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This chapter begins with section 2.2 that provides information about the environmental disclosure and the importance of environmental disclosure towards society. Section 2.3 review the prior studies on association of various corporate characteristics with environmental disclosure. These corporate characteristics include environmental sensitive companies, financial performance, ISO 14000 companies as well as leverage. Section 2.4 discuss some background information on the development of environmental disclosure in Malaysia and finally Section 2.5 assesses theoretical framework on the CSR disclosure practices
2.2 Environmental Disclosure
As time goes by, the company's engagement in CSR issues has developed and so as the extent to which they disclose the information. Previous researches indicated a gradual increase for CSR disclosure in companies' annual reports (for example, Trotman & Bradley, 1981; Gray, Owen & Maunders, 1987; Cowen, Ferreri & Parker, 1987; Guthrie & Parker, 1990; Gray, Kouhy & Lavers, 1995). However Ten (2009) claimed that Malaysian corporate social reporting practice is still at its infancy, particularly in the environmental area.
Environmental reporting was initially studied as part of social reporting ( Pahuja , 2009). Various study have been done about corporate social reporting and environment reporting.( Pahuja. 2009). Previous study has been predict the voluntary environmental disclosure over a longitudinal period. (Razeed , 2009 ; Yusoff et al, 2005 ; Campbell , 2004 ) Some of researcher have done a longitudinal studies to looked the trend of environmental information. ( Yusoff, Yatim & Nasir , 2005; Cambell, 2004; Ten, 2004). According to Othman and Ameer (2009) corporate environmental reporting is refers to a corporation's release of environmental performance information to the general public.
Pahuja (2009) has been made an attempt to statistically test the combined impact of selected variables on environmental reporting practices of large manufacturing companies in India. Environmental reporting by the public sector companies was found to be significantly higher than those operating in the private sector.
Jaafar (2006) found that environmental information was reported in the Review of operation ( 30 percent ) and Chairman's Statement (17 percent ). All of this environmental information was reported on a voluntary basis since no information was found in the statutory section of annual reported. The majority of the companies reported environmental information in the general statements or quantitative- non-monetary data form. The level of quality measured based on themes and location of environmental information in annual reported, the average score obtain only nine which considered very low. This indicates that the environmental matters was not reported in detailed and found in the less important sections in annual report.
In addition Dragomir (2009) and Clarkson et al (2008) used an environmental disclosure index, inspired by the Global Reporting Initiative Guideline which are forms the basis for the content analysis of sustainability report published before the year end of 2008. Disclosure index studies are assume that the amount of disclosure on specified topic is a proxy for the quality of disclosure . Besides, this index better captures firm disclosures related to its commitment to protect the environment than the indices employed by prior studies. In contrast, Cho (2009) had been investigate whether a higher level of governmental support for standalone reporting is associated with differences in the extent of disclosure . These researcher using two separate environmental disclosure scoring metrics and examine the extent of environmental disclosure made by a matched sample of 25 South Korean and 25 U.S companies in standalone sustainability-type reports. Their results show, using either disclosure scale, that South Korean companies' environmental disclosure are significantly more extensive than the disclosures for U.S. counterparts.
2.2.1 Importance of Environmental Disclosure
Environmental disclosure practices are affected by some other factors like polluting nature of industry, foreign association of the company, its association of the company, its associations with large business houses or position of the company in the global market. ( Pahuja , 2009) As for that Pahuja (2009) have been explore the environmental disclosure practices by selected large manufacturing companies in India and take into consideration these issue.
There was an increase in the number of studies examining the motivations behind Malaysian environmental disclosures using different theoretical perspectives and Methodologies. (Ten, 2009; Yusoff and Lehman, 2009). Environmental information is a strategic mechanism used towards enhancing good corporate reputation of the company. Yusoff et al (2005) it is very important for the company to disclose their environmental information that shows the corporate environmental performance. The growth of environmental reporting initiatives to ensure its effectiveness to fulfill the need and demands of stakeholders.
