Environmental And Social Accounting Disclosure ESAD Accounting Essay

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Accompany with the fast advancement of economic and technological progress and rapid industrial development, sever environmental damages have been recognized globally, including climate change, acid rain, destruction of the ozone layer, and so on. Businesses have been criticized for creating such severs environmental impacts, and greater responsibility has been required from stakeholders and the society. Thus, a large number of organizations started to report their environmental and social related activities. In recent years, with the increase in awareness of environmental and social issues, the level of environmental and social accounting disclosures (ESAD) and the stakeholders demand for the related information are increasing (Hackston and Milne, 1996). Corporate social and environmental responsibility has been the subject of substantial academic debate for over a number of years (see for example, Guthrie and Parker, 1990; Gray et al., 1995a; Owen, 2007).

According to KPMG (2011), about ninety-five percent of the 250 largest global companies in the world now report on their corporate social and environmental activities, which represented an increase of more than fourteen percent over the 2008 survey. This survey also found out that most of the companies are demonstrating an increasing willingness to account for the organisations' behavior on important issues (KPMG, 2011). Admittedly, more and more organizations are increasingly realizing that environmental and social reporting offered various benefits, including driving innovation, increasing organizational value and promoting competitive advantage, apart from being responsible to the society. Academic researchers also advocated that ESAD information in the reports promotes accountability and transparency in corporate activities (Lehman, 1995; Gray et al., 1996).

Seeing the evolving global trends of environmental and social reporting, different international organizations and bodies have produced guidelines and principle to assist corporations undertake environmental and social reporting and disclosure. The mainstream guidelines include: Sustainability Reporting Guidelines by Global Reporting Initiative in 1999 and latest updated in 2012, ISO14000 Standards released by International Organization for Standardization in 1996 and issued new ISO 14001 series lately, and AA1000.

1.2 Research Aim and Objectives

Corporate social responsibility has increasingly concentrated on corporate governance as a vehicle for incorporating social and environmental responsibility into the organization's decision making process, benefiting various stakeholders, including financial investors, communities, customers, and employees (Gill, 2008). However, there is very little literature that covers the disclosure of corporate social and environmental from the perspective of corporate governance. Previous literature and studies have pointed that substantial country differences in ESAD appear to reflect differences in national context (William, 1999; Aaronson, 2003). It has been noted that Asian companies usually lag behind the Western corporations in the related area (KPMG, 2011, 2005). Previous literature also demonstrated that corporate governance has an influence on the level of ESAD (Xiao et al. 2005; Wang et al. 2008).

Accordingly, this paper aims to analysis the differences of ESAD in China and UK, and the relationship between corporate governance and ESAD.

The main objective of this study is two folded. The first research objective is to investigate the differences of disclosures in the sustainability report between companies in the UK and China, and how the disclosure practices change over time by reference to legislative drives that govern corporate environmental and social performance and try to examine how and why these arise. Specifically, examine the articulating power of legitimacy theory and stakeholder theory for the incentives of organizations in the UK and China to report environmental and social activities. The second objective is to investigate whether under different regulatory frameworks and national culture, the different corporate governance structure attribute to different level of ESAD in these two countries.

1.3 Reasons for choosing UK and China

The Reasons for choosing these two countries, namely the UK and China are listed in this section. Firstly, United Kingdom is a typical highly developed country, the public and institutions have been aware of the social and environmental issues for a long time. Thus, UK companies have addressed ESAD and reporting for over two decades, and have achieved significant achievements in this area. While, China is a newly industrialized country, and the relevant studies about ESAD began with 1990. China is a country that plays a vital character in global financial market with its dramatic increase and has unique economy context and a fast emerging capital market, however, devoted little attention on ESAD research (Wang, Sewon & Claiborne, 2008). In recent years, the development of sustainability reporting has increased significantly in terms of both volume and quality. As mentioned before, the different stage of economic development is one of the attributing factors that result in the different levels of ESAD. In addition, in the context of fast advancing economy of China, there have been several significant events that happened recently in a number of corporations shocks the society. For example, a large company named Foxconn, which is famous for making digital products, such as iPods and iPhones, had 13 employees suicides in 2010. And most recently, one of the Red Cross member in China has uploaded several photos and information about her personal life, which were about she bought many luxury products using the Red Cross's money. Serious criticisms throughout the country have been attracted by these shocking events that reflect lacking of certain degree of awareness of sustainability issue in a large number of Chinese organizations. These high-profile events have attracted both the government and the companies' attention. As a result, more and more companies in China are engaging in corporate social and environmental activities and disclosures. Moreover, a substantial change were happened as the Shanghai Stock Exchange (SSE) issued a code that required that the top companies listed on Shanghai Stock Exchange and foreign exchange markets to publish their corporate social responsibility reports besides the annual reports after the end of 2008. Additionally, the regulatory frameworks related to ESAD in these two countries are one of the main differences. Until now, the ESAD in UK companies are voluntary.

The contributions of this study for literature are listed as follows. First, this study will provide details of environmental and social accounting disclosure practices from China, which has previously received little attention. Second, this study will identify the relevance of a theoretical perspective that may provide a foundation for ESAD, including stakeholder theory and legitimacy theory. Third, by comparing the differences of ESAD in these two countries through the years, this study will offer relevant suggestions and improvement incentives for ESAD in China. Last but not the least, this paper will fill the literature gap by providing mandatory information apart from voluntary disclosure, which most of previous studies were not concerned with this type of disclosure.

1.4 Structure of the Research

The remainder of this study consists of the following four sections. Chapter two establishes a theoretical framework for this study by reviewing current research in the area of systems or social oriented theories as a basis for understanding management's motives for making ESAD. Prior to that, a literature review is established that offers a summary of previous studies. Lastly, the culture and regulatory framework in China and UK is introduced. Chapter three is research methodology, which consists of three sections, including data selection, research instrument, and the process. Chapter four is analysis and discussion of findings, which is the most important part of this study. The conclusion, limitation and recommendations can be found in chapter five.

