BOARD SIZE , COMPANY SIZE, PROFITABILITY AND LEVERAGErepository.uinjkt.ac.id/dspace/bitstream/123456789/23905/1/Thesis... · BOARD SIZE , COMPANY SIZE, PROFITABILITY AND LEVERAGE

BOARD SIZE, COMPANY SIZE, PROFITABILITY AND LEVERAGE

ON CORPORATE SOCIAL RESPONSIBILITY REPORTING

IN THE ANNUAL REPORT

(Empirical Evidence of Mining Companies listed in

Indonesia Stock Exchange Period 2009 - 2011)

By:

Oktavian Surya Pramono

107082103317

DEPARTMENT OF ACCOUNTING

INTERNATIONAL CLASS PROGRAM

FACULTY OF ECONOMICS AND BUSINESS

SYARIF HIDAYATULLAH STATE ISLAMIC UNIVERSITY

JAKARTA

1435 AH/2013 AD

i

ii

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ENDORSEMENT SHEET

COMPREHENSIVES EXAMS

Today is Wednesday, January23, 2013 A Comprehensive Examination has been

conducted on student:

1. Name : Oktavian Surya Pramono

2. Student Number : 107082103317

3. Department : International Accounting

4. Thesis Title : Board Size, Company Size, Profitability and Leverage

on Corporate Social Responsibility Reporting in the

Annual Report (Empirical Evidence of Mining

Companies Listed in Indonesia Stock ExchangePeriod

2009 - 2011)

After careful observation and attention to appearance and capabilities relevant for

the comprehensive exam process, it was decided that the above student passed and

given the opportunity to continue to thesis as one of the requirements to obtain a

Bachelor of Economics in the Faculty of Economics and Business

SyarifHidayatullah State Islamic University Jakarta.

Jakarta, January23, 2013

Prof. Dr. Ahmad Rodoni (______________________)

ID. 19690203 200112 1 003 Chairman

Rahmawati, SE, MM (______________________)

ID. 19770814 200604 2 003 Secretary

Prof. Dr. Azzam Jassin, MBA (_____________________)

Examiner Expert

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CURRICULUM VITAE

Personal Data

Name : Oktavian Surya Pramono

Place & Date of Birth : Jakarta, 22nd

October1989

Address : Pamulang Indah (M.A) Jl. Edelweiss Blok B 7 No. 7

Religion : Islam

Nationality : Indonesia

Sex : Male

Hobby : Football and Travelling

Mobile Phone : 085697155110

Email : [email protected]

Formal education

1. 1994-1995 TK Ananda U.T

2. 1995-2001 SD Dharma Karya U.T

3. 2001-2004 SMPN 1 Pamulang

4. 2004-2007 SMAN 1 Pamulang

5. 2007-2013 State Islamic University SyarifHidayatullah (UIN), Jakarta

Faculty of Economics and Business, Major of International

Accounting

Non Formal Education & Training

1. 2005-2007 English Education Course (LIA)

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ABSTRACT

The objective of this study is to identify the influence of board size,

company size, profitability and leverage to corporate social responsibility

reporting in the annual report of mining companies listed in Indonesia Stock

Exchange year 2009 - 2011. The dependent variable in this research is corporate

social responsibility reporting, which is measured by ratio scale and then the

independent variables consist of 4 variables namely board size, company size,

profitability and leverage are measured by ratio scale. The data in this research

include 16 mining companies which were selected by using purposive judgment

sampling in the period 2009 – 2011 where the total of samples are 48. The

methods used in this research are normality test, classical assumption test and

hypotheses test by using multiple regression analysis.

Keywords: Corporate Social Responsibility Reporting, Board Size, Company

Size, Profitability, Leverage.

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ABSTRAK

Tujuan penelitian ini adalah untuk mengidentifikasi pengaruh ukuran

dewan, ukuran perusahaan, profitabilitas dan leverage terhadap pengungkapan

tanggungjawab sosial perusahaan di laporan tahunan perusahaan pertambangan

yang terdaftar di Bursa Efek Indonesia tahun 2009 - 2011. Variabel dependen di

penelitian ini adalah pengungkapan tanggungjawab sosial perusahaan, yang

diukur dengan skala rasio dan variabel independennya terdiri dari 4 variabel

yaitu ukuran dewan, ukuran perusahaan, profitabilitas dan leverage yang diukur

dengan skala rasio. Data dalam penelitian ini meliputi 16 perusahaan

pertambangan yang terpilih dengan menggunakan purposive judgment sampling

untuk periode 2009 – 2011 dimana total keseluruhan data sample adalah 48.

Metode yang digunakan dalam penelitian ini adalah uji normalitas, uji asumsi

klasik dan uji hipotesis dengan menggunakan analisis regresi berganda.

Kata kunci: Pengungkapan Tanggung Jawab Sosial Perusahaan, Ukuran

Dewan, Ukuran Perusahaan, Profitabilitas, Leverage.

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ACKNOWLEDGEMENTS

Alhamdulillah, praise and gratitude be Allah SWT, God of universe, who

already gives a gift, a bless, as well as affection to me and also regard to Prophet

Muhammad SAW as our life-guide, so that I am able to finish my thesis in

fulfilling one of the requirements to obtain my Bachelor Degree in Economics at

the State Islamic University (UIN) Syarif Hidayatullah, Jakarta.

The writer realizes that this thesis is too far from the perfection, realizing

that the limitation of the knowledge as well as experiences that the writer has, but

because of many parties support, finally the writer could finish this thesis by

hoping that it could be worthwhile for the readers.

In finishing this thesis, the writer was not alone since I was supported and

taught by many parties. In this opportunity, the writer would like to say my huge

thankful to:

1. My lovely parents, Suparmin, SE, MM & Sri Fachrida Ach for their effort to

have their children to be the best we can be. I realize that I am nothing and

impossible to be like now without their role model.

2. My lovely siblings who so beautiful and so kind, Andhianty Nur Pratiwi,

Muhammad Fadhil Aldaffa, Siti Alfiani Fauziah for their essential role to

support each other. Eventually it is my turn to have my degree in Economics

after having completed my education in university. I wish we are able to

accomplish our dreams. So we will be a successful people together and make

our parents happy and proud of us.

3. All of my family that I can’t tell one by one.

4. Someone special in my life now, Andrea Ardilla Mandry, SE. Thank you for

coloring my life with your special and your contributions as my third

supervisor for finishing this thesis. I don’t even know to draw you words

which mean more than anything.

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5. Prof. Dr. Abdul Hamid as a Dean of Faculty of Economics and Business, State

Islamic University (UIN) Syarif Hidayatullah, Jakarta, who responsible for the

teaching and learning processes at the faculty.

6. Dr. Amilin, SE, Ak, M.Si and Wilda Farah, SE, Ak, M.Si as my first and

second thesis supervisor. Thanks for spending some times to guide, motivate

and support accompanied by the knowledge in contributing for this thesis

compliance so that the thesis can finish properly.

7. My expert comprehensive test examiner Prof. Dr. Ahmad Rodoni, Rahmawati,

SE, MM and Prof. Dr. Azzam Jassin, MBA who had given me the

contribution of knowledge and good mark in comprehensive test.

8. Lecturers and Staffs in UIN Jakarta, especially at international program

secretariat FEB, Arief Mufraini Lc., M.Si (Head), Dr. Ahmad Dumyathi

Bashori, MA (Secretary), and also Sugih Waluyo Romdlon, SE. Wish Allah

SWT rewards back your nice contributions.

9. All of my friends in campus, especially at international program (Accounting

& Management Department) where we have a great time in the last 4 years.

Hopefully we will always keep in touch, guys.

10. All that I cannot mention one by one. I am very grateful for all the support and

pray for me to make this process run properly. Hope you all will get the

success in the future.

At the end, the writer opens for any critics as well as suggestions that

could improve the content of this thesis. Hopefully this thesis could be worthwhile

for all of us. Amin. Thank you.

Assalamualaikum Warahmatullahi Wabarakatuh.

Jakarta, July 25th

2013

(Oktavian Surya Pramono)

Author

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TABLE OF CONTENTS

SHEET STATEMENT AUTHENTICITY SCIENTIFIC WORKS ........... i

SUPERVISOR APPROVAL SHEET .......................................................... ii

ENDORSEMENT SHEET COMPREHENSIVES EXAMS ....................... iii

CERTIFICATION OF THESIS EXAM SHEET ......................................... iv

CURRICULUM VITAE .................................................................................. v

ABSTRACT .................................................................................................... vi

ABSTRAK .................................................................................................... vii

ACKNOWLEDGEMENTS ............................................................................ viii

TABLE OF CONTENTS ............................................................................... x

LIST OF TABLES ........................................................................................... xiii

LIST OF FIGURES ......................................................................................... xiv

LIST OF ATTACHMENTS .......................................................................... xv

CHAPTER I INTRODUCTION

A. Background ..................................................................... 1

B. Problem Identification ..................................................... 7

C. Objective and Benefit of Research ................................. 7

1. Objective of Research ............................................... 7

2. Benefit of Research .................................................. 7

CHAPTER II LITERATURE REVIEW

A. Theory Basis ................................................................... 10

1. Corporate Social Responsibility (CSR) .................... 10

a. Definition of CSR ............................................... 10

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b. Benefit of CSR .................................................... 12

c. CSR in Indonesia ................................................ 12

2. Corporate Social Responsibility Reporting ............... 15

a. Definition of CSR Reporting .............................. 15

b. Motivation and Reason for Doing CSR

Reporting ............................................................. 17

c. Categories of CSR Reporting .............................. 19

d. CSR Reporting in Annual Report ....................... 21

1) Annual Report............................................... 21

2) CSR Reporting in Annual Report................. 22

3. Company Characteristics .......................................... 23

a. Board Size ........................................................... 24

1) Definition of Board Size ............................... 24

2) Board Size and CSR Reporting ..................... 25

b. Company Size ..................................................... 26

1) Definition of Company Size ......................... 26

2) Company Size and CSR Reporting ............... 26

c. Profitability ......................................................... 28

1) Definition of Profitability .............................. 28

2) Profitability and CSR Reporting ................... 30

d. Leverage .............................................................. 32

1) Definition of Leverage .................................. 32

2) Leverage and CSR Reporting ....................... 32

B. Previous Research ........................................................... 42

C. Logical Framework ......................................................... 50

D. Hypothesis ....................................................................... 51

CHAPTER III RESEARCH METHODOLOGY

A. Scope of Research ........................................................... 54

B. Sampling Method ............................................................ 54

C. Data Collection Method .................................................. 56

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D. Data Analysis Method ..................................................... 57

1. Descriptive Statistics ................................................. 57

2. Normality Test .......................................................... 57

3. Classical Assumption Test ........................................ 59

4. Multiple Regression Analysis ................................... 61

5. Hypothesis Test ......................................................... 62

E. Operationalization Variable ............................................ 63

CHAPTER IV ANALYSIS AND DISCUSSION

A. Overview of Research Object ......................................... 71

1. Description of Research Object ................................ 71

2. Description of Selected Companies’ Sample ........... 72

B. Analysis and Discussion ................................................. 74

1. Descriptive Statistics Analysis .................................. 74

2. Normality Test .......................................................... 77

3. Classical Assumption Test ........................................ 79

a. Multicolinearity Test ........................................... 79

b. Heteroskedastisity Test ....................................... 80

c. Autocorrelation Test............................................ 81

4. Hypothesis Test ........................................................ 81

a. Multiple Regression Analysis ............................ 81

b. Hypothesis Test ................................................. 83

1) Determination Coefficient Test .................... 83

2) Simultaneous Regression Analysis ............... 84

3) Partial Regression Analysis .......................... 85

CHAPTER V CONCLUSION AND IMPLICATION

A. Conclusion ...................................................................... 93

B. Research Finding Implication ......................................... 94

C. Limitation and Suggestion .............................................. 96

BIBLIOGRAPHY ............................................................................................. 98

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LIST OF TABLES

No Details Page

1.1 Sample Cases of Environmental and Social Issues ................................... 2

2.1 Review of Previous Research.................................................................... 42

3.1 Sample Selection ....................................................................................... 55

3.2 Durbin Watson .......................................................................................... 60

3.3 Operational Variable ................................................................................. 69

4.1 Sample Selection ....................................................................................... 72

4.2 List of Companies’ Sample........................................................................73

4.3 Distribution of Sample According to Sub Sector ...................................... 74

4.4 Descriptive Statistics ................................................................................. 75

4.5 Kolmogorov-Smirnov Test ....................................................................... 78

4.6 Multicolinearity Test Result ...................................................................... 79

4.7 Autocorrelation Test Result....................................................................... 81

4.8 Result of Multiple Regression Analysis .................................................... 82

4.9 Result of Determination Coefficient Test ................................................. 83

4.10 Result of F Test ......................................................................................... 84

4.11 Result of T Test ......................................................................................... 85

4.12 Result of Partial Test ................................................................................. 86

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LIST OF FIGURES

No Details Page

2.1 Conceptual Framework of Study ............................................................ 50

4.1 Normality Test Result.............................................................................. 77

4.2 Heteroskedastisity Test Result ................................................................ 80

xv

LIST OF ATTACHMENTS

No Details Page

1. Dimensions and Classification CSR Disclosure .................................... 102

2. Research Data ........................................................................................ 105

3. Outputs SPSS ......................................................................................... 108

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CHAPTER I

INTRODUCTION

A. Background

Business and academic researchers have shown increasing levels of

interest in corporate social responsibility (CSR) during recent years. The

theme of environmental and social responsibility appears in a number of

political and legal documents and is gaining ever-greater importance at the

international level and national level. Survey of PriceWaterhouseCoopers

(Pwc) of 750 Chief Executive Officers showed that increasing pressure to

implement CSR was second ranking of the other business challenges in 2000

(Suharto, 2008:1).

