CHAPTER 2

THEORETICAL FOUNDATION

2.1 Conservatism Concept

In simple accounting sense, common implication of conservatism is illustrated as

book values are understated. Watts and Zimmerman (1986, pg. 206-206) define

conservatism as circumstance where the accountant should report the lowest value

among possible alternatives for assets and highest value for liabilities, and revenues

should be recognized later rather than sooner and vice versa for expense. Rajan et al

(2008) described conservative accounting as follows:

“The accounting is conservative if investments are written off faster, in a cumulative sense,

than they would have been under neutral (unbiased) accounting. Conversely, liberal

accounting requires new investments to be amortized more slowly in comparison to neutral

accounting. This stronger form of conservatism is met, for instance, if straight-line

depreciation is applied to projects with uniform cash flows, or if a share of new investments

is directly expensed. Given neoconservatism, it can be shown that higher growth in any past

period of the relevant time horizon will ceteris paribus lower current ROI. Partial expensing

of new investments, like those for R&D and other intangible assets under GAAP, is

arguably an extreme form of conservatism. More conservative accounting can then be

represented by a higher share of directly expensed investments.”

Kung et al (2008) stated that conservatism is a feature of accounting measurement

and mechanism used to constraints managerial opportunistic behavior and to

enhance the reliability of financial reporting and disclosure. “The presence of

inherent uncertainty in the real world makes conservatism a desirable feature of

performance measurement and under uncertain condition, economic forces generated

by the facts that various stakeholders will act in their own economic interests creates

a demand for a conservative accounting” (Kung et al, 2008). In 2005, Ball and

Shivakumar in their paper titled “Earnings Quality in UK Private Firms:

Comparative Loss Recognition Timeliness” argue that conservatism in accounting is

an important element of financial reporting quality as conservatism enhances

relevance and represents faithfulness. Additionally, as conservatism represents a

more relevant and faithful financial reporting, conservatism also improves

contracting efficiency because it increases decision usefulness for stakeholders who

are believed to be interested in timely information.

However, accounting literature has not settled on a single comprehensive definition

of conservatism (Rajan et al, 2008). Ball et al. (2003) examined variations of degree

of conservatism across seven international GAAP and reported that conservatism

will vary depending on the institutional context. They also argue that the level of a

country’s conservatism will remain a function of its political and legal system. Ball

et al. (2000) studied cross-countries differences in developing accounting system,

with preeminent clusters are code-law and common-law countries. They found that

principle role of accounting in common-law countries is to reduce information

asymmetry between managers and investors. Common-law countries assume that

transactions are conducted at arm’s-length, which results in requiring companies to

report higher standard of public disclosure. Thus, accounting information will more

efficiently reflect economic events in timely manner. Under the code-law system,

where information asymmetry between managers and investor is resolved by private

communication, accounting serves the needs of various stakeholders and the focus of

accounting information is on communicating payout preferences. Furthermore, code-

law model does not support large equity market which allows stakeholder groups

have incentive to reduce volatility of earning. As a result, the code-law model

provides management with considerable discretion in smoothing reported accounting

earnings. In 2005, Lara et al. revised research by Giner and Rees’ (2001) research by

adopting earnings minus discretionary accruals (earnings measure) rather than

reported earnings. The research result was differences in conservatism between

common-law and code law countries were significant after correcting the effect of

discretionary accruals.

Discretionary accrual is accounting policies related to accruals made by companies’

management to reduce reported earnings; for example by increasing amortization

charges, recording excessive liabilities, contingencies and rebates, and generous

provision for doubtful accounts and obsolescence inventories (Scott, 2006). In

conjunction with conservatism concept, discretionary accrual is usually used to

measure conservatism.

2.1.1 Jones Model

In 1991, Jones examined whether firms used discretionary accruals to lower

reported income during import relief investigation. The granting relief to firms

that are affected by foreign competition is part of political decision. Using 23

firms from five industries involved in six import relief investigations by the

ITC during 1980 to 1985, the investigation considered economic factors such

as sales and profits of affected firms. As a result, affected firms have an

incentive to choose accounting policies lower their reported income

Total accrual is calculated by taking the difference between operating cash

flow from the net income. However, separating total accruals into discretionary

and non-discretionary accruals is rather difficult (Scott, 2006). The reason is

the correlation between non-discretionary accruals with level of business

activities; example is when a firm suffering from foreign competition, it may

lower receivables, delay payment of current liabilities, and write off large

amount of slow-moving inventory.

