Relationship Of Corporate Social Responsibility Disclosure Accounting Essay



This chapter commences with background review of this study which delves into determinants and emphasis of corporate social responsibility, corporate financial performance and ownership structure in Malaysian context. This is followed by outlining of problem statement, research questions, research objectives, and significance of the study.

Background of study

With the evolution of the global economy into a borderless and increasingly integrated world, the concept of corporate social responsibility (CSR) has gained growing recognition and significance. Increasing number of companies engaging in corporate social and environment disclosure reporting (henceforth CSR), are indicated in many surveys (KPMG, 2002, ACCA, 2002, ACCA, 2004). This practice however have already become a norm among the big multinational companies (MNCs). In some countries, CSR is now made mandatory but in Malaysia it is still very much left to the initiatives of the individual firms.

As said by Royal Norwegian embassy in Malaysia (2011), the focus on CSR in Malaysia has in line with international trends increased. Even though some companies have CSR programs which date back many years, even decades, it seems to have been an increased awareness and activity of CSR initiatives in Malaysia. Despite the increasing trend in disclosures, findings from Malaysian reporters suggest that their understanding of the underlying concepts of CSR is dismally low (Amran and Susela, 2004).

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Before, abundant efforts have been made to encourage companies to be more involved in CSR activities and disclosures have been carried out by the Malaysian government and the capital market authorities. In 2002 onwards, efforts are being made by ACCA to promote the corporate social reporting through the MERA (Malaysian Environmental Reporting Awards) and MESRA (Malaysian Environmental and Social Reporting Awards) awards, given to Bursa Malaysia Listed Companies. In 2006, Bursa Malaysia released a CSR framework as a set of guidelines for Malaysian public-listed companies (PLCs) who wish to practice CSR. The aim of this framework is to guide PLCs in defining their CSR priorities, implementation and reporting.

A substantial literature on the empirical evidences on the relationship between corporate social responsibility and corporate financial performance as well as ownership structure in developed markets are already in place. In Malaysia, the lack of empirical evidences on such relationship may be one possible reason for the low corporate social responsibility disclosure by companies. Thus, using corporate social responsibilities disclosure as a proxy of corporate social responsibility activities, it is the aim of this proposal to explore whether or not there is any association between corporate social responsibility and corporate financial performance as well as ownership structure in the context of the Malaysian public listed companies (PLCs)

Problem Statement

Corporate Social Responsibility (CSR) has been given too much attention across the business circle and emerges as the main agenda of boardroom discussion. CSR is all about company awareness, managing and improving its impact on the economy, the environment and society.

In today's business environment people expecting corporation to become more responsible by doing an activity that benefits the community such as conserving the environment, sponsoring students for higher education, product quality, safety and much more. In Malaysia, CSR has been an important principle for most big corporation. In fact, a large number of companies are already engaged in CSR initiatives in a substantial ways (Bursa Malaysia, 2011). By focusing in CSR, business are encouraged to think about how their operations affect the environment, community and society, and how to be responsible for the ways in which they make their money, not merely what to do with the money once they have it.

CSR is essentially a concept relating to firms' decisions to voluntary contribute toward the development of a better society and a cleaner environment, and it has become increasingly important for firms to demonstrate their commitment to CSR in order to counteract the growing public skepticism caused by corporate wrong doings. Likewise, in Malaysia, CSR disclosure has become an integral part of Bursa Malaysia's listing requirement which states that all listed firms whose financial year ended on or after 31 December 2007, must disclose all the CSR activities undertaken by them or their subsidiaries, or if there are none, they must include a statement to that effect (Bursa Malaysia, 2011). In addition, the Institute of Corporate Responsibility of Malaysia has objectives to promote sustainable development, and to initiate and embed CSR best practices among Malaysian companies that would provide a competitive edge.

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Therefore, this study aims to provide current evidence on how of Malaysian companies influence CSR reporting practices. The context chosen for the study is level of CSR disclosure in Malaysia for 2011. The setting is conducive to the study of determinants of CSR disclosure from an institutional perspective as public listed companies in Malaysia are required to comply with the mandatory disclosure requirement of the CSR activities beginning with the financial year ending 31 December 2011.