Chapter 2: Literature review

2.1 Introduction

Since the 1970s, environmental and social accounting disclosures (ESDA) literature has been concerned with how organizations interact with society via reporting mechanisms (Guthrie and Mathews, 1985). There are a large amount of academic research studies had been concentrated on this area. In order to gain a solid understanding about best approach to analyze the research question, it is important to study and summarize the previous works that has been done. This chapter is going to present relevant prior research literature regarding this issue and the related theories.

2.2 Prior Research Studies

There are a number of Comparative studies about environmental and social accounting disclosures, however, most of them are descriptive in nature and focus on developed regions, particularly the United Kingdom, the United States and the European countries (see, for example, Adams et al., 1995; Gray, Kouhy, & Lavers, 1995a; Archel and Husillos, 2009). For example, Gray, Kouhy, & Lavers (1995) did a longitudinal study of UK disclosure, which enables researchers gaining further understanding regarding the development of related theories and the practicing trends in the U.K.. There are many cross-country or multinational studies that have been undertaken during past decades (see, for example, Guthrie and Parker, 1990; Adams, Hill, & Roberts, 1998; and Williams and Pei, 1999). The majority of those studies are among western countries or developed countries. One of the exceptions is a study carried out by William (1999). This paper using content analysis on 356 listed companies in the Asia-Pacific Region (Australia, Singapore, Hong Kong, Indonesia, the Philippines, Thailand and Malaysia). They concluded that the socio-political and economic system of a nation interact to shape the perceptions of corporations in the need to release environmental and social disclosures that meet social expectations as well as to avoid government regulation to preserve their own self-interests, which consistent with Bourgeois political economy theory

Currently, there are limited numbers of published journal articles about environmental and social disclosures that focused on comparing developed countries and developing nations. One of them is a study that compares and contrasts the impact of social and economic development on corporate social and environmental disclosures in the U.K. and Hong Kong, written by Xiao et al (2005). This study identified that social and economic development is one of the factors influencing environmental and social accounting disclosures, assessed 69 listed companies over the period of five years (1993-1997) and found out that companies in Hong Kong and the U.K. differed in the theme and amount of disclosure. Nevertheless, due to the fact that in their analysis the economic development variable is not evaluated, their argument is not that convincing.

At present, no study has been taken to compare environmental and social accounting disclosures (ESAD) in China and the United Kingdom. Nevertheless, significant amount of studies about ESAD has been done separately in both countries, particularly, in the U.K.. Environmental and social accounting disclosures in the U.K. have a significant change, including increased volume and information, since the beginning of organisations disclosing sustainability issues (Gray, Javad, Power, & Sinclair, 2001; Gray, Kouhy, & Lavers, 1995a). Nowadays, most of the organisations listed on stock exchange have issued Sustainability Reports, apart from Annual Reports. During the period from 1979 to 1991, there had been a steady growth in the volume of total corporate social responsibility reports, both voluntary and mandatory disclosures (Gray, et al., 1995a). By contrast, Chinese companies just started to realize the importance of disclosing sustainability information. Previous related studies about ESAD in China began with 1990 (Han & Zhang, 2008). Those separate studies in both countries are somewhat informative and lack of comparability on the study of environmental and social accounting disclosures.

Most of the previous studies use quantitative method for their studies (see, for example, (Williams & Pei, 1999; Farook, Lanis, & Hassan, 2011; Roberts, 1992). They often analysis a sample of campanies' sustainability reports or annual reports. However, there are a number of sutdies adopt the qualitative methods, such as interviews, case study, and discourse analysis (see, for example, Archel, Husillos, Larrinaga, & Spence, 2009; O'Dwyer, Owen, & Unerman, 2011). Among the related studies, there are large amount of studies utilize content analysis as a method to gather information on disclosure in reports (Guthrie and Parker, 1990; Gray et al., 1995a; Xiao et al., 2005)

2.3 Theoretical framework

Different institutions such as governments, professional accounting and business organizations have faced many pressures to begin sustainability reporting without a substantial basis or theoretical underpinning. At the same time theoretical frameworks in the relevant literatures have been developed and adopted to analysis ESAD, including economic theory studies, and social and political theory studies. Economic theory studies include positive accounting theory (see, for example, Milne, 2002;) and agency theory (see, for example, Ness and Mirza, 1991; Tinker and Okcabel, 1991), and those two perspectives are highly contestable. Economic-based theories were criticized of being self-interested and aiming at wealth maximization, which run counter to the basic objective of sustainability (Liu & Anbumozhi, 2009). In this situation social and political theories appears to be better at explaining the reasons of organizations responding to public or government concerns about their social and environmental impacts ( (Guthrie & Parker, 1990) Social and political theory studies including stakeholder theory (Roberts, 1992; Unerman and Bennet, 2004), legitimacy theory (Archel, Husillos, Larrinaga, & Spence, 2009; Guthrie and Parker, 1989), and political economy theory (Cooper and Sherer, 1984; Clark, 1991). The nature of Environmental and social accounting disclosures is rather complex and there is no single motivation for organisations to disclose sustainability information (Xiao, et al., 2005). As a result, it is extremely difficult to explain the organisations environmental and social accounting disclosures from one theoretical perspective and many of the theoretical perspectives are overlaped (Gray, et al., 1995a). We attempt to explain the relationship between environmental and social accounting disclosure, regulation and corporate governance using theories such as stakeholder theory, legitimacy theory and political economy theory. The followings briefly discuss these theories, which allow us to focus on the role of ESAD

2.3.1 Political economy theory

Political economy theory is defined as 'the social, political and economic framework within which human life takes place', which recognizes the power of conflicts in the society and among different groups (Gray, Owen, & Adams, 1996). Political economy theory is the only theory that takes the impact of social, political and economic development into consideration. According to Deegan and Unerman (2006), by adopting a political economy theory perspective in the study, researchers can broaden the level of analysis and consider the broader social, economic and political issues that may impact ESAD.