2.3 Association Between Firm Characteristics With Environmental Disclosure
2.3.1 Association of Industry type and Environmental Disclosure
Engagement in environmental reporting amongst listed companies varies between sectors. (ERRM, 2002). Sector with greater environmental impact which are industrial product,plantation,consumer product, trading, construction and infrastructure appeared to be more active in reporting environmental information. The environmental sensitive industry has been identified as industry where the operation of companies in the industry can have a substantial negative impact to the environment. ( Jaafar, 2006) . The industry which is consider as an environmental sensitive company are agriculture, plantation, mining, chemical, construction, transportation, manufacturing, trading and services,wood and timber as well as oil and gas companies. ( Ten, 2004 ; Buniamin et al , 2008 ; Wilmshurt &Frost , 1999 ; Ten, 2009 ; Yusoff et al , 2006 )
Jaafar (2006) has been investigated the environmental reporting practices by environmentally problematic companies which are define as a companies that are not in compliance of the environmental regulation. The study found that only 44 percent of environmental problematic companies (14/ 32) has provided environmental information in their annual reports. Twelve of these fourteen companies (or 86 percent) have reported positive environmental information while two others companies reported both negative and positive information. In addition, 93.75 percent of environmentally problematic companies (30 out of 32 ) did not mention this problem in their annual reports.
Furthermore, Dragomir (2010) also examine the relationship between environmentally sensitive companies and environmental disclosure of 60 of the largest Europian Union industrial business group for the year 2008. However Yusoff et al (2006) examine the motivation factor from both environmental sensitive companies and non environmental sensitive companies towards environmental disclosure and found that the industry factor has no role in promoting environmental disclosure among Malaysian companies
Amongs most of the researchers found that industry type has no relationship towards environmental disclosure, Goa, Heravi and Xiao ( 2005) have been examine the environmental disclosure by analyzing 33 listed companies and found that there is a positive relationship between industry differences towards environmental disclosure.
2.3.2 Association of Financial Performance and Environmental Disclosure
Financial performance shows how well the company is able to meet its financial obligations, whereas low liquidity ratios predict bankruptcies . Different profitability and growth measures used have given contradicting signs for its association with disclosure quality.
Pahuja (2009) has been define profitability as the ratio of net profits to net sales. The ratio indicates net profit margin on sales. Its measures the capability of the company in order to operate business successfully as well as to cover expenses occur effectively. The higher the ratio will be the profitability of the organization.
Accordings to Jaafar (2006) the average percentage of return on assets of these companies is 5.12 percent and also indicated that there are not much differences in financial performance between companies that produced positive or negative environmental information. The rate of return on assets is 11.16 percent for companies that provide environmental disclosure compared with 11.5 percent of companies that provided negative environmental disclosure.
Pahuja ( 2009) also provide an evidence in support of the hypotheses related to influence of the profitability on environmental disclosure practices. The result indicate that big and more profitable companies provide more information on environment than small and less profitable companies respectively.
In contrast, Dragomir (2009) and Leary (2003) found that there is no association between financial performance and environmental disclosure. However, some of the study done by the previous researchers show that there is a significant relationship between company performance and environmental disclosure (Stanwick and Stanwick , 1998 ; Cormier, Ledoux and Mangan (2009).
2.3.3 Association of ISO 14000 Companies and Environmental Disclosure
Sumiani et al. (2007) had been examined the disclosures made by top 50 Malaysian public companies to explore the reporting behaviour of ISO-certified companies. They found that out of 36 disclosing companies, 13 were ISO14001 certified and all the ISO-certified firms provided some form of environmental disclosure in their annual reports. Same goes to Saizarbitoria, Landin and Azorin ( 2010) stated that the internal drivers to implement and certify the ISO 14000 standards have a degree of influence on the environmental disclosure. However, Ten (2009) noted that not all ISO 14000 companies showed an environmental disclosure.
2.3.4 Association of Leverage and Environmental Disclosure
According to agency theory higher monitoring costs would be incurred by firms that are highly leveraged. To reduce these costs, firms are expected to disclose more information. Leverage is the ratio of debt that is refer to the non current liabilities and asset that is refer to average total asset. ( Razeed , 2009 ; Ten, 2004) . The more the companies rely on debt financing, the more company will provide an environmental disclosure to be seen as a company is being seen as a company with lower risk ( Campbell, Sefcik and Soderstrom , 2003).