Under the pressure of various stakeholders and the public, many

companies have begun to deal with social and environmental issues firmly,

which is evidenced by increase in the communication of social and

environmental issues (Gao and Joshi, 2009:27). This happens because over

time, society increasingly aware of social and environmental impacts posed by

the company in running its activities to achieve the maximum profits that the

longer the bigger and more difficult to control (Lubis, 2010:466).

There are some real cases in the field both at national and international

scale about the negative impact of company activities that significantly affect

the problem of social environment and physical environment, which can cause

long-term social cost and borne by society (Nor Hadi, 2011), such as:

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Table 1.1

Sample Cases of Environmental and Social Issues

No.

Cases

Environmental and Social Issues

1. PT. Freeport

Indonesia

1. Mass labor strike because the labors

demanding improved wages and welfare.

2. Communities around the company

demanding to be given job opportunities.

3. Get protests from local communities and

public and international concern regarding

problems with the waste of industry and

environmental pollution.

2. PT. Lapindo Lapindo mudflow in Sidoarjo in the middle of

overcrowding caused by human error. Many

people left homeless and lost sources of

income.

3. Nike Had ignored business ethics, such as extortion

to workers in developing countries

(employment of underage children).

6. In the World Global Warming can also be triggered by the

release of (product) of carbon from

industrialization. It can cause a gradation of

environment due to waste pollution in rivers

and air pollution from factory emissions of

gases that are not controlled.

Source: Bachtiar and Siregar (2010) and Nor Hadi (2011)

The occurrence of the various cases as described above is a reflection

of the lack of a sense of corporate responsibility towards the environment in

the vicinity. So in the midst of society gave birth to a critique of the corporate

existence of the company's activities should be expected to have the feedback,

both socially and economically (Nor Hadi, 2011:20).

This has increasingly lead to the development of corporate social

responsibility (CSR) in both the international and national scale which

emphasizes that every management efforts undertaken by the business entity

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to achieve sustainable development based on the balance of the pillars of

economic, social and environmental, to minimize and compensate for negative

impacts and maximize the positive impact on each pillar (Elkington (1987)

cited in Nor Hadi (2011:55).

Concern with corporate social responsibility (CSR) in Indonesia has

been increasing and continues to grow since the government (Indonesia’s

House of Representatives) issued Limited Liability Company Law No. 40 year

2007. In article 74 notes that a company having its business activities in the

field of and/or related to natural resources shall be obliged to perform its

social and environmental responsibility (Bachtiar and Siregar, 2010:242).

As an integral part of the company, accounting aims to accommodate

the changing trend by establishing a sub-discipline of social accounting. There

was an essential change by the accounting discipline through this issue, that is,

the change in paradigm of responsibility. During times, accounting products

were purposed as a management responsibility to stockowners. Nowadays,

that paradigm was extended as a responsibility to all stakeholders. This

extended paradigm of responsibility is a large contribution by the accounting

discipline for the community. There is an acknowledgment that the users of

financial reports are not only stockowners, future investors, creditors, and

government, but have extended to other stakeholders (Mirfazli, 2008:389).

Therefore, the increasing concern with CSR has impacted also on

growing attention to its reporting in companies’ annual reports (Bachtiar and

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Siregar, 2010:242) and has encouraged researchers across the globe to study

various aspects in CSR (P and W, 2011:46).

CSR disclosure has been a research subject of many academicians for

over two decades. Two major issues of those studies are factors that determine

the level of CSR reporting and whether CSR reporting affects a firm’s future

performance (Haniffa and Cooke (2005) cited in Bacthiar and Siregar

(2010:242)).

In this study concern with factors that determine the level of CSR

reporting (CSR disclosure). As we know that many empirical studies about

factors that determine the level of CSR reporting had been done by previous

researchers both nationally and internationally such as Al-Haj et al. (2011),

Bachtiar and Siregar (2010), Darwis (2009), Gao and Joshi (2009), Janggu et

al. (2007), Rahman (2008), Reverte (2009), Siregar and Sitepu (2009) and

others.

Their study have found that various factors which determine the extent

of CSR disclosure such as company size, profitability, leverage, board size

(board of commissioner and board of director), company age, company

profile, auditor size, foreign ownership and others. In addition, their study

also has found different result of their empirical study.

In this study, researcher only focused of four variables namely board

size, company size, profitability and leverage. Where the result of previous

research conducted by Bachtiar and Siregar (2010) and Siregar and Sitepu

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(2009) indicated that board size positively affects corporate social

responsibility reporting. Even though, a very large board could limit the

communication and coordination among board members and consequently

will hamper monitoring process.

Then, research result of Al-Haj et al. (2011), Bachtiar and Siregar

(2010), Darwis (2009), Gao and Joshi (2009), Janggu et al. (2007) and

Reverte (2009) indicated that company size positively affects corporate social

responsibility reporting. Whereas, study of Rahman (2008) Siregar and Sitepu

(2009) indicated that company size negatively affects corporate social

responsibility reporting.

Afterward, variable of profitability also indicated different results

where the study of Gao and Joshi (2009), Janggu et al. (2007), Mohamed Zain

& Janggu (2006) cited in Al-Haj et al. (2011) and Siregar and Sitepu (2009)

indicated that profitability positively affects corporate social responsibility

reporting. While, study of Al-Haj et al. (2011), Bachtiar and Siregar (2010),

Darwis (2009), Rahman (2008) and Reverte (2009) indicated that profitability

negatively affects corporate social responsibility reporting.

Likewise with variable of leverage, where within study of Al-Haj et

al. (2011), Bachtiar and Siregar (2010), Darwis (2009), Janggu et al. (2007),

Rahman (2008), Reverte (2009), Siregar and Sitepu (2009) indicated that

leverage negatively affects corporate social responsibility reporting. While,

based on agency theory argue that more highly leveraged firms disclose

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voluntary information in order to reduce their agency costs and, as a result,

their cost of capital.

In previous research has been inconsistent between the theory and

result of empirical study. Reconciliation of inconsistent research results

requires further research to determine whether the company characteristics

consist of board size, company size, profitability and leverage influential

toward corporate social responsibility reporting.

Based on the description above, the researcher is motivated to conduct

this research because researcher want to know the practice of corporate social

responsibility reporting (CSR disclosure) of companies in Indonesia as a

manifestation of social responsibility that made the company, especially

mining companies because it is a sector that has the most extensive range of

stakeholders including employees, communities, investors, creditors,

government, customers, suppliers and also related to natural resources (planet)

where the its implementation and disclosure is also influenced by several

factors owned by the company like company size, profitability, leverage,

board size and others. Therefore, researcher is interesting to take the title of

thesis “Board Size, Company Size, Profitability and Leverage on

Corporate Social Responsibility Reporting in The Annual Report

((Empirical Evidence of Mining Companies listed in Indonesia Stock

Exchange Period 2009 - 2011)”.

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B. Problem Identification

1. Is the corporate social responsibility reporting influenced by board size?

2. Is the corporate social responsibility reporting influenced by company

size?

3. Is the corporate social responsibility reporting influenced by profitability?

4. Is the corporate social responsibility reporting influenced by leverage?

C. Objective and Benefit of Research

1. Objective of Research

a. To get empirical evidence related to effect of board size toward

corporate social responsibility reporting.

b. To get empirical evidence related to effect of company size toward


c. To get empirical evidence related to effect of profitability toward


d. To get empirical evidence related to effect of leverage toward


2. Benefit of Research

The expected benefits in this research are:

a. Theoretical Contribution

1) For Next Researcher

This research is expected to be a reference for next researcher that

wants to develop this topic.

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2) For Teaching Material

This study is expected to provide input to the learning program

because the issue of CSR has been increasing during recent years

both in international and national level. Where learning program

that not only provides knowledge about the financial records

solely, because now the company is no longer only concerned with

financial records (single bottom line), but has been covering the

financial, social, and environmental aspects of the so-called Triple

Bottom Line. This is a synergy of three key elements of the concept

of sustainable development.

b. Practical Contribution

1) For Company

For consideration in formulating policies related to the

implementation of CSR in the company's operations and disclosure

in corporate reports.

2) For Government

Provide relevant information about how big the contribution of

Indonesia mining companies in implementing CSR activities as

well as disclosure in corporate annual reports.

3) For Stakeholders

a) For Society

Provide relevant information about what factors are pushing

companies to implement and disclose social responsibility

9

activities and also give information about practice of CSR

activities that disclosed in mining companies annual report.

b) For Investor

This research can provide an overview for investors who has

been or will be invested in the capital market about how the

influence of company characteristics on corporate social

responsibility reporting. So that, in the future investors can

consider the criteria of CSR reporting into investing strategy.

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CHAPTER II

LITERATURE REVIEW

A. Basis Theory

1. Corporate Social Responsibility (CSR)

a. Definition of CSR

As a concept, although CSR has become a trend that much

discussed both international and national scale, CSR doesn‟t have a

commensurate limitation. Many experts, practitioners and researchers

do not yet have similarities in providing definitions. Although in many

cases have the same essence (Nor Hadi, 2009:46).

The concept of CSR is still in the early stages in developing

countries, there appears to be a growing recognition within the

business community of the importance key stakeholders attach to the

social, environmental, and ethical behavior of companies (Zadek et al.

(1997) cited in Hassan and Harahap (2010:205)).

In this paper will introduce to CSR-definitions from:

1) The World Business Council for Sustainable Development

(WBCSD)

Continuing commitment by business to behave ethically and

contributed 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 (Al-Haj et al., 2011:182).

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2) Commission of the European Communities

A concept by which “companies decide voluntarily to contribute to

a better society and a cleaner environment”. It states that behaving

in a socially responsible way amounts to “going beyond

compliance and investing „more‟ into human capital, the

environment and the relations with stakeholders”. (P and W,

2011:45).

3) CSR Ghana

CSR is about capacity building for sustainable likelihoods. It

respects cultural differences and finds the business opportunities in

building the skills of employees, the community and the

government (Nor Hadi, 2011:46).

4) CSR Asia

The company's commitment to operate in a sustainable based on

the principle of economic, social and environment, while balancing

the diverse interests of its stakeholders (Suharto, 2008:5).

5) CSR Indonesia

CSR can be defined based on the Law of the Republic of Indonesia

Number 40 Year 2007 regarding Limited Liability Company that

CSR is company's commitment to participate in sustainable

economic development in order to improve the quality of life and

environment that are useful, both for the company itself, the local

community, and society in general.

12

b. Benefit of CSR

According to Wibisono (2007) cited in Irawan (2008:4) that

company gets several benefits because implement its social

responsibility such as:

1) Maintaining and improving the company‟s reputation and brand

Image.

2) Social License to Operate.

3) Reducing the risk of company‟s business.

4) Expands the access to resources for business operations.

5) Expands the opportunities market.

6) Reducing costs, such as costs associated with the impact of waste

disposal.

7) Improving relationship with stakeholders.

8) Improving relationship with regulators.

9) Raising the employees‟ spirit and productivity.

c. CSR in Indonesia

The issue of corporate social responsibility (CSR) in Indonesia

has grown steadily since the government (Indonesia‟s House of

Representatives) issued Limited Liability Company Law about the

company's obligation to implement Corporate Social Responsibility

(CSR) which proper with the Article 74 in the Limited Liability

Company Law No. 40 year 2007 forces all companies in the field of

and/or in relation to natural resources to put CSR into practice.

13

According to Harahap (2002) cited in Irawan (2008:5), social

involvement is done by the company based on the situation in the

Indonesia country, namely:

1) Environment, among others: surveillance of the effects of

pollution, improvement of natural destruction, conservation of

nature, the beauty of the environment, reducing the noise pollution,

land use, waste management and wastewater, research and

development of environment; cooperation with energy, among

other things: conservation and energy savings are made by

companies in their activities.

2) Human resources and education, among other: safety and health of

employees, employee education, family needs and recreation

employees, increase and broaden employees' rights, efforts to

encourage participation, pension improvements, scholarships,

assistance to schools, the establishment of schools, help the higher

education, research and development, requirement of employees

from poor, and enhancement of employee career.

3) Honest business practices, among others: pay attention to the rights

of female employees, honesty in advertising, credit, service,

products, and warranties. Thus, control of product quality,

government, universities, and the building of recreational place.

4) Aid the environment community, among others: use the expert of

company in addressing social problems in its environment, does

14

not intervene in the structure of society, building the health clinics,

schools, worship houses, improvement of village or city,

contribution to social activities, improvement of rural housing,

financial assistance, improvement the market transport vehicle.

5) The activities of art and culture, among others: helping arts and

cultural institutions, arts and cultural sponsored, using arts and

culture in advertising, recruiting talented people in arts and sports.

6) Relation with shareholders, among others: openness of directors to

all limited liability company, rising of disclosure in financial

statements, disclosure of company involvement in social activities.

7) Relation with the government, among other: obey of government

regulations, limiting the lobbying activities, control the company‟s

political activities, helping government agencies in accordance

with enterprise capabilities, helping as general of enhancement of

social welfare society, help the project and government policies,

improve the productivity of the informal sector, development and

innovation of management.

According to Nor Hadi (2011:170) noted that typology of

social responsibility seen from the direct and indirect involvement of

companies in practice, there are two implementation strategies,

namely:

15

1) Pattern of Self Managing

CSR practice is performed by the company to assign employees or

through foundations and social organizations that formed the

command of the company through corporate secretary/public affair

manager/ public relations firm and the like.

2) Pattern of Outsourcing

This is an implementation of CSR strategies are handed by third

parties, either partnered with professional parties such as NGOs,

Red Cross (PMI), universities, mass media and others.