Jones Model suggests the following regression equation for each firm of the

sample:

TAt = α1 (1/A t-1) + α2 (∆REV), α3 (PPEt) + υt,

where :

∆REV = revenues in year t less revenue in year t-1, scaled by lagged total

assets at t-1

PPEt = gross property plant and equipment in year t, scaled by lagged total

assets at t-1

A t-1 = total assets at t-1

α1, α2, α3 = firm-specific parameter

υt, = residual term that captures al impacts on TA other than those from

∆REV and PPE

∆REV is to control non-discretionary accruals of current assets and current

liabilities as this variable depends on changes in business activities measured

by revenues, whereas PPE control non-discretionary components of

amortization expense on the grounds that this depends on the firm’s investment

in capital assets. Thus, discretionary accruals calculated as:

DA it = TA it – NDA

Jones research found evidence of the predicted behavior. Discretionary

accruals, as measured above, were significantly negative during the

investigation years. However, on years preceding and following the

investigations, there were no significant negative accruals found. In other

words, this theory can explain manager reaction to accounting policy change

(Scott, 2006).

2.2 Conservatism and CSR Disclosure Underlying Assumption

In Indonesia, according to “Undang Undang No. 40 Tahun 2007 tentang Perseroan

Terbatas Pasal 47”, CSR reporting is mandatory for all Indonesian listed companies.

This regulation has caused society is vague of the motive of Indonesian listed

companies to report their CSR activities. Many companies claimed that they are

genuinely committed to the society, thus they performed social activities. However,

it is a very subjective opinion. Public and government policy are believed to be the

trigger of companies reporting CSR activities.

In many parts of the world, cultural dimension of accounting practice has dragged

attention of accounting practitioners (Gray 1988; Hamid, Craig, and Clark 1993;

Saudaragan and Meek 1997; Dahawy et al. 2002.). The most relevant theory

regarding to this accounting area is Hofstede Model (1980) which further extended

by Gray (1988). Over the years, empirical and conceptual study have examined the

impact of natural culture on accounting (Dahawy & Conover, 2007). Based on

Hofstede (1980) societal framework, Gray (1988) concludes that society structure

influence societal values and that these relations are dynamic. Gray extends Hofstede

model by proposing framework for international accounting change and

development. He develops four distinguishable accounting value that he believes to

have relation with societal value.

Table 2.1

Gray’s Accounting Value

Accounting Value Description Professionalism versus statutory control

preference for individual professional judgment and maintenance of professional self regulation as opposed to compliance with perspective legal requirement and statutory control

Uniformity versus flexibility

preference for enforcement of uniformity accounting practice between companies and for consistent use of such practices over items as opposed to flexibility in accordance with the need

Conservatism versus optimism

preference for cautious approach to measurement so as to cope with uncertainty of the future events as opposed to a more optimistic, laissez faire taking approach

Secrecy versus transparency

preference for confidentiality and restriction of disclosure of information about the business only to those who are closely involved with its management and financing as opposed to be more transparent, open, and publicly accountable.

Gray (1988) argues that values of accounting subculture are expressed in accounting

practices of authority, enforcement, measurement, and disclosure. The following

table shows model that links Gray’s accounting values and Hofstede societal values

to accounting practice.

Table 2.2

Gray’s Model (1988)

Societal Values → Accounting Values → Accounting Practice

Individualism/collectivism → Professionalism versus statutory control → Authority and enforcement Uniformity versus flexibility → uncertainty avoidance → Conservatism versus optimism → measurement assets and profits masculinity/feminimity → Secrecy versus transparency → information disclosure

Perera (1989b) recommends that Gray’s model that combined societal and accounting

values can have strong impact on accounting practice. Moreover, he also argues that

value orientations of the preparers of financial statements are formed by societal values.

2.3 Definitions of CSR

CSR concept has been described in many ways by many regulatory bodies and

academic or economic practitioners. In 2005, Habisch and Jonker define CSR as the

level of an organization awareness of responsibility towards the results of its actions

and non-actions and assesses the impacts of the actions on legitimate constituency

which represents the organization maintains its relations with its direct and indirect

environment. While David Vogel in his book “The Market Virtue : The Potential and

Limits of Corporate Social Responsibility” states that corporate social responsibility

is “practices that improve the workplace and benefits society in ways go above and

beyond what companies are legally required to do”. A research paper titled A Guide

to Corporate Social Responsibility by University of Miami (2007) formulates CSR

definition as “a means of analyzing the inter-dependent relationship that exist

between businesses and economic systems, and the communities within which they

are based.