This study, proceed with reviewing the literature on the relationship between CSR disclosure with corporate financial performance and ownership structure, from which hypotheses will be developed.

Research Question(s)

RQ1: Is there any relationship between corporate social responsibility and corporate financial performance?

RQ2: Is there any relationship between corporate social responsibility and ownership structure?

Research Objective(s)

RO1: To determine whether corporate social responsibility activities will give consequences or do not affect performance of financial performance in an organization at all.

RO2: To assess whether corporate social responsibility will give consequences or do not affect different types of ownership structure in an organization at all.

Significance of Study

In Malaysia, the issues of CSR have attracted increasing attention from the government, practitioners, media as well as the public, particular in relation to social and environment impact and transparency of reporting.

This study is useful for organization and regulatory bodies to take into consideration in identifying the corporate characteristic that will enhance CSRD, since it had been shown in previous studies that CSR in Malaysia is generally low. It showed the level of CSR information disclosure as a PLC in Malaysia are required to comply with the mandatory requirements of CSR activities in annual report after 2011. The level will indicate the regulation that provided by Bursa Malaysia.

This research will provide evidence on the effectiveness of the implementation of corporate governance best practices for the practitioner such as Securities Commission (SC) and Malaysian code of Corporate Governance (Revised MCCG 2007). The finding also will impart the essentials of integrated consideration to the investor in their decision making process.

Structure of the Study

The remainder of the paper is organized as the following:

Chapter 1

Overview of corporate social responsibility, corporate financial performance and ownership structure

Chapter 2

Covers the literature review, theoretical and empirical work of this research

Chapter 3

Describing the data set and author methodology that had been used to conduct the research



In this part of research, it will review all the related literature that concern about corporate social responsibility disclosure, corporate financial performance and ownership structure to bring out understanding of the complexity and breath of issues. Its need in identifying the relationship between corporate financial performance, various types of ownership with corporate social responsibility.

Literature Review

Concept of CSR

The term "corporate social responsibility" came into common use in the late 1960s and early 1970s after many multinational corporations formed the term stakeholder, meaning those on whom an organization's activities have an impact. The terminology was subsequently used to describe "corporate owners beyond shareholders" in the influential book written by R. Edward Freeman, Strategic Management: A Stakeholder Approach in 1984.

Spectrum Consultants (2010), define Corporate Social Responsibility (CSR, also called Corporate Conscience, Corporate Citizenship, Social Performance, or Sustainable Responsible Business) as the "continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the community and society at large. It's how companies manage the business processes to produce an overall positive impact on society".

The goal of CSR is to "embrace responsibility for company's actions and encourage a positive impact through its activities on the environment, consumers, employees, communities, shareholders and all other members of the public sphere. Furthermore, it focused on business would proactively promote public interest by encouraging community growth and development" Wikipedia (2011) states.

Many companies involve themselves in social activities because of the tax exemptions or the income spent on special purposes. Corporate Social Responsibility process is 'routinely being abused' because of the scramble for maximizing profits. From oil multinationals, telecommunication giants, to the banking sector, it has become en vogue to engage in highly publicized charitable and philanthropic ventures as an act of CSR to plicate the abused public. And that more often than not, many approaches to CSR pit businesses against society, thereby emphasizing the cost and limitations of compliance with externally imposed social and environmental standards (Chiejina, 2011).

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Proponents argue that corporations make more long term profits by operating with a perspective, while critics argue that CSR distracts from the economic role of businesses. Others argue CSR is merely window-dressing, or an attempt to pre-empt the role of governments as a watchdog over powerful multinational corporations.

Relationship between corporate social responsibility and corporate financial performance

The concept of CSR has evolved largely with the historical development of the notion of what an enterprise is in relation to society. As CSR is an evolving concept and therefore a moving target, enterprises are likely to prioritize actions that fulfill their CSR obligations that also have a positive financial impact. Academia has also given much attention to identifying the business case for CSR in measuring the relationship between CSR and CFP.