2. Corporate Social Responsibility Reporting (CSR Reporting)

According to Douglas et al. (2004) cited in P and W (2011:46) and

Zadek et al. (1997) cited in Hassan and Harahap (2010:205) that CSR

reporting is variously called CSR disclosure, social accounting, corporate

social reporting, social auditing, social and environmental reporting, social

review, or sustainability reporting.

a. Definition of CSR Reporting

According to Finch (2005) cited in Sutantoputra (2009: 37) that

companies used CSR reporting as means to communicate to their

stakeholders over their management performance. The external

communication of CSR activities can help a firm to build a positive

image among its stakeholders (Fombrun and Shanley, 1990; Lafferty et

al., 2002).

16

Thus, according to Gray et al. (1987) cited in Sutantoputra

(2009:37) defined CSR reporting as the process of providing

information designed to discharge social accountability and the

medium may cover annual report, special publications or reports or

even socially orientated advertising. CSR is executed through triple

bottom line reporting which declares not only financial results but also

social and environmental impact of a business (Elkington, 1999).

While, according to GRI Sustainability Reporting Guidelines

2002 cited in Sutantoputra (2009:38) that GRI used the term

sustainability reporting for CSR reporting and mentioned that:

Sustainability reporting is the practice of measuring, disclosing,

and being accountable to internal and external stakeholders for

organizational performance towards the goal of sustainable

development”. The report can provide important information

that is not included in financial reports but is crucial for

business decision making. Companies can use sustainability

reporting to measure their sustainability performance (i.e.

economic, social and environmental performances) over time

and use them as basis to improve their internal business

practices and external communication.

After that, according to Gray et al (1987) cited in Bachtiar and

Siregar (2010:242), CSR disclosure (CSR Reporting) is:

The process of communicating the social and environmental

effects of organizations‟ economic actions to particular interest

groups within society and to society at large. As such, the

traditional role of providing a financial account to the owners

of capital, in particular, shareholder. Such an extension is

predicted upon the assumption that companies do have wider

responsibilities than simply to make money for their

shareholders.

17

In addition, according to Hackston and Milne (1996) cited in

Rahman (2008:26) stated that corporate social responsibility disclosure

(CSR Reporting) is communication process of social effect and

environment from organization economics activity toward public

society as a whole.

b. Motivation and Reason for Doing CSR Reporting

Within research of Mirfazli (2008:396) stated that some

motivation is possible to push the environmental and social

performance information disclosure, namely:

1) To maintain the legitimacy of company operation (Legitimacy

Theory). According to Legitimacy Theory, company conduct

certain activity, included in matter of information disclosure, in

order to obtain the legitimacy from society where the company

operates and also as a strategy to keep the good relation between

the company with the outside party (especially stakeholders).

2) To manage or influence certain group stakeholders who have a

strong influence. In stakeholders‟ theory, a company considers the

existence of expectation, which differ from each group of

stakeholders that have an affect on operation and policy of

information disclosure.

3) To increase properties of all stockholders and managers. Positive

Accounting Theory has the assumption that everyone does the

activity because they are pushed by private interest

18

accomplishment. If everybody has an activity to fulfill its private

interest, it can be that managers set their mind to disclosure of the

environmental and social information because they expect to get

the make-up of properties from the disclosure activity. Make-up of

properties is possible from profit improvement or assessing the

company.

4) Manager confidence that companies have the accountabilities or

duty to provide certain information. Disclosure of social and

environmental responsibility performance information can be

pushed because a manager believes that various group stakeholders

are entitled to know the operate implication for the company to

environmental and social quality.

5) To hinder or preceding the effort recognition/making of disclosure

regulation that more weighing. Managers do the environmental

and social performance information disclosure in order to hinder

governments and depress the pertinent industry. It is very possible

to disturb this when too much reporting occurs.

Thereafter, according to Nor Hadi (2011:159) noted that there

are two paradigm approaches in doing social performance

improvement and disclosure, which is based on:

1) Motive Approach, means the practice of social responsibility and

disclosure based on certain motive, either social motive or

economic motive. Motive approach foster social responsibility

19

practices to be volunteer accordance with the requirements and

corporate interests such as the existence of direct linkage and

positive between financial performances with social disclosure and

there is linkage between social performances with social

disclosure. Research has proven this paradigm is Belkaoui and

Karpik (1989), Bowman and Haire (1975), Ulmann (1985), Strand

(1983) and others.

2) System Approach, means that company hold social spending,

including disclosure because of the demands and conditioning an

existing system. This system may be rules and policies that must be

complied such as determination of management which is the

translational code of conduct, vision and mission as well as

company strategy and regulations arising from the government

(Law of the Republic of Indonesia Number 40 Year 2007 regarding

Limited Liability Company), Standard, Regulation of Capital

Markets, social customs or conventions. Thus, a violation of the

implementation of social performance and disclosure will have

implications on the company.

c. Categories of CSR Reporting

Douglas et al. (2004) cited in P and W (2011:46) noted that

reporting of the CSR behavior is different in different countries, which

is attributed to the government policies, cultural differences, and stage

of economic development. Further, they also state that the volume of

20

disclosure does not necessarily reflect the quality of corporate social

reporting.

Until now, there are still differences of opinion about the

contents of the disclosure of CSR itself. . The study is conducted by P

and W (2011:48) noted that types and categories of disclosures (both

mandatory and voluntary which are disclosed by the companies in

annual reports among others:

1) Environment

2) Fair business

3) Equal opportunity

4) Personnel or human resources

5) Community involvement

6) Product quality or safety/consumer

7) Political

8) Energy

Meantime, cases in Indonesia, many companies do social

responsibility, although each company has the interpretation and

availability differently. Implications of social responsibility practices

are carried out voluntarily and without a commensurate standard so

that content and implementation strategies to be different (Nor hadi,

2011:133).

21

The study result of Nor Hadi (2009) cited in Nor Hadi

(2011:134) find that social responsibility that has been done by

company includes six dimensions, namely:

1) Environmental

2) Community

3) Energy

4) Employee

5) Product

6) Others

d. CSR Reporting in Annual Report

1) Annual Report

According to Mirfazli (2008:398) definition of an annual

report is at the top every analyst‟s list (of financial reports used by

analysts) is the annual report to shareholders. It is the major

reporting document and every other financial report is in some

respect subsidiary or to it.

Annual Reports are obliged to be submitted by companies

enlisting in Stock Exchange as activity reporting during one

previous year to interested parties (stakeholders). Overall, content

from the annual report is not arrange by a professional authority in

charge like Indonesia Accounting Association (IAI), but is

arranged by the regulator of Stock Exchange that is Bapepam.

22

The objectives of annual report involve:

a) Useful to users of the annual report in making investments,

credits, and other decisions.

b) Providing comprehensive reports about the company prospect

in future of operation activity, finance, and other relevant

information

c) Providing information about the claims of company resources

and also its charge.

2) CSR Reporting in Annual Report

According to Sutantoputra (2009) cited in P and W (2011:

46) that generally, the main medium of disclosing CSR activities is

the annual report. However, if they are not disclosed in the annual

report, and are published separately, then they are known as social

and environmental report, CSR report or sustainability report.

Nevertheless, the most common form of disclosing CSR is

disclosure in annual report. Adam et al. (1998) cited in Bacthiar

and Siregar (2010:243) found that firms in Germany, France,

Switzerland, UK, and Dutch firms, generally disclose their CSR

activities through annual reports. In Indonesia, CSR reporting is

also revealed in the annual report. Based on those studies, our

study focuses on the annual report also as the source of CSR. Kent

and Chan (2003) provided a number of reasons why it is justified

to use the annual report:

23

a) Annual report is the principal source of corporate

communications to investors and it is widely used by firms to

disclose their social activities.

b) The presentation of financial and social information within one

document (which is the annual report) is one way of reducing

costs of disclosure.

c) Annual report is also the type of information most actively

sought by pressure groups.

d) Disclosures through other media, such as the popular press, are

subject to the risk of journalistic interpretations and distortions,

whereas disclosures through annual report are completely

editorially controlled by management.

3. Company Characteristics

Empirical study has shown that disclosure activism and CSR

disclosure activism varies across companies, industries, and time. For

disclosure activism, Fuad (2006:82) research the factors that influence

disclosure of manufacturing companies where he explained that the level

of corporate disclosure is influenced by several factors contingency.

Several factors are considered as a contingency independent variable for

the level of disclosure is a Debt to Total Assets, Return on Assets,

Company Size, Auditor Size, and Disclosure Level one year before.

For CSR disclosure activism varies across companies, industries,

and time (Al-Haj et al. (2011), Bachtiar and Siregar (2010), Darwis

24

(2009), Gao and Joshi (2009), Janggu et al. (2007), Rahman (2008),

Reverte (2009), Siregar and Sitepu (2009), and others), where they had

researched about CSR reporting that analyze whether company

characteristics are potential determinants of CSR reporting practices by

various countries listed firms.

Each company has special characteristic that different between one

entity to another (Lang & Landholm (1993) cited in Rahman (2008:28)).

According to Willance (1994) cited in Rahman (2008:28) divided

company characteristics into three, namely:

a. There are structured related variables, like company size, leverage, and

type of stock ownership.

b. Performance related variables like profitability, company type, and

company basis.

c. Market related structured like industry type.

Company characteristics explain wider variation of CSR reporting

in the annual report. Company characteristics in this research refer to

board size, company size, profitability and leverage.

a. Board Size

1) Definition of Board Size

Within research of Bacthiar and Siregar (2010:244),

Indonesia Country adopts a two-tier board system, board size

relates to total of board of commissioners‟ and board of directors‟

size.

25

Then, within research of Siregar and Sitepu (2009:4), board

size is total of board of commissioner.

2) Board Size and CSR Reporting

Collier and Gregory (1999) cited in Bactiar and Siregar

(2010) and Siregar and Sitepu (2009:4) argued that larger board of

commisioners‟ size and directors‟ size will make it easier to control

the CEO and the monitoring process will be more effective. But, a

very large board could limit the communication and coordination

among board members and consequently will hamper monitoring

process. So, larger board size will have positive influence on CSR,

but a very large board size will have negative effect on it.

Result of research conducted by Bachtiar and Siregar

(2010), Sembiring (2005), Siregar and Sitepu (2009) indicated that

board size positively affects corporate social responsibility

reporting.

In this study, researcher only using board of commissioner

as one of factors related to CSR reporting in the companies‟ annual

reports. Eventhough, in Indonesia adopts a two-tier board system,

board size relates to total of board of commissioners‟ and board of

directors‟ size.

26

b. Company Size

1) Definition of Company Size

According to Abrams (1993:69) that company size can be

measured with using total revenue, total units sold or volume and

total employment. Meantime, according to Indriani (2005) cited in

Sudaryono (2007:109) explained that the company's size can be

measured using total assets, sales, or capital from company.

Likewise, according to Gao and Joshi (2009:39) noted that

to measure the company size can be measured in a number of

ways, such as total asset, capital employed, turnover, number

employees, company’s market value and equity.

2) Company Size and CSR Reporting

Company size is the independent variable which is usually

used to explain disclosure variation in the company‟s annual

report. In this study, researchers use total assets as company size.

According to Al-Haj et al. (2011:194) that one of

benchmarks to indicate whether company is big or small with see

its total asset. The company has big total assets shows that the

company has reached maturity stage, generally company has a

positive cash flow and considered to have good prospects in a

relatively long period of time, moreover it also reflects that the

company is relatively more stable and able to generate profits than

27

companies has small amount of total assets (Indriani (2005) cited

in Sudaryono (2007:109)).

According to Belkaoi (2004) cited in Sudaryono

(2007:109), the asset is one element of the financial statements

relating directly to the measurement of financial position (balance

sheet) an economic entity. The larger size (total assets) of

company, the greater of information required to be disclosed than

small firms. The statement was based on agency theory in which

large firms have greater agency costs than small firms.

Generally, large firms have greater agency costs. To reduce

the agency costs, company tend to disclose more extensive

information. Then, large company is issuers of the most

highlighted. The greater disclosure is reduction of political cost as

a form of corporate social responsibility (Darwis, 2009:54).

Theoretically, larger companies tend to receive more

attention from the public and are under greater public pressure to

exhibit social responsibility (Cowen et al. (1987) cited in Gao and

Joshi (2009:33)). Larger companies can be expected to disclose

more social and environmental information to prove their corporate

citizenship, thereby legitimizing their existence. That is because

additional disclosure may influence society‟s perception about the

company (Neu et al. (1998) cited in Gao and Joshi (2009:33)).

28

In addition, signaling theory suggest that companies with

superior performance (or good companies) use information to send

signals to the market (Ross (1979) and Morris (1987) cited in Gao

and Joshi (2009:33)). Employing signaling theory, Inchausti (1997)

cited in Gao and Joshi (2009:33) finds that management with

“good news” disclose more information than that with “bad news”.

So, company size frequently been assumed as a factor

determining CSR reporting. The study is done by Al-Haj et al.

(2011), Darwis (2009), Gao and Joshi (2009), Bachtiar and Siregar

(2010), Janggu et al. (2007) and Reverte (2009) indicated that

company size positively affects CSR reporting.

c. Profitability

1) Definition of Profitability

According to Jordan et al. (2010:61), profitability is

intended to measure how efficiently a firm uses its assets and

manages its operation. The focus in this group is on the bottom

line, net income.

According to Suharli (2006:294), the ratio of profitability is

closely related to profits and the sources used to produce it. Ideally

companies generate as much as possible profit from a given source.

Ratio needs to be calculated is the ROA, ROE, and EPS.

Whereas, according to Kieso (2010:803), profitability ratios

measure the income or operating success of a company for given

29

period of time. Income, or lack of it, affects the company‟s ability

to obtain debt and equity financing. It also affects the company‟s

liquidity position and the company‟s ability to grow. As a

consequence, both creditors and investors are interested in

evaluating earning power – profitability. Analysts frequently use

profitability as the ultimate test of management‟s operating

effectiveness. This ratio can be measured with profit margin, asset

turnover, return on asset, return on common stockholders’ equity,

earning per share (EPS), price-earning ratio and payout ratio.

