke (2002), Alhabshi (1994), p.24 stated that the way managers perform their roles and functions may be affected by their own tradition, history, beliefs, values and culture.
The effect of culture on the developments of accounting practices in Malaysia has recently drawn the attention of a number of accounting researchers (Abdul Rahman and Mohamed Ali, 2006; Che Ahmad, Houghton and Muhammad Yusof, 2006; Haniffa and Cooke, 2002; Haniffa and Cooke, 2005; 2005; Patel, Harrison and Mc Kinnon, 2002; Salleh, Steward and Manson, 2006, and Yatim, Kent and Clarkson, 2006,).
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Thus, the researcher intends to look into the influences of culture in enhancing the relationship between corporate governance and CSR disclosure. This study ties together the three streams of research, corporate governance, culture and corporate social responsibility (CSR) reporting and it investigates the relationship between the three. Specifically this study attempts to look into the governance structures and culture as predictors towards the extent of CSR disclosure among public listed companies in Malaysian public listed companies.
The Bursa Malaysia CSR Framework (2006) defined Corporate Social Responsibility as an open and transparent business practices that are based on ethical values and respect for the community, employees, the environment, shareholders and other stakeholders. This CSR framework was designed to deliver sustainable value of the company to society at large. The CSR supports the Triple Bottom Line Reporting which emphasizes on the economic, social and environmental bottom-line wellness.
As cited in Hofstede (1980), Kluckhohn , 1951 describe culture as:
"Culture consists in patterned ways of thinking, feeling and reacting, acquired and transmitted mainly by symbols, constituting the distinctive achievements of human groups, including their embodiments in artifacts; the essential core of culture consists of traditional (i.e. historically derived and selected ) ideas and especially their attached values". (pâ€¦..?)
Hofstede (1980) also defined culture as the interactive of common characteristics that influence a human group's response to its environment. Culture determines the identity of human group in the same way as personality determines the identity of an individual. The word "culture" is usually reserved for societies (in modern world known as "nation") or ethnic or regional group, but it can be applied equally to other human collectivities or categories: an organization, a profession, or a family.
Various researchers have used annual reports as a medium for CSR disclosure. For example, Hackston and Milne (1996) examined some potential determinants (firm's size, profitability and industry type) of social disclosures in New Zealand companies', and examine the research analysts choice of measurement technique of Corporate Social disclosures .They used content analysis to measure corporate social responsibility disclosures. An instrument, checklist, and decision rules were used in their study which include aspect of disclosure themes , evidence of disclosure ( monetary quantification, non-monetary quantification, declarative) and news type (good news, bad news, neutral news) and amount (number of sentences). They found that the highest disclosed theme was Human Resource, followed by Community, Environment, Products and General/Others.
A study conducted by Thomas and Simerly (1995), addressed the theoretical and empirical on the issue between top managers and corporate social performance. In their study, they perceive that the top managers of an organization as people who make important decisions about its future direction and also play a critical role in the articulation of its stance with reference to its stakeholders and constituents. They found that top managers, top management team and CEO'S are important determinants to social performance outcome. Therefore, from their study, it is found that top managers particularly board of directors, CEO, Chairman are important determinants to the social performance of organizations.
In Malaysia, only few study examined the relationship between corporate governance characteristics and corporate social reporting. Most of the study concentrated on the relationship between corporate governance characteristics and voluntary disclosure. Guan Yeik (2006) examined the relationship between independent non-executives, female directors and managerial ownership towards corporate social disclosure in 200 companies listed in Main Board of Bursa Malaysia in the year 2004. Her study used the proportion of pages devoted to different themes of social disclosure over the total pages in the annual report. A grid of twenty rows of equal height of five columns of equal width was laid across each corporate social disclosure by using a clear transparency A4 sheet divided into 100 rectangles. Three control variables were used in this study namely firms size, financial leverage and firm's performance. Her study found that the managerial ownership was significantly negatively related with corporate social disclosure, whereas the other two variables, i.e. independent non-executive directors and female directors were found insignificantly in explaining corporate social disclosure. Their findings imply that the higher management ownership in the company the lower corporate social disclosure in companies' annual report.