Academic data is however inconclusive in explaining this relationship, reporting positive, neutral and even negative associations (Griffin and Mahon, 1997; Margolis and Walsh, 2001). While there is no consensus, two basic approaches stand out. The "slack resources" approach (Seifert et al., 2004) argues that better CFP results in the availability of slack resources accessible to implement CSR, while the "good management" approach (Garriga and Melé, 2004) argues that CSR improves CFP when it is one more element of a well-managed enterprise. De Bakker et al. (2005) considered that most CSR research is repetitive, without looking at the underlying factors affecting the relationship. Therefore the research question should be not only whether CSR and CFP are related, but also how, and what the nature of that relationship is.

Wood's (1991) principles approach is precisely helpful in that sense by focusing on the reasons for CSR engagement within organizations and the stakeholder impacts caused. Stakeholder theory was put forward in the 1980s to explain the interaction of the enterprise with different stakeholder groups with two arguments, legal (explicit compliance with some stakeholders) and economic (implicit compliance) (Freeman and Reed, 1983). Wood (1991) added that responsibilities stretch beyond the legal and economic, to include the ethical and discretionary responsibilities. The main reasons driving enterprises to implement CSR will tell us which stakeholder interests are these enterprises responding to. Enterprises driven by competitiveness reasons will focus normally on shareholders and investors, those driven by legitimization respond to a broader range of stakeholders (employees, consumers, public administration. . .) that engage with the company, while altruistic reasons respond to societal concerns (both local and global).

By honoring contracts with some stakeholder groups, the enterprises implicitly make choices that can influence their CFP. Academics have developed two explanations of the results of these choices. The "resource based view" (RBV) of the enterprise (Barney, 2001; Branco and Rodrigues, 2006) suggests sustainable competitive advantaged can be gained from implementing CSR practices, acquiring resources and developing skills that result in a product that cannot immediately be imitated by competitors. Alternatively, proponents of Transaction Cost Economics (Williamson, 2005) argue CSR implementation makes business sense because it avoids higher costs from more formalized contractual compliance mechanisms.

Competitiveness reasons have been typically explained by RBV, while legitimization is explained by Transaction Cost Economics. Altruism has received less attention in this particular literature. In any case, CSR-CFP literature reports primarily studies in large manufacturing enterprises.

Concept of Ownership Structure

Ownership structure is defined as owners have rights over property of possession. This study is focusing more on insider and outsider ownership. The study emphasizes on the managerial ownership for insider and government ownership for outsider ownership. Managerial ownership defines ownership by the board's member in other words the directors. Meanwhile government ownership is government who owned of any asset, industry or corporation at any level either in national, regional or local (municipal).

Literally, the companies in Malaysia have so many ownership structure. Ownership structures play a central role in determining the extent to which the interests of owners and managers are aligned (Dalton et al., 2003).The different of the ownership structure could lead to the financial market activeness and the company performance. Shareholders from different domains play multiple roles and have different interests for control, monitoring, and resource dependence purposes; thus, the use of a single theoretical lens is not sufficient to draw a precise research model.(Suk Bong Choi, Byung Il Park, Paul Hong, 2012). Therefore the build of a theory is crucial to drive the firm's performance into the right way.

Relationship between ownership structure and financial performance

Family Ownership

A higher authority to have a voting right can bring to the greater opportunities for controlling shareholders to own a special benefits. This trend may be exacerbated in the case of family firms because those benefits remain in the controlling family, whereas in non-family firms, they are distributed among a large number of shareholders (Villalonga and Amit, 2006).

There will be too many speculations about the family ownership structures to lead the firm going forward due to the lack of motivation about the success. However, from the previous study they have a different result. The family's interest in the long-term survival of the business as well as its concern for maintaining the reputation of the firm and the family, lead the family to avoid acting opportunistically with regard to the earnings obtained (Anderson and Reed, 2003a; Burkart et al., 2003; Wang, 2006).

Thus, the ambitions of the ownership structure will be determine the financial performance of the firm in order to implement and adopt the sustainability to the firm. If the financial performance of a firm and the ownership structure of the firm in the great situation, the firm can adopt the corporate social responsibility without a doubt.