Pahuja (2009) stated that the companies with higher debt-equity ratio are expected to disclosed more environmental information than the companies with lower debt -equity ratio. In his study, ratio of total debt to equity was used as it has a significant impact on the ability of an organization to obtain additional funds. It gives some idea about the protection given to lenders if the organization become insolvent. Same goes to Cormier, Ledoux and Mangan ( 2009) that found that leverage have a significant impact towards environmental disclosure. However , Leary (2003) revealed that there is no association between leverage and environmental disclosure.
2.4 Environmental disclosure development in Malaysia
In a developing country like Malaysia, the improvement of material welfare tends to receive top prirority ( Cho, 2009 ). The growth of Malaysian economy, on the other hand, has accelerated the expansion and globalization of business enterprises, which in turn , has induced increased societal demands for a cleaner environment.
2.4.1 Malaysian Environmental Reporting Regulations
As time goes by, there are no statutory requirement in Malaysia requiring public listed companies to disclose environmental information to the public. Current regulation regarding environmental disclosure including Environmental quality Act 1974, Occupational Safety and Health Act 1994, Listing Requirements of Kuala Lumpur stock exchange 2001, Malaysian Accounting Standards Boards and Malaysian Code on Corporate Governance 2001.
The main power for the prevention and control of environmental pollution in Malaysia is the Department of Environment (DOE), a department under the umbrella of the Ministry of Science, Technology and Environment (MOSTE). MOSTE is responsible for developing environmental laws and regulations, while DOE is responsible for developing standards and guidelines for ensuring compliance. There is no specific requirement on the disclosure of environmental information under the Environmental Quality Act 1974 . However, there are requirement under sub-regulation 17 of Occupational Safety and Health Act (OSHA) 1994 for the disclosure of information with respect to personal safety, which could be interpreted to cover instances that affect both people and environment. Besides, sub-regulation 22 of occupational safety and health ( control of industrial Major accidents) CIMAH regulations, 1996 for manufacturers to disclose information to public relating to the nature of a major accident hazard including its potential effects on the population as well as the environment.
Furthermore, requirement for disclosure of information under the companies Act, 1965 are financially oriented, with no reference to environmental information. Under the Act, every company intending to conduct a business in Malaysia must register with the Registry of Companies (ROC) before commencement of any business activity.
In addition, the only other source of environmental reporting guidelines is the Malaysian Accounting Standards Board (MASB). Financial Reporting Standard (FRS) 101 (formerly known as MASB 1) makes explicit reference to environmental reports encouraging companies to present additional information if management believes they will assist users in making economic decisions. FRS 137 (formerly MASB 20) sets out the disclosure requirements for the recognition of contingent liabilities and assets. Although FRS 137 does not provide specific details of the types of liability, it is foreseeable that environmental liabilities could potentially be included within a company's financial statement.
It is clear from the above discussion that annual report environmental disclosure in Malaysia is largely optional. Despite the absence of mandatory requirement, the literature reveals that Malaysian corporate environmental reporting practice is on the increase ( Ten, 2009). Moving towards the vision of 2020, Malaysia have been gone through Ninth plan period , 2006-2010. For the Ninth Plan , environmental stewardship will continue to be promoted to ensure that the balance between development needs and the environment is maintained. Environmental planning tool such as environmental assessment, cost benefit analysis, market-based instrument and environmental auditing will be increasingly applied in evaluating and mitigating environmental impact of development activities.
2.4.2 Malaysian Corporate Environmental Reporting
2.5 Theory development
The theoretical context, relating to a few theories that can help in explaining what actually motivated voluntary disclosure among companies. The related theoretical framework adopted comprises of the institutional theory, legitimacy theory and stakeholder theory.
2.5.1 Institutional Theory
This theory implies the relationship between an organization and its broader institutional context. The concepts of institution can be indicted as ambiguous as it has been defined in various ways. Institutional theory asserts as a distinguishing process whereby one accepts a shared definition of social responsibility. In other words, companies are motivated to disclose environmental activity because it was perceived to be well-accepted practices by other companies as well. Despite of that, DiMaggio and Powell (1983) has suggested the 'new institutionalism', which the key argument is that organizational practices has changed and become institutionalized because they are considered as legitimate. They identify three mechanisms of institutional isomorphic change that are the coercive, mimetic and normative processes.