Moreover, World Business Council for Sustainable Development describes CSR as

“Corporate social responsibility is 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 local community and society at

large”. Additionally, World Bank states CSR “is the commitment of businesses to

contribute to sustainable economic development by working with employees, their

families, the local community and society at large to improve their lives in ways that

are good for business and for development.” Looking at different opinions about

CSR, it is understandable that there is no single unilateral understanding about CSR

yet. However, all definitions regarding to CSR are referring to the same concept.

Despise the unclear and yet no international standardization upon CSR definition,

Indonesian government issues “Undang Undang No. 40 Tahun 2007 tentang

Perseroan Terbatas Pasal 47” which states that CSR reporting is mandatory for all

Indonesian listed companies. However, the regulation does not state clear

methodology on how to report and to implement CSR. Additionally, although a legal

regulation had been issued by government, local GAAP regulatory body, known as

Indonesian Institute of Accountants (IAI) has yet regulate how to record CSR

expense.

CSR becomes a very good entry point for companies to improve its operation with

the prime objective to sustain its capability to compete in its business environment

(Rahendrawan, 2006). Moreover, in order to keep its objective to sustain capability

to compete, companies should realize that they no longer can remain focus on profit

seeking motive, but they are supposed to regard social responsibility as a value

added to stakeholder consider that modern stakeholders value corporate good deeds.

It is important that CSR activities are fully integrated with the company’s strategy to

acquire competitive edge to be the basis for business development and efficiency

(Rahendrawan, 2006). Not only with company’s strategy, but also CSR programs

have to be congruent with company’s goals and objectives. Incongruence between

CSR programs toward company’s goals, objectives, and strategies will create

another burden for company to be socially responsible. Integration of its goals,

objectives, and strategies reflected in the CSR activities ensures company

sustainability between economy and environment. In order to be sustainable, all

critical components of its systems of activities must also be sustainable, while also

recognizing the limits within which these must operate (AtKisson, Cited in

Rahendrawan, 2006). “The principle of sustainability appeals to enlightened self-

interest, often invoking the so-called triple bottom line of economic, social, and

environmental performance. In other words, company should operate in ways that

secure long-term economic performance by avoiding short-term behavior that is

socially detrimental” (Porter & Kramer, 2006)

According to Rahendrawan (2006), excellent CSR programs does not mean company

allocate its resources effectively, however, it helps the company to manage its value-

addition chain more effectively and having new resources to respond market

dynamism. He addresses five key elements of delivering excellent CSR :

1. Stakeholder involvement is crucial especially in articulating the commitment

to the needs of stakeholders and during the setting up of indicators of

performance;

2. Governance and conduct, which represents shareholders concerning

management’s policies regarding to the needs to implement CSR,

consideration of environment, priorities set based on the condition of the

company, and key performance indicator;

3. Process of learning (knowledge management) based on continuous

monitoring and evaluation of the progress;

4. Timely reports, not only regarding the extent of CSR implementation, but

also the impact of its implementation to each level of the operation which is

beneficial for learning process;

5. Accountability and transparency, annual report beyond financial report Take

the initiative to lead the company toward sustainability report as part of the

company accountability and transparency.

2.4 Theory of CSR

The subsequent are theories that support the concept of CSR implementations and

reasons behind local and global society enforcement toward companies to conduct

business ethically.

2.4.1 Sustainability

Sustainability concept was first introduced in 1987 in a report made by the

World Commission on Environment and Development commissioned by

United Nation, titled “Our Common Future” also known as the “Brundtland

Report”. Brundtland Report defines sustainability as “development that meets

the needs of the present without compromising the ability of future generations

to meet their own needs” which contains of two key concepts of sustainable

development:

1. concept of 'needs', in particular the essential needs of the world's

poor, to which overriding priority should be given; and

2. idea of limitations imposed by the state of technology and social

organization on the environment's ability to meet present and future

needs.

Further in the report, in regards with the key elements, under the condition

where poverty and inequity are endemic, environment will always prone to

society, ecological and other crises. Sustainability needs to meet basic needs of

the society and give equal opportunity to satisfy society aspirations for a better

life. Thus, sustainability concept requires societies meet human needs by

increasing productive potential and ensuring equitable opportunities for all

(Brundtland Report, 1987).