Likewise, according to Sudaryono (2007:111) that level of

profitability of a company is a measure of the ability to get profit

through all the existing capabilities and resources such as sales

activities, cash, capital, the number of employees, and the number

of branches.

Profitability becomes more important than profit problems

in the literal sense, because the high profit is not necessarily the

size that the company has worked with efficiently. Thus,

companies should not only pay attention to how the effort to

increase profit but more important is the effort to enhance its

profitability, because of high profitability is reflection efficiency is

also high (Sudaryono, 2007:111).

30

2) Profitability and CSR Reporting

Theoretically, based on the legitimacy theory, one of the

arguments in the relationship between profitability and level of

CSR disclosure is that when a company has a high rate of

profitability, the company (management) considers not need to

report things that can disturb the information about the company's

financial success. Conversely, when low rate of profitability,

company hopes to the users of report will read good news of

company's performance, for example in the social sphere and thus

investors will still invest in the company and also other investors

will be interested to investee in its company. Thus, it can be

concluded that profitability has a negative relationship of the level

of CSR disclosure (Donovan and Gibson (2000) cited in Darwis

(2009:55)).

Nevertheless, according to Shinghvie & Desai (2001) cited

in Sudaryono (2007:112) stated that firms with high profitability

will encourage managers to provide more detailed information so

that it can convince investors and creditors of the company's

profitability.

Then, according to Heinze (1976) and Hackston and Milne

(1996) cited in Rahman (2008:29) stated that profitability is a

factor that makes the management free and flexible to disclose

social responsibility to stakeholder. The higher company

31

profitability rating so the bigger the social information disclosure

(Bowman and Haire, 1976; Preston, 1978; Hackston and Milne,

1996; cited in Rahman, 2008:29).

In addition, according to Belkaoi and Karpik (1989) cited in

Rahman (2008:29), social care wants the company (management)

to make the company profitable. Therefore, we may assume that

the profitability has a positive relation with company social

responsibility.

Moreover, according to Mohamed Zain & Janggu (2006)

cited in Al-Haj et al. (2011:183) find the results provides strong

evidence that the corporate social disclosure is positively related to

companies‟ profitability. This indicates that, the bigger, in terms of

size a company is, the more the company discloses its social and

environmental information.

The result of studies of Gao and Joshi (2009), Janggu et al.

(2007), Zain & Janggu (2006) cited in Al-Haj et al. (2011) and

Siregar and Sitepu (2009) indicated that CSR reporting is

positively related to profitability.

In this study, researcher use return on assets (ROE) to

measure the profitability variable. According to Ross, et al.

(2006:65), ROE is measure of how the stockholders fared during

the year, because benefiting shareholders is our goal, ROE is, in an

accounting sense, the true bottom-line measure of performance.

32

Formula for calculating ROE is as follows:

d. Leverage

1) Definition of Leverage

Leverage ratio is usually also called solvency ratio.

According to Ross et al. (2006:60), leverage is intended to address

the firm‟s long-run ability to meet its obligations.

Then, Solvency ratio or leverage ratio is ratio used to

measure the extent of corporate assets financed by debt. In a broad

sense it is said that this ratio is used to measure a company's ability

to pay its liabilities, both short and long term (Kasmir, 2012:151).

Then, according to Kasmir (2012:155), kind of leverage

ratio consist of seven namely debt to equity ratio (DER) and debt

to asset ratio (debt ratio), long term debt to equity ratio, tangible

assets debt coverage, current liabilities to net worth, times interest

earned and fixed charge coverage. In this study, researcher use debt

to equity ratio (DER).

2) Leverage and CSR Reporting

Leverage is one of company characteristics that influence

corporate social responsibility reporting practice (Al Haj et al.,

2011:183).

ROE=

33

There are only few studies conducted to find out the

relationship between social responsibility and financial leverage of

the corporation. Within study of Darwis (2009:55), Janggu et al

(2007:11) and Reverte (2008:387) explain that the context of the

agency theory, Jensen and Meckling (1976) argue that more highly

leveraged firms disclose voluntary information in order to reduce

their agency costs and, as a result, their cost of capital.

Empirical evidence of Trotman and Bradley (1981) cited in

Janggu et al. (2007:11) show that positive relationship has been

found between financial leverage and the extent of social

disclosure.

However, Brammer and Pavelin (2008) sustain that a low

degree of leverage ensures that creditor stakeholders will exert less

pressure to constrain managers‟ discretion over CSR activities,

which are only indirectly linked to the financial success of the firm

(Reverte, 2008:387).

Al-Haj et al. (2011), Bachtiar and Siregar (2010), Darwis

(2009), Janggu et al. (2007), Rahman (2008), Reverte (2009),

Siregar and Sitepu (2009) show that leverage negatively affects

CSR reporting, where management with high leverage will reduce

its CSR to avoid creditor scrutiny.

Thus, we do not make any a priori assumption about the

sign of the association between CSR disclosure and leverage.

34

In this study, researcher use debt to equity ratio (DER).

According to Kasmir (2012:157), debt to equity ratio is a ratio used

to assess the debt to equity. This ratio is useful to know the amount

of funds provided by creditors with the owner of the company and

also provides a general indication of the company's financial

viability and risk.

Formula for calculating leverage (DER) is as follows:

B. Previous Research

1. Factors Affecting Social Disclosure in Annual Report on

Manufacturing Companies Listed in the Jakarta Stock Exchange

(Andre Christian Sitepu and Hasan Sakti Siregar, 2009)

The purpose of this research is to examine the effect of corporate

characteristics, consist of size of board of commisioner, leverage,

company size and profitability to corporate social responsibility

disclosure. This research can explain the decision making about the

corporate social responsibility disclosure done by manufacturing

companies listed in JSX for the year 2007. The data used are in form of

annual reports from 33 companies used as sample for the year 2007.

The statistical methods use in this research is multiple regressions.

The result of this research shows that size of board of commisioner and

Debt to Equity Ratio (DER) =

35

profitability have significant effect to corporate social responsibility

disclosure , while leverage and company size have insignificant efect to

corporate social responsibility disclosure.

2. The Analysis of Company Characteristic Influence toward CSR

Disclosure: Empirical Evidence of Manufacturing Companies (Arif

Rahman, 2008)

This research investigates the influence of company characteristic

toward CSR disclosure. The research is using the proxy of management

ownership, leverage, size, profitability and company profile as the

variable of company characteristic, while the CSR disclosure, unlike the

previous researches, is proxied by dummy score from the companies‟

mandatory disclosure based on the items of Public Environmental

Reporting Initiative (PERI) and Global Reporting Initiative Social

Performance (GRISP) issued by Global Reporting Initiative (GRI).

It found that simultaneously, company characteristics significantly

influence CSR disclosure. Whereas based on the partial test, among the

characteristics observed, only company profile which significantly

influences CSR disclosure. The result indicates that legitimacy from the

society is the big concern of companies and therefore drives the actions

of companies. However, the disclosure presumably depends on the

awareness of the management toward social and environmental

prosperity because the pressure from investors and market is still weak.

36

3. Determinants of Corporate Social Responsibility Disclosure Ratings

by Spanish Listed Firms (Camelo Reverte, 2009)

This paper is to analyze whether a number of firm and industry

characteristics, as well as media exposure, are potential determinants of

corporate social responsibility (CSR) disclosure practices by Spanish

listed firms. Empirical studies have shown that CSR disclosure activism

varies across companies, industries, and time which is usually justified

by reference to several theoretical constructs, such as the legitimacy,

stakeholder, and agency theories.

It findings evidence that firms with higher CSR ratings present a

statistically significant larger size and a higher media exposure, and

belong to more environmentally sensitive industries, as compared to

firms with lower CSR ratings. However, neither profitability nor leverage

seem to explain differences in CSR disclosure practices between Spanish

listed firms. The most influential variable for explaining firms‟ variation

in CSR ratings is media exposure, followed by size and industry.

Therefore, it seems that the legitimacy theory, as captured by those

variables related to public or social visibility, is the most relevant theory

for explaining CSR disclosure practices of Spanish listed firms.

37

4. Company Size, Profitability and Financial Leverage on Social

Responsibility Disclosure of High Profile Companies in Indonesia

Stock Exchange year 2005 (Herman Darwis, 2009)

This study aimed to give empirical evidence that company size,

profitability and financial leverage influenced social responsibility

disclosure. Research finding proved that company size significantly and

positively influence CSR disclosure. It was based on agency theory that

the bigger a company was the bigger its agency theory cost was. To

reduce such agency cost, a company tended to disclose information

extensively.

Company‟s profitability had negative and insignificantl

association. This study was in conflict with legitimacy theory that

profitability had a negative influence to corporate social responsibility

disclosure.

Financial leverage had no influence to corporate social

responsibility disclosure this study failed to support agency theory that

predicted a company with higher leverage ratio would disclose more

information because agency cost of a company with such capital

structure would be higher.

38

5. CSR Disclosures and Its Determinants: Evidence from Malaysian

Government Link Companies (Nor hawani, Mustaffa M. Zain and

Norashfah Hanim Al-Haj, 2011)

The main aim of this study is to assess the level of corporate social

responsibility (CSR) disclosure of 44 government-linked companies

(GLCs) listed on Bursa Malaysia and to ascertain the relationship of

certain company characteristics; namely size, age, profitability and

leverage on the total CSR disclosure from the year 2005 to 2006.

The major finding of this study is that the theme of disclosure has

shifted from human resource to marketplace. This is followed by human

resource, community and, finally, environment. Ironically, companies are

not only disclosing good news, but also bad/negative news. This study

provides further evidence that is, to a certain extent, some GLCs have

influenced other companies‟ practices to disclose CSR information.

Company size was found to be positively significant associated with the

total disclosure. The remaining variables were found to be insignificant

in explaining the total disclosure.

6. Multinational Corporations’ Corporate Social and Environmental

Disclosures (CSED) on Web Sites (Prem Lal Joshi and Simon S.Gao,

2009)

The purpose of this paper is to investigate multinational

corporations‟ (MNCs) voluntary practice of including corporate social

and environmental disclosure (CSED) on their web sites and

39

characteristics that inspire MNCs to be more accountable in this regard.

This study adopts discrimination analysis to test six hypotheses to

determine which variables influence the MNCs to post their CSED on the

web sites. Data from a sample of 49 MNCs were analyzed with

STATISTICA. The independent variables tested include log of total

assets (size) and log of total equity (size), return on assets (profitability),

debt ratio (risk), auditor (Big4 and non-Big4), country effect (origin the

USA or non-USA) and industry effect (manufacturing versus services).

The results show that companies with a strong equity base and in a

good financial condition have a propensity to voluntarily disclose more

environmental information. For social disclosure, company size and the

profitability are significant variables that influence CSED on websites..

These results are in line with evidence found in some prior studies.

7. Corporate Social Reporting: Empirical Evidence from Indonesia

Stock Exchange (Sylvia Veronica Siregar and Yanivi Bachtiar, 2010)

The purpose of this paper is to investigate the effect of board size,

foreign ownership, firm size, profitability, and leverage on corporate

social responsibility (CSR) reporting and the possible effect of CSR

reporting on a firm‟s future performance.

Evidence was found that board size has a positive and non-linear

(quadratic and concave) relationship with CSR. This result confirms

predictions that a larger board will be able to exercise better monitoring,

but that too large a board will make the monitoring process ineffective.

40

Firm size has a positive effect on CSR. This suggests that larger

firms have more resources to devote to social activities and a larger asset

base over which to spread the costs of social responsibility. They also

face more pressure to disclose their social activities for various groups in

society.

Profitability and leverage, however, do not have significant

influence. Little evidence was found of positive impact of CSR on future

performance. This result could encourage firms to disclose their CSR

activities because there seems to be a positive effect on future

performance.

8. The Current State of Corporate Social Responsibility Among

Industrial Companies in Malaysia (Tamoi Janggu, Corina Joseph, and

Nero Madi, 2007)

The main aim of the study is to find out the level and trend of CSR

disclosure pattern of industrial companies in Malaysia and its relationship

with companies‟ characteristics. Content analysis is used to analyse the

data from the corporate annual reports of the companies from 1998 to

2003. Samples are selected using simple random sampling technique.

Research findings, inter alia, indicate that there is positive

relationship between CSR and companies‟ turnover but no apparent

relationship is noticed with companies‟ capital. Relationship between

CSR and companies‟ profitability is also found to be positive but weak.

More disclosure by local companies as compared to their foreign counter

41

parts is another noteworthy finding. Overall, CSR level of industrial

companies in Malaysia is increasing both in terms of amount of the

disclosure and the number of participating companies.

Continued on the next page 42

Table 2.1

Review of Previous Research

No Researcher

(Year) Title Similarity Difference

Result

(Summary)

1

Andre

Christian

Sitepu and

Hasan Sakti

Siregar (2009).

Faktor-faktor yang

Mempengaruhi

Pengungkapan

Informasi Sosial dalam

Laporan Tahunan pada

Perusahaan Manufaktur

yang Terdaftar di Bursa

Efek Jakarta.

1. Variable:

Board of

commissioner

size, company

size, profitability

and leverage.

2. Method:

Multiple

Regression

Analysis.

1. Categories of CSR

reporting using 3

categories (Darwin,

2004) those are:

economic,

environmental

performance and social

performance.

2. Object is manufacturing

companies.

3. Time horizon is cross

sectional.

The result shows that size of

commissioner board and

profitability has significant

effect of CSR reporting.

Whereas, leverage and

company size have

insignificant effect of CSR

reporting. Thus, the result of

F test shows all independent

variables altogether

influence amount of social

information.

2

Arief Rahman

(2008)

The Analysis of

Company

Characteristic Influence

Toward CSR

Disclosure: Empirical

Evidence of

Manufacturing

Companies.

1. Variable:

Company size

(proxied by total

asset).

2. Time horizon is

time series.