DiMaggio and Powell (1983) further explain the coercive isomorphism as the external codified rules, regulations, norms and laws that assigned the legitimacy to new management practices.
2.5.2 Legitimacy Theory
The legitimacy theory underpins the essence of the relationship between company and its stakeholders. Disclosure strategies, which in this study, focus on the environmental disclosure become the way companies manage this relationship. According to Jantadej and Kent (1999), legitimacy theory is based on the underlying concept of the social contract that exists between firms and societies within which firms operate and consumes resources. Legitimacy can be considered as a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs and definitions (Suchman, 1995). Firms seeking to gain or maintain legitimacy have an incentive to use communication strategies, including financial report disclosures, to potentially influence societal perceptions (Lindblom, 1994).
In this regards, previous research into environmental reporting suggests that companies can attempt to protect their legitimacy by using the corporate annual report to disclose voluntary information about their social and environmental activities (Mastrodanas & Strife, 1993; De Villiers & Van Staden, 2006). It has been argued that the inclusion of voluntary information in the annual report can be, and is used by managers to send specific signals and messages to the public (Salancik & Meindl, 1984). Amernic (1992) also asserts that the inclusion of information in the corporate annual report is used to persuade readers to accept managements' view of society and that annual reports are both reflective and constitutive of a wider set of societal values (Dyball, 1998).
Deegan (2002) and Campbell et al. (2003) have opined that legitimacy theory has become the most widely used theory to explain environmental disclosure as there is mounting evidence that managers adopt legitimizing strategies. According to Magness (2006) , proponents of legitimacy theory have suggested several ways that companies use discussion of non-financial issues to manage stakeholder impression. Legitimacy theory has its roots in the idea of a social contract between the corporation and society.
Yusoff and Lehman (2009) stated that from the legitimacy theory perspective, the qualitative and narrative environmental stories are seen to have been utilized by company as an impression management tool.
2.5.3 Stakeholder Theory
The stakeholder theory proposes that a firm's success is dependent upon the successful management of its relationships with its stakeholders. Gray et al. (1995b) in conducting longitudinal studies of UK corporate social and environmental disclosure assert that social disclosure is seen as part of the dialogue between the company and its stakeholders. Company's existence requires support from stakeholders and activities are adjusted to gain approval from the stakeholders, especially if the stakeholders are more powerful.
The definition of stakeholder has expanded and altered substantially to adapt with changes in business requirements and trends. Some have defined shareholder as the sole stakeholder since this party serves most of that company needs. The others have visualized stakeholders in wider perspectives that include people outside the corporations; for example society, environmentalist, government and others. Clarkson (1995) which stated that stakeholders are persons or groups that have ownership or interest in a corporation and its activities in past, present and future offers a comprehensive definition of stakeholder. Thus, with various groups of stakeholders, it seems that corporations are now responsible and accountable to fulfill wider corporate responsibilities because these groups have the ability to affect and control the resources and operations of corporations.
In addition, the work of Neu et al. (1998) explicitly links the use of stakeholder theory with the concept of 'organizational legitimacy', acknowledging the interrelatedness of the two perspectives in analyzing CSD. Neu et al. (1998) examined the environmental disclosures in the annual reports of Canadian public companies operating in environmentally 'sensitive' industries. They concluded that primarily an organization's relevant publics influence the level and type of environmental disclosure contained in the annual reports, and that the communication strategies adopted by the organization are influenced by the multiplicity and power of these different publics.
With the increasing awareness and global demand for better environmental disclosure, companies should recognize and adopt them into their management practices. Moving forward, it is important to note that while environmental activities can only be taken on by the companies themselves, stakeholders, especially government, employees, consumers and investors, can play an effective and decisive role in prompting companies to adopt such practices. The stakeholders can also enhance their role by requiring companies to be transparent with respect to their social responsibility performances.
In similar, the power of government as a stakeholder is manifested in its enforcement mechanisms. For example, the corporation may use environmentally responsible activities to reduce the risk of governmental intrusions, which may affect the firm's value.