Another research in Malaysia conducted by Amran and Devi (2008) delved the influence of government and foreign affiliates on corporate social reporting development in Malaysia. In their study, only two corporate governance variables were examined namely, government and foreign shareholding in explaining the influence on corporate social reporting in Malaysia. The regression results showed that the government has influence on corporate social reporting whereas the foreign affiliate is not evident to explain the influence on CSR development in Malaysia.
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Previous researches have also inculcating culture as one of the determinants towards corporate social responsibility which describe the societal values, personal values and the behavioral change of the people inside the organization. For example, Haniffa and Cooke (2005) have examined whether the extent of Corporate Social Disclosure in the annual reports of Malaysian listed companies changes over time and whether there is an association with three groups of variables; culture, corporate governance and firms characteristics. Content analysis is used to examine the extent of Corporate Social Disclosure and they found two cultural characteristics, three corporate governance practices to be significant determinants to explain the variability in Corporate Social Disclosure practice of Malaysian companies. They also found that, there is a significant relationship between executive directors and chairperson that hold multiple directorships with Corporate Social Disclosure indicates that those who are aware of the business environment make disclosure decisions for a purpose. Furthermore, they found a significant relationship between Corporate Social Disclosure and foreign shareholders indicates that Malaysian companies use Corporate Social Disclosure as a proactive legitimate strategy to obtain continued inflows of capital and to please ethical investors.
Table1 describe the differences between cultural values of the Malays, Chinese and Indians in Malaysia. It showed that a Malay values respect for elders where all young people should respect the superior and an elderly person in their community; faith in God which was come from Islam Principles where all Muslims should belief in "Rukun Islam" and "Rukun Iman". The Chinese values concentrated more on seeking wealth, prosperity and financial rewards. While Indians values are characterized by their loyalty, hard work, sense of belonging and "karma".
Fontaine and Richardson (2005) studied the cultural values of three main ethnic groups in Malaysia which were Malay, Chinese and Indians. They used Scwartz's model which covered the 57 cultural values using the Likert Scale ranging from 1 to 7. The 57 cultural values represent 10 dimensions at the individual level and 7 dimensions at the cultural level. They found that, there is a significant difference between Malay, Chinese and Indian in 'tradition' and 'achievement' at individual level. Also for cultural level, there was significant difference between Malay, Chinese and Indian in "embeddedness". This implies that there is a significant difference between cultural values between ethnic groups in Malaysia which were Malay, Chinese and Indians
Since ethnicity as one feature of culture as described by Hofstede (1980) , culture has been operationalized by previous research as ethnicity of board of directors such as (Tsui, 2001; Patel, Harrison and Mc Kinnon, 2002; Archambault and Archambault ,2003; Haniffa and Cooke,2002,2005; Abdul Rahman and Mohamed Ali, 2006; Che Ahmad, Houghton and Mohamad Yusof, 2006; Salleh, Stewart and Manson, 2006; Yatim, Kent and Clarkson, 2006).to be the proxy for culture.
Unit of analysis and Population
The units of analysis for this study are the annual reports of the public listed companies on Main Board companies of Bursa Malaysia. The population consists of non-financial companies on the Main Board Bursa Malaysia for the year ended 2006. This study includes all industry as in Main Board. They are consumer products, industrial products, trading and services, plantations, properties, constructions, technology, hotels, infrastructure and mining. All financial companies were excluded from this study due to different regulatory framework and governance environment. BAFIA companies or financial companies were legislated with BAFIA Act 1989, Central Bank of Malaysia Act 1958 (Revised 1994), whereas non financial companies legislated with Companies Act 1965.
The proportional stratified sampling method was used in this study to determine the sample size of each sector of public listed companies in Main Board Companies in Malaysia. The study is based on secondary data collected from the Annual Report of non-financial companies listed on the Main Board of Bursa Malaysia in the year 2006. The final sample of 150 companies is a valid representative of the target population of 602 main board companies of public listed companies in Bursa Malaysia for the year ended 2006. Based on Roscoe's rules of thumb, it is ideal that for every item investigated, 10 sample sizes are needed. Therefore with nine items for corporate governance characteristics, three items for board of directors' ethnicity and one item for CSR Disclosure, 130 samples are needed for the study, which means that a sample size of 150 would be sufficient for the study.