3. Method:

Multiple

Regression

Analysis.

1. Variable:

Profitability (net profit

margin), company

profile, management

ownership and leverage

(total liabilities/total

assets).

The empirical research

shows that there is

significant influence

between all company

characteristics of CSR

reporting. However, among

those variables only

company profile which

significantly influence CSR

reporting.


No Researcher


Result

(Summary)


reporting using 7

categories from

mandatory disclosure

namely company profile,

environment

management system,

pollution (PSAK no.8),

obedient toward law and

regulation (company

taxation & product

standardization), cost

related to the

environment (PSAK

no.32 & no.33),

company achievement

and stakeholder

involvement.

3. Object is manufacturing

companies listed in JSX

year 2003-2005.

Conversely, the other

variables don’t have

significant influence of CSR

reporting.


No Researcher


Result

(Summary)

3 Camelo

Reverte (2009)

Determinants of

Corporate Social

Responsibility

Disclosure Ratings

By Spanish Listed

Firms.

1. Dependent

Variable:

CSR content

rating (CR).

2. Time horizon is

time series.

3. Method:

Multiple

Regression

Analysis.

1. Variable:

Add variable of board

size as one of

independent variables.

2. Variable:

Company size (the

natural logarithm of

market capitalization),

industry sensitivity,

profitability (ROA),

ownership structured,

international listing,

media exposure and

leverage (long term debt

to equity ratio).

3. Dependent Variable:

Total CSR, CSR content

rating (CR), CSR

management systems

rating (MSR).

Firms with higher CSR

ratings present a statistically

significant larger size and a

higher media exposure.

Also, firms with higher CSR

ratings belong to more

environmentally sensitive

industries, and are listed in a

higher number of foreign

stock markets. As regards

ownership structure, firms

with higher CSR ratings

have a less concentrated

ownership. However,

neither ROA nor leverage

seems to explain differences

in CSR reporting practices

between Spanish listed

firms.


No Researcher


Result

(Summary)

4. Object is OCSR report

listed on the Madrid

Stock Exchange and

included in IBEX35

index year 2005 and

2006.

4 Herman

Darwis (2009)

Ukuran Perusahaan,

Profitabilitas dan

Financial Leverage

Terhadap

Pengungkapan

Tanggung Jawab Sosial

Perusahaan High

Profile di BEIs.

1. Variable:

Company size

(log total asset),

leverage (DER).

2. Method:

Multiple

Regression

Analysis.

1. Variable:

Profitability (EPS).


reporting using 7

categories from

research of Sembiring

(2005) that are:

Environmental, ,

energy, health and

safety of workers,

employee, product,

community, and other.

3. Object is high profile

company in IDX year

2005.


sectional

Only company size effect on

of level of CSR reporting.

While, profitability and

leverage is not influential of

level of CSR reporting. In

addition, the result of F test

shows all independent

variables altogether

influence amount of CSR

reporting.


No Researcher


Result

(Summary)

5 Nor hawani,

Mustaffa M.

Zain and

Norashfah

Hanim Al-Haj

(2011)

CSR Disclosures and

Its Determinants:

Evidence from

Malaysian Government

Link Companies.

1. Variable:

Company size

(log of total

asset).

2. Time horizon is

time series.

3. Method:

Multiple

Regression

Analysis.

1. Variable:

Company age,

profitability (net profit

after tax over sales),

leverage (total

liabilities/total assets).


reporting using 4

categories (Belkaoui &

Karpik, 1999) namely:

social disclosure scale

by ernst and ernst

(1973), percentage of

prose in annual report,

quality of disclosure in

annual report and

quantity of disclosure

in annual report.

3. Object is GLCs listed

on the Malaysian Stock

Exchange.

The study found only

company size has positive

significant relationship with

CSR reporting. Thus, other

variables, on the other hand,

show an insignificant

relationship. Therefore, this

rejects the assumption that

age, profitability and

leverage can influence the

level of CSR reporting.

Meanwhile, F test shows

that independent variables

have the significant

influence toward level of

CSR reporting.


No Researcher


Result

(Summary)

6 Prem Lal Joshi

and Simon

S.Gao (2009)

Multinational

Corporations’

Corporate Social and

Environmental

Disclosures (CSED) on

Web Sites.

1. Variable:

Company size

(log of total

asset).

2. Method:

Multiple

Regression

Analysis.

1. Variable:

Company size (log of

total asset & log of

total equity),


debt ratio (Risk),

auditor (big4 and non-

big4), country effect

(origin USA or non-

USA), industry type

(manufacture versus

services).


reporting using 2

categories namely

social and

enviromental.

3. Object is multinational

(MNC) on websites

year 2005.


sectional.

This research explains that

68.83 percent of the

companies were audited by

Big4 audit firms and the rest

by non-Big4 where auditor

size has relationship with

CSED. Log of assets and

profitability are significant

variables that influence

CSED on websites.


No Researcher


Result

(Summary)

7 Sylvia

Veronica

Siregar and

Yanivi

Bachtiar

(2010)

Corporate Social

Reporting: Empirical

Evidence from

Indonesia Stock

Exchange.

1. Variable:

Board size (board

of commissioner),

company size (log

of total asset),

profitability

(ROE), leverage

(DER).

2. Categories of

CSR reporting

using 6

categories (Nor

Hadi, 2011) that

are:

environmental,

community,

energy,

employee,

product, other.

3. Method:

Multiple

Regression

Analysis.

1. Variable:

Board size (board of

commissioner and

board of director),

foreign ownership.

2. To measure CSR using

CSR reporting index

(CSDI) and CSR

disclosure length

(CSDL).

3. Object is public firms

year 2003.


sectional.

Evidence was found that

board size positively affects

CSR reporting and also

relationship between board

size and CSR reporting in

concave (board

commissioners’ size has

positive and concave

relationship with CSDI,

whereas, board of directors’

size has a positive and

concave relationship with

CSDL). Foreign ownership,

Profitability and leverage

have no significant affect on

CSR reporting. Only firm

size has a positive effect on

CSR reporting. Then, as

simultaneous, all

independent variables can

influence the level of CSR

reporting.


No Researcher


Result

(Summary)

8 Tamoi Janggu,

Corina Joseph,

and Nero Madi

(2007)

The Current State of

Corporate Social

Responsibility Among

Industrial Companies

in Malaysia.

1. Time horizon is

time series.

1. Variable:

Company size

(firm’s turnover),


leverage (total

liabilities/total assets),

audit Firm, ownership,

directorship (new).


reporting using 4

themes human

resources, community

involvement, product

and environment.

3. Object is industrial

companies listed on the

Malaysian Stock

Exchange (MSE) year

1998-2003.

CSR reporting is positively

related to firm size and

profitability. While, there is

negative relationship

between CSR reporting and

leverage. Size of audit firm

indicated that it does not

have influence on CSR

level. Then, as

simultaneous, all

independent variables can

influence the level of CSR

reporting.

50

C. Logical Framework

Figure 2.1

Conceptual Framework of Study

Situational Phenomenon:

There are some real cases in the field at

national scale about the negative impact of

company activities that significantly affect the

problem of social environment and physical

environment, which can cause long-term social

cost and borne by society.

Theoritical Phenomenon:

The government (Indonesia’s House of

Representatives) issued Limited Liability

Company Law No. 40 year 2007. In article 74

notes that a company having its business

activities in the field of and/or related to

natural resources shall be obliged to perform

its social and environmental responsibility.

Descriptive Statistics

“Board Size, Company Size, Profitability and Leverage On Corporate Social

Responsibility Reporting In The Annual Report (Empirical Evidence of Mining Companies

Listed In Indonesia Stock Exchange Period 2009 – 2011)”

Board Size (X1)

Company Size (X2)

Profitability (X3)

Leverage (X4)

Corporate Social

Responsibility

Reporting (Y)

Conclusion

Multiple Regression Analysis (Hypothesis Test namely

Determination Coefficient Test, F test and T test.)

Normality Test

Clasical Assumption Test

51

D. Hypothesis

From the explanation concern with this research, hypothesis that can be

formulated as follows:

1. Board Size and CSR Reporting

Board size relates to total of board of commissioners’ and board of

directors’ size. Collier and Gregory (1999) cited in Bactiar and Siregar

(2010) and Siregar and Sitepu (2009:4) argued that larger board of

commisioners’ size and directors’ size will make it easier to control the

CEO and the monitoring process will be more effective. So, larger board

size will have positive influence on CSR.

Result of research conducted by Bachtiar and Siregar (2010),

Sembiring (2005), Siregar and Sitepu (2009) indicated that board size

positively affects corporate social responsibility reporting.

Ha1: Board size significantly affects CSR reporting.

2. Company Size and CSR Reporting

Company size can be measured with using total revenue, total

units sold / volume, total assets, sales, capital from company, capital

employed, turnover, number employees, company’s market value and

equity. Theoretically, larger companies tend to receive more attention from

the public and are under greater public pressure to exhibit social

responsibility (Cowen et al. (1987) cited in Gao and Joshi (2009:33)).

Larger companies can be expected to disclose more social and

environmental information to prove their corporate citizenship, thereby

52

legitimizing their existence. That is because additional disclosure may

influence society’s perception about the company (Neu et al. (1998) cited

in Gao and Joshi (2009:33)).

The study is done by Al-Haj et al. (2011), Darwis (2009), Gao and

Joshi (2009), Bachtiar and Siregar (2010), Janggu et al. (2007) and

Reverte (2009) indicated that company size positively affects CSR

reporting.

Ha2: Company size significantly affects CSR reporting.

3. Profitability and CSR Reporting

Profitability is intended to measure how efficiently a firm uses its

assets and manages its operation. The focus in this group is on the bottom

line, net income. Profitability is a factor that makes the management free

and flexible to disclose social responsibility to stakeholder. The higher

company profitability rating so the bigger the social information

disclosure. In addition, according to Belkaoi and Karpik (1989) cited in

Rahman (2008:29), social care wants the company (management) to make

the company profitable. Therefore, we may assume that the profitability

has a positive relation with company social responsibility.

The result of studies of Gao and Joshi (2009), Janggu et al. (2007),

Zain & Janggu (2006) cited in Al-Haj et al. (2011) and Siregar and Sitepu

(2009) indicated that CSR reporting is positively related to profitability.

Ha3: Profitability significantly affects CSR reporting.

53

4. Leverage and CSR Reporting

Leverage ratio is usually also called solvency ratio. It used to

measure the extent of corporate assets financed by debt. In a broad sense it

is said that this ratio is used to measure a company's ability to pay its

liabilities, both short and long term. Within study of Darwis (2009:55),

Janggu et al (2007:11) and Reverte (2008:387) explain that the context of

the agency theory, Jensen and Meckling (1976) argue that more highly

leveraged firms disclose voluntary information in order to reduce their

agency costs and, as a result, their cost of capital.

Empirical evidence of Trotman and Bradley (1981) cited in Janggu

et al. (2007:11) show that positive relationship has been found between

financial leverage and the extent of social disclosure.

Ha4: Leverage significantly affects CSR reporting.

54

CHAPTER III

RESEARCH METHODOLOGY

A. Scope of Research

This research is empirical study of hypothesis testing with using

causalities research method to prove whether board size, company size,

profitability and leverage influential toward CSR reporting. Where in this

study, which act as the independent variables are factors affect CSR reporting

which taken from the company characteristics that are board size (board of

commissioner), company size (total asset), profitability (ROE), and leverage

(DER). Meanwhile, the dependent variable is CSR reporting (CSR reporting

index).

Then, this study is categorized as time series, because data are gathered

at regular intervals (one series of time) namely annual report year 2009-2010,

where the object of research all mining companies registered (listing) in

Indonesia Stock Exchange (IDX) year 2009-2011. The researcher has been

starting to colect data since August 2012 – Mei 2013.

B. Sampling Method

The research population is all mining companies that have been listed

in the Indonesia Stock Exchange year 2009-2011. This population was chosen

because it is expected to provide relevant information and to ease researcher in

completing this study based on the present condition.

The choosing of mining companies as the sample is based on report

explained that this sector is a sector that has the most extensive range of

55

stakeholders including employees, communities, investors, creditors,

government, customers, suppliers and also related to natural resources

(planet). So, it needs to perform its social disclosure. Furthermore, mining

companies are companies in accordance with article 74 in the Limited

Liability Company Law Number 40/2007 force all companies in the field of

and/or in relation to natural resources to put CSR into practice.

Sample selection is done by purposive judgment sampling namely take

a sample of the obtained information with using certain criteria (Sekaran,

2006:136). Researcher determines several criteria to take sample, namely:

1. Company publishes annual report period 2009 - 2011.

2. Company publishes corporate social reporting in annual report during the

research period.

3. Company has not been “delisted” or “suspended”.

4. Company has positive ROE

5. The annual report must use Indonesia language or English language.

Table 3.1

Sample Selection

No. Explanation Number

1. Population

33

2.

Offense of first criteria:

Companies have not published annual report

period 2009 – 2011

(10)

3.

Offense of second criteria:

Companies that didn’t reveal corporate social

reporting activity in annual report during the

research period

0

56


4. Offense of third criteria:

Companies that have been “delisted” 0

5.

Offense of fourth criteria:

Companies have negative ROE during research

period

(7)

6.

Offense of fifth criteria:

The annual report doesn’t use Indonesia language

or English language. 0

7. Total sample of company 16

8. Obsevation 3 Years

Total Sample Used in This Research 48

C. Data Collection Method

Type of data that used in this research is secondary data. Secondary

data is data source do not directly provide data to data collectors, for example,

using document (Sugiyono, 2007:137). Data collection methods in this

research is using documentation study method that is the obtained data through

annual report issued by the company year 2009-2011 and Fact Book 2010-

2012 issued by Capital Market Reference Center in Indonesia.