It is generally agreed that the three major factors that contribute to

sustainability are environmental suitability, economic viability and social

acceptability (Bell and Morse,2000 cited in Borsari and Onwueme, 2007). To

be considered as environmentally sustainable, company must complete all of

the three factors, otherwise it will be weak sustainability.

Figure 2.1

Sustainable Development and Corporate Social Responsibility

Source : Corporate Social Responsibility in 2000 by Dr. Walter Wehrmeyer

2.4.2 Stakeholder Theory

In stakeholder theory, the success of an organization depends on management

ability to balance various conflicts of interest of company’s various

stakeholders. Dellaportas et.al (2005) describes stakeholder theory is a

descriptive theory that attempts to justify the provision of social information in

an attempt to gain stakeholder support and thus minimize the costs of dealing

with complaints and actions that might affect the company. Traditional

definition of stakeholders is those parties who have direct interest in

organization’s financial matter such as common shareholders and other finance

providers institutions. However, modern business world has shift the concept

Natural and Physical Sciences

Technology and Micro-economics

Social issues and Macro-economics

Ecological system

Economic system

Social system

of stakeholder as those parties who are affected by the operation of the

company such as employees, analysts, business contacts, government, and

public as a whole. Thus, those stakeholders have the right to obtain information

about company’s operation.

Further, Dellaportas et.al (2005:207) points three logical and moral viewpoints

that underlie the concept of descriptive and normative ethical considerations of

stakeholder theory. First is interest based analysis where it emphasizes on the

assessment of consequences of actions and policies based on direct interests to

those actions of related parties which include self interest, group interest and

utilitarianism concept. Second, right based analysis that rights protection

should surpass interest satisfaction and right of distribution of opportunities

and wealth, and rights to basic freedom should be fairly distributed. Third is

duty based analysis which is governed by the ethical concept of duty or

responsibility to communities. In 1997, Werhane & Freeman, added one more

moral viewpoint, it is virtue based analysis which emphasized more about

justice and prudence.

In 1994, Freeman cited in his paper from Kenneth Goodpaster that stakeholder

analysis has two competing interpretations. First is strategic interpretation that

says “managing stakeholder is a mean to achieve both stockholder and

managerial ends”. “Thus, by managing stakeholder relationship, company

allows its objectives being understood in, according to Goodpaster, narrow

economic (profit maximizing) terms” (Freeman, 1994). However, company

objectives in order to be supported and understood by stakeholder,

management should understand stakeholders concerns (SRI,1960 cited in

Freeman & Velamuri, 2005). Second is multi fiduciary interpretation that says

managers and directors have fiduciary obligation to stakeholder, and they are

morally required to manage stakeholder relationship.

Figure 2.2

Sustainability Triangle

Source : Corporate Social Responsibility in 2000 by Dr. Walter Wehrmeyer

Figure 2.3

Contrasting Model of Corporations : Stakeholder Model

Source : The Stakeholder Theory of the Corporation: Concepts, Evidence, and

Implications in 1995 by Thomas Donaldson and Lee E. Preston

Investors

employees

Suppliers CustomersFirm

Governments

Trade Associations

Political Group

Communities

2.4.3 Legitimacy Theory

According to Deegan (2002), in his paper titled “The Legitimizing Effect of

Social and Environmental Disclosures – A Theoretical Foundation”, legitimacy

theory is system-oriented theory, which “permits us to focus on the role of

information and disclosure in the relationship(s) between organizations, the

State, individuals and groups” (Gray et al., 1996. p.45 cited in Deegan).

Further, legitimacy theory also originated from theory known as political

economy theory. “Political economy theory explicitly recognizes the power

conflicts that exist within society and the various struggles that occur between

various groups within society” (Deegan, 2002). It is believed that society,

politics, and economics are inseparable factors where an absence of

consideration of one factor in which the economic activity takes place, may

lead to misinterpretation in economic issues (Deegan, 2002).

In many literatures, the idea of legitimacy theory is based on concept of social

contract. The theory emphasizes on managements’ reaction toward the

community expectations (e.g. Tilt, 1994; Patten, 1992; Guthrie and Parker,

1989 cited in Frost & Wilmshurst, 2000). Legitimacy theory is proposed by

granting companies with privileges through the mechanism of corporate

legislation, which is ratified in parliament by public representative. Thus,

social contract between company and public is formed (Dellaportas et.al,

2005:208). “Legitimacy theory posits that the organization must appear to

consider the rights of the public at large, not merely those of its investors”

(Deegan & Rankin, 1997).

