The impact of culture and governance on corporate social reporting

Journal of Accounting and Public Policy 24 (2005) 391–430

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The impact of culture and governanceon corporate social reporting

R.M. Haniffa a, T.E. Cooke b,*

a School of Management, Bradford University, Emm Lane, Bradford BD9 4JL, UKb School of Business and Economics, University of Exeter, Exeter EX4 4PU, UK

Abstract

Our aim is to increase understanding of the potential effects of culture and corporategovernance on social disclosures. The ethnic background of directors and shareholdersis used as a proxy for culture. Corporate governance characteristics include board com-position, multiple directorships and type of shareholders. The dependent variable, dis-closure in annual reports of Malaysian corporations, is measured by an index score aswell as in terms of number of words. Our results indicate a significant relationshipbetween corporate social disclosure and boards dominated by Malay directors, boardsdominated by executive directors, chair with multiple directorships and foreign shareownership. Four of the control variables (size, profitability, multiple listing and typeof industry) were significantly related to corporate social disclosure with the exceptionof gearing. This study has public policy implications for Malaysia as well as a number ofother countries in the Asia–Pacific region.� 2005 Elsevier Inc. All rights reserved.

Keywords: Corporate social reporting; Culture; Corporate governance; Malaysia; Disclosure

0278-4254/$ - see front matter � 2005 Elsevier Inc. All rights reserved.doi:10.1016/j.jaccpubpol.2005.06.001

* Corresponding author. Tel.: +44 1392 263201; fax: +44 1392 263210.E-mail address: [email protected] (T.E. Cooke).

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392 R.M. Haniffa, T.E. Cooke / Journal of Accounting and Public Policy 24 (2005) 391–430

1. Introduction

Corporate social reporting has been the subject of substantial academic re-search for more than two decades.1 Some of the main research questions thathave been tackled or are currently being researched include: what companiesare reporting;2 can social and environmental disclosure practices be linked toattributes of economic performance or to factors such as size, industry mem-bership, risk, market reaction, external influences, firm reputation, countryof origin or proximity to individual consumers;3 and what motivates compa-nies to make particular social and environmental disclosures.4

However, most of the factors and proxies that have been considered in pre-vious studies are company-specific. Since disclosure is an ‘‘. . . accounting activ-ity involving both human and non-human resources or techniques as well asthe interaction between the two’’ (Perera, 1994, p. 268), studies in this areawould benefit if both cultural and corporate governance factors are considered.The inclusion of ethnicity (a proxy for culture) of decision makers within andwithout an organisation is important in some countries because the traditionsof a nation are instilled in its people and might help explain why things are asthey are. As such, how a firm operates and reports will be influenced by the so-cial values of the relevant publics within which it exists (Lehman, 1995; Deeganand Rankin, 1996).

The mind of Malaysian managers is influenced by ethnicity, education andtype of organisation they work for (Chuah, 1995). Thus, operationally, ethnic-ity acts as a suitable surrogate for culture in this study but the researchersacknowledge that the measure is partial. Ethnicity is chosen because it is a sig-nificant marker of class relations and provides a principle ‘‘... according towhich conflicts over wealth and state power take place’’ (van Fossen, 1998,p. 89). Furthermore, in multiracial countries, the prevailing societal valuesmay not reflect the values of the nation as a whole especially if each racialgroup has chosen to maintain its own ethnic identity and values. Differencesbetween the groups are greater if there exists a history of conflict or in which

1 See Mathews (1997) for further discussion on the development of social reporting over thatperiod.2 See, for example, Ernst and Ernst, 1976; Teoh and Thong, 1984; Andrew et al., 1989; Guthrie

and Parker, 1990; Harte and Owen, 1991; Adams et al., 1995; Deegan and Gordon, 1996; Newsonand Deegan, 2002.3 See, for example, Ingram and Frazier, 1980; Anderson and Frankle, 1980; Trotman and

Bradley, 1981; Freedman and Jaggi, 1982; Ullman, 1985; Cowen et al., 1987; Roberts, 1992;Herremans et al., 1993; Tilt, 1994; Clarke and Gibson-Sweet, 1999; Newson and Deegan, 2002.4 See, for example, Guthrie and Parker, 1989; Patten, 1992; Roberts, 1992; Donaldson and

Preston, 1995; Deegan and Gordon, 1996; Deegan and Rankin, 1997; Adams et al., 1998; Neuet al., 1998; Deegan, 2000.

R.M. Haniffa, T.E. Cooke / Journal of Accounting and Public Policy 24 (2005) 391–430 393

racial differences coincide with national or socio-economic differences (Petti-grew, 1979). Similarly, the extent of shared values and degree of co-operationis determined by organisational co-ordinating activities and formality in thesystem (Birnberg and Snodgrass, 1988). As such, it is important to acknowl-edge that values may differ between groups even within a nation (Specterand Solomon, 1990).

As well as culture, it is important when discussing corporate social disclo-sure (CSD) practices to consider the values, motives and choices of thoseinvolved in formulating policy and taking decisions in the organisation (Macl-agan, 1999). Hence, consideration of corporate governance, including owner-ship structure and constituents of boards that exist in an organisation (proxyfor leadership style and control of decision makers), are important because itis top management who oversee information disclosure in annual reports (Gib-bins et al., 1990).

Longitudinal studies of corporate social disclosure indicate increases overtime, both in terms of the number of companies making disclosures andin the extent of information being reported (Harte and Owen, 1991; Deeganand Gordon, 1996).5 Theories explaining social disclosure patterns includethe following: �social contracting theory� which suggests that companieshave a social contract with society to perform certain tasks within the boundsof justice; �legitimacy theory� which extends social contracting theory and in-volves companies responding to demands of divergent interest groups bylegitimising their actions; �accountability theory� which also extends social con-tracting theory and considers companies� compliance with the law; and lastly,�decision usefulness theory� which incorporates users other than investors (Tilt,1994).

The objective of this paper is twofold. First, to explore CSD practices in twodifferent time periods (1996 and 2002) to determine whether differences exist inthe extent and variety of social disclosure over time. Our second objective is toexplain variability in CSD, and specifically to assess whether culture (ethnicity)and governance structures, besides size, profitability, gearing, listing status andindustry type, are good explanatory variables. We adopted legitimacy theory asthe premise of our theoretical framework in this paper because we seek tounderstand what factors may cause variability in corporate social disclosureand to what extent our variables of interest viz. ethnicity and governance struc-ture within an organisation may influence organisational actions in respond-ing to various stakeholder groups especially in situations where there is

5 However, longitudinal studies of disclosure practices in the annual reports of a particularorganisation indicate fluctuations in the variety and extent of CSD (Guthrie and Parker, 1989;Deegan et al., 2002).


government �intervention� via certain socio-economic policies.6 Legitimacyneeds to be placed in its environmental context to avoid the problem of ethno-centricity which can occur when a country such as Malaysia is evaluated by thenorms prevalent in an Anglo-Saxon culture that are taken to be absolutes. Forexample, in an Anglo-Saxon society it may well be that demand for legitimacycomes from groups such as consumers whereas in Malaysia that demand comesfrom government and certain elite groups.

We analysed the 1996 and 2002 annual reports of 139 non-financial compa-nies7 listed on the Kuala Lumpur Stock Exchange (KLSE). The earlier year re-flects an environment when Malaysia enjoyed remarkable economic growthproviding a reasonably high standard of living (Jayasankaran and Hiebert,1997). An aspect of this growth was the strong collusion (patron–client net-works) between the government and certain businessmen who benefited fromthe government�s National Economic Policy (NEP) (Jayasankaran, 1997;Far Eastern Economic Review, 1998). We recognise that in certain societiesthere exists a close relationship between business and government. Witness,for example, the chaebol in South Korea and keiretsu in Japan. However,Malaysia differs in the sense that the co-operation (collusion) is often specificto an individual rather than to business in general. In contrast to 1996 we se-lected 2002, a year in which companies were recovering from the 1997 financialcrisis and some business reforms had been implemented. We considered ethnic-ity (proxy for culture) in our study because it is an important explanatory fac-tor in the context of countries where there exists institutionalised positivediscrimination, particularly in terms of job offers and concessions such asgrants and trade. Such policies have important implications for corporatebehaviour including disclosure and governance practices. Investigating CSDpractices in Malaysian annual reports over two time periods and identifyingculture and governance structure as possible explanatory factors makes a con-tribution to the literature. Our findings may have implications for other devel-oping countries where the government takes special interest in racial andbusiness policies such as Fiji, Hong Kong, India, Indonesia, Japan, Sri Lankaand Singapore.