There are two streams of political economy theory. One is bourgeois political economy, which is a derivative of the modern liberalism perspective (Gray, Owen, & Adams, 1996). The other is classical political economy theory. Classical political economy theory assumes the government is not neutral, and 'explains that corporate disclosures are being a tool that powerful individuals or groups use to maintain their own positions to the detriment of those without power' (Deegan, 2007).

The Bourgeois perspective concentrates on the interactions of actors within a pluralistic world and there are various conflicts among the different individuals, organizations, and institutions (Clark, 1991, p.90; Gray et al., 1996; Williams, 1999, p.211). Bourgeois perspective also considers the role of the state are neutral. Both stakeholder theory and legitimacy theory are more specific theories that developed within the political economy framework (Gray, Owen, & Adams, 1996). The next two sections are going to discuss these theories in detail.

2.3.2 Stakeholder theory

Stakeholders are defined as individuals or groups that have a 'legitimate claim on the company' and somebody that is affected by the company's performance, including shareholders, institutional investors, suppliers, customers, community, etc. (Freeman, 1984; Mattingly and greening, 2002 p.268; Deegan & Blomquist, 2006). Stakeholder theory asserts that the organisation's continued existence requires stakeholders support and approval, which is based and tested on the direct effect that stakeholders have on decisions regarding the organizations' activities and disclosures (Ulmann, 1985; Roberts, 1992). Besides, the organisation's activities must adjust to gain the approval from stakeholders. A number of studies have emphasized the importance of stakeholder engagement activities in the process of sustainability reporting (Andriof et al, 2002; Unerman & Bennett, 2004). Mainly, there are two approaches in the stakeholder engagement process. One is holistic approach, and the other is strategic approach (Deegan and Blomquist, 2006).

The former approach will treat all the stakeholders equally and try to be responsible to all of the related parties, which is rather difficult to achieve in real life. As to the latter branch assumes that ESAD is driven by the degree of power or control that the specific group of stakeholders has over the company's resources. Accordingly, an organization will only respond to the powerful stakeholders

In addition, some of them hold the opinion that stakeholders have the ability to influence the reporting, the more powerful the stakeholders, the more the corporation must adapt. Social and environmental accounting disclosure is regarded as part of the dialogue between the corporation and its stakeholders (Robert, 1992). Based on Robert's (1992) work, sustainability reporting has been a relatively useful medium for negotiating these relationships. Environmental and social accounting disclosures are seen by some researchers as a mechanism that organizations utilize in order to enhance the company's status, provide information to stakeholders and discharge the social contract between the entity and the relevant stakeholder groups (Gray, 1988; Guthrie and Parker, 1990).

Even though previous studies have proved that stakeholders influence the decision making of the organization and corporate activities, there are no researches to test the level of stakeholder influence on corporate social and environmental activities (Roberts, 1992). It should be noted that the definition of the term stakeholder is rather wide and complex, which may result to the company unable to ascertain the stakeholders and the degree of accuracy. As a result, the theory may not be able to respond to the argued concerns.

Stakeholder theory fits for this study as previous studies suggested that the unique stakeholders' expectations in a particular nation will lead to different ESAD between the countries (Van der Laan Smith et al., 2005; 2010).

2.3.3 Legitimacy theory

Legitimacy is defined by Suchman (199, p.574) as 'a generalized perception or assumption that the actions of any entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs and definitions'. When a disparity exists between these two value systems, there is a threat to the entity's legitimacy (O'Donovan, 2002). According to Dowling and Pferrer (1975), legitimacy can be considered as a resource on which organisaitons depend for the long term viability, which is different from the term 'legitimation'. It promotes corporate viability by assuring the essential availability of labour, capital and customers, while alleviating possible threats and disruptive actions, such as government regulations and disgruntled stakeholders (Pfeffer and Salancik, 1978; Chalmers and Godfrey, 2004).

A legitimacy gap arises when one entity's activities not meet the expectations of other entities' (Sethi, 1979; Lindblom, 1994). It is demonstrated that reactions to a legitimacy gap will depend on management's perception of the acceptability from the society or stakeholders, thus, the response to a perceived threat will be varied accordingly. Legitimacy theory advises that ESAD is a reaction to media attention, social visibility or public pressure from major social and environmental events (Patten, 1991; 1992; 1995; Brown and Deegan, 1999). Lindblom (1994) identified four strategies which an organization seeking legitimation may adopt, including educate and inform the public about changes in the organization's performance and activities, change the perceptions of the relevant groups, manipulate perception by deflecting attention from the issue of concern to other related issues, and change external expectations of its performance (detail see table 1). ESAD is a critical way for organizations to communicate with the stakeholders and the society and the organization will report on activities when management realizes that the information is demanded by the society (De Villiers and Van Staden, 2006). Consequently, ESAD can be regarded as a signal toward legitimacy by organizations improve the enforcements as well as the reputation (Guthrie and Parker, 1990; O'Donovan, 2000)

This paper's discussion is extended to legitimacy theory, since stakeholder theory and legitimacy theory often used to complement each other, and they are closely related (De Villiers and Van Staden, 2006). However, Legitimacy theory does suffer from an overlap with other theories, including institutional theory and political economy theory (Gray et al., 1995a; Deegan, 2002).

Table 1: legitimacy strategy (source from Gray et al. 1995a)

2. 4 Regulatory framework in UK and China

One of the research questions for this paper is to investigate whether the differences in the two countries' regulatory framework attribute to the different level of environmental and social accounting disclosure. As a result, a basic understanding of the regulatory framework in UK and China is necessary. Additionally, the organisations utilize social and environmental activities as an instrument to reduce the possibility of adverse governmental regulations and stakeholder' expectations to maintain the organizations' position. The regulatory framework is an important element in the related theory, such as legitimacy theory and stakeholder theory. Thus, this section is going to introduce the background information about the regulations and guidelines in UK and China.

2. 4. 1 Principles and Regulations related to ESAD in China

Recently, Chinese government and Shanghai Stock Exchange (SSE) have realized the importance of social and environmental responsibility. In order to promote sustainability reporting at the national level and organizational level, Chinese government and SSE have issued laws and regulations mandatorily require certain organization to report information about social and environmental responsibility.