Given the notion of legitimacy theory, companies are expected to perform their

activities within the bounds and norms of the respective societies as

stakeholders in the societies are aware of companies’ business activities.

Otherwise, society may remove the organization’s rights to continue operations

or revoke the social contract formed unless the organization undertakes

particular strategies. Given a growth in community awareness and concern, that

firms will take measures to ensure their activities and performance are

acceptable to the community (Frost & Wilmshurst, 2000). Thus, any actions

that cause adverse impact to the society, company should disclose additional

information in regard to their destructive actions.

2.4.4 Triple Bottom Line Reporting

The term “triple-bottom-line” reporting was first invented in 1994 by John

Elkington and the word began to be used in public in his book titled Cannibals

with Forks: The Triple Bottom Line of 21st Century Business in 1997. Triple-

bottom-line concept consists of three main elements; people, planet, and profit

which represents social, environment, and economic factors in the society. In

his article, he also stated that 1987 Brundtland Report has alert companies and

societies the importance of socially responsible business and sustainable

development, focusing not only on economic value that the company add but

also environmental and social value that company add or destroy. As a result,

many companies are now adopting triple bottom line reporting, as it is believed

to offer them opportunity to demonstrate to stakeholder that they are engaging

sustainable business.

Moreover, Elkington also stated that sustainable capitalism transition will be

the most complex problem regarding to social reporting, considering triple

bottom line reporting dependence on seven linked revolutions known as seven

sustainability revolutions (shown below).

Old Paradigm New Paradigm 1. Market Compliance Competition 2. Values Hard Soft 3. Transparency Closed Open 4. Lifecycle technology Product Function 5. Partnership Subversion Symbiosis 6. Time Wider Longer 7. Corporate governance Exclusive Inclusive

Additionally, according to Elkington (2004), there are three waves of public

pressure that shaped the environmental agenda where roles and responsibilities

of governments and public sector have transform as a result of the three waves.

The three waves are: first, brought an understanding that environmental

impacts and natural resource demands have to be limited, resulting in an initial

outpouring of environmental legislation; second, brought a wider realization

that new kinds of production technologies and new kinds of products are

needed, culminating in the insight that development processes have to become

sustainable – and a sense that business would often have to take the lead. The

business response began to be more competitive; third, focuses on the growing

recognition that sustainable development will require profound changes in the

governance of corporations and in the whole process of globalization, putting a

renewed focus on government and on civil society. Now, in addition to the

compliance and competitive dimensions, the business response will need to

focus on market creation.

2.5 Perception Against CSR

Although most companies are in favor of CSR reporting, some economists are

against the concept of CSR reporting. CSR implementation is said to be costly for

companies and affect the profitability. In 1970, in his article titled “The Social

Responsibility of Business is to Increase Its Profits”, Milton Friedman argues that

the only social responsibility of business is to utilize its resources and use it for

activities that can increase its profits. He stated that corporate social responsibility

concept is lack of rigor and prominent of its analytical looseness. Further in his

paper, he also stated that managements of companies acts upon shareholder’s interest

and that management should not spending someone else’s money for general social

interests. Such action, mentioned in his paper, by being socially responsible, will

reduce shareholder’s return as management spent the money. “Insofar as

management actions raise the price to customers, they are spending the customers'

money; insofar as management actions lower the wages of some employees, they are

spending their money” (Friedman, 1970).

When management is exercising social responsibility and the way they would spend

the money, they are imposing taxes and raising political questions of principle and

consequences while imposing taxes and enacting expenditures from the executive

function of collecting taxes and administering expenditure programs and from the

judicial function of mediating disputes and interpreting the law are regulated and

standardized by the government (Friedman,1970). “On grounds of political principle,

it is intolerable that such civil servants, management in this case – insofar as their

actions in the name of social responsibility - are just windowdressing”

(Friedman,1970).

Incurring corporate social responsibility expense can be costly, thus, will affect the

competitiveness and profitability of the company. CSR program activities such as

environmental protection performance, charitable donations, encourages the

advancement of women and minority ethnicities, and involvement in communities

projects are viewed as having significant impact in profitability of a company

(Balabanis et.al, 1998). Logically thinking, implementation of CSR activities not

only would cause company additional cost, but also additional work in order to

deliver the activities to the society. Rahendrawan (2006) stated that there is no

incentive for company to implement CSR other than to be considered a “good

citizen” or to build good image. As society views social goals top, for firms in order

to capture good image in the society, they have to show their awareness and supports

to social goals (Davis 2001:313).