The remainder of the paper is organised as follows: the next section reviewsthe literature on organisational legitimacy theory and how CSD in annual re-ports forms part of the strategic legitimation process. The development ofhypotheses are outlined in Section 3, followed by details of the research method

6 Although political–economy theory has been used by others to explain this phenomenon, we feltthat legitimacy theory would be more appropriate when considering voluntary rather thanmandatory social disclosure.7 All banks, insurance and unit trusts companies were excluded, primarily because of the different

statutory requirements that apply. In addition, companies in these sectors rarely disclose socialresponsibility information, unlike entities in developed countries.


in Section 4. Section 5 discusses the results followed by the summary and con-cluding remarks including avenues for further research.

2. Theoretical framework: organisational legitimacy

Legitimacy theory is defined as ‘‘a generalised perception or assumption thatthe actions of any entity are desirable, proper, or appropriate within some so-cially constructed system of norms, values, beliefs and definitions’’ (Suchman,1995, p. 574). The entity, through its top management, seeks congruency be-tween organisational actions and the values of its general and relevant publics(Dowling and Pfeffer, 1975; Lindblom, 1994) or its stakeholders. Sethi (1979)argues that if an actual or potential disparity exists between organisationaland social values, then organisational legitimacy will be jeopardised giving riseto a �legitimacy gap�. In essence, seeking organisational legitimacy is deemedimportant in demonstrating social worthiness (Oliver, 1991), ensuring contin-ued inflows of capital, labour and customers (Pfeffer and Salancik, 1978), aswell as demonstrating that the firm is in tune with societal concerns (Clarkeand Gibson-Sweet, 1999) and values to help close any perceived legitimacygaps.

Actions by corporate management to convince wider society that the orga-nisation is socially responsible are part of the legitimation process (Gray et al.,1995a). Lindblom (1994) identifies four broad legitimation strategies that firmsmay use to secure organisational legitimacy: informing stakeholders about in-tended improvements in performance; seeking to change stakeholders� percep-tions of an event; distracting attention away from an issue; and changingexternal expectations about its performance. Such legitimation strategies in-clude gaining, maintaining or repairing legitimacy (Suchman, 1995). Dowlingand Pfeffer (1975) suggest three modes of action that firms can take to enhancelegitimacy: adapt outputs, goals and methods of operation to conform to pre-vailing definitions of legitimacy; attempt through communication to alter thedefinition of social legitimacy to conform to present practices, output and val-ues; and finally, attempt through communication to become identified withsymbols, values or institutions which have a strong base for social legitimacy.Gray et al. (1995a) link the strategies suggested by Lindblom (1994) and theactions proposed by Dowling and Pfeffer (1975) within the framework of legi-timacy theory, a relationship illustrated in Fig. 1. The adoption of an appropri-ate strategy depends on how best management feel they can close thelegitimacy gap.

Legitimacy theory is also the basis for our analysis because ‘‘. . . it is difficultto separate the notion of legitimacy from the idea of crisis, in fact, as this isoften the only time that constituents in a power system will consciously assertwhere they believe authority should be concentrated, and how it should be

Strategy Educate society

of changes in

organisation’s

actions

Alter society’s

perceptions of

the organisation

Alter society’s

expectations of

the organisation

Divert society’s

attention away

from issues of

concern

Action Adapt outputs,

goals and

methods of

operations to

conform to

prevailing

definitions of

legitimacy

Through

communication,

alter definitions

of social

legitimacy so as

to conform to

present

practices,

outputs and

values

Through

communication,

alter definitions

of social

legitimacy so as

to conform to

present

practices,

outputs and

values

Through

communication,

try to become

identified with

symbols, values

or institutions

which have

strong base of

social legitimacy

Source: adapted from Gray et al. (1995a)

Legitimacy theory

Fig. 1. Link between Lindblom�s legitimation strategies and Dowling and Pfeffer�s legitimationactions.


used’’ (Sutton, 1993, p. 2). The financial crisis in the Far East in 1997 raisedquestions of corporate legitimacy and its governance structures and the rela-tionship between the corporation and the social context governing the func-tioning of such entities.

Empirical studies in social accounting have employed a number of proxiesto test aspects of legitimacy theory although content analysis has been mostcommonly used. Proxies, that help explain environmental disclosures includeownership structure i.e. public vs private company (Cormier and Gordon,2001); industry sensitivity (Deegan and Gordon, 1996); major corporate events(Guthrie and Parker, 1989; Patten, 1992); and type of users of annual reports(Deegan and Rankin, 1997). Proxies used to explain community involvementdisclosure include a corporation�s public profile i.e. proximity of a companyto individual consumers (Clarke and Gibson-Sweet, 1999). More recent studieshave focused on direct questioning of managers to test their motivations forCSD. For example, the study by O�Donovan (2002) supports legitimacy theoryand provides insight into management disclosure behaviour based on scenariosthat have different impacts. Where the perceived threat is minimal, disclosure is


deemed unnecessary and if it is threatening, the disclosure reactions are deemednecessary and aimed at either gaining, maintaining or repairing legitimacy.O�Dwyer (2002) suggests that the aim of companies in disclosing environmentaland social information is to influence opinion: either in a defensive way to re-pair perceived loss of legitimacy or in a proactive way to be seen as havingsocial conscience and enlightened self-interest. However, his results questionedthe explanatory ability of legitimacy theory in the context of Ireland.

Where a legitimacy gap exists and is recognised by senior management thenthe company has to consider a response. One response is to ignore the gap, pre-sumably on the basis that no adverse consequences will arise. Alternatively, se-nior management responds by disclosing information helpful in reducing thelegitimacy gap, and this is the focus of this study. Management perceives thata gap exists and wishes to reduce it through additional disclosure. We do thisby considering social disclosure practice in the 1996 and 2002 annual reports ofMalaysian companies.

3. Determinants of CSD and hypothesis development

3.1. CSD over time

Previous studies on developed countries have shown that CSD in annual re-ports has increased over time in response to a number of factors. Some of thereasons may be attributed to increases in legislation, risk, activities of pressuregroups, ethical investors, specific events, awards, economic activities, mediainterest, societal awareness, and politics.

Over the past decade, especially the early 1990s, Malaysia experienced sub-stantial economic growth and tremendous social change before being hit by theeconomic crisis in 1997. The rapid change in business environment was attrib-uted to the conducive environment for both local and foreign businessesincluding political stability, excellent infrastructure, indigenous supply of nat-ural gas and petroleum, well trained and versatile workforce, and the wide useand recognition of English as an international language (Seetharaman, 1993).At the same time, the massive expansion in the economy resulted in a shortageof workers in certain sectors, higher consumer spending on goods and services,and an increase in awareness of environmental issues as a result of the boom inthe construction and property market.

However, the economic crisis in 1997 opened the Pandora�s Box revealingstrong collusion between the ruling political group and business. A survey pub-lished in the Far Eastern Economic Review (1998) indicated that 86.2% of busi-nessmen felt that the government is too close to business to the point that the‘‘. . . private sector can dictate terms, telling government what to do based ontheir links to leadership, who got overambitious and the private sector who


got greedy’’ (Jayasankaran and Hiebert, 1998, p. 15). There were also worriesof rising corruption following the government�s emphasis on economic growthat any price (Jayasankaran, 1997). The Securities Commission and the KLSEaddressed some of these weaknesses through reforms in corporate governance.There has also been greater emphasis on better disclosure and greater transpar-ency of information. Given the scenario of events in the chosen time periods,our directional hypothesis is as follows:

H1: There is a significant increase in the extent and variety of CSD in the

annual reports of Malaysian companies between 1996 and 2002.

3.2. Culture

Culture may be represented by perceptions of loyalty to an ethnic group inwhich the group is a collection of people who share patterns of normativebehaviour (Cohen, 1974) and embrace notions of kinship and common origin,however mythical (Harowitz, 1985). It is important to acknowledge that valuesmay differ between groups even within a nation (Specter and Solomon, 1990),especially when various groups choose to maintain their ethnic identity (Sen-dut, 1991). Malaysia is such a multiracial country. Divergence in cultural val-ues within the nation results from ethnic polarisation, partly as a result of thegovernment�s NEP which is an affirmative action plan to eliminate the identi-fication of race with economic function (Jomo, 1986).8 In reality, the NEP is aform of institutionalised positive discrimination in favour of the bumiputras9 byoffering them various concessions including business contracts. The govern-ment�s NEP, which discriminates on the basis of ethnicity, affects corporatebehaviour including its social disclosure practice.