Variable Measurements and Model Specification
Dependent Variable (CSR Disclosure)
The categories of social responsibility disclosure were adapted from previous studies such as by Ernst and Ernst (1978), Hackston and Milne (1996) and Haniffa and Cooke, (2005), Mannaseh (2006) and Shaw Warn (2006) that include five themes .They are environmental, community involvement, Human resource/Employee Information, Energy and Product. The study, adopts the definition by Hackston and Milne (1996), as it captures the themes of CSR disclosure and consistent with the Bursa Malaysia CSR framework 2006.
A CSR Disclosure index is constructed by adding all the items that represents each of the five themes, which are Environment, Community, Human Resource, Energy and Product. The CSR index is constructed by using the dichotomous measure, of "1", if the company discloses the items and "0", if it is not disclosed. The subsequent process is adding all the scores and equally weighted .The scores will be calculated as follows:
CSRDI j = âˆ‘ t =1 Xi j
CSRDI j= CSR Disclosure Index
nj= Number of items expected for the company njâ‰¤86 items
Xij = of "1", if the company disclose the items and "0", if it is not.
Multiple regressions analysis is used to test the hypothesized relationships between the independent variables (predictor) and the dependent variables (criterion) (Hair et al., 2006). According to Pallant (2005), multiple regressions can be used to explore the relationship between one continuous dependent variable and a number of independent variables. Thus, in order to test the hypotheses, regression analysis is used to the variance of CSR disclosure in explaining by the corporate governance characteristics and board of directors' ethnicity. Hierarchical multiple regression analysis is conducted to examine the strength of the relationship between corporate governance characteristics and board of director's ethnicity as a proxy with corporate social responsibility disclosure in Malaysian Public Listed Companies for the year ended 2006.
Incorporating all these variables, the full regression model is as follows:
CSD= Î²0+Î²1BD SIZE+Î²2NED+Î²3DUAL+Î²4AC NED+ Î² 5CONCERN+ Î²6SH + Î²7MGR OS+ Î²8FRGN OS + Î²9GOVT. OS + Î²10Malay dom+ Î²11Malay Executive +Î²12MalayNonexecutive+ Î²13lgTA +Ä“
CSD : CSR Disclosure Index
Î²1BD SIZE: Board Size
Î²2NED : Percentage of non-executive directors to total directors
Î²3DUAL: CEO Duality
Î² 4AC NED : Proportion of non- executive directors to total of directors sit in audit committee
Î²5CONCERN; Ownership concentration
Î²6SH: Number of shareholders
Î²7MGR OS: Managerial ownership
Î²8FRGN OS: Foreign ownership
Î²9GOVT. OS: Government ownership
Î²10Malay dom : Malay domination BOD
Î²13TA ( proxy for firm's size)
Ä“ : Error term
Findings of the study
Table 3 represents the 150 of final sample of the target population of 602 public listed Companies at Bursa Malaysia for the year ended 2006. 26 percent (n=39) of the sample firms are in Industrial Product. The remaining companies represents Trading and Services (n=30, 20%), Properties (n=29, 19.3%), Consumer Product (n= 25, 16.7%), Plantation (n = 11, 7.3%), Construction and Technology (n = 13, 8.7%).
The descriptive statistics includes statistics such as minimum, maximum, mean and standard deviation for each of corporate social responsibility index. The mean for the CSR disclosure level in Annual Report Index is 8.35 percent.
Table 5 presents the level of CSR disclosure index for the 150 companies. The highest number of non-disclosure companies in Annual Report is 33.3 percent (n=50).
Regression results of the association between corporate governance characteristics, culture and CSR Disclosure.
Hierarchical Regression analysis is used to examine the relationship between the CSR Disclosures index and the independent variables namely the board size, board independence, duality, audit committee, ten largest shareholders, number of shareholders, managerial ownership, foreign ownership and government ownership, Malay domination directors, and Proportion of Malay Executive Directors to total Directors. To determine the appropriateness of the model and data or goodness of measure, several tests underlying the regression model were conducted such as test of normality, checking for outliers, test of linearity, Test of Equal Variance (Homoscedasticity), Multicollinearity test and Autocorrelation (Independence of Residuals) test.