Other argument against CSR reporting is implementation of CSR is only in favor to

the viability of a firm. In order to maintain long-term profitability, a firm has to

retain its social role and social power by responding to what society needs and wants

(Davis 2001: 314). Moreover, by engaging themselves to CSR programs, firms can

avoid government imposing regulations that would be costly for them. “Regulation is

costly to business and restricts its flexibility of decision making. From

businessman’s point of view it is desirable to retain freedom in decision making so

that he can maintain the initiative in meeting market and social factors” (Davis 2001:

314). Porter and Kramer (2006) argue that as the concept of CSR as insurance of

company image, it is impossible to measure the indirect connection between good

deeds and consumer. Whereas this indirect connection puts social responsibility

program on a shaky ground and liable be dislodged by a change of management or

swing in business cycle.

2.6 Corporate Social Responsibility and Good Corporate Governance

Shleifer and Vishny (1997) define corporate governance concept as ways in which

suppliers of finance to corporations assure themselves of getting return on their

investment. “Good governance is of course important in every sphere of the society

whether it be the corporate environment or general society or the political

environment. Good governance levels can, for example, improve public faith and

confidence in the political environment. When the resources are too limited to meet

the minimum expectations of the people, it is a good governance level that can help

to promote the welfare of society” (Aras & Crowther, 2008). In Thomas Clarke’s

book, Theories of Corporate Governance : The Philosophical Foundations of

Corporate Governance, Guillén (2000) stated that a well functioning corporate

governance system can contribute to economic efficiency and perhaps social equity,

however, a poorly conceived system can cause havoc that may lead to misallocation

of resources. When a company seeks to satisfy its stakeholders, it cedes primary

control of their CSR agenda to outsiders (Porter & Kramer, 2006). Although

stakeholders views are obviously important, they can never fully understand a

company’s ability, competitive positioning, and trade-off it must take other the

management itself.

Developing from the definitions above, corporate governance mechanism not only

considers about internal factors, but also external. Modern mechanism of corporate

governance not only consists of BOD, shareholders, managers and employees, but

also society, suppliers, and customers. Further, the mechanism is shown in the figure

below.

Figure 2.4

Modern Mechanism of Corporate Governance

Source : Recent Developments in Corporate Governance : an Overview, 2006

by Stuart L. Gillan

↓Management

Board of Directors

AssetsDebt

Equity

Suppliers

Employees

Shareholders

Creditors

Customers

Culture

Markets Politics

Communities

Law / Regulations

↓

↓ ↓

In 2006, in his paper, Kiroyan stated five basic principles of good corporate

governance; responsibility, independence, fairness, transparency, and accountability.

While other researchers explain how corporate social responsibility depends on

implementation of good corporate governance principles, consists of accountability,

integrity, efficiency, and transparency (Mardjono, 2005). It can be seen that

responsibility principle refers to corporate being responsible of value added and

destruction to the society resulting from its activities.

In concept of company’s accountability, company should perform satisfactory

actions for all parties related to its business (Porter, 2009). Goddard and Burke

(1991) suggest four main areas of concern that must be addressed to construct an

accountable system:

1. Process whereby interest group can have access to decision making

and performance monitoring to consider various roles in

accountability process, relationship between them and the impact of

the information system.

2. Ladder of accountability suggested by Stewart (1984, cited in

Goddard and Burke): Policy accountability with goals and objectives;

program accountability of goals, objectives, and policy; performance

accountability with achievement of required standard; process

accountability to ensure adequate procedures and legality; and

accountability for probity and legality to avoid malfeasances and

illegality.

3. The importance to include three different accountability relationships:

administrative/bureaucratic/hierarchical as the area of management

requires performance information; professional relationship

concerning client relationship and requires information on service

efficacy; social relationship requires qualitative information of an

informal nature.

4. Further consideration on evaluation and judgment of information and

consequences of action as part of development of accounting system.