During the economic boom of the mid-1990s there was substantial collusionbetween the government and certain Malay businessmen (Jayasankaran, 1997;Far Eastern Economic Review, 1998). Since government is one of the relevantpublics of the firm, developing a corporate reputation as being socially respon-sible through performing and disclosing social responsibility activities may beseen as part of a strategic plan in managing stakeholder relationships (Roberts,1992). Hence, it may be expected that firms managed by the government�s fa-voured ethnic group, the Malays, choose to disclose more social responsibility

8 NEP was introduced in 1970 following race riots in 1969 due to the economic dominance of theChinese amidst the poverty of the Malays (Jayasankaran and Hiebert, 1997). See Haniffa (1999) fora discussion of NEP and its implications on the business environment.9 Bumiputra refers not only to Malaysians of Malay but other indigenous ethnic groups

(Malaysia, 1991). However, for the purposes of this study, bumiputra refers to the Malay groupsince they form the majority.


information as a legitimisation strategy aimed at changing the perceptions ofother stakeholders on the business capability of Malay directors. An additionalobjective is to divert the attention of other stakeholders away from the closerelationship between Malay directors and government, so that such favouredgroups can continue to have an influential voice at both governmental andinstitutional levels. Similarly, since the finance director is normally involvedin the preparation of annual reports and disclosure policies, the ethnicity ofthe finance director would influence corporate social responsibility disclosurepolicy and practice.10

In the same vein, the ethnicity of the majority of shareholders of a companywould influence disclosure strategies of the company. Companies with Malaydominated shareholders would adopt legitimation strategies aimed at attract-ing or diverting their attention to or from issues of concern to such a group.For example, with regards to religion, Malay shareholders would be concernedto ensure that business activities are halal (permissible), and also whetheremployees are provided with a place to worship in the workplace. Thus, theintention of CSD by firms dominated by a particular ethnic group whose val-ues are specifically supported by government, is corporate legitimation. Threeproxies of culture11 based on ethnicity (firms with boards dominated by Malaydirectors; Malay finance director; and Malay shareholders) are selected to testthe following hypotheses:

H2: Ceteris paribus, the extent of CSD is greater for companies with boards

dominated by Malay directors.

H3: Ceteris paribus, the extent of CSD is greater for companies with a Malay

Finance Director.

H4: Ceteris paribus, the extent of CSD is greater for companies dominated by

Malay shareholders.

3.3. Corporate governance

Corporate governance may be broadly defined as ‘‘the manner in whichcompanies are controlled and in which those responsible for the direction ofcompanies are accountable to the stakeholders of these companies’’ (Dahyaet al., 1996, p. 71). According to Selznick (1992, p. 290), ‘‘to govern [as opposed

10 Interviews conducted in Malaysia reveal that top management, including the finance director, inconjunction with PR specialists, makes decisions on information disclosure. In this study, financedirector refers to the individual who has the greatest power in financial decision making as well asdisclosure matters regardless of whether the individual sits on the board or not. It is also commonin Malaysia to find the CEO to be the finance director as well.11 We acknowledge that culture is a complex issue that cannot be resolved by a simple assertion ofproxies. Nevertheless, the proxy chosen is thought appropriate to support the theoreticalframework of this study.


to manage] is to accept responsibility for the whole life of the institution. . . .Governance takes account of all the interests that affect the viability, compe-tence and moral character of an enterprise’’. Issues of governance includethe legitimacy of corporate power, corporate accountability, to whom andfor what the corporation is responsible, and by what standards it is to be gov-erned and by whom (Worthy and Neuschel, 1983).

The CSD process can be seen as a strategy aimed at closing a perceived legit-imacy gap between management and shareholders (especially foreign share-holders) via non-executive directors. Non-executive directors are seen as thecheck and balance mechanism, not only in ensuring that companies act inthe best interests of owners, but also other stakeholders; advising on the publicpresentation of the company�s activities and performance; and providing �addi-tional windows on the world� (Tricker, 1984, p. 171). Furthermore, they arelikely to respond to concerns about honour and obligations and would gener-ally be more interested in satisfying the social responsibilities of the firm (Zahraand Stanton, 1988) as this may enhance their prestige and honour in society.Thus, non-executive directors can put pressure on companies to engage inCSD in ensuring congruence between organisational actions and societal val-ues or organisational legitimacy. Therefore, boards dominated by non-execu-tive directors are expected to have more influence on CSD as they aresupposed to represent the interests of other stakeholders. Therefore,

H5: Ceteris paribus, the extent of CSD is greater for companies with boards

dominated by non-executive directors.

The chairman of the board may have greater power and influence than otherboard members although, de jure, all directors share equal power (ignoring theissue of share ownership). Influence may extend to disclosure practices of thefirm. Since CSD is largely voluntary in nature, awareness of issues of concernraised and discussed in other companies by chairmen who hold multiple direc-torships12 would influence disclosure practice of the company to be in tunewith others as part of its reputation management and legitimacy strategy(DiMaggio and Powell, 1983). Multiple directorships refer to the situationwhere directors sit on more than one board.13 This aspect is often discussed

12 Before the introduction of the Malaysian Code of Corporate Governance (MCCG) in 2000which among others requires directors to undergo training to equip themselves to undertake therole, the general perception is that non-executive directors sitting on the boards of Malaysiancompanies lack skills and experience to contribute to performance of companies and merely plays a�rubber stamp� function except where they sit on more than one board.13 We have not come across any literature that directly discusses multiple directorships. However,it has been discussed indirectly under directorship interlocks. It is quite difficult to segregate cross-directorships/interlocks and multiple directorships because, by creating interlocks, the incidence ofdirectors holding more than one directorship will be higher.


in the literature under directorship interlocks (see Haunschild, 1993; Zajacand Westpal, 1996). The informational effects of interlocks have beenwidely discussed in the literature. For instance, Useem (1984) suggeststhat interlocks function as a channel of information about business practiceswhile Lorsch and MacIver (1989) assert that the interlocking of CEOs ofother firms on boards is desirable because of their experience and credibilityas peers. Furthermore, ‘‘serving on a board is a way to see how somebody elseis doing the same thing you�re doing’’ (Lorsch and MacIver, 1989, p. 27). Thus,CEOs join other boards and thereby create interlocking relationships specifi-cally to �embed� what they are doing (Davis, 1996). Another argument in fa-vour of interlocking directors is that members of other boards can offerinsights or comparisons derived from personal knowledge of other organisa-tions (Dahya et al., 1996). Thus, decisions at one board become part of theraw material for decisions at other boards. There was also evidence that boardmembers who have participated in various strategic/structural changes onother boards may bring those beliefs to advocate changes in another board(Bettenhausen and Murnighan, 1985; Mizruchi, 1992; Haunschild, 1993).14

Hence,

H6: Ceteris paribus, the extent of CSD is greater for companies with a chair-

man having multiple directorships.

The ownership structure of the company may give rise to legitimacy gaps.Different shareholders may demand different disclosures and the demand isgreater when foreigners, due to the separation between management and own-ers geographically, hold a high proportion of shares (Schipper, 1981; Brad-bury, 1991; Craswell and Taylor, 1992). Since a substantial fund in theMalaysian capital market comes from foreign investors, higher disclosure ofinformation, including social and environmental information to aid decision-making may be expected. Thus, the hypothesis is,

H7: Ceteris paribus, the extent of CSD is greater for companies dominated by

foreign shareholders.

3.4. Control variables (firm-specific characteristics)

3.4.1. Size

Previous studies have indicated a positive relationship between the extent ofCSD and company size. One explanation for the association is that large com-panies undertake more activities and have greater impact on society (Trotman

14 For a discussion of the impact of interlocking directorships in Japan, see Cooke (1996).


and Bradley, 1981; Teoh and Thong, 1984; Andrew et al., 1989). Larger com-panies are also subject to greater scrutiny by various groups in society andtherefore would be under greater pressure to disclose their social activities tolegitimise their business (Cowen et al., 1987). Thus,

H8: Ceteris paribus, the extent of CSD is greater for larger companies.

3.4.2. Profitability

Unlike size, the relationship between profitability and CSD is inconclu-sive (see Mangos and Lewis, 1995; Patten, 1991; Roberts, 1992). A possibleexplanation for a positive association between CSD and profitability isthat management has the freedom and flexibility to undertake and revealmore extensive social responsibility programmes to shareholders. Profit-able companies disclose social information to demonstrate their contribu-tion to society�s well being (legitimise their existence) and therefore thehypothesis is,

H9: Ceteris paribus, the extent of CSD is greater for highly profitable

companies.