Since 2007, the Ministry of Environmental Protection of China (MEPC) has launched a sequence of measures related to corporate social and environmental reporting. The Measures on Open Environmental Information Disclosure (for Trial Implementation) is the initial regulation issued by MEPC in 2007 and Effective in May 2008. In this regulation, it mandates heavy-polluting firms, such as oil production companies, mining companies and Iron & Steel companies, and environmental agencies to reveal certain environmental related information to the society and public(MEPC, 2008). Additionally, The State-Owned Assets Supervision and Administration Commission of the State Council (SASAC) issued the Guidelines to the State-owned Enterprises Directly under the Central Government on Fulfilling Corporate Social Responsibilities in 2008. The state-owned enterprises (SOEs) are large organizations and highly visible to the public that are directly under Chinese central government's control. Basically, this guide illustrates the importance of implementing Corporate Social Responsibility in the state-owned enterprises (SOEs) and states the requirements for SOEs to fulfill the obligation. The detailed information of this guide can be found in SASAC's website. In the same year, the pace of ESAD was further accelerated by SSE that mandate require three types of listed companies to publish corporate social responsibility report, including the sample companies that listed in the SSE Corporate Governance Index, companies in the financial sector, and companies that listed on the foreign exchange stock. In addition, SSE encourages companies to issue CSR reports voluntarily, and assurance the report by a third party.

2. 4. 2 Principles related to ESAD in UK

In the UK, the Companies Act of 2006 imposes disclosure of key environmental and social performance indicators in the annual operating and financial review (OFR) for companies that listed and non-listed on the stock exchange (Williams and Conley, 2007). However, the Companies Act allows enormous degree of determination about the information to be disclosed, which may hamper the coherence of the related information (Williamson and Lynch-Wood, 2008). Additionally, in the subsection of accounting standards of Combined Code, there are requirements regarding the issue of social and accounting disclosure in annual report. However, there are no mandatory requirements about sustainability report. Besides, the main differences for the Combined Code in the UK, and corporate governance regulations in China is that the main essence for combined code is the organisations are recommended to comply with the requirements, when the company is not comply with the requirement, the organisaiton should explain the reason for this act. However, the corporate governance regulation in China for the organisation is that the organisation should act complete in accordance with the regulations, or the company will be punished by the law. Nevertheless, several Industry-led initiatives have issued guidelines regarding the ESAD in corporations, including the ISO 14000 series and Environmental Key Performance Indicators - Reporting Guidelines for UK business issued by Department for Environment Food and Rural Affairs (defra, 2010), which are voluntary in nature.

Due to the different measures have been taken from these two governments, and this study is going to analysis whether the different approach will influence the quality of ESAD. Specifically, it is argued that the mandatory requirements regulated by the Chinese government would have a positive impact on the quantity of corporate social and environmental reports, but will have a negative influence on the level of ESAD. Because of the laid back progress of social and environmental responsibility awareness of the organisations and related stakeholders comparing to the UK's progress.

2.5 Culture and ESAD

Culture is defined as the preliminary setting of customs and beliefs through the expression of social relations, which can be depicted as a set of standards for behavior regarded circumstantiated within the society (Withrop, 1991). All organizations endure within cultural backgrounds, and national culture can influence organisations' activities, managements and structures. The culture values that differentiated countries from one and another can be systematized statistically into five dimensions, namely, Power Distance(PDI), Individualism versus Collectivism (IDV), Masculinity Versus Feminity (MAS), Uncertainty Avoidance (UAI), and Long-Term Orientation (LTO) (Hofstede, 1980; 2001; Micheal, 1991).

In the context of the Hofstede Dimensions of national culture, several studies have been made to analysis whether culture is a factor that influencing the level of ESAD (see for example, Gray, 1988; Williams, 1999; Adams et al. 1998; Qu and Leung, 2006; Van Der Laan Smith et al., 2005). Gray (1988) suggested that cultural values influence the nation's accounting system and ESAD. Williams (1999) noticed that UAI and MAS are statistically related to the ESAD, which has provided quantitative evidence to explain the differences of ESAD in Asia-Pacific. However, it should be noted that the aspects of qualitative information are a research gap in this study. Adams et al. (1998) also discovered that the level of general social attention, attitudes, and concerns are related to the level of ESAD. This may be associated with the related reporting requirements and regulations.

The following bar graph below shows a brief comparison of the culture differences in the context of China and United Kingdom. It is apparent that both UK and China are characterized as having high levels of masculine and strong uncertainty avoidance, which indicates that they are highly success oriented and driven, with the same score of 66 (itim, 2012). http://geert-hofstede.com/china.html

The other three dimensions of China and UK are totally different. Chinese society is characterized as high levels of power distance and collectivism and long term orientation, While UK is the opposite.

Table 2: Hofstedd Dimensions of National culture in UK and China

Based on the Hofstede Dimensions of national culture, this study is going to investigate whether national culture will impact the level of ESAD. This study assumes that national culture has a influence on the level of ESAD. Despite that the Hofstede Dimensions of national culture framework is criticised of its methodological flaws (see for example, Mcsweeneys, 2002). This framework has been proved useful (see for example, Kim and Gray, 2009).

Chapter three: Methodology

3.1 introduction

This chapter will introduce the methodology utilized in this study in order to achieve the research objective. It will start by justifying the use of disclosure media, especially, the use of sustainability reports. Then, sample selection criteria will be introduced, including the reasons for choosing those companies. After that, this chapter details the research method including the content themes to testify the quality of the reports and the testing method to justify the impact of those potential factors may influence the degree of ESAD.

3.2 disclosures media

It has been noted that companies not only make public disclosure in the sustainability reports, but also use other channels of distribution, such as annual reports, advertising, and internet. However, in a developing country like China, the organisation's Corporate Social Responsibility Report is the main information disclosing channel. These reports are originally no difference with sustainability reports, but utilized in a different name.