In testing the model, it's involved two fold which are testing the individual independent variables and secondly, testing the overall relationship after model estimation (Hair et al., 2006). According to Hair et al. (2006) and Pallant (2005) there are basic assumptions that need to be fulfilled to conduct multiple regression analysis. The current study has fulfilled all assumption for multiple regressions.
***p < 0.01, ** p < 0.05, * p < 0.10
The result of regression in table 6 indicates that the estimated equation is statistically significant at less than 1 percent level (p < 0.01) with F value for all models ranges Between 7.345 to 51.67. This indicates that the model as a whole for Model 1 and Model 2 is significant. The reported D-W value is 1.92 (which is close to 2) and suggests that the residuals are reasonably independent each other.
Model 1 showed regression analysis with the control variable which which is Total Assets (Natural log Total Assets). The model is significant with R square 0.259, Adjusted R square = 0.254, R square change = 0.259 and F value = 51.67. The result showed that the control variable namely Total assets (ß = +0.509, p < 0.01) were found to be significant at p < 0.01. The result implies that control variables (Total assets) have a positive influence on the dependent variables, CSR Disclosure Index.
In model 2, the independent variables are included in the model together with the control variables. The model the direct relationship between independent variables and dependent variables after statistically control for the control variable namely Total Assets (Natural log Total Assets). From the table 5.6, the model improved significantly with R square = 0.412, Adjusted R square = 0.356, R square change = 0.154, F value = 7.345. The result showed that the control variable namely Total assets (ß = +0.446, p < 0.01) were found to be significant at p < 0.01. In this model, From the result, the most significant independent variable that influence the CSR Disclosure index is audit committee (proportion of non executive directors to total non executive directors in audit committee boards), is positively correlated with ß = +0.268, p < 0.05. While, government ownership is positively correlated with ß = +0.171, p < 0.05. The result indicated that the higher the proportion of non- executive directors to total of directors sits in audit committee and government ownership in the company, the higher the CSR disclosure. However, total number of shareholders, is negatively correlated with ß = -0.197, p < 0.05. The result indicated that the higher the total numbers of shareholders in the company, the lower the CSR disclosure.
However, one of the independent variables that is, foreign ownership is found to be marginally significant at p < 0.10, ß = +0.142, p < 0.10. The result indicated that the higher the foreign ownership, the higher the CSR disclosure.This result showed that audit committee, government ownership and foreign ownership had a positive and significant influence on the CSR Disclosure index. Meanwhile, the total number shareholders has a negative and significant influence on the CSR Disclosure index. Furthermore, the analysis of the result found that board independence, board size, duality, ten largest shareholders, managerial ownership, Malay domination board of directors, Malay executive directors and Malay non executive directors do not significantly related to CSR disclosure.
In model 2, by adding the model variables with the control variables, the R Square has increased to 15.3% and the R square change is 15.4% and is significant. This implies that the additional 15.7% of the variation in CSR Disclosure is explained by corporate governance characteristics and culture. R square change of 15.4% means that the corporate governance characteristics and culture explain additional 15.4% of the variance in CSR Disclosure even when the effects of firm's size of the companies are statistically controlled for.
DISCUSSION AND CONCLUSIONS
The CSR disclosure level was constructed by taking the five themes into consideration. The themes include Environment, Community, Human Resource, Energy and Product. The CSR disclosure index constructed is then used to examine the level of CSR disclosure from companies' annual report.
Even though the CSR disclosure level in Malaysian public listed companies was in increasing trends. This level was considered low as compared to companies from developed countries and other Asian companies (Chambers, et. al, 2003). This is consistent with CSR 2007 Status Report findings done by Bursa Malaysia which showed that the companies in Malaysia are far behind international practices and thus there is a need to increase CSR disclosure and practice. Further, CSR 2007 Status Report, it is recommended that public listed companies give higher priority and attention to CSR and assign appropriate resources in planning and incorporating CSR practices into business operations and to CSR disclosure.
In addition to that, this study also investigates the relationship between corporate governance characteristics namely board size, board independence, CEO duality, audit committee, ownership concentration, total number of shareholders, managerial ownership, foreign ownership, and government ownership, culture and CSR disclosure in Malaysian Public Listed Companies for the year ended 2006.