3.4.3. Gearing

In a highly geared company, management needs to legitimise its actions tocreditors as well as shareholders. Gearing has been found to be an importantexplanatory variable by Belkaoui and Kahl (1978), Malone et al. (1993) andWallace et al. (1994). Highly geared companies disclose more information toassure creditors that shareholders and management are less likely to bypasstheir covenant claims (Myers, 1977; Schipper, 1981) as well as to meet someof the needs of lenders (Cooke, 1996). Hence, the next hypothesis is,

H10: Ceteris paribus, the extent of CSD is greater for highly geared

companies.

3.4.4. Listing status

Stakeholders in foreign countries have diverse interests and power and may,therefore, exert different pressures on companies. For example, in developingcountries, there are few consumer and interest groups that are powerful andarticulate enough to put pressure on companies to be socially responsible (An-drew et al., 1989). As such, companies listed on the domestic capital market ina developing country would not disclose a great deal of social information dueto the absence of rules and regulations as well as public awareness. In contrast,companies that are listed in developed countries may have to adhere to rulesand regulations pertaining to such information or adopt good practice by com-


peting companies and respond to the pressures of various interest groups. Thisalso suggests that pressure to legitimise a corporation is greater in developedrather than developing countries. Hence,

H11: Ceteris paribus, the extent of CSD is greater for companies with multiple

listing status.

3.4.5. Industry type

Companies tend to provide information that is in line with the peculiaritiesof their industries (Dye and Sridhar, 1995). For instance, labour intensiveindustries such as manufacturing will choose to disclose more informationon employees compared to companies in the extractive and chemical industriesthat are likely to disclose more environmental information to reflect sensitivityto their particular problems. Similarly, consumer-oriented industries can be ex-pected to exhibit more social disclosure to enhance their corporate imageamong market consumers, which in turn influences the amount of sales gener-ated (Cowen et al., 1987). Thus, the influence of industry type on CSD practicedepends on how critical the effects of their economic activities impacts on soci-ety. As such, hypothesis 12 is,

H12: Ceteris paribus, the extent of CSD is associated with the type of

industry.

4. Research method

4.1. Sample design and data collection

The sample was drawn from non-financial companies listed on the mainboard of the KLSE in 1996. Companies were selected at random on a propor-tional allocation basis to ensure a representative sample from all other indus-trial sectors. Letters were sent to 160 companies requesting their Englishversion annual reports and the response rate was 83%.15

15 The 1996 annual reports were collected in 1997. A sample size of 167 was selected based on thetable developed by Krejcie and Morgan (1970) as a guideline for sample size decisions. Theresponse rate in 1997 was 83% (139 companies) and due to time constraint after sending reminderletters twice, additional searches were not undertaken. Based on the same list of companies thatresponded in 1997, letters were sent in August 2003 asking for their 2002 annual reports to enablethe undertaking of this longitudinal study. The English version of annual reports were selected toease analysis and the researchers do not foresee any problems related to inconsistency in differentlanguage versions of the report as Malaysians are well versed in different languages.


Based on the pedagogical note suggested by Wallace and Mellor (1988), thethird type of check on non-response bias, which involved assessing whether re-sponses received validly represent the entire population based on certain se-lected characteristics, was undertaken. This is important because informationrelating to the whole population from which the sample is selected may enablethe researcher to assess whether the responses are free of bias (Holmes et al.,1991).16

Although companies may use other media of communication to demon-strate social responsibility disclosures (see Zeghal and Ahmed, 1990), this studyfocuses on annual reports because of the high degree of credibility attached toinformation disclosed in this way (Tilt, 1994). Additionally, annual reports areused by a number of stakeholders as the sole source of certain information(Deegan and Rankin, 1997); have greater potential to influence due to wide-spread distribution (Adams and Harte, 1998); offer a snapshot of manage-ment�s mindset in a particular period (Neimark, 1992); and are moreaccessible for research purposes (Woodward, 1998). The same 139 companieswere used for 2002 and our response rate was 100%.

4.2. Measurement of variables

4.2.1. Dependent variable—corporate social disclosure

Content analysis, a method of codifying the text (or content) of a piece ofwriting into various groups (or categories) depending on selected criteria (We-ber, 1988), was used to collect the necessary data. An essential element of con-tent analysis is the selection and development of categories into which contentunits can be classified. The categories and items were drawn from previous re-search in the area (Ernst and Ernst, 1976; Cowen et al., 1987; Guthrie and Par-ker, 1989, 1990; Gray et al., 1995a) and applicability to the Malaysianenvironment (Hossain et al., 1994; Haniffa and Cooke, 2002).

A research instrument (see Appendix A) was designed covering itemsrelating to five themes (environmental, employee, community, product andvalue-added). Two types of measure (number of CSD items expressed as anindex [CSDI] and the length of CSD items expressed in terms of number of

16 Non-response bias was tested using the parametric t-test based on means of two criticalvariables viz. total assets and return on equity (proxies for company size and profitabilityrespectively) in testing the sets of respondents and non-respondents. The test for non-response biasindicated that the sample is soundly based i.e. no significant difference in the critical variablesbetween the two groups. We also tested for non-response bias based on means of boardcomposition and share ownership. The results also indicated that the sample is soundly based i.e.no significant difference based on culture and governance structure between the two groups.


words [CSDL])17 were used to capture the nature of disclosure made in each ofthe five themes. The former measurement captures �variety� of disclosure whilethe latter captures the �extent� of disclosure. One of the reasons for adoptingboth measures is because the latter cannot capture pictures and graphics, whichare potentially powerful and highly effective methods of communication (Beat-tie and Jones, 1992, 1994; Preston et al., 1996) and excluding them may be con-sidered a limitation. We measure pictures and graphics through the disclosureindex i.e. a company scores one for disclosure of any number of pictures orgraphics under each item in a theme, hence indicating/capturing �variety� of dis-closure rather than �extent�. Since our focus is on the nature of disclosure ratherthan the importance of items disclosed, we consider our approach to bereasonable.

The preliminary research instrument was pilot tested on 20 companies se-lected at random from the 1996 and 2002 samples to ensure that items thatwere unique or important to the Malaysian environment were added and thosenot relevant omitted. This also ensured that items peculiar to a particularindustry were taken into account. The final checklist instrument consisted of41 corporate disclosure items. To ensure consistency, only one of the authorscoded all the annual reports and a set of basic coding rules was constructedto ensure reliability and validity.

4.2.1.1. Corporate social disclosure index. The approach to scoring items isessentially dichotomous in that an item in the research instrument scores oneif disclosed and zero if it is not18 although no penalty is imposed if the itemis considered irrelevant. To ensure that judgement of relevance is not biased,the entire annual report is read before any decision is made (Cooke, 1992,1996). The scores for each item were then added to derive a final score for

17 Different volume measurement has been employed in previous studies and each has itsadvantages and limitations. Number of pages (Patten, 1992; Deegan and Rankin, 1996) andproportion of page (Guthrie and Parker, 1990; Gray et al., 1995a) reflect the amount of total spacegiven to a topic and by inference, the importance of that topic (Krippendorff, 1980). However, suchmeasurements may be affected by font size, margins and treatment of blank parts of a page. The useof number of words (Zeghal and Ahmed, 1990; Deegan and Rankin, 1996; Deegan and Gordon,1996) is more practical and easily categorised but may be affected by concise and verbose styles ofwriting (Hackston and Milne, 1996). Number of sentences (Tsang, 1998; Hackston and Milne,1996) has the advantages of being more easily identifiable, less subjective to interjudge variations,and avoids problems of allocations based on proportion of page and standardising number of wordbut is more suitable in inferring meanings (Krippendorff, 1980). In this study, both word andsentence counts were considered but due to a high correlation between the two, only word countwill be reported in the paper.18 Use of dichotomous procedure is considered a limitation because it treats disclosure of one itemas equal to a company that makes 50 disclosures and does not indicate how much emphasis is givento a particular content category but the advantage is that it gives coders less choice (Hackston andMilne, 1996, p. 88). The use of word count partly overcomes this problem.


the firm. The approach to scoring is additive and equally weighted19 and wascalculated as follows to give the final CSDI (index):

CSDIj ¼Pnj

t¼1X ij

nj

where

CSDIj = corporate social disclosure index,nj = number of items expected for jth firm, nj 6 41,Xij = 1 if ith item disclosed,

0 if ith item not disclosed

so that 0 6 Ij 6 1.

4.2.1.2. Extent of corporate social disclosure. Using the same researchinstrument, the number of words in every sentence related to each item inthe checklist is counted. Items relating to graphical presentation in the check-list were excluded from the word count. The number of words related toeach item under the five themes was added together to compute the CSDL(length).

4.2.2. Independent variables

The independent variables representing the constructs are given in Table 1.