Besides, drawing from the majority of previous studies utilized the annual report as a principal focus of the organization's principal focus (see, for example, Archel, Husillos, Larrinaga, & Spence, 2009; Xiao, Gao, HERAVI, & Cheung, 2005; Gray, Kouhy, & Lavers , 1995b; Roberts, 1992; Kirkman & Hope, 1992) . However, nowadays, sustainability Reports are the official publications for organisaitons' to disclose environmental and social responsibility information. More and more companies started to publish sustainability reports to disclosure social and environmental issues, apart from annual reports. Corporations publish environmental information in Corporate Social Responsibility, Corporate Responsibility, Sustainability, or stand-alone Environmental reports. No matter what the report name is, what is important is that companies understand and can be transparent about their actions and activities to reduce the harmful environmental and social impacts of their activities, products and services (Department for Environment, Food and Rural Affairs, 2006).

In addition, there are mandatory requirements for top one hundred stock exchange listed companies to issue corporate social responsibility reports annually in China. Thus, this study utilizes organisations sustainability reports as a principle focus of companies' reporting information. In this study, the corporate sustainability report is viewed as a means by which corporations seek to establish an image in the public sphere through reporting, emphasizing the role of the sustainability report in constructing and presenting a corporate life and, seeking to promote the interests of a company by providing a 'snapshot' of the mindset of corporate management (Gray et al., 1995 b; Hines, 1989).

The sustainability reports of organizations listed on stock exchanges have often become a source of raw data for sustainability disclosures studies, and therefore have served as an instrument for observing ESAD. Sustainability reports are used because companies commonly signal what they perceive as important through the reporting mechanism. This is the same condition with annual reports, thus, most of previous researchers also utilized annual reports as the main focus about companies ESAD. However, there were literature argue that the annual reports provide limited insight into corporate social and environmental activities in the organizations and the stand-alone sustainability report (namely, corporate social responsibility report) are better sources (Frost et al. 2005; KPMG, 2011). Consequently, this study has utilized the sustainability report as the primary instrument.

3.3 sample selection

A sample of 16 publicly listed companies was selected from within chosen environmentally sensitive industry groups for two countries, and companies were selected from each country from oil and gas production, mining, electric utilities, and Iron and steel industries (see Appendix one for detail).

The samples selected are the biggest in terms of company size in that particular industry. The measurement of size is based on the total amount of market capital (sales).The company size was restricted to big companies for two reasons. Firstly, previous literature on corporate disclosure provides consensus that big companies generally are good reporters (Cowan et al., 1987; Belkaoui and Karpik, 1989). In other words, 'super-large' companies are significantly more like to disclose more information than others. A number of empirical studies (see for example Patten, 1992; Gray et al., 1995a; Deegan and Gordon, 1996; Hackston and Milne, 1996; Liu and Anbumozhi, 2009) demonstrating that there is an association between the size of a company and corporate social disclosures. Secondly, big companies face greater political and public pressures than small companies due to the resources and profits they generate. Besides, drawing upon legitimacy theory, the sustainability issue is more prominent in big companies. Accordingly, focusing only on big companies may help in controlling the effect of size on the ESAD (see for example, Guthrie and Parker, 1990; Patten, 1992; Hackston and Milne, 1996; Kolk 2003; KPMG 2005).

This study is restricted only to environmentally and socially sensitive corporations because previous studies documented evidence that the nature of a company's industry has been identified as a factor potentially affecting companies social and environmental disclosure practices (see for example, Gray et al., 1995a; Milne and Patten, 2002; Deegan and Blomquist, 2006; Belal, 2008). Companies whose economic activities directly alter the environment are more likely to disclose information about their environmental impacts than organizations are in other industries (Hackston and Milne, 1996; Adams et al., 1998). Besides, It has been argued that the environmental sensitivity of the industry influence the level of environmental reporting (Deegan and Gordon, 1996).

Accordingly, this study has gathered a total of 48 annual reports from the 16 companies within the range of 3 years, where nine are from the UK and 7 are from China. If the companies' sustainability reports could not be obtained, corporations were removed from the sample and substituted by the next biggest company in the industry. The biggest companies were selected from the Forbes Global 2000 largest public companies in the world (Forbes, 2012), and cross referenced with the Financial Times UK top 500 companies list (FT, 2012) and the Chinese top 500 companies list (Fortunechina, 2012).

After finished the sample selection, it appears that the sampled companies are all state-owned companies in China. And this is not a surprising result, as they are the largest companies in China and they are energy companies. These types of companies in China are all SOEs. Currently, there are about over one hundred SOEs under the government's control and most of them are listed on SSE or Shenzhen Stock Exchange and some of them listed on foreign exchanges.

3.4 research technique

This paper employs content analysis to examine written material contained in the sustainability reports from 2008 to 2010 to examine the level and nature of environmental and social information being disclosed. Since this is the most common approach in analyzing environmental and social accounting disclosures. It defined as 'a technique employed to measure systematically, objectively and qualitatively of the content of communication (Berelson, 1971; Milne and Adler, 1999; Gray, Kouhy, & Lavers , 1995b). The measurement instrument utilized in this study is derived from a number of previous academy researchers' approaches (including Xiao, Gao, HERAVI, & Cheung, 2005; Guthrie and Parker, 1990; Wiseman, 1982; Sumiani et al., 2007; Leigh and Yee, 2003). The content themes are divided into six main categories, including board oversight and governance structure, stakeholder engagement, environment and energy, health and safety, human resources and community (see table 3 for the content themes). This content theme has been widely used in previous studies and the category is in accordance with the decision rules for the categories of social and environmental disclosures developed by Global Reporting Initiative (GRI)'s G3 Sustainability Reporting Guidelines (GRI, 2006), the related environmental management standards, such as theISO14001 series from the International Organization for Standardization (ISO), and the Center of Social and Environmental Research (CSEAR) in United Kingdom. In this study, the content analysis employed presumed that content categories identified in the written messages of the sustainability report contain evident meaning (e.g. environment, health and safety, environmental management system, etc.) that can be categorized. The definition of each category will form a basis for determining the subject of concern, level, amount and location of ESAD (Guthrie and Parker, 1990).