Numerous researchers have attempted to identify the level of information disclosure in corporate annual reports (Barako, Hancock and Izan, 2006; Barnea and Rubins, 2004; Cheng and Courtenay, 2006; Eng and Mak, 2003; Gul and Leung, 2004; Hackston & Milne, 1996; Haniffa and Cooke, 2005; Ho and Wong, 2001; Mohd. Ghazali & Weetman, 2006; Mohd Nasir & Abdullah, 2004; Wilekens et al., 2005). The findings of the current study showed that the CSR disclosure level is still remains in low in companies' annual report. This is consistent with CSR 2007 Status Report findings done by Bursa Malaysia which showed that the companies in Malaysia are far behind international practices and this foresees that there is a need to increase their levels of CSR disclosure and practice. Further analysis showed that trading and services industry shows the highest number of non disclosure companies of CSR disclosure and industrial product industry shows the highest number of companies that disclose CSR disclosure with less than ten percent of CSR disclosure level in companies' annual report.
The direct relationship between corporate governance characteristics, culture/ethnicity and CSR disclosure showed that the most significant variable that influences CSR disclosure is audit committee independence. The result demonstrated that audit committee is a significant factor that explains CSR disclosure, that is , more is disclosed when a company has more members in the audit committee. The result indicates that audit committee is important corporate governance characteristic that assists the board of directors in overseeing and ensuring adequate functioning of internal control mechanisms, monitoring and focusing on reviewing financial risk and risk management. The study showed that audit committee in Malaysian public listed companies had played their roles to protect the interest of the shareholders, and other stakeholders and ensure that the agent namely the board of directors carry their role according to the contract. This study had verified that audit committee plays important functions especially in assisting board of directors in discharging their responsibilities in financial reporting and internal control of the companies particularly in the CSR disclosure.
The government ownership showed a significant factor in influencing CSR disclosure in Malaysia. It implies that the higher the government shareholding in a company the higher the level of CSR disclosure will be. The result of the study is consistent with Eng and Mak (2003) and Amran and Devi (2008) who found a positive relationship between government ownership and CSR disclosure. Government interventions may create pressures for companies to disclose additional information because the government is a body that is trusted by the public. In order to alleviate agency problems between firms and shareholders, society and other stakeholders, the force from government can help to reduce the expected costs and the negative impact on firm value and can indicate to society and stakeholders that individual firms are doing their part to help in solving society's social problems through additional disclosures.
The result of the study also revealed that there is a significant relationship between foreign ownership and CSR disclosure. The result of the current study contradicts with Amran (2006) but consistent with several other studies such as Huafang and Jianguo (2007), Barako et al. (2006) and Haniffa and Cooke (2005). The mean for foreign ownership in this study is 9.95%. Even though, the mean value is low, but the variable is still has a significance influence towards CSR disclosure in Malaysia. The involvement of foreign shareholders will have a significance influence towards the CSR activities in Malaysia. In other words, companies those have more foreign investors appear to be obligated to disclose more.
In conclusion, it can be seen that the role of foreign ownership, government interventions through shareholdings and audit committee, and are very important in enhancing the extent of the level of corporate social responsibility disclosure in Malaysian companies. The foreign ownership, audit committee independence, government ownership and audit committee are important corporate governance characteristics that ensure the companies will comply with accounting standards and other legal requirements. This study has demonstrated that, in order to mitigate the agency problems between firms and shareholders, society and stakeholders, the pressure from government, involvement of foreign ownership and audit committee functions can help to reduce the expected costs and the negative impact on firm value and indicate to society and stakeholders that individual firms are doing their part to help in solving society's social problems through additional disclosures.
The findings of the study explicating that none of culture characteristics have an impact towards CSR disclosure in Malaysia. This explained that cultural values of board of directors do not affect the motivation of the companies to disclose their activities in companies' annual report. As demonstrate by Choi and Wang (2007) the alternative rationale for corporate philanthropy based on managerial values of kindness and integrity values are more likely to spread their intrinsic concern for others into the wider society in the form of corporate philanthropy. They argued that top managers with high compassion and integrity are most likely to contribute to improved managerial credibility and trusting firm-stakeholder relationships.