4.3. Data analysis

To test whether there is a significant difference in the extent and variety ofdisclosures in the two selected periods, both the parametric paired sample t-testand the non-parametric Wilcoxon test were conducted. We used regressionanalysis to test the interrelationship between the various independent variablesand the two measures of overall CSD. The assumptions underlying the regres-sion model were tested for multicollinearity based on the correlation matrix aswell as the variance inflation factor (VIF). In addition, an analysis of residuals,plots of the studentised residuals against predicted values as well as the Q–Qplot, were conducted to test for homoscedasticity, linearity and normalityassumptions. Normality tests based on skewness, kurtosis and Kolmogorov–Smirnov Lilliefors (KSL) were also conducted. The regression models basedon the two measures are as follows:

19 Wiseman (1982) used a weighted index to measure disclosure but in this study the items werenot weighted because of potential scoring bias and scaling problems and is consistent with Cooke(1989) and Ahmed and Nichols (1994).

Table 1Constructs of the independent variables

Explanatory variables Measurement

Malay dominated boardof directors (MALDIR)

Proportion of Malay directors to totaldirectors on the board

A Malay finance director (MALFD) 1 = Malay finance director and 0 = othersMalay dominatedshareholders (MALOWN)

Proportion of Malay shareholders to totalshareholders

Composition of non-executivedirectors (COMPNED)

Proportion of non-executive directors to totaldirectors on the board

Chairperson with multipledirectorships (CHMD)

1 = chairperson with multiple directorshipsand 0 = otherwise

Ownership by foreignshareholders (FOROWN)

Proportion of foreign shareholders tototal shareholders

Size (STA) Proxy used is total assetsProfitability (ROE) Return on equity = Earnings after tax/Total equityGearing (DTE) Debt to equity = Long-term debt/Total equityMultiple listing (LIST) 1 = multiple listings and 0 = single listingIndustry type (IT) KLSE classification:

IT1 = consumer, IT2 = construction/property,IT3 = trading/services, IT4 = plantations/mining,IT5 = industrial


CSDI ¼ b0 þ b1MALDIRþ b2MALFDþ b3MALOWN

þ b4COMPNEDþ b5CHMDþ b6FOROWNþ b7STA

þ b8ROEþ b9DTEþ b10LISTþ b11IT1 þ b12IT2 þ b13IT3

þ b14IT4 þ b15IT5 þ �it

CSDL ¼ b0 þ b1MALDIRþ b2MALFDþ b3MALOWN

þ b4COMPNEDþ b5CHMDþ b6FOROWNþ b7STA

þ b8ROEþ b9DTEþ b10LISTþ b11IT1 þ b12IT2 þ b13IT3

þ b14IT4 þ b15IT5 þ �it

where

CSDI = corporate social disclosure index,CSDL = corporate social disclosure length,MALDIR = proportion of Malay directors to total directors on the board,MALFD = Malay finance director,MALOWN = proportion of Malay shareholders to total shareholders,COMPNED = proportion of non-executive directors to total directors onthe board,CHMD = chairperson with multiple directorships,FOROWN = proportion of foreign shareholders to total shareholders,


STA = size based on total assets,ROE = profitability based on return on equity,DTE = gearing based on debt to equity,LIST = multiple listing,IT1 = consumer,IT2 = construction/property,IT3 = trading/services,IT4 = plantations/mining,IT5 = industrial (the excluded dummy variable),b0, . . . ,b15 = coefficients to be estimated,�it = disturbance term.

One other issue involved in the construction of the dependent variable re-lates to equal weighting since the directional magnitude may not be clearcut.Even though the scores and scoring instrument are connected to a numericalcontinuum associated with the dependent variable, it might not be appropriateto treat raw scores as interval measures since underlying characteristics aremore akin to ordinal data. In addition, the direction of some of the relation-ships discussed earlier between the dependent and independent variables isnot clear although assumed to be monotonic. One method to deal with thisissue is to transform the data to normal scores (Cooke, 1998) and this is theapproach adopted here. Normal scores are used since the resulting tests haveexact statistical properties because significance levels can be determined, theF and t-tests are meaningful, the power of the F and t-tests can be used, andthe regression coefficients derived are meaningful. In addition, normal scoresoffer a means whereby a non-normal dependent variable can be transformedinto normality, thus implying that errors are normally distributed by theassumptions of OLS.

To further verify the results of the regression analysis and in drawing con-clusions based on legitimacy theory, telephone interviews20 were conductedwith ten respondents involved in the corporate disclosure process. Initial con-tacts were made by telephone seeking their cooperation to participate, givingan approximate idea of how long the interview would last and setting up amutually convenient time when the telephone conversation would not be inter-rupted. A semi-structured questionnaire (see Appendix B) was used to obtaininsights into reasons for engaging/not engaging in CSD and the suitability ofthe proxies used in this study to reflect pressures from within and withoutthe organisation.

20 Telephone interviews were used, as it is easy to contact different people outside the country in arelatively short period of time. E-mail was not used because respondents indicated preference torespond via short informal telephone conversations rather than having to read and answer thequestionnaire sent by e-mail.


5. Discussion of results

5.1. Descriptive analysis of CSD

Table 2 presents the results of the descriptive analysis of CSD by themes forboth years. The table summarises: the number of companies making at least onedisclosure for both years (columns 1 and 2); incidence figures i.e. the number ofcompanies making at least one disclosure as a percentage of the total sample forboth years (columns 3 and 4); the means and standard deviation of disclosurebased on the number of items disclosed under each theme for both years (col-umns 5–8); extent of disclosure as measured by the word count for both years(columns 9 and 10); the extent of disclosure as measured by the word countto total words for all disclosures in the sample (columns 11 and 12) for bothyears; and the means and standard deviations of disclosure based on the numberof words disclosed under each theme for both years (columns 13–16).

Relying on incidence rates alone may not give a complete picture as the ap-proach treats companies that disclose one or more items in each theme asequal. For example, based on incidence rates, the percentage of companies(11%) disclosing at least one item under the environmental theme in 1996 ishigher than the number of companies (9%) disclosing at least one item underthe community involvement theme but in terms of the percentage of words dis-closed by the former group (5% of total disclosures), it is less than the lattergroup (9% of total disclosure). This may partly be due to the exclusion ofgraphics and pictures when using word count. A total of 37,243 words ofCSD was provided in the 1996 annual reports for the 139 companies examined,representing an average of 268 words per annual report. In the 2002 annual re-ports, a total of 38,293 words of CSD was recorded, an average of 275 wordsper annual report.

Table 3 presents the results of the test on the hypothesis that there is a sig-nificant difference in the extent and variety of CSD in the annual reports ofMalaysian companies for the two periods under study.

Tests based on both Wilcoxon and paired sample t-test based on number ofitems indicate significant differences in four themes of CSD (environmental,employees, community and product) while words measurement do not showsignificant differences21 in two of those themes viz. community and product.Based on the descriptive analysis and statistical tests, we can accept the direc-tional hypothesis (H1) i.e. CSD in annual reports of Malaysian companies hassignificantly increased (based on items measured) and the extent and variety ofCSD differs between the two years for four of the five themes. This finding isconsistent with other longitudinal studies.

21 Test for the theme �value-added� cannot be computed due to zero standard deviation.

Table 2Descriptive statistics for social disclosure measures in Malaysian listed companies

Themes Disclosingcompanies(making atleast onedisclosure)

Disclosingcompaniesas apercentageof totalsample(incidence)

Mean Std. Dev. Number ofdisclosed words(amount)

Disclosedwords as apercentageof alldisclosedwords

Mean Std. Dev.

1996 2002 1996 2002 1996 2002 1996 2002 1996 2002 1996 2002 1996 2002 1996 2002

Environment 15 24 11 17 0.29 0.35 0.74 0.75 1909 2543 5 7 13.73 18.30 33.59 40.63Employees 59 60 42 43 2.45 2.71 2.08 2.13 11,867 12,518 32 33 134.44 90.06 72.85 70.07Community 13 29 9 21 0.53 0.68 1.03 1.03 3419 3542 9 9 24.60 25.48 47.11 43.64Products 22 24 16 17 2.82 3.00 1.66 1.54 18,687 18,329 50 48 134.4 131.86 70.37 63.44Value-added 3 4 2 3 0.14 0.14 0.49 0.49 1361 1278 4 3 9.80 8.64 35.0 32.0

Total 37,243 38,293 100 100

Note: Total sample of companies for each year—139.

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Table 3Paired-sample t-test and Wilcoxon test for social disclosure measures in Malaysian listed companies

Disclosures Mean difference t-value Sig. Mean Z Sig.