In 2008, Aras and Crowther stated in their paper an increase in level of responsibility

and accountability of a company to their stakeholder, a code of conduct of good

corporate governance can lead them to appropriate stakeholder relations. High

standard of corporate governance concept stems from the rationale of inherent

character of the corporate from the organization (Clarke, 2004 cited in Sharma,

Agarwal, & Ketola, 2009). As a socially responsible entity, a company must

reconfirm and reiterate themselves that they are operating in a society, with its

sanction and authority, for the goodness of the largest part, not only their

shareholders, employees, and managers, but society as a whole (Ogletree, 2002).

Social solidity among government, business, and society will not be reached if there

is no understanding upon the previous concept (Oketch, 2004). It can be said that the

center of social contract, corporate social responsibility and corporate governance is

sustainability.

Sustainability implies that society should not use resources more than they can

regenerated (Aras & Crowther, 2008). “Unsustainable operations can be

accommodated for either by developing sustainable operations or by planning for a

future lacking in resources currently required. In practice, organization mostly tends

to aim towards sustainability by increasing efficiency in the way in which resources

are utilized” (Aras & Crowther, 2008). Further in the paper, Aras and Crowther

(2008) reveal two commonly held assumptions which underlie the association

between corporate sustainability and governance; first is that sustainability is

synonymous with sustainable development; and second is that sustainable

development will exist by recognizing environmental and social issues and

integrating them into company strategic planning. Included in the assumptions, there

are four key dimensions of sustainability that makes corporate governance and social

responsibility connected to one another; societal influence which is defined as

measure of impact that society makes upon corporations in terms of social contract

and stakeholder influence; environmental impact as effect of actions of corporations

upon environment; organizational culture as relationship between corporation; and

internal stakeholders as defined in term of return for level of risk undertaken.

2.7 CSR – FP

As the pressure on firm to report their socially responsible activities, trade-off

between the actions and profitability is a certain issue that managers in all firms will

put into considerations in making decision. Although the results of previous

empirical studies of relationship between CSR and profitability have been

conclusive, reporting positive, negative, and neutral results (McWilliams and Siegel,

2000), some companies are treating CSR as an independent business function to gain

more financial control upon it (Shahin and Zairi, 2007). CSR activities also needs to

be thoroughly considered by management and treated as investment (Castka et al,

2004) as core of return on investment in CSR is finding the optimum level that

balances the need for maximizing profit from CSR while satisfying demand of CSR

from stakeholders (McWilliams and Siegel, 2001).

2.8 Corporate Social Responsibility in Indonesia

Rahendrawan (2006) describes that CSR in Indonesia is still widely considered as

either environmental issues or community development activities. Explained further

in the paper, Indonesian government encourage it SOE (state owned enterprise),

through PKBL (Program Kemitraan dan Bina Lingkungan), to provide portion of

reserves from their annual profit and dedicate them to build the community

surrounding the enterprise through provision of fund, training, and monitoring

activities for micro and small entrepreneurs. The program considered as success if an

enterprise can fully disburse the allocated fund to as many SMEs as possible during

certain time and to charitable activities budgeted in annual plan.

CSR reporting in Indonesia was initiated by multinational companies as it was

believed as brought up spirit of transparency, democracy, and social awareness

(Koestoer, 2007). They encourage corporate social responsibility after major issues

regarding to the “sweatshop” industry and other human rights issues on Nike and

Levis Strauss in 1992. She also stated in her paper :

“A study undertaken among natural resources based industry in Indonesia reveals

that companies’ motivation to invest on social development of their surrounding

communities varies, but almost all are claiming similar notions of problems (IBL,

2004). Those challenges can be categorized as internal problems (within the

companies) and external-driven problems i.e. the external environment which often

are outside the control of the companies. The internal problems include internal

management within the companies; many aspects of it are reflecting the internal

values of the companies. The external problems include: (i) Government related

issues, (ii) Customer/Community Behaviour, and (iii) Influence of civil society

organizations.”

The after-shock of the Indonesian economic crisis has required a re-evaluation of

both economic and investment policy, and the way business is run in Indonesia

(Kemp, 2001). Melody Kemp (2001) outlooks the condition of multicultural,

economic, and political development make the CSR implementation in Indonesia is

ideal. She suggested that educational foundations and management training are

needed to improve business condition and political reform, and from which CSR

may be a spin-off.

2.9 Frameworks

As mentioned above, companies these days are viewing CSR as part of their

investment. Investors, as capital provider, also demand companies to include CSR

reporting in their annual report. Although there is no unilateral standard that

organizes CSR reporting, there are organizations intended to build the framework

and provide guidelines for companies to report their CSR activities. The followings

are CSR reporting framework that are widely used by companies which expected to

provide them benefits.