The obtained data, there are hard copy and soft copy. In hard copy,

source of data obtained from library of Indonesia Stock Exchange (IDX) to

obtain Fact Book 2010-2012 and annual report available to financial year 31

Dec 2009 and 2011. Then, the soft copy data obtained from website of

Indonesia Capital Market namely www.idx.co.id and website of mining

companies that obtained from. IDX is selected as the primary resource

because it is a representative capital market center in Indonesia.

57

D. Data Analysis Method

Data analysis methods that used in this research are descriptive

statistics and hypothesis test. This study is multiple regression analysis.

Therefore it will be examined with normality test, classical assumption test

and hypothesis test. To process research data, researcher uses Statistical

Package the Social Sciences (SPSS) 20.0.

1. Descriptive Statistics

Descriptive statistic is the statistic that is used to analyze sample data in a

way to describe or depict the data already collected as they are (Sugiyono,

2007:147). In this study included descriptive statistics among others are

presentation of data through the calculation of sum, minimum, maximum,

mean, and standard deviation (Ghozali, 2006:19).

2. Normality Test

According to Hair et al. (2006) cited in Adinugraha et al. (2007:128), the

purpose of the normality test is to determine whether the regression model

variables are normally distributed or not. The normality test conducted to

determine whether the inferential statistics to be used is a parametric or

non parametric statistics. In this research, to detect whether normally

distributed data or not, it can be done with using graph analysis (Ghozali,

2006:147).

58

a. Graph Analysis

According to Ghozali (2006:149) normality test can use Normal

Probability Plot (P-P Plot) namely with see at the spread of the data

(dots) on the diagonal axis from the normal chart. Basic for decision-

making are:

1) If the data spread around the diagonal line and follow the direction

of the diagonal line, so the regression model meet the normality

assumption.

2) If the data spread far from diagonal line and / or do not follow the

direction of the diagonal line, so the regression model does not

meet the normality assumption.

b. Statistical Analysis

To detect the normality of data, can also be done through statistical

analysis of the Kolmogorov-Smirnov Test (KS). K-S test is done by

making hypotheses:

H0 = The residual data is normally distributed

H1 = The residual data is not normally distributed

Basic for decision-making are:

1) Number of Kolmogorov- Smirnov significance Sig. > 0.05,

indicates the data normally distributed.

2) Number of Kolmogorov- Smirnov significance Sig. < 0.05,

indicates the data are not normally distributed

59

3. Classical Assumption Test

a. Multicolinearity Test

According to Ghozali (2006:95), the aim from multicolinearity test is

to test whether the regression model found a correlation among the

independent variables. A good regression model should there is no

correlation among independent variables. In this research, to detect the

presence or absence of multicolinearity can be done by calculating

value of variance inflation factor (VIF) of each independent variable.

If the variance inflation factor (VIF) greater than 10, Ho is rejected

that there is multicolinearity, otherwise if variance inflation factor

(VIF) less than 10, Ho is accepted that there is no multicolinearity.

b. Heteroskedastisity Test

According to Ghozali (2006:125), the aim from heteroskedastisity test

is to test whether the regression model occur the variance inequality of

the residual from one observation to another observation. If the

variance from residual of one observation to other observations is

fixed, it is called homokedastisity and if it different called

heteroskedastisity. A good regression model is homokedastisity or

there is no heteroskedastisity. In this study, heteroskedastisity test can

be viewed with using the chart Scatterplot between the predicted value

of dependent variable (ZPRED) and residual (SRESID). Y-axis

becomes the axis that has been predicted and the X axis is the residual

60

(Y predicted-Y actually) that has been in the studentized. Basic for

decision-making are as follows:

1) If there is a certain pattern, like dots that are forming a regular

pattern (wavy, widening and then narrow), then it indicates that

there is heteroskedastisity.

2) If there is no clear pattern, as well as the dots spread above and

below zero (0) on the Y axis, then it indicates that there is no

heteroskedastisity or homokedastisity.

c. Autocorrelation Test

Autocorrelation test aims to test whether a regression model there is a

correlation between data in variable. A good regression model is a

regression that is free from autocorrelation. In this research,

autocorrelation test is done by using the Durbin-Watson (Santoso

(2000) cited in Nadya (2011:49)).

Basis for decision-making autocorrelation test is shown in the

following table:

Table 3.2

Durbin Watson Autocorrelation Measurement

Durbin Watson Conclusion

Less than -2 Autocorrelation positive

available

(-2) – (2) There is no autocorrelation

Above +2 Autocorrelation negative

available

61

4. Multiple Regression Analysis

Multiple regression analysis used to test the effect of two or more

independent variables toward the dependent variable (Ghozali, 2006:7).

Independent variables in this research are board size, company size,

profitability and leverage and dependent variable is corporate social

responsibility reporting. Structural equation model that proposed as an

empirical model is as follows:

Notation:

Y = CSR Reporting

α = Intercept

β1.... β4 = Regression coefficient

X1 = Board Size

X2 = Company Size

X3 = Profitability

X4 = Leverage

℮ = Error term (permanent mistake estimate)

Y = α + β1X1 + β2X2 + β3X3 + β4X4 + ℮

62

5. Hypothesis Test

Hypothesis testing in this research done with Determination

Coefficient Test, F test and t test.

a. Determination Coefficient Test

Determination coefficient testing done to measure the magnitude

contribution of independent variables toward the dependent variable.

Determination coefficient value is between 0 and 1. The value closes

to 1, it means that independent variables provide almost of all needed

information to predict variation of dependent variable. In this study,

determination coefficient testing done with sees the value of Adjusted

R2 (Ghozali, 2006:87).

b. Simultaneous Regression Analysis (Test - F)

Test of F statistic is basically indicates whether independent variables

altogether can influence the dependent variable (Ghozali, 2006:88).

Basic for decision-making are as follows:

Decision-making based on probability values:

1) If the sig. (F) < 0.05, Ho is rejected, Ha failed to be rejected.

2) If the sig. (F) > 0.05, Ho is accepted, Ha failed to be accepted.

c. Partial Regression Analysis (Test - t)

Test of t statistic performed to determine the effect of one independent

variable toward the dependent variable (Ghozali, 2006:88). Basic for

decision-making:

Decision-making based on probability values:

63

1) If the value Significance < error rate (α=0.05), then Ho is rejected.

2) If the value Significance > error rate (α = 0.05), then Ho is

accepted.

E. Operationalization Variable

Referring to the research hypothesis, there are five variables under

study, i.e. board size, company size, profitability, leverage and CSR reporting.

According to Sekaran (2003) cited in Amin (2011:514), the four

variables are measured by formulating operational definition. Defining

variable operationally involves the following steps: determine the variables,

define the dimension (sub-variable), and define elements (indicators), and

determine the relevant measurement scale (see Table 3.3).

1. Board Size

Within research of Bacthiar and Siregar (2010:244), Indonesia

Country adopts a two-tier board system, board size relates to total of board

of commissioners’ and board of directors’ size.

Collier and Gregory (1999) cited in Bactiar and Siregar (2010) and

Siregar and Sitepu (2009:4) argued that larger board of commisioners’ size

and directors’ size will make it easier to control the CEO and the

monitoring process will be more effective. But, a very large board could

limit the communication and coordination among board members and

consequently will hamper monitoring process. So, larger board size will

have positive influence on CSR, but a very large board size will have

negative effect on it.

64

Result of research conducted by Bachtiar and Siregar (2010),

Sembiring (2005), Siregar and Sitepu (2009) indicated that board size

positively affects corporate social responsibility reporting.

In this study, researcher only using board of commissioner as one

of factors related to CSR reporting in the companies’ annual reports.

2. Company Size

Company size is the independent variable which is usually used to

explain disclosure variation in the company financial report. According to

Gao and Joshi (2009:39) noted that to measure the company size can be

measured in a number of ways, such as total asset, capital employed,

turnover, number employees, company’s market value and equity.

The result of study of Al-Haj et al. (2011:194) that one of

benchmarks to indicate whether company is big or small with see its total

asset. Result of many studies noted that company size has a positive effect

on CSR reporting. This indicates that, the bigger, in terms of size a

company is, the more the company discloses its social and environmental

information.

In this study, company size is measured by ratio scale and

researcher use total assets as company size. The company size variable is

Size= Board Size

Size= Total Board of Commissioner

65

presented in the form of logarithms, because the value and its spread is

large compared to other variables.

The measurement with using the formula:

3. Profitability

According to Jordan et al. (2010:61), profitability is intended to

measure how efficiently a firm uses its assets and manages its operation.

The focus in this group is on the bottom line, net income.

Empirical evidence of study of Gao and Joshi (2009), Janggu et al.

(2007), Mohamed Zain & Janggu (2006) cited in Al-Haj et al. (2011) and

Siregar and Sitepu (2009) find the results provides strong evidence that the

corporate social reporting is positively related to companies’ profitability.

This indicates that, the bigger, in terms of size a company is, the more the

company discloses its social and environmental information.

In this study, profitability is measured by ratio scale and researcher

use return on assets (ROE) to measure the profitability variable. According

to Ross, et al. (2006:65), ROE is measure of how the stockholders fared

during the year, because benefiting shareholders is our goal, ROE is, in an

accounting sense, the true bottom-line measure of performance.

Size= Total Assets of Company

Size= Log Total Assets of Company

66

The measurement with using the formula:

4. Leverage

Leverage ratio is usually also called solvency ratio. According to

Ross et al. (2006:60), leverage is intended to address the firm’s long-run

ability to meet its obligations.

Jensen and Meckling (1976) cited in Darwis (2009:55), Janggu et

al. (2007:11) and Reverte (2008:387) argue that more highly leverage

firms disclose voluntary information in order to reduce their agency costs

and, as a result, their cost of capital.

Thus, empirical evidence of Trotman and Bradley (1981) cited in

Janggu et al. (2007:11) show that positive relationship has been found

between financial leverage and the extent of CSR reporting.

In this study, researcher use debt to equity ratio (DER). According

to Kasmir (2012:157), debt to equity ratio is a ratio used to assess the debt

to equity. This ratio is useful to know the amount of funds provided by

creditors with the owner of the company and also provides a general

indication of the company's financial viability and risk.

Formula for calculating leverage (DER) is as follows:

ROE=

Debt to Equity Ratio (DER) =

67

5. CSR Reporting

According to Douglas et al. (2004) cited in P and W (2011:46) and

Zadek et al. (1997) cited in Hassan and Harahap (2010:205) that CSR

reporting is variously called CSR disclosure, social accounting, corporate

social reporting, social auditing, social and environmental reporting, social

review, or sustainability reporting.

According to Gray et al (1987) cited in Bachtiar and Siregar (2010)

stated that corporate social responsibility reporting is a process of

communicating the social and environmental effects of organizations’

economic actions to particular interest groups within society and to society

at large.

This variable is measured by ratio scale. To measure CSR

reporting, we use content analysis method. According to Al- Haj et al.

(2011), content analysis method is used to measure the CSR disclosure

practices of companies. This method has been used in the social

environmental reporting (SER) literature to evaluate the extent of

disclosure of various items as a process of codifying the text of a piece of

writing in annual reports of listed companies.

This checklist is modified from a checklist used by Bachtiar and

Siregar (2010), one of measures is number of CSR reporting items stated

in Index. The CSR reporting checklist include six subjects involve

environment, community, energy, employee, product and others. They

chosen because of result from research of Nor Hadi (2011) found that

68

many companies in Indonesia have done CSR activities involve 6

dimensions with the total of CSR reporting items is 67 (see Appendix 1).

If the item is disclosure within corporate annual report is given a

score of 1 and if the item is no disclosure within corporate annual reports

is given a score of 0.

The measurement with using formula:

Source: Darwis (2009)

Notation:

CSRRIj = Corporate Social Responsibility Reporting Index of

Company j

nj = Number of Disclosure Items to Company j, nj ≤ 67

ΣXij = (1 = if item i disclosed and 0 = if item i is not disclosed),

thereby, 0 ≤ CSRDIj ≤ 1

CSR Reporting Indexj=

Continued on the next page

69

In table 3.3 below will explain the four variables are measured by formulating operational definition. Defining variable

operationally involves the following steps: determine the variables, define the dimension (sub-variable), and define elements

(indicators), and determine the relevant measurement scale

Table 3.3

Operational Variable

Variable Sub Variable Indicator Scale

Board Size

“board size relates to total of board

of commissioners’ and board of

directors’ size (Bachtiar and

Siregar (2010:244))”

Board of Commissioner

Total Board of Commissioner

Ratio

Company Size

“Company size can be measured

with using total asset, capital

employed, turnover, number

employees, company’s market

value and equity (Gao and Joshi

(2009))”

Total Assets

Log of Total Assets

Ratio

Continued on the next page

70

Variable Sub Variable Indicator Scale

Profitability

“Profitability is intended to

measure how efficiently a firm uses

its assets and manages its

operation. The focus in this group

is on the bottom line, net income

(Jordan et al. (2010))”

ROE

ROE=

Ratio

Leverage

“Leverage is intended to address

the firm’s long-run ability to meet

its obligations (Ross et al. (2006))”

Debt to Equity Ratio

DER=

Ratio

CSR Reporting

“a process of communicating the

social and environmental effects of

organizations’ economic actions to

particular interest groups within

society and to society at large

(Gray et al. (1987) cited in Bachtiar

& Siregar (2010))”

The six dimensions:

1. Environmental

2. Community

3. Energy

4. Employee

5. Product

6. Other

CSR Reporting Indexj=

Ratio

71

CHAPTER IV

ANALYSIS AND DISCUSSION

A. Overview of Research Objects

1. Description of Research Object

The research population is all mining companies that have been

listed in the Indonesia Stock Exchange year 2009-2011. This population

was chosen because it is expected to provide relevant information and to

ease researcher in completing this study based on the present condition.

Then, the choosing of mining companies as the sample is based on

report explained that this sector is a sector that has the most extensive

range of stakeholders including employees, communities, investors,

creditors, government, customers, suppliers and also related to natural

resources (planet). So, it needs to perform its social disclosure.