Overall

Items 0.6403 8.028 0.000 1996—6.230 6.597 0.0002002—6.871

Words 7.554 1.975 0.052 1996—267.94 1.483 0.1382002—275.49

Environmental

Items 0.065 3.091 0.002 1996—0.288 3.000 0.0032002—0.353

Words 4.561 3.486 0.001 1996—13.74 3.181 0.0012002—18.30

Employee

Items 0.252 4.923 0.000 1996—2.453 4.550 0.0002002—2.701

Words 4.684 2.753 0.007 1996—85.37 2.955 0.0032002—90.06

Community

Items 0.144 4.144 0.000 1996—0.532 3.911 0.0002002—0.676

Words 0.885 0.584 0.560 1996—24.60 0.903 0.3662002—25.48

Product

Items 0.179 3.257 0.001 1996—2.820 3.350 0.0012002—3.000

Words 2.576 0.896 0.372 1996—134.4 1.481 0.1392002—131.9

Value-added

Items 1996—0.1367N/A N/A N/A 2002—0.1367 N/A N/A

Words 1996—9.79142002—9.832


Although CSD in Malaysia is voluntary in nature, companies that have dis-closed in the past continue to disclose at least the same extent of informationover time. The difference in extent and variety may be attributed to a numberof factors such as the Best Corporate Social Reporting Award, the HibiscusAward and the Environmental Reporting Awards.22 These awards recognise

22 This is one of the special category awards under NACRA (National Annual Corporate ReportAwards) organised by the KLSE (now known as Bursa Malaysia), the Malaysian Institute ofCertified Public Accountants (MICPA), Malaysian Institute of Management (MIM) andMalaysian Institute of Accountants (MIA) to honour excellent corporate reporting among publiclisted companies.


exemplary commitment by companies to the natural and physical environment;greater awareness and interests of relevant publics about corporate social activ-ities; government�s interest in the environmental effects of business activities;and interest aimed at demonstrating good corporate behaviour and therebyto continue to benefit from government support and attract funds from ethicalinvestors.

5.2. Multivariate analysis

5.2.1. Descriptive statistics

Table 4 provides descriptive statistics of the voluntary disclosure index andthe continuous independent variables. It is noticeable that the means of theCSDI in 1996 and 2002 were 16.28% and 17.13% respectively. The range in

Table 4Descriptive statistics for the dependent and continuous independent variables

Variables Mean Std. Dev. Min. Max. Skewness Kurtosis K–S(Lilliefors)

1996

CSDI 16.28 11.11 2.63 52.63 5.22 2.44 0.125**CSDL 267.94 178.83 15.00 857.00 4.55 1.29 0.102**MALDIR 46.05 24.46 0.00 100.00 2.20 �1.38 0.119**MALOWN 36.85 22.84 6.01 97.30 4.42 �0.38 0.151**COMPNED 43.34 11.54 20.00 82.00 3.81 1.97 0.129**FOROWN 16.19 12.60 0.00 48.85 3.54 �0.39 0.099**STA(RM million)

883030.7 1519155 3986 11867584 21.45 59.44 0.281**

ROE 9.81 8.20 �18.17 31.79 0.36 2.14 0.069DTE 38.62 20.67 1.07 89.56 1.27 �0.31 0.064

2002

CSDI 17.13 10.47 2.50 56.10 6.06 4.36 0.149**CSDL 275.49 168.52 16.00 801.00 4.66 1.27 0.110**MALDIR 47.19 23.70 0.000 100.00 1.95 �1.14 0.116**MALOWN 38.73 23.20 10.40 94.00 3.52 �1.43 0.132**COMPNED 49.87 10.14 25.00 74.00 �1.20 �1.40 0.140**FOROWN 14.90 10.12 0.00 43.13 2.16 �1.14 0.070STA(RM million)

3681429 9519842 8529 81859055 27.96 95.37 0.350**

ROE 12.14 7.35 �5.30 35.33 1.79 0.06 0.088DTE 14.5 4.82 0.20 46.13 3.86 1.50 0.038

Notes: CSDI = corporate social disclosure index; CSDL = length of corporate social disclosure;MALDIR = proportion of Malay directors on the boards; MALOWN= proportion of Malayshareholders; COMPNED = proportion of non-executive directors on the board; FOR-OWN = proportion of foreign shareholders; STA = size of total assets; ROE = return on equity(proxy for profitability); and DTE = debt to equity ratio (proxy for gearing).** K-S (Lilliefors) with significance <.05, hence data not normally distributed.

Table 5Correlation matrix

CSDL CSDI BPDIR BPOWN NED FOOWN SIZETA ROE DTE

1996

CSDL 1CSDI .933** 1MALDIR .219** .259** 1MALOWN .148 .135 .232** 1COMPNED �.182* �.192* .126 �.047 1FOROWN .075 .172* �.176* .016 �.162 1STA .441** .419** .138 .056 .062 .145 1ROE .310** .268** �.207* �.013 �.182* .157 .042 1DTE �.042 �.041 .015 �.067 �.003 .015 .078 .031 1

2002

CSDL 1CSDI .940** 1MALDIR .216* .243** 1MALOWN .264** .248** .231** 1COMPNED �.241** �.186* .066 �.048 1FOROWN .193* .258** �.144 .158 �.122 1STA .195* .210* .102 .066 .001 .076 1ROE .333** .356** �.109 �.024 �.164 .162 �.046 1DTE �.063 �.043 .023 .106 .173* �.138 .137 �.094 1

* Correlation is significant at the 0.05 level (2-tailed).** Correlation is significant at the 0.01 level (2-tailed).


1996 was from 2.6% to 52.6% while in 2002, the range was between 2.5% and56.1%. The mean of the CSDL in 1996 was 267 words and ranged between 15and 857 words while the mean of the CSDL in 2002 was 275 words with arange between 16 and 801 words. Both measures of dependent variables werenot normally distributed as indicated by standard tests on skewness and kurto-sis as well as the non-parametric Kolmogorov–Smirnov normality test (or K–SLilliefors).23 Similarly, the continuous independent variables were found not tobe normally distributed except for profitability and gearing in 1996 and foreignownership and gearing in 2002. As such, the dependent and continuous inde-pendent variables were transformed to normal scores before conducting theregression analysis.

Besides testing for normality, it is important to check for multicollinearity,homoscedasticity and linearity. Table 5 presents the correlation matrix for thedependent and continuous independent variables for both years. It can be seen

23 K–S Lilliefors with significance of >.05 indicates normality and small significance valueindicates reason to doubt the normality assumption (see Norusis, 1995).


that multicollinearity is not a problem.24 Similarly, an analysis of residuals25

indicates no problems of heteroscedasticity and linearity.Table 6 summarises the results for both years of the multivariate regression

models using normal scores26 for the CSDI i.e. based on �variety� of disclosureitems expressed in the form of an index. The adjusted R2 for 1996 was 0.389and for 2002 was 0.453. Regression results for both years indicate a positiverelationship at the 1% and 5% significance level, as predicted, between CSDIand companies with Malay dominated boards and companies dominated byforeign shareholders, respectively. Interestingly, companies with boards domi-nated by non-executive directors were also significantly related at the 1% signif-icance level to CSDI, but in the direction opposite to that predicted. In 1996,results indicate a significant positive relationship at the 5% level between CSDIand chairman with multiple directorships, and in the direction predicted. Outof the five firm-specific control variables, multiple listings and profitability werefound to be significant at the 1% level while size was found to be significant atthe 5% level for both years. Gearing and industry membership were not signif-icant for both years.

Table 7 presents the regression results for both years using normal scores forthe CSDL i.e. based on �extent� of disclosure (word count). The adjusted R2 for1996 was 0.485 and for 2002 was 0.438. Regression results for both years indi-cate a positive relationship at the 1% significance level, as predicted, betweenCSDL and companies with Malay dominated boards but in the direction oppo-site to that predicted for boards dominated by non-executive directors. Theregression model also indicates a significant relationship, in the direction pre-dicted, between chairman with multiple directorships and CSDL at the 1%and 5% levels for 1996 and 2002 respectively. Malay share ownership wasfound to be significant at the 5% level for only 2002. Three of the control vari-ables (size, profitability and multiple listing) were again found to be significantfor both years at less than the 1% level. In 2002, none of the industry variableswere significant at the 5% level but in 1996, two industrial sectors (trading andservices and construction and property) were found to disclose significantlymore than the other sectors.

Based on the two models for 1996 and 2002 we find that Malay domi-nated boards are positively related to CSD, thus providing support for H2.