Managerial ownership

Managerial ownership occurs when the companies give blind share to the directors. The stock ownership reduces the conflict between shareholders and directors while aligned interest both of them. Aligned interest between shareholders and directors will reduce the agency cost of monitoring. Research by Hu and Zhou (2006) using the samples from 1500 non-listed Chinese firm, they found that there is a positive relationship between ownership and performance but their result is unique because it is in a form of an inverted "U" and the negative is due to entrenchment effects.

In contrast, according to Zainal Abidin et al. (2009) using samples from Malaysia, there is not enough evidence to show any relationship between ownership with firm performance (Value Added Intellectual Capital -VAIC). In their study, they clarify that the result is mixed and depends on the types of sample used for example positive in Sweden but negative in other countries.

Studying a large sample of firms in the relatively weak governance environment that existed in South Korea before the Asian financial crisis, Joh (2003) found less concentrated board ownership was associated with lower profitability. Other research suggests the relationship between ownership and performance is not strictly linear. Other studies of U.S. firms have concluded that firm performance increases with board ownership until ownership concentration reaches a point above 25% to 40% where it begins to have adverse effect on performance (Thomsen and Pedersen, 2000) Acharya and Bisin (2009) mentioned that an appropriate level of managerial ownership can serve to mitigate the moral hazard associated with manager's inability to diversify their firm specific risk due to legal restrictions and that firms with high levels of managerial ownership also have high levels of firm specific risk.

Although the non linear relationship between firm performance and managerial ownership is consistent with agency theory, Fahlenbrach and Stulz (2009) discussed whether this relationship is the result of the incentive effects of managerial ownership. Demsetz (1983) argues that this relationship arises empirically because the firm's environment is not captured properly in the empirical tests. He argues that an ownership structure should arise endogenously and that there should be no systematic relation between managerial ownership and firm performance.

Government Ownership

Government ownership is also a called public ownership or state ownership and occurred when the government owned or hold equity in the companies. In Malaysia, some public listed companies are controlled by government which is claimed to be monitored and supported by the government and they are GLCs.

Government ownership may give companies special advantages such as more opportunity to get fund, tender the project and also recognition of business. Furthermore, the companies are backed by the government if they faced any financial difficulty in business. Recent study by Najib and Abdul Rahman (2011) using the samples from GLCs found significant result that the government ownership may influence firm performance. This is supported by Umar and El-Elg (2003) using the Return on Equity (ROE) as proxy for firm performance. The finding demonstrated that government ownership has statiscally significant impact on ROE with 0.026 level of significance.

In contrast, study by Klungland and Sunde (2009) disagree that the government ownership influences the firm performance as their result is negative measured by Tobin's Q. Their argument is that the government ownership is likely to be less active monitoring the companies. Most likely perhaps the government has imposed strict rules and regulations in the companies for example have right to select the board members in consequence make the government is less likely to monitor the companies. This argument is in line with the research b Hong (2009) who also insisted that government ownership creates multiple problems such as agency problem, corruption and only fulfill the political objectives rather than the firm objectives.

Theoretical Framework

According to the article 'Managing Corporate Finance: investigating the relationship between CSR and financial performance in emerging market', there are two theories that are highlighted which is the 'Stakeholder Theory' and 'Signalling Theory'.

Stakeholder Theory

Stakeholder theory is the theory of organizational management and business ethics that addresses morals and values in managing an organization (R. Edward Freeman, 2010). The main aim of this theory is to try to do good things and try to satisfy the stakeholder's needs. The company try to reward not only for internal parties in organizational but for the external parties. CSR activities will give good impact to internal parties. The company will motivate employees to enhance their skill in perform their job. The company will motivate employees to enhance their skill in perform their job. Our study relate with this theory because CSR activities need to show respect to their beloved employees. The company felt that with implementation of CSR in the workplace can help increase the skill and performance of the employees therefore this can give effect for the company reputation thus it can give good impact to financial performance.

Olympus Corporation has a good management in CSR activites for internal parties. For example, Olympus Corporattion implements the MBO-S "Management by Objectives and Self-Control" to encourage challenge and growth of the employees in the future. With MBO-S, the employee can enjoy their work and increase in their expertise on specified work. The employee motivation towards their jobs can be influenced with good communication between employee and their supervisor.