Furthermore, mining companies are companies in accordance with article

74 in the Limited Liability Company Law Number 40/2007 force all

companies in the field of and/or in relation to natural resources to put CSR

into practice.

In 2009-2011, the mining companies that go public in Indonesia

Stock Exchange are 33 companies. The data in this research includes 16

mining companies which were selected by using purposive judgment

sampling in the period 2009 - 2011. So, the total sample are 48 data

observations.

72

Table 4.1 below presents the sample selection process based on

established criteria:

Table 4.1

Sample Selection


1. Population

33

2.

Offense of first criteria:

Companies have not published annual report

period 2009 – 2011

(10)

3.

Offense of second criteria:

Companies that didn’t reveal corporate social

reporting activity in annual report during the

research period

0

4. Offense of third criteria:

Companies that have been “delisted” 0

5.

Offense of fourth criteria:

Companies have negative ROE during research

period

(7)

6.

Offense of fifth criteria:

The annual report doesn’t use Indonesia language

or English language. 0

7. Total Sample of Companies 16

8. Observation (Years) 3

Total Sample Used in This Research 48

Source : Fact Book 2010 - 2012

2. Description of Selected Companies’ Sample

Sample selection is done by purposive judgment sampling namely

take a sample of the obtained information with using certain criteria.

Samples selected for the company that presents the data required in this

study, such as board size, company size, profitability (positive ROE),

leverage and published annual report period 2009 – 2011 to see the

73

dislcosure of CSR. The following companies are chosen as the study

sample was as follows:

Table 4.2

List of Companies’ Sample

3

Source : Fact Book 2010 – 2012

Table 4.3 below, can be seen that selected sample is spread

randomly and represent each of sub sector on 4 sub sector. The most

representing company in this research is coal mining sub sector as many as

7 companies (43,75%).

No Code Company Name

1. ADRO Adaro Energy Tbk

2. BYAN Bayan Resource Tbk

3. BUMI Bumi Resource Tbk

4. ITMG Indo Tambangraya Megah Tbk

5. PTRO Petrosea Tbk

6. KKGI Resource Alam Indonesia Tbk

7. PTBA Tambang Batubara Bukit Asam Tbk

8. ELSA Elnusa Tbk

9. MEDC Medco Energi Internasional Tbk

10. RUIS Radiant Utama Interinsco Tbk

11. ANTM Aneka Tambang (Persero) Tbk

12. CITA Cita Mineral Investindo Tbk

13. INCO Intr Nickel Ina Tbk / Vale Ina Tbk

14. TINS Timah (Persero) Tbk

15. CTTH Citatah Industri Marmer Tbk

16. MITI Mitra Investindo Tbk

74

Table 4.3

Distribution of Sample According to Sub Sector

Source: Processed Data

B. Analysis and Discussion

1. Descriptive Statistics Analysis

In this study, the corporate social responsibility reporting consist of

6 themes involve environment, community, energy, employee, product and

others with the total amount of CSR reporting items are 48. Then,

independent variables in this study are 4 variables used as predictor in this

study namely board size (board of commissioner), company size (log of

total asset), profitability (ROE) and leverage (DER). Description of

research variables are as follow:

Number of

Sub Sector Sub Sector Frequency Percentage

21 Coal Mining 7 43,75%

22

Crude

Petroleum &

Natural Gas

Production

3 18,75%

23

Metal and

Mineral

Mining

4 25,00%

24 Land/Stone

Quarrying 2 12,50%

Total 16 100%

75

Table 4.4

Descriptive Statistics

Statistics

CSR_Reporting Board_Size Company_Size Profitability Leverage

N Valid 48 48 48 48 48

Missing 0 0 0 0 0

Mean ,6863 5,2500 12,6193 ,2322 1,3306

Std. Deviation ,11547 1,89624 ,80794 ,15646 1,10538

Minimum ,46 2,00 11,04 ,01 ,21

Maximum ,90 10,00 13,90 ,68 5,26

Sum 32,94 252,00 605,73 11,14 63,87

Source: Secondary Data Output from SPSS 20.0

Table 4.4 above describes the variables used in this study

consisting of CSR reporting (CSR reporting_index), board size (board of

commissioner), company size (log total assets), profitability (ROA), and

Leverage (DER).

CSR reporting variable is measured by CSR reporting_index with

using 48 items of disclosure and obtained a mean is 0,6863 or 68,63%. Its

means that in three period in the annual report, the company has revealed

as much as 68,63% or about 32 to 33 items in the annual report on

corporate social reporting conducted. Then, the minimum value of total

CSR disclosure is 0,46 or 46% is owned by PT. Citatah Industri Marmer

Tbk (31 disclosure) and the maximum value of total CSR reporting is 0,90

or 90% is owned by PT. Aneka Tambang (Persero) Tbk (60 disclosure), as

well as having a relatively small standard deviation namely 0,11547 or

11,55%.

76

Then, board size variable shows the minimum value of total assets

is 2 for PT Cita Mineral Investindo Tbk year 2009-2011 and the maximum

value is 10 for PT. International Nickel Indonesia Tbk year 2009 – 2010,

as well as having a mean is 5,25 and the standard deviation is 1.89624

which is lower than mean value, indicating that data have low deviation

which means the data is distributed normally.

The results of the analysis using descriptive statistic on company

size variable that proxied by total assets (log total asset) shows a mean is

12,62. The minimum value of total assets is 11,04 for PT. Mitra Investindo

Tbk year 2009 and the maximum value is 13,90 for PT. Bumi Resources

Tbk year 2010, as well as having a relatively small standard deviation

namely 0,80794. It shows that companies have total assets are large

enough where the mean is almost close to the maximum value.

The results of the analysis using descriptive statistic on profitability

variable that measured by return on equity (ROE) shows a mean is 0,2322

or 23,22%. The minimum value of ROE is 0,01 or 1% for PT. Citatah

Industri Marmer Tbk year 2011 and the maximum value is 0,68 or 68% for

PT. Resource Alam Indonesia Tbk year 2011, as well as having a

relatively small standard deviation namely 0,15646 or 15,646%. This

suggests that companies have a relatively small ROE because the mean

value is quite far from the maximum value.

Afterward, the results of the analysis using descriptive statistic on

leverage variable that measured by Debt to Equity Ratio (DER) shows a

77

mean is 1,3306 or 133,06%. The minimum value of DER 0,21 or 21% for

PT. Aneka Tambang (Persero) Tbk year 2009 and the maximum value is

5,26 or 526% for PT. Bumi Resources Tbk year 2011, as well as having a

relatively small standard deviation namely 1,10538 or 110,538%. It shows

that companies have a relatively small DER because the mean value is

quite far from the maximum value.

2. Normality Test

The purpose of the normality test is to determine whether the

regression model variables are normally distributed or not. A good

regression model is to have normal or nearly normal distribution. In this

research, to detect whether normally distributed data or not, it can be done

with using graph analysis namely histogram graph Normal Probability

Plot (P-P Plot) and statistical analysis namely kolmogorov-smirnov test.

Figure 4.1

Normality Test Result

Source : Secondary Data Output from SPSS 20.0

78

From result of figure 4.1 shows that data spread around the

diagonal line and follow the direction of the diagonal line. So, it can be

concluded that the regression model meet the normality assumption.

Table 4.5 below will show the result of statistical analysis namely

kolmogorov-smirnov test:

Table 4.5

Kolmogorov-Smirnov Test

The result of Kolmogorov-Smirnov test on table 4.5 also shows that

the value of Kolmogorov-Smirnov 0.636 with the level of significant

probability 0.814, the value of p > 0.05. So the residual data is distributed

normally. Therefore, regression model used in this research has met the

normality test assumption.

One-Sample Kolmogorov-Smirnov Test

Unstandardized

Residual

N 48

Normal Parametersa,b

Mean 0E-7

Std. Deviation ,07829805

Most Extreme Differences

Absolute ,092

Positive ,083

Negative -,092

Kolmogorov-Smirnov Z ,636

Asymp. Sig. (2-tailed) ,814

a. Test distribution is Normal.

b. Calculated from data.


79

3. Classical Assumption Test

a. Multicolinearity Test

The aim from multicolinearity test is to test whether the

regression model found a correlation among the independent variables.

A good regression model should there is no correlation among

independent variables. In this research, to detect the presence or

absence of multicolinearity can be done by calculating value of

variance inflation factor (VIF) of each independent variable.

Table 4.6

Multicolinearity Test Result

Based on table 4.6 above, the result shows that value of variance

inflation factor (VIF) of each independent variable is less than 10. So, it

can be concluded that there is no multicolinearity.

Coefficientsa

Model Collinearity Statistics

Tolerance VIF

1

Board_Size ,504 1,986

Company_Size ,504 1,986

Profitability ,930 1,076

Leverage ,929 1,076

a. Dependent Variable: CSR_Reporting

Source: Secondary Data Output from SPSS 20.0

80

b. Heteroskedastisity Test

The aim from heteroskedastisity test is to test whether the

regression model occur the variance inequality of the residual from one

observation to another observation. A good regression model is

homokedastisity or there is no heteroskedastisity. In this research,

heteroskedastisity test can be viewed with using the chart Scatterplot

between the predicted value of dependent variable (ZPRED) and

residual (SRESID).

Figure 4.2

Heteroskedastisity Test Result


From result of figure 4.2 shows that there is no clear pattern, as

well as the dots spread above and below zero (0) on the Y axis. So, it

can be concluded that there is no heteroskedastisity (homokedastisity).

81

c. Autocorrelation Test

Autocorrelation test aims to test whether a regression model

there is a correlation between data in variable. A good regression model

is a regression that is free from autocorrelation. In this research,

autocorrelation test is done by using the Durbin Watson (DW test).

Table 4.7

Autocorrelation Test Result

Model Summaryb

Model R R Square Adjusted

R Square

Std. Error of

the Estimate Durbin-Watson

1 ,735a ,540 ,497 ,08186 1,243

a. Predictors: (Constant), Leverage, Board_Size, Profitability, Company_Size

b. Dependent Variable: CSR_Reporting


Based on table 4.7 above, the result shows that value of Durbin-

Watson (DW) is 1,243 (DW = (-2) – (+2)). So, it can be concluded that

there is no autocorrelation.

4. Hypothesis Test

a. Multiple Regression Analysis

Multiple regression analysis used to test the effect of two or

more independent variables toward the dependent variable. In this

research, Independent variables are board size (board of

commissioner), company size (log of total asset), profitability (ROE)

and leverage (Debt to Equity Ratio) and dependent variable is

corporate social responsibility reporting (CSR reporting_index).

82

Table 4.8

Result of Multiple Regression Analysis

Coefficientsa

Unstandardized Coefficients

B Std. Error

1

(Constant) -,781 ,234

Board_Size -,009 ,009

Company_Size ,118 ,021

Profitability ,078 ,079

Leverage ,004 ,011



Based on table 4.8 above, the result of multiple regression

analysis with using significance 5% obtained the following equation:

From the multiple regression analysis above, it can be explained

for each variable as follows:

1) Regression model shows that the constant of -0,781 states that if

the independent variables assumed to be constant, the average of

level of CSR reporting are -0,781.

2) Regression coefficient of board size variable (X1) has negative

value namely -0,009. It shows that the influence of board size on

the CSR reporting is negative or opposite direction, which means

that if the value of board size variable is increased by 1%, then

the reporting of CSR will decrease by -0,9%.

CSR Reporting = -0,781 – 0,009X1 + 0,118X2 + 0,078X3 + 0,004X4

83

3) Regression coefficient of company size variable (X2) states that

each additional 1% of total assets will increase the reporting of

CSR in the annual report of 11,8%.

4) Regression coefficient of profitability variable (X3) states that

each additional 1% ROE will increase reporting of CSR in the

annual report of 7,8%.

5) Regression of coefficient of leverage variable (X4) states that

each additional 1% DER will increase reporting of CSR in the

annual report of 0,4%.

b. Hypothesis Test

1) Determination Coefficient Test

Determination Coefficient Testing done to determine the

magnitude contribution of independent variables toward the

dependent variable with sees the value of Adjusted R2.

Table 4.9

Result of Determination Coefficient Test

Model Summary

Model R R Square Adjusted R

Square

Std. Error of the

Estimate

1 ,735a ,540 ,497 ,08186

a. Predictors: (Constant), Leverage, Board_Size, Profitability,

Company_Size



Based on table 4.9 above, the result shows that the

correlation coefficient (R) for 0,735, which means that the

correlation between the dependent variable with the independent

84

variables are strong based on the value of R is above 0,5.

Adjusted R Square value or coefficient of determination is 0,497

or 49,7%. It means that magnitude contribution of independent

variables toward the dependent variable is 49,7%, while 50,3%

can be explained by another variables that are not included in this

regression analysis.

2) Simultaneous Regression Analysis (Test - F)

Test of F statistic is basically indicates whether

independent variables altogether can influence the dependent

variable. In this research, F test done with sees probability value.

Table 4.10

Result of F Test

ANOVAa

Model Sum of

Squares df

Mean

Square F Sig.

1

Regression ,339 4 ,085 12,629 ,000b

Residual ,288 43 ,007

Total ,627 47


b. Predictors: (Constant), Leverage, Board_Size, Profitability,

Company_Size


Based on table 4.10 above, the result of F test shows that

value of F is 12,629 and p-value = 0,000. P-value shows a very

good result. Its mean that the variable of CSR reportig is

simultaneously influenced by board size, company size,

profitability and leverage (Ho is rejected).

85

3) Partial Regression Analysis (Test-t)

Test of t statistic performed to determine the effect of one

independent variable toward the dependent variable. In this

research, t test done with sees probability value.

Table 4.11

Result of T Test

Coefficientsa

Model

Unstandardized

Coefficients

Standardized

Coefficients t Sig.