24 The rule of thumb for checking problems of multicollinearity is when the correlation is >0.800(Gujarati, 1995). Based on the VIF, multicollinearity is a problem if the factor exceeds 10 (Neteret al., 1983; Kennedy, 1992).25 Residuals are what are left over after the model is fit and they are also the difference between theobserved value of the dependent variable and the value predicted by the regression line (Norusis,1995, p. 447).26 Four different transformations of the dependent and independent variables were conducted andthe normal scores approach produced the best fit.

Table 6Multiple regression results using index (CSDI) as the dependent variable

1996 2002

Variables Predicted sign Coefficient value t-statistic Sig t VIF Coefficient value t-statistic Sig t VIF

Intercept �1.640 0.104 �1.119 0.234MALDIR + 0.371 5.061 0.000** 1.214 0.359 5.005 0.000** 1.301MALOWN + 0.021 0.300 0.765 1.119 0.101 1.491 0.138 1.148MALFD + �0.112 �1.619 0.108 1.086 �0.105 �1.577 0.117 1.117COMPNED + �0.221 �3.147 0.002** 1.114 �0.205 �3.085 0.003** 1.117CHMD + 0.140 2.133 0.035* 1.292 0.087 1.336 0.184 1.082FOROWN + 0.166 2.148 0.034* 1.353 0.153 2.197 0.021* 1.233STA + 0.193 2.511 0.013* 1.339 0.188 2.584 0.011* 1.338ROE + 0.215 2.781 0.006** 1.348 0.278 3.759 0.000** 1.376DTE + �0.058 �0.743 0.459 1.371 �0.017 �0.230 0.818 1.365LIST + 0.238 3.238 0.002** 1.222 0.288 4.115 0.000** 1.238IT1 ± 0.059 0.745 0.457 1.410 0.043 0.580 0.563 1.408IT2 ± 0.126 1.494 0.138 1.617 0.124 1.542 0.126 1.636IT3 ± 0.146 1.647 0.102 1.780 0.068 0.803 0.424 1.806IT4 ± �0.036 �0.369 0.713 2.199 �0.104 �1.113 0.268 2.212

Adjusted R2 = 0.389, F-statistic = 7.287, p = 0.000 Adjusted R2 = 0.453, F-statistic = 9.164, p = 0.000

Note: IT1 = consumer; IT2 = construction/property, IT3 = trading/services; IT4 = plantations/mining; IT5 = industrial and the excluded industrygroup is industrial.* Significant at 5%; ** significant at 1%.

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Table 7Multiple regression results using words (CSDL) as the dependent variable

1996 2002

Variables Predicted sign Coefficient value t-statistic Sig t VIF Coefficient value t-statistic Sig t VIF

Intercept �3.292 0.001** �2.147 0.034*MALDIR + 0.313 4.591 0.000** 1.214 0.273 3.745 0.000** 1.301MALOWN + 0.030 0.453 0.651 1.119 0.138 2.018 0.046 1.148MALFD + �0.060 �0.933 0.352 1.086 �0.080 �1.192 0.236 1.117COMPNED + �0.217 �3.319 0.001** 1.114 �0.193 �2.867 0.005** 1.117CHMD + 0.173 2.441 0.004** 1.250 0.139 2.036 0.045* 1.082FOROWN + 0.108 1.506 0.135 1.353 0.088 1.192 0.236 1.344STA + 0.210 2.933 0.004** 1.339 0.232 3.141 0.002** 1.338ROE + 0.219 3.054 0.003** 1.348 0.211 2.817 0.006** 1.376DTE + �0.013 �0.183 0.855 1.371 0.013 0.180 0.857 1.365LIST + 0.307 4.485 0.000** 1.222 0.305 4.298 0.000** 1.238IT1 ± 0.068 0.930 0.354 1.410 0.084 1.110 0.269 1.408IT2 ± 0.182 2.309 0.023* 1.617 0.076 0.927 0.356 1.636IT3 ± 0.288 3.484 0.001** 1.780 0.169 1.971 0.051 1.806IT4 ± 0.033 0.363 0.717 2.199 �0.018 �1.194 0.846 2.212

Adjusted R2 = 0.485, F-statistic = 11.007, p = 0.000 Adjusted R2 = 0.438, F-statistic = 8.688, p = 0.000

Note: IT1 = consumer; IT2 = construction/property; IT3 = trading/services; IT4 = plantations/mining; IT5 = industrial and the excluded industrygroup is industrial.* Significant at 5%; ** significant at 1%.

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Respondents in fact identified ethnicity of boards as a determinant of CSDpartly due to the �feminine� cultural value of the Malays (see, for example, Hoe-cklin, 1994, p. 38) and also because of the close link to government (patron–cli-ent network). The existence of a policy of positive discrimination in businessopportunities based on ethnicity affects corporate behaviour including its dis-closure practice. Being the government�s favoured ethnic group, boards domi-nated by Malays adopt a reactive legitimation strategy to change perceptionsand divert the attention of its various stakeholders away from the close relation-ship they enjoy with government by increasing social responsibility disclosures.

The influence of ethnicity of finance directors, the second cultural variable,was not significantly related to CSD. This implies that Malay finance directorsin Malaysian listed companies do not seem to pay a great deal of attention tolegitimation strategies on CSD when preparing annual reports. As for the thirdcultural variable, the proportion of Malay shareholders, it is noticeable thatthere is a positive relationship at the 5% level only in 2002. This suggests thatcompanies dominated by Malay shareholders do tend to disclose more in 2002,perhaps to address some perceived legitimacy gap following the financial crisisevent.

In terms of corporate governance variables, the regression models for bothyears indicate that the composition of non-executive directors is statistically re-lated to CSD but in the opposite direction to that predicted. This implies thatMalaysian companies with boards dominated by non-executive directors play alimited role in influencing CSD policy and practice. The telephone interviewsconducted, confirmed this and was explained in terms of the relative lack ofexperience and knowledge of non-executive directors and also, in some situa-tions, because of indifference towards societal concerns. However, chairs withmultiple directorships were significantly related to CSD in the direction pre-dicted for both years using CSDL as the dependent variable and in 1996, forthe CSDI dependent variable, but not in 2002. This seems to confirm thatnon-executive directors as a group do not have much influence but a chairmanwith experience gained by sitting on more than one board may be able to influ-ence disclosure. Interview respondents agreed that sometimes the chairmanmay express a desire to disclose certain issues based on knowledge of eventsin other companies in which he/she is a director or simply, to ensure congru-ence between organisations� actions and societal concerns to enhance his/herprestige and honour in society (Zahra and Stanton, 1988). The results also sup-port the informational effect organisational theory as proposed by Useem(1984), Lorsch and MacIver (1989) and Davis (1996).

The third corporate governance variable, foreign share ownership, wasfound to be statistically significant at the 5% level based on CSDI in 1996and 2002 but not when the dependent variable is CSDL. Firms dominatedby foreign shareholders engage in CSD to attract funds from a wide rangeof sources, an explanation confirmed with the telephone respondents.


The two models also show that size, profitability and multiple listings wereall statistically related to CSD, results consistent with Foo and Tan (1988) andAndrew et al. (1989) on Malaysian companies. Large companies make moresocial disclosures for reasons of accountability and visibility as outlined inlegitimacy theory (Cormier and Gordon, 2001). The significance of profitabilitywas consistent with Roberts (1992) but inconsistent with Cowen et al. (1987)and Patten (1991). This indicates that Malaysian companies use annual reportsas an avenue to publicise their image and legitimise their activities. The signif-icance of multiple listings was consistent with Hackston and Milne (1996) andindicates that in the absence of rules and regulations on social disclosures inMalaysia, companies with listings on overseas stock exchanges adopt legitima-tion strategies to reflect societal concerns in the global market. The industry–social disclosure relationship seems to be less significant with the interactionof other variables, suggesting that Malaysian companies do not adopt legitima-tion strategies to address specific concerns relating to core economic activitiesin their industry grouping. Similarly, gearing as proxy for risk, does not seemto impact on CSD.

6. Conclusion

6.1. Overview of findings

This study has examined whether the extent of CSD in the annual reports ofMalaysian listed companies changes over time and whether there is an associ-ation with three groups of variables: culture, corporate governance and firm-specific (control) variables. Consistent with previous studies, content analysisis adopted to achieve the objectives. Descriptive analysis of our longitudinalstudy and the results of both the parametric paired sample t-test and non-para-metric Wilcoxon test indicates significant differences in the extent and varietyof CSD for the two years, despite minimal legislative guidance for such disclo-sures. Some of the reasons identified from the interviews of companies choos-ing to engage in CSD include getting awards, enhancing corporate image,receiving government support, obtaining funds and a bandwagon effect.