Table 3: content themes

According to Gray et al. (1995b), words, sentences and pages are the preferred units of analysis in written communications and prior studies have undertaken diversified approaches, quantification taking the form of either the number of words, characters, sentences, pages, or the number of documents containing a particular category of disclosure, or proportion of pages devoted to different categories, or the proportion of volume of CSR disclosure to total disclosure (Unerman, 2000). This paper adopted number of sentences in the analysis, since Gray et al. (1995b) suggested that sentences are preferred in written communication if the task is to infer meaning and considered both as the most appropriate measure of disclosure and as the most appropriate basis for coding and analysis, which is likely to provide complete, reliable and meaningful data for further analysis (Milne and Adler, 1999). The use of words and pages contain difficulties and bias. Firstly, the interpretation of individual words out of context may result in differences of meaning and triggered misunderstanding (Unerman, 2000). Secondly, due to differences arising from font size, margins, graphics etc. and the use of a grid presenting problems of comparability, the use of pages is not appropriate (Lavers, 1993; Wilmshurst and Frost, 2000). Unerman (2000) argued that measuring the volume of sustainability disclosures in terms of proportions of a page, should take into account of non-narrative SER disclosures, including charts, tables, photographs, because of the possibility that pictures might be used by management to impress stakeholders. Thus, this study includes pictures and graphs in the measurement, and levels of extensiveness for each content theme are measured based on five categories, namely, non-disclosure (0), general disclosure, qualitative (narrative) disclosure, quantitative disclosure, and combination disclosure (4). General disclosure (1) is any statement of one sentence in length. Qualitative disclosure (2) is the information that contains more than one sentence and pictorial information. Quantitative disclosure (3) is the information that expressed in quantitative numbers (including tables). And the last category contains both quantitative and qualitative information. The previous categories are labeled from zero to four accordingly.

The assurance statement in the sustainability report is considered as one of the control variables. And the extensiveness of this variable is categorized into three categories, namely, no assurance statement (0), assurance statement assured by one of the big four accounting firms (1), and assurance statement assured by other organizations (2).

After acknowledging the measurements utilized in the previous literature measuring organisations' corporate governance (see for example, Chau and Gray, 2002; Wen and Philomena, 2006; Larcker et al. 2007), this study uses the following two constructs: board structure and board compositions. Specifically, the board structure is concerned with where there is the existence of a corporate social responsibility or sustainability committee on the board, the existence will be marked with '1', and no will be marked with '0'. And the board composition will be measured by the percentage of independent directors.

Based on the previous information, a multiple linear regression model was established to investigate whether hypotheses have an influence on the level of environmental and social accounting disclosure. POINTS is the achieved total points of the companies environmental and social accounting disclosure. This is the dependent variable. And the independent variables are the level of assurance (AS), the percentage of independent board member (IP), the Hofstede Dimensions of national culture: Power Distance(PDI), Individualism versus Collectivism (IDV), Masculinity Versus Feminity (MAS), Uncertainty Avoidance (UAI), and Long-Term Orientation (LTO).

POINTS=βo + β1AS + β2 IP+ β3 PDI +β4 IDV‐ Β5MAS+ β6 UAI+β7 LTO

REVENUE (in millions $)

bp

2008

2009

2010

shell

367,053

246,138

308,928

BG

458,361

278,188

368,056

RT

58,065

44,036

60,324

AA

26,311

20,858

27,960

V

2,885

6,578

7,930

AN

3,372

2,962

4,577

BH

47,473

50,211

52,798

X

27,952

22,732

30,499

2008

2009

2010

REVENUE

Millions RMB

Millions RMB

Millions RMB

Sinopec

1,444,291

1,345,052

1,913,182

Petro

1,072,640

1,019,275

1,465,415

CNOOC

125,977

194,800

209,600

shenhua

107,133

121,312

157,662

wuhan

86,592

95,426

190,691

baoshan

200,332

148,326

202,149

huaneng

115,607

151,375

177,140

Chapter four: Data presentation, discussion and interpretation

4.1 Introduction

In this chapter, the data analysed and gathered from the research procedure is going to presented and interpreted in the following five main sections. In the first section, the preliminary statistics of China corporate social responsibility report is going to illustrate to the readers. The second section will present descriptive statistics of the sampled companies' reports in China and UK. Specifically, the sub-sections will contain the six content themes data, including board oversight and governance, stakeholder engagement, environment and energy, employee, health and safety, and community. The last section is going to discuss the finding and interoperate the meanings.

4.2 Descriptive statistics overview in China

In the preliminary analysis process, the author discovered that the total number of sustainability reports in China have been increased dramatically, after the first report issued by PetroChina in 2001. As mentioned in the previous chapter, there are mandatory requirements from Shanghai Stock Exchange for certain type of companies to issue social responsibility reports since the end of 2008. And the table below shows the total number of Shanghai Stock Exchange listed companies that issued corporate social responsibility reports from 2008 to 2009, the mandatory reported companies, voluntary disclosed companies, and the number of companies that contain external assurance. The numbers of companies that report social and environmental issues are increased from 290 in 2008 to 327 in 2010. It is apparent that mandatory disclosure companies constitute the majority of disclosure reports; however, it is a decrease trend in the proportion of mandatory disclosure companies from 2008 to 2009 (from 89% in 2008 to 84% in 2010). This indicates that more and more organizations have realized the importance of take part into social and environmental responsibilities. As to the number of reports that contain external assurance is rather lower, just around 15 from 2008 to 2010.

Table 3: Numbers of shanghai stock exchange companies that publish CSR reports.