2.9.1 Global Reporting Initiatives Sustainability Reporting Guidelines.

GRI sustainability reporting was first initiated in 1997 by CERES, a leader

nonprofit organization made up of leading social investment professionals,

environmental groups, religious organizations, pension trustees, and public

interest group, and UNEP, a subdivision of United Nations whose main

concerns is environment programs. GRI objective is to provide guidance for

organization to disclose their sustainability performance that is applicable for

all type, size, sector, and geographic locations of companies. “GRI

sustainability reporting guidelines are intended to help organizations report

information on sustainability in a systematic way” (Hussey et al, 2001).

The G3 Guidelines are the cornerstone of the GRI Sustainability Reporting

Framework and it is recommended they be used as the basis for all of an

organization's annual reporting. Although GRI is the mostly accepted standard

for sustainability reporting, the framework gives corporations flexibility to

voluntarily adopt the framework, and adopt frameworks that best suit the

company needs.

G3 sustainability indicator consists of three categories; social performance

which emphasize on company contribution on the well being of the employees,

customers, stakeholders, and society through its labor, human rights,

governance and product responsibility, and safety practices. Second is

economic performance indicator which addresses company’s and host’s society

financial performance, focusing on its impact to consumers, suppliers,

employees, and related stakeholders, with topics including sales, profit, capital

expenditures, community development, taxes, wages, brand strength, debt and

interests, and local purchasing. Last, environmental performance indicator

which concern about environmental performance and its impacts for current

and future generations, including resource and energy conservation, waste

management and disposal, recycling, greenhouse gas, biodiversity, water and

material use, and wildlife conservation (Brown et al, 2007).

2.9.2 Social Accountability 8000 (SA8000)

Social Accountability 8000 (SA8000) was developed by Social Accountability

International (SAI), today known as Council on Economic Priorities

Accreditation Agency (CEPAA). It is an auditable standard for a third party

verification system that sets out voluntary requirements to be met by

employers, including workers’ rights, workplace condition and management

system and promotes as a voluntary and universal standard for companies who

are interested in auditing and certifying labor practices in their workplace.

Elements acknowledge in the standard are based on principles of ILO,

international human rights norms, UN Conventions on the Rights of the Child

and the Universal Declaration of Human Rights.

Considering one benefit for company who includes CSR reporting in its annual

report is to improve public image and reputation toward its products and

services, it is beneficial for company to pursue SA8000 certification since the

standard assures that the products and services have been produced in

accordance with an commonly and socially accepted set of values (Rohitratana,

2002). Not only has the company benefited from the standard, but also the

supplier, as the company is pressured to select suppliers who can afford the

standard. There are nine elements that must be followed in SA8000 : Child

Labor : no workers under the age of 15; Forced labor : no forced labor

including prison or debt bondage labor; Freedom of Association and Right to

Collective Bargaining : workers must have the freedom to bargain with

employers; Discrimination: any kind of discriminations are forbidden; Working

Hours: no more than 48 hours per week with at least one day off for every

seven day period; Compensation: wages paid must meet the legal and industry

standards; Management Systems: management system must be standardized.

2.9.3 Corporate Social Responsibility Disclosure Used in this Research

Following the previous study titled “Ranking Indonesian Listed Banks At

Indonesia Stock Exchange (IDX) on their Corporate Social Responsibility

Disclosures from 2004 to 2006” by Ratnawaty Tandanu(2008), CSR disclosure

used in this research replicating categories used by Branco and Rodrigues

(2006) in Portuguese Banks. Disclosure are divided into four major categories;

environmental, human resources, products and services, and community

involvement.

1. Environmental :

• Environmental policies or company concern for the environment

• Environmental management, systems and audit

• Lending and investment policies

• Conservation of natural resources and recycling activities

• Sustainability

• Conservation of energy in the conduct of business operations

2. Human resources disclosure

• Employee health and safety

• Employment of minorities or women

• Employee training

• Employee assistance/benefits

• Employee remuneration

• Employee profiles

• Employee share purchase schemes

• Employee morale

• Industrial relations

3. Products and costumers disclosure

• Product quality

• Customer complaints/satisfaction

• Provision for disabled, aged, and difficult-to-reach customers

4. Community involvement disclosure

• Charitable donations and activities

• Support for education

• Support for the arts and culture

• Support for public health

• Sponsoring sporting or recreational projects