Regression analysis is used to explain variability in the dependent variablewith the explanatory variables being culture and corporate governance withcompany-specific factors acting as control variables. Two different dependentvariables are used in the regression models: CSDI and CSDL. We find two cul-tural, three corporate governance and four of the control variables to be signif-icant regressors that help explain variability in CSD practice of Malaysiancompanies in both 1996 and 2002.

The significant relationship between Malay directors and Malay sharehold-ers with CSD practice in the annual reports of Malaysian companies suggests


that disclosure cannot be culture free and is attributed primarily to governmentpolicy. Hence, CSD is used as a reactive legitimation strategy aimed at divert-ing attention from questionable business practices, cronyism, nepotism andclose affiliation with the government as well as a proactive legitimation strategyto ensure a continued influential voice at both governmental and institutionallevels.

The significant relationship between executive directors and chair with mul-tiple directorships with CSD indicates that those who are aware of the businessenvironment make disclosure decisions for a purpose. The values of executivedirectors may not be congruent with other stakeholders and CSD can be usedas a legitimation strategy to appease some of the concerns of the relevant pub-lics. Similarly, the chairman may want companies to engage in CSD as a legit-imation strategy to demonstrate social worthiness and that the firm is in tunewith societal concerns. The significant relationship between CSD and foreignshareholders indicates that Malaysian companies use CSD as a proactive legit-imation strategy to obtain continued inflows of capital and to please ethicalinvestors.

Our results have implications for other countries in the Asia–Pacific region,an area where power tends to be concentrated within an elite group therebymaintaining the traditional order of patron–client networks (Maidment andMackerras, 1998). Countries in the Asia–Pacific region where racial, ethnicand linguistic discrimination and inequality exists includes Fiji, India, Indone-sia, Hong Kong and Japan. Distinctions between ethnic groups in these coun-tries may be institutionalised, even to the extent of being enshrined in legalsystems. For example, in Fiji electors may only vote for candidates from theirown ethnic group (Maidment and Mackerras, 1998). However, racial, ethnicand linguistic distinctions are much less important in the Anglo-Saxon influ-enced countries (areas) of Australia, New Zealand and Hawaii and thereforeour research has further implications for these countries.

6.2. Limitations and future research

The findings of this research are subject to several limitations. First, thisstudy examined the disclosure practice of companies listed only on the mainboard of the KLSE for the years 1996 and 2002 and as such, may not be gen-eralised to other periods. A longitudinal study on a yearly basis that can tracethe disclosure practice of a particular company or a particular industry is a po-tential avenue of research as it may help to provide insights into the relation-ship between strategic changes in the company or industry over the years andits CSD practices. Similarly, it will help trace the trend of disclosure and theimpact of culture and corporate governance against the backdrop of socialand economic development in the country. Since this study considered theinfluence of culture and corporate governance factors on Malaysian listed


companies, studies in the future could test the influence of these variables onCSD in other countries.

Secondly, the study focused on only disclosures in corporate annual reportsalthough it is known that management utilise other mass communicationmechanisms. Hence, future research may consider disclosures in other mediasuch as newspapers, the internet, and in-house magazines.

Thirdly, developing accurate proxies for culture and corporate governancedimensions in the CSD models and selection of variables to be included inthe models are constrained by data availability. Future research may considerother cultural proxies such as religious values and culture dimensions proposedby Hofstede (1991) and corporate governance dimensions such as age, qualifi-cation and share ownership of board of directors.

Finally, given the exceedingly complex nature of the business environmentas well as time and geographical constraint, there are inherent limits in the abil-ity of positive empirical research to capture all dimensions that influence CSDpolicy and practice. Hence, further survey work involving more detailed inter-views may help our understanding of these issues.

Appendix A. Research instrument used in the study

NAME OF COMPANY: ITEMS WORDS

INDUSTRY:

I. COMMUNITY INVOLVEMENT

1. General philanthropy2. Participation in government

social campaigns3. Community programs

(health & education)

II. ENVIRONMENTAL1. Environmental policies2. Raw materials conservation

& recycling3. Environmental protection

programme4. Awards for environmental

protection5. Support for public/private action

designed to protect the environment

III. EMPLOYEE INFORMATION

1. Employees appreciation2. Recruitment problems

Appendix A (continued)

NAME OF COMPANY: ITEMS WORDSINDUSTRY:

3. Discussion of ways to overcomerecruitment problems

4. Picture of employees welfare5. Discussion of employees welfare6. Profit sharing schemes policy7. Number of employees8. Breakdown of employees by

line of business9. Breakdown of employees by

geographic area10. Categories of employees by

functions11. Categories of employees by race12. Categories of employees by age13. Number of employees for

2 or more yrs14. Reasons for changes in

employee number15. General redundancy/

retrenchment information16. Information on accidents17. Cost of safety measures18. Health & safety standards19. Corporate policy on

employee training20. Nature of training21. Number of employees

trained22. Amount spent on

employees training23. Categories of employees

trained

IV. PRODUCT OR SERVICE

INFORMATION

1. Discussion of major typesof products

2. Pictures of major typesof products

(continued on next page)


Appendix A (continued)

NAME OF COMPANY: ITEMS WORDSINDUSTRY:

3. Improvement in product quality4. Improvement in customer services5. Distribution of mktg network

for finished products—domesticmarket

6. Distribution of mkg network forfinished products—foreignmarket

7. Customer awards/ratings received

V. VALUE-ADDED INFORMATION

1. Value-added statement2. Qualitative value-added

statement3. Value-added data/ratios

Total

Index score

Appendix B. Semi-structured questionnaire

Section A

1. Current job status/position in the organisation

2. Number of years worked in the organisation

(a) Less than 1 h

(b) 1–2 h

(c) 3–5 h

(d) 6–10 h

(e) Over 10 h

3. Number of other organisations worked for

before joining this organisation

(a) None h

(b) One h

(c) Two h

(d) Three h

(e) Four or more h


Appendix B (continued)

Section B1. Who is responsible for preparing and publishing the

company�s annual report in your company?

2. Which other parties may influence decisions as to

accounting policies and formats and the level of disclosure?

3. Who has the most influence in the disclosure

decision making process in your company? (by rank)

Finance Director/Chief AccountantChairman of the board of directorsManaging DirectorPublic relations consultantExternal AuditorAudit CommitteeOther

4. Is your company engaged in CSD?

Yes No5. Why does your company engaged in CSD?

Enhance corporate image/Good corporatecitizenship/marketing/PRWin awardsBandwagon/fashionable to do soObligations to community/accountabilityPublic awareness and concerns on CSD issuesImprove morale of employeesAppease ethical investors/seek credit for good deedsObtain funds from wider sourcesPressures from stakeholdersLower political pressuresCompetitors in the industryReceive government supportDirectors desire to engage in CSDMedia attentionStability and improvement in share pricesOther

6. Why doesn�t your company engaged in CSD?

Cost of data collection and processing/auditing/publication/technical problemsCompetitive disadvantage/Disadvantagesin terms of bargaining powerPossibility of intervention by governmentagencies

(continued on next page)



Section BPossibility of claims from political or consumergroups/increase demands/heighten suspicionNot to set precedence/make an issueOther

7. What factors may influence companies in

Malaysia to engage in CSD?

Enhance corporate image/Good corporatecitizenship/marketing/PRWin awardsBandwagon/fashionable to do soObligations to community/accountabilityPublic awareness and concerns on CSD issuesImprove morale of employeesAppease ethical investors/seek credit forgood deedsObtain funds from wider sourcesPressures from stakeholdersLower political pressuresCompetitors in the industryReceive government supportDirectors desire to engage in CSDMedia attentionStability and improvement in share pricesOther

8. What factors may influence companies in

Malaysia not to engage in CSD?

Cost of data collection and processing/auditing/publication/technical problemsCompetitive disadvantage/Disadvantagesin terms of bargaining powerPossibility of intervention by governmentagenciesPossibility of claims from political or consumergroups/increase demands/heighten suspicionNot to set precedence/make an issueOther

9. Which of the following characteristics of companies

may influence decisions to engage in CSD?

SizeType of industry



Section BListing statusListing ageProfitabilityOther

10. Which of the following personal characteristics

of directors may influence decisions to engage in CSD?

RaceSocial statusAcademic backgroundOther

11. Which of the following characteristics of boards

may influence decisions to engage in CSD?

Cross-holdings of directorshipsBoard composition (executive vs non-executive)Finance director on the boardOther

12. Any other matters/issues?

Note: Some of the questions are adapted from O�Dwyer (2002).


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Documents

The impact of culture and governance on corporate social reporting