2008

2009

Mandatory disclosure companies

in the governance board of SSE

231

237

listed on foreign exchange markets

49

55

in the financial industry

21

26

repeated appeared companies

43

39

total mandatory discourse companies

258

279

Voluntary disclosure companies

32

39

Total disclosure companies

290

318

external assurance

12

16

Table 4: Proportion of voluntary and mandatory disclosure companies

4.3 Descriptive statistics overview for the Energy sector

Based on the primary analysis, it is apparent that the level of ESAD of companies in the United Kingdom is significantly higher than those in China and there is an increase trend for organizations in both countries about the quality of ESAD. Besides, the major reporting form in Chinese companies is different from the British companies. Most of the Chinese organizations are reported based on the requirements issued by SSE and The State-Owned Assets Supervision and Administration Commission of the State Council (SASAC), while, British companies are reported in accordance with the GRI Index. Specifically, the report format for Chinese companies is stakeholder oriented. They usually divided into six main sections, including customers, governments, economic performances, investors, employee and the society. Additionally, the Chinese companies' reports put a lot effort emphasis their efforts in fulfill the government's regulations and requirements and the organisations' policies, and they usually do not contain a specific objective in the near future. When comes to UK organizations, their reports usually more reader friendly, cover more information using pictures, graphs and tables, and they often present their objectives for the near future and their progresses have achieved. More detailed information is going to present in the following sub-sections.

4.3.1 Descriptive statistics of ESAD scores

Among the forty-eight energy sector sustainability reports sampled, only 8% (4 sustainability reports) achieved higher than 60%, and they all UK companies' reports in 2010. Nearly half of them (46%) reached a score between 50% and 59.9%, which equals to 22 reports. The reports that get lowest scores (less than 39.9%) constitutes 15% of the total reports, equal to 7 reports, and they all the Chinese companies reports. The left 31% are the reports that achieved the score higher than 40% but lower than 49.9%. Based on the previous analysis, it is apparent that the quality of ESAD is rather poor, and the Chinese companies' reports are significantly lower than the UK ones. The detailed information is going to be presented in the following paragraph.

Table 5:

Table below (table 7) present a descriptive statistically of disclosure score of ESAD both UK and China for sample companies' sustainability reports of each year and in general (from 2008 to 2010). And table 6 shows the tendency off ESAD from 2008 to 2010 between UK and China. Based on the information, one can concluded that there is a significant gap of the quality of ESAD between Chinese firms and UK companies; nevertheless, the tendency of the gap has been reduced slightly from 2008 to 2010 (reduced 5%). The minimum score for ESAD in China is 0.32 in 2008, and in UK is 0.44 at the same year. As to the maximum score, for Chinese companies report is 0.52, and for UK orgnisations is 0.61. Both the maximum scores and the minimum scores contain a difference around 10%, which indicate a huge ESAD gap between these two countries. Generally speaking, the mean scores for UK and China are slightly varied, which signify that the mean is regarded to be highly representative for the sample. Besides, the standard deviation from 2008 to 2010 and overall is very small. Thus, it could be concluded that the mean is very reliable.

Table 6: Tendency of ESAD from 2008 to 2010 (mean)

Table 7: Descriptive statistics

UK

CHINA

2008

2009

2010

general

2008

2009

2010

MAX

0.57

0.57

0.61

0.61

0.43

0.51

0.52

MIN

0.44

0.45

0.49

0.44

0.32

0.34

0.37

MEDIAN

0.5

0.51

0.53

0.51

0.38

0.44

0.51

Std. Deviation

0.045

0.039

0.048

0.048

0.046

0.063

0.097

Mean

0.5

0.52

0.56

0.53

0.38

0.44

0.49

Table 8 presents the detailed sample repots' ESAD points. Generally speaking, the trend is the same with the ESAD score, indicates the evident reporting quality gap between these two countries. However, the quality of ESAD has been enhanced throughout the years. Nevertheless, some Chinese companies' report is not in accordance with the trend, the quality of ESAD has dropped certain points from 2009 to 2010; see for example, CNOOC and Baoshan Iron & Steel. In order to analysis the reporting more detailed and to identify the pros and weakness, the following paragraph will present the sectional themes information.

Table 8: ESAD points for all the sample reports

4.3.2 Descriptive statistics of ESAD points by content themes

Table 9.1 shows each companies' sustainability reports board oversight and governance structure achieved points. From the table below, it is apparent that Chinese companies reports level of disclosure about this information is overtly lack behind the UK companies' in 2008. However, there is an upward trend about the quality of disclosing this information through the years for both UK companies and Chinese organizations. Generally speaking, one companies report achieved over 20 points should be the accepted level, and above 25 points should be rated 'good'. It can be seen from the data in table 9.2; the mean points for both countries have not achieved a good performance level. Nonetheless, some of the UK organisations' reports achieved this level. The minor differences for the mean and median indicates that the sample mean are reliable. And there are about 10 points' gap between the maximum points and minimum points for both countries.

Table 9.1

Table 9.2

UK

China

2008

2009

2010

total

2008

2009

2010

MAX

28

28

30

30

22

24

24

MIN

21

22

21

21

15

15

22

MEDIAN

23

23

26

23

18

22

23

Std

2.42

2.18

2.96

2.55

2.77

3.02

0.69

Mean

24.11

24.00

25.56

24.56

18.00

20.86

23.14

Table 10.2 presents the information about second content theme, which is the stakeholder engagement. Again, there are huge differences between the Chinese companies and UK firms. The most striking result from the data is that CNOOC's 2008 report contains no sign of stakeholder engagement information. Besides, in most of Chinese companies reports, they utilize tables or graphs to present the information about the stakeholder engagement process, including identification of major stakeholders, approaches to stakeholder consultation, type of information generated by stakeholder consultation and use of stakeholder information. Using this instrument, the readers could see the related information more clearly. However, there are problems, as well. Firstly, the information they provided is very general, hardly to find any detailed information. Secondly, the table or graphs nearly contain the same information throughout the analyzed three years reports, which attribute to the questions about the reliability of their approaches. Have they really do any type of stakeholder engagement in the process, or just for the sake of in accordance with the guidelines. As to the UK companies reports, they usually disclose detailed information about the stakeholder engagement process, and presented the way the consulted the related stakeholders and the results. Thus, the rated points telling the same story, the mean score for UK companies from 2008 to 2010 achieved 8 points, while, the Chinese reports only achieved half of the points, equal to 4 (see table 10.2).