Stakeholder theory is also called organization centered . Its consider corporation to have a number of different shareholder affect the organization mission. Organisation responsible to these stakeholder. Its concerntrated upon defining factors influencing the continued existence of corporation . There are two reason for the consideration of stakeholder theory. Firsly, as for stakeholder demand for environmental disclosure is being a stakeholder issue. Secondly, to provide a framework to uncover the determinant and motivation behind the corporate disclosure. There are three component of stakeholder theory which consist of stakeholder power, strategic posture and economic performance. As a proxies of these component, it seems that different researcher used different proxies to measure it. Razeed (2009) measured stakeholder power by leverage ( debt to assets ratio), while strategic posture through the level of environmental disclosure on the internet and hard copy and economic performance is measured through return on asset. In contrast , Ten (2004) measured stakeholder power by government power, strategic posture by environmental concern which can be proxies by ISO 14001 and presence of environmental committee. While economic performance are proxies by average return on assets and change in firm value. This researcher also categorize stakeholder into two group which are primary and secondary. Primary stakeholder include shareholder which are capital provider of the company, creditor, customer, supplier, regulator and employee. Secondary stakeholder include environmental lobby group, media and consumer advocacy group.
The basic proposition of stakeholder theory is that the firm's success is dependent upon the successful management of all the relationships a firm has with its stakeholders. Stakeholder theory offers a useful framework given the increasing stakeholder involvement in the reporting process. Hence, as stakeholder involvement becomes increasingly important in the reporting process globally, it is highly insightful to know if a stakeholder framework that has been extensively used in Western societies could be useful in our understanding of the determinants and motivations behind voluntary environmental disclosures in a developing economy such as Malaysia. The motivation for using the Malaysian context is driven by its inherent background in terms of its strategic vision, economic development and regulatory/nontransparent setting.
Firstly, from a strategic standpoint, Malaysia is the only developing country with an explicit timeline to achieve the developed nation status by the year 2020 (Vision 2020). The launch of Vision 2020 coincides the inception of the National Development Policy in 1991.
Since then, Malaysia has not been immune to environmental disasters such as the 1993 Highland Towers erosion, the 1997 haze crisis (when the Air Pollution Index exceeded the 500 mark) and more recently, the 2004 tsunami that hit Penang along with 8 other Asian countries killing more than 200,000 people. Although these disasters have been caused both by man and mother-nature, these experiences inevitably put environmental considerations as a top priority creating the need to strategically preserve and maintain the environment if Vision 2020 is to be achieved. This may create incentives for firms to provide environmental reports. Secondly, on the economic front, Malaysia offers an interesting setting since it is one of the fastest growing economies in Southeast Asia since the 1960's1. Compared to its neighbouring countries like Indonesia, Thailand and the Philippines, Malaysia has recovered much quicker from the 1997 Asian financial crisis. Along with rapid economic development, however, Malaysia has been experiencing intensified environmental impacts such as deforestation, erosion, loss of biodiversity, air and water pollution largely brought about by corporate activities such as logging, large scale land development, open burning, mining, power stations and dam constructions (Teoh & Thong, 1984; Smith, Yahya & Amiruddin, 2007; Sumiani, Haslinda & Lehman, 2007).
Firms are motivated towards adopting stakeholder management practices due to stakeholder influence on the ultimate business outcome which are profit. ( Yusoff, Lehman and Nasir, 2006 ; Yusoff and Lehman, 2009) . Yusoff et. al (2006) found that stakeholder concern are one of the motivating factors towards business especially environmental disclosure.
Among the three dimension of stakeholder theory, only government power are significant to the annual report environmental disclosures. ( Ten, 2009). The other two which are stakeholder power and creditor power are not significant to the annual report environmental disclosure.
This chapter has briefly discussed the concept behind the environmental disclosure and its roles, environmental development in Malaysia as well as the relationship between firm characteristics with environmental disclosure. From the literature, it can be concluded that environmental reporting requirements are gaining greater and better attention among various jurisdictions. The same conditions also apply in Malaysia through various initiatives and efforts. The disclosure of environmetal activities in different countries are varied and inconsistent as different countries required different disclosure requirements. However, even with different reporting requirements, one thing for sure is that all these efforts have shed some light to better reporting and communicating environmental activities to fulfill various stakeholders demand.