For instance, CSR activities between the company and the external parties, such as Syarikat Faiza Sdn Bhd spends RM 5,000,000 annually to promote and advertise their product to improve the company reputation as a high quality rice supplier. The CSR activities are the company sponsor for TV programme 'Bersamamu'. Indirectly, this activity will help to communicate with their society and promote their product. Thus, it can increase their sales in the future.

Signalling Theory

Signalling theory is concerned with understanding why certain signals are reliable and others are not. It looks at how the signal is related to the quality it represents and what are the elements of the signal or the surrounding community that keep it reliable. It looks at what happens when signals are not entirely reliable-how much unreliability can be tolerated before the signal simply becomes meaningless.

Signalling occurs in competitive environments. The interest of the sender and the receiver seldom align exactly and often they are quite at odds with each other. Sometimes the competition is fierce and overt, as with prey and predators. Potential prey may signal to predators that they are poisonous or that they can run so fast or fight back so strongly that pursuing them is futile. Potential competitors may signal their strength to each other; if they are unevenly matched, the weaker may acquiesce and actual battle, which is costly for all, can be avoided. Sometimes the competition is subtle, as when the signaling is between seemingly congenial companions.

A company's social performance can shape the impressions of key stakeholders such as employees, customer and investors that influence subsequent decision making and relationship to the company. To test this notion, we examine how a company's public recognition for exemplary social performance can serve as a positive signal of the company's business performace to shareholders therefore affecting financial performance.

Agency Theory

Agency theory is concern about the relationship between principal and agent whereby the principal is a perdon whose contributes the capital to the firm, and agent is a person who has the authority to make decision of the firm (Jensen and Meckling, 1976). The managers (agents) who have superior knowledge and authorities to run the business were responsible to the shareholder (principals) in maximizing shareholder's wealth.

The relationship between owner and management of the company may give rise to the agency problem whereas the shareholders and managers have different view towards running the business. The problems arise because manager and shareholder have different goals to achieved and different action towards risk. Effect of the agency problem may cause the managers to provide incomplete information and uncertainty exist to the shareholders. These agency problems could give negative impact to the shareholder's wealth whereby the manager may prefer to have a wider range of economic and psychological needs such as to maximize compensation, security, status and to boost their own reputation (Rashidah, 2009).

The ownership differences between managers and shareholders may create information asymmetry and affect in agency cost (Farrer and Ramsay, 1998). This separation ownership has been long recognized to potentially have an adverse effect on the firm's value in which the manager has intention to pursue their own interest and make shareholder suffer the loss. There are several mechanisms have been introduced to reduce the agency problems. In economic view, the agency problems could be minimized by providing commissions, profit-sharing, efficiency wages and other incentives such as bonds and company shares. Jensen and Meckling (1976) said there is no agency cost if the manager holds 200 percent interest in the company because the interest of managers and shareholder could be aligns. This could be done by encouraging the mangers to own share in the company. The manager who has less 100 percent of interest in the company may pursue to maximize their self-interest whereby reduced shareholder's welfare (Fleming, Heaney and McCosker, 2005).

The divergence of ownership leads conflict of interest between manager and shareholder at the same times give rise to agency cost. One of the agency cost component is monitoring cost. Maijoor (2000) claims that corporate governance issues such as monitoring mechanisms are related to agency theory. This monitoring cost would be borne by shareholders to monitor and control the activities and behavioral of managers. The monitoring cost would be higher if separation of ownership becomes wider because the shareholders need to control the managers to ensure the shareholder's wealth unaffected due to difference of interest.

Hypotheses Development

Based on the previous studies and theoretical argument, the following hypotheses are developed:

HI: There is a positive significant relationship between corporate social responsibility activities and corporate financial performance

H2 (a): There is positive significance relationship between family ownership and corporate financial performance

H2 (b): There is positive significance relationship between managerial ownership and corporate financial performance

H2 (c): There is positive significant relationship between government ownership and corporate financial ownership



Corporate Financial Performance


Ownership Structure

Family Ownership

Government Ownership

Managerial Ownership

Corporate Social Responsibility

Employee Relations

Community Involvement



Control Variable

Board Size