Table 10.1

Table 10.2

UK

CHINA

2008

2009

2010

total

2008

2009

2010

MAX

9

10

10

10

4

9

7

MIN

5

5

6

5

0

1

3

MEDIAN

8

8

9

8

3

5

5

Std

1.45

1.69

1.39

1.62

1.60

2.52

1.57

Mean

7.11

7.89

8.78

7.93

2.71

5.00

5.14

The next content theme is environment and energy. In this subheading, it is apparent from the data in table 11.1 that the level of information disclosure about the environment and energy in both countries are quite promising. The total mean points for UK and China just stand with around one point of differences, with UK reports achieved 23.78 marks and Chinese reports reached 22.29 points. It could be explained that as environmental sensitive industries would pay more attention to present environment and energy related achievements or information. Nevertheless, the mean points in 2008 for Chinese companies are significantly lower than UK reports. This may attribute to the fact that many of the companies just start reporting the related information for the first time in 2008, after the requirement issued by SSE. Once again, the differences between mean points and median points are very small, indicating that the mean points are reliable.

Table 11.1

Table 11.2

UK

CHINA

2008

2009

2010

total

2008

2009

2010

MAX

26

27

29

29

23

27

27

MIN

19

17

18

19

16

18

18

MEDIAN

24

24

26

24

18

24

25

Std

2.47

3.32

3.69

3.18

2.34

3.21

2.83

Mean

23.11

23.33

24.89

23.78

18.86

24.00

24.00

Table 12.1 exhibits the gained points for companies in UK and China from 2008 to 2010 in the forth content theme human resources. Based on the information, it could be observed that Chinese companies' reports gained fewer points in this section as most of the former content themes. However, the difference is not that sever. The main reason attribute to this phenomenon is that many Chinese disclosing information about human resources just utilizing words and paragraphs to describe what they have done and seldom include any type of pictorial, table, or graphic information. They paid more attention to how they comply with the regulations and company policies. When it comes to the UK organizations reports, the quality of this information shows an enhancing trend. And the mean score in three years indicates the same trend; they have increased three points from 10.11 to 13 (see table 12.2 below). Even though, the mean points for Chinese companies indicate the same trend, the improvement is less convincing. Besides, when looking at each company's performance in this section (table 12.1), the trend is less obvious, except for those supper large companies such as Sinopec and Petro China.

Table 12.1

Table 12.2

UK

CHINA

2008

2009

2010

total

2008

2009

2010

MAX

12

14

16

16

11

11

11

MIN

7

9

9

7

4

4

4

MEDIAN

11

11

13

11

6

8

10

Std

1.76

1.41

2.24

2.14

2.50

2.36

2.38

Mean

10.11

11.33

13.00

11.48

7.29

8.29

9.00

Table 13.1 presents the information about health and safety. Based on the two figures, it can be concluded that the Chinese companies reported slight worse than UK ones. The maximum points could be achieved in this theme is 16. And the total mean points for UK organizations are 10.15, about 1 point higher than Chinese firms. This indicates high attention to this section by both countries. The reason for this might be the character of the energy sector companies. One interesting find in table 13.1 is that the information disclosed by Wuhan Iron and Steel from 2008 to 2010. The points are ran the contrary to the general trend, which is a decrease trend. This is very difficult to explain the situation.

Table 13.1

Table 13.2

UK

CHINA

2008

2009

2010

total

2008

2009

2010

MAX

14

14

14

14

12

12

13

MIN

8

7

8

7

6

4

2

MEDIAN

10

10

10

10

8

9

8

Std

1.86

2.40

2.45

2.20

2.57

2.94

3.95

Mean

9.78

10.00

10.67

10.15

8.43

9.00

8.71

The last subheading is community. And based on the table, it is apparent that this is the only section that Chinese companies gained more points than UK companies, despite the fact that the difference is only 0.1 point for the total mean between these two countries (table 14.2). Additionally, the minimum point for UK companies is 4 and for Chinese companies are 6. This could indicate that Chinese organization paid more attention to reveal information related to community. Besides, one of the subthemes is the society, fines and corruption. All of the sampled Chinese firms have disclosed the related information about anti-corruption. The reason for this might be the highly recommendation and requirements that published by the Chinese government's regulations for Central State-owned companies.

Table 14.1

Table 14.2

UK

CHINA

2008

2009

2010

total

2008

2009

2010

MAX

9

11

11

11

10

10

10

MIN

4

4

6

4

6

6

8

MEDIAN

8

8

9

8

8

8

9

Std

1.62

1.90

2.00

1.89

1.40

1.41

0.76

Mean

7.11

8.11

8.67

7.96

7.57

8.00

8.71

4.4 Descriptive statistics and Hypothesis test

The following table shows correlations among the variables, so as to cluster the variables regressed against the ESAD points into the step-wise regression mode. Based on the Pearson correlation coefficient table showed below, it indicates a negative relation between Power Distance (PDI), Long-Term Orientation (LTO) and ESAD points (POINTS). And there is a moderate positive relationship among assurance (AS), Individualism versus Collectivism (IDV), Uncertainty Avoidance (UAI), and ESAD points (POINTS). In this procedure, Long-Term Orientation (LTO), assurance (AS), percentage of Independent board members (IP) are employed in the regression analysis, since, these variable are related to ESAD points.

Table 15:

In the regression alaysis, ESAD points (Points) is the dependent variable. The model summary presents the R and R Square values. Based on this information, it could found out that the related variables accounts for 58.6% of the ESAD points. This may interpreted that about sixty percent of change in the level of ESAD could be attributed to the assurance type and national culture influence. And Individualism versus Collectivism (IDV), Uncertainty Avoidance (UAI), and percentage of Independent Board members (IP) are excluded from this. As a result, the final equation is presented in the following:

Points = 64.294 + 7.436Assurance - 0.077 LTO

4.5 discussion of findings and interpretation

Based on the previous sections result, it is apparent that there is a sever gap in the quality of Environmental and social accounting disclosure between UK organizations and Chinese companies. Additionally, the formats for both countries are diverse, despite the fact that most of them utilize the same guideline (GRI

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