B Std.

Error Beta

1

(Constant) -,781 ,234 -3,330 ,002

Board_Size -,009 ,009 -,151 -1,036 ,306

Company_Size ,118 ,021 ,827 5,673 ,000

Profitability ,078 ,079 ,106 ,992 ,327

Leverage ,004 ,011 ,043 ,401 ,690



Based on table 4.11 above, the result of t test can be

concluded based on probability value (value significance < error

rate (α=0,05) = Ho is rejected) which will be explained as below:

a) Board Size

Based on table 4.11 above, the result of t test toward variable

of board size (board of commissioner) shows that probability

value is 0,306 > 0,05. It means that board size is not

influential of corporate social responsibility reporting (Ho is

accepted).

86

b) Company Size


of company size (log of total assets) shows that company size

value is 0,000 < 0,05. It means that company size effect on

CSR reporting (Ho is rejected).

c) Profitability


of profitability (ROE) shows that probability value is 0,327 >

0,05. It means that profitability is not influential of corporate

social responsibility reporting (Ho is accepted).

d) Leverage


of leverage (DER) shows that probability value is 0,690 >

0,05. It means that leverage is not influential of corporate

social responsibility reporting (Ho is accepted).

From the result testing above can be concluded with the

explanation below, that are:

Table 4.12

Result of Partial Test

No. Name of Variables P-Value Status (Ho)

1 Board Size (X1) 0,306 Accepted

2 Company size (X2) 0,000 Rejected

3 Profitability (X3) 0,327 Accepted

4 Leverage (X4) 0,690 Accepted

Source: Processed Data

87

5. Interpretation

This study aims to get empirical evidence related to effect of

company characteristics (board size, company size, profitability, and

leverage) toward corporate social responsibility reporting of mining

companies in Indonesia. The result of partial test can be seen in Table

4.11.

a. The Influence of Board Size to CSR Reporting

The test results in this study found that board size is expressed

in total of board commissioner shows a significant result is p-value =

0.306. It shows that board size variable is insignificant factor in

measuring the association with CSR reporting (Ha1 is rejected).

Based on research of Collier and Gregory (1999) cited in Bactiar

and Siregar (2010) and Siregar and Sitepu (2009:4) argued that larger

board of commisioners’ size and directors’ size will make it easier to

control the CEO and the monitoring process will be more effective.

But, a very large board could limit the communication and

coordination among board members and consequently will hamper

monitoring process. So, larger board size will have positive influence

on CSR, but a very large board size will have negative effect on it.

Its mean that board size (board commissioner) in mining

companies is very large so that could limit the communication and


monitoring process. So, larger board size will have negative influence

88

on CSR (Collier and Gregory (1999) cited in Bachtiar and Siregar

(2010:244).

b. The Influence of Company Size to CSR Reporting

Company size is the independent variable which is usually used

to explain disclosure variation in the company’s annual report.

Generally, the larger size (total assets) of company, the greater of

information required to be disclosed than small firms.

Generally, large firms have greater agency costs. To reduce the

agency costs, company tend to disclose more extensive information.

Then, theoretically, larger companies tend to receive more attention

from the public and are under greater public pressure to exhibit social

responsibility. Larger companies can be expected to disclose more

social and environmental information to prove their corporate

citizenship, thereby legitimizing their existence. That is because

additional disclosure may influence society’s perception about the

company. Later on, size of company increase, the more amount of

information is disclosed, and there is greater ability of such a firm to

engage in CSR activities.

The test results in this study found that company size is

expressed in total assets and reduced its magnitude by using the log of

total assets shows a significant result is p-value = 0.000. So that, the

result of this study supports the hypothesis (Ha2 is accepted) namely

company size significantly affects CSR reporting.

89

So, it can be concluded that company size is significant factor to

measure disclosure of CSR information, especially mining companies

with high total assets tend to disclose more CSR information in annual

report.

The result of this study supports the result of previous research

had been done by Al-Haj et al. (2011), Bachtiar and Siregar (2010),

Darwis (2009), Gao and Joshi (2009), Janggu et al. (2007) and

Reverte (2009) found that company size positively affects CSR

reporting.

c. The Influence of Profitability to CSR Reporting

Profitability is intended to measure how efficiently a firm uses

its assets and manages its operation. The focus in this group is on the

bottom line, net income. Profitability is a factor that makes the

management free and flexible to disclose social responsibility to

stakeholder (Heinze (1976) and Hackston and Milne (1996) cited in

Rahman (2008:29)). The higher company profitability rating so the

bigger the social information disclosure (Bowman and Haire, 1976;

Preston, 1978; Hackston and Milne, 1996; cited in Rahman, 2008:29).

According to Shinghvie & Desai (2001) cited in Sudaryono

(2007:112) stated that firms with high profitability will encourage

managers to provide more detailed information so that it can convince

investors and creditors of the company's profitability.

90

Nevertheless, the result of this study is not proper with theory

above because p-value = 0,327. It shows that profitability variable is

insignificant factor in measuring the association with CSR reporting in

annual report of mining companies (Ha3 is rejected).

The result of this study proper with legitimacy theory, namely

one of the arguments in the relationship between profitability and

level of CSR reporting is that when a company has a high rate of

profitability, the company (management) considers not need to report

things that can disturb the information about the company's financial

success. Conversely, when low rate of profitability, company hopes to

the users of report will read good news of company's performance, for

example in the social sphere and thus investors will still invest in the

company and also other investors will be interested to investee in its

company. It can be concluded that profitability has a negative

relationship of the level of CSR reporting.

So, the conclusion is mining companies in Indonesia year

2009-2011, the profitability measured by ROE is insignificant factor

to measure disclosure of CSR information in annual report.


had been done by Al-Haj et al. (2011), Bachtiar and Siregar (2010),

Darwis (2009), Rahman (2008) and Reverte (2009) which indicated

that profitability negatively affects CSR reporting.

91

d. The Influence of Leverage to CSR Reporting

Leverage is one of company characteristics that influence

corporate social responsibility reporting practice (Al Haj et al.,

2011:183). There are only few studies conducted to find out the

relationship between social responsibility and financial leverage of the

corporation.

Based on agency theory argue that more highly leveraged firms

disclose voluntary information in order to reduce their agency costs

and, as a result, their cost of capital (Jensen and Meckling (1976) cited

in Darwis (2009:55), Janggu et al (2007:11) and Reverte (2008:387)).

Nevertheless, the result of this study is not proper with theory

above because p-value = 0,690. It shows that leverage variable is

insignificant factor in measuring the association with CSR reporting

(Ha3 is rejected).

So, the conclusion is mining companies in Indonesia year

2009-2011, the leverage measured by DER is insignificant factor to

measure disclosure of CSR information in annual report where

management with high leverage will reduce its CSR to avoid creditor

scrutiny (agency theory).


had been done Al-Haj et al. (2011), Bachtiar and Siregar (2010),

Darwis (2009), Janggu et al. (2007), Rahman (2008), Reverte (2009),

92

Siregar and Sitepu (2009) show that leverage negatively affects CSR

reporting.

93

CHAPTER V

CONCLUSION

A. Conclusion

This research examines of board size, company size, profitability, and

leverage on corporate social responsibility reporting in the annual report.

Analyses are performed using multiple regression analysis with the program

Statistical Package for Social Science (SPSS) 20.0. The data in this research

include 16 mining companies period 2009 – 2011 where the total of samples

are 48 mining companies.

Test results and discussion in the previous chapter can be concluded as

follows:

1. Based on the multiple regression result, board size does not have

significant influence towards the CSR reporting. The results of this

research support the research that has been done by Collier and Gregory

(1999) cited in Bachtiar and Siregar (2010:244).

2. Based on the multiple regression result, company size has significantly

positive influence towards the CSR reporting. The results of this research

support the researches that have been done by Al-Haj et al. (2011),

Bachtiar and Siregar (2010), Darwis (2009), Gao and Joshi (2009), Janggu

et al. (2007) and Reverte (2009).

3. Based on the multiple regression result, profitability does not have

significant influence towards the CSR reporting. The results of this

94

research support the researches that have been done by Al-Haj et al.

(2011), Bachtiar and Siregar (2010), Darwis (2009), Rahman (2008) and

Reverte (2009).

4. Based on the multiple regression result, leverage does not have significant

influence towards the CSR reporting. The results of this research support

the researches that have been done by Al-Haj et al. (2011), Bachtiar and

Siregar (2010), Darwis (2009), Janggu et al. (2007), Rahman (2008),

Reverte (2009), Siregar and Sitepu (2009).

B. Research Finding Implication

1. Board size variable is insignificant factor in measuring the relation with

CSR reporting. It implies that board size (board commissioner) in mining

companies is very large so that could limit the communication and


monitoring process. So, larger board size will have negative influence on

CSR reporting.

2. Company size significantly affects CSR reporting. it can be concluded that

company size is significant factor to measure disclosure of CSR

information, especially mining companies with high total assets tend to

disclose more CSR information in annual report than mining companies

with lower total assets. It implies that large firms have greater agency costs.

To reduce the agency costs, company tend to disclose more extensive

information. Theoretically, larger companies tend to receive more attention

95

from the public and are under greater public pressure to exhibit social

responsibility. Larger companies can be expected to disclose more social

and environmental information to prove their corporate citizenship, thereby

legitimizing their existence.

3. Profitability measured by ROE is insignificant factor to measure disclosure

of CSR information in annual report of mining companies. It implies that

based on legitimacy theory, namely one of the arguments in the relationship

between profitability and level of CSR reporting is that when a company

has a high rate of profitability, the company (management) considers not

need to report things that can disturb the information about the company's

financial success. Conversely, when low rate of profitability, company

hopes to the users of report will read good news of company's performance,

for example in the social sphere and thus investors will still invest in the

company and also other investors will be interested to investee in its

company. It can be concluded that profitability has a negative relationship

of the level of CSR reporting.

4. Leverage measured by DER is insignificant factor to measure disclosure of

CSR information in annual report of mining companies. It implies that

company with high leverage should reduce its CSR reporting to avoid

creditor scrutiny.

96

C. Limitation and Suggestion

This research has several limitations, including:

1. The research population only use mining companies that have been listed

in the Indonesia Stock Exchange year 2009-2011 with total sample is just

48 companies.

2. To measure CSR reporting use annual report of companies.

3. As predictors only use 4 independent variables namely board size (board

commissioner), company size (log of total assets), profitability (ROE) and

leverage (DER).

4. Generalizing the results of the study can be distracted because of the

circumstances corporate environments are different in every mining

company listed in IDX.

Therefore, for further research, it is suggested:

1. Using a larger sample.

2. Research object is more extended in the sense of not only mining

companies, but other company in Indonesia like trading company or

service company because as we know that based on the company

limitation in this study, the biggest contribution and disclose to publish the

CSR over the companies that produce dangerous materials such as mining

companies. They produce the hazardous activity to the society.

3. The instrument to measure CSR disclosure not only uses annual report, but

it can use sustainability reporting.

97

4. Should use other factors to determine the more significant factors affecting

any of CSR reporting in company's annual report like leverage (debt to

asset ratio (debt ratio), long term debt to equity ratio)), company size

(capital employed, turnover and number of employees, company’s market

value and equity), profitability (ROA, ROI, EPS and others), company

profile (high and low profile), management ownership, foreign ownership,

board size (BOD), company age and others (Siregar and Sitepu (2009),

Rahman (2008), Reverte (2009), Darwis (2009), Al-Haj et al. (2011), Gao

and Joshi (2009), Bachtiar and Siregar (2010), Janggu et al. (2010)).

98

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102

Attachment 1: Dimensions and Classification CSR Disclosure

Table of Attachment 1.1

Theme of Corporate Social Responsibility Disclosure

Indonesia Languange English Language

Lingkungan

1. Perusahaan melakukan investasi alat untuk

pengelolaan limbah, dalam rangka mengurangi

dampak limbah produksi.

2. Perusahaan memberlakukan kebijakan, metode

dan strategi pengolahan dan pengelolaan

limbah secara ketat.

3. Perusahaan memiliki program riset terkait

lingkungan.

4. Perusahaan memberlakukan program

rehabilitasi dan keamanan lingkungan.

5. Perusahaan memiliki sistem manajemen tata

lingkungan, manajemen lingkungan berbasis

ISO 14001 dan sejenisnya.

6. Perusahaan berupaya melakukan pencegahan

terjadinya pencemaran lingkungan.

7. Turut aktif dalam menjaga keamanan

lingkungan sekitar.

8. Penghargaan dalam menjaga kualitas

lingkungan.

9. Bersama masyarakat, perusahaan melakukan

kegiatan secara rutin menjaga kebersihan

lingkungan.

10. Perlindungan lingkungan dari eksploitasi yang

tidak seimbang.

11. Kepatuhan terhadap peraturan perundangan

lingkungan.

Enviromental

1. Company invests a tool for waste

management, in order to reduce the impact of

waste production.

2. Company enforces policies, methods and

processing strategy and waste management

closely.

3. The company has a research program related

to environmental.

4. The company imposed a program of

rehabilitation and environmental safety.

5. The company has a system of environmental

governance management, environmental

management based on ISO 14001 and the like.

6. The Company seeks to prevent environmental

pollution.

7. Participate actively in maintaining the security

of the surrounding environment.

8. Award in maintaining the environmental

quality.

9. Together with communities, companies

routinely conduct environmental hygiene.

10. Environmental protection from exploitation

that is not balanced.

11. Compliance toward the Law of

environmental.

Masyarakat

1. Bantuan perbaikan jalan, penerangan jalan dan

lingkungan sekitar perusahaan.

2. Program penanganan pengangguran bagi

masyarakat dan/atau masyarakat sekitar.

3. Bantuan kesejahteraan dan peningkatan

ekonomi masyarakat dan/atau masyarakat

sekitar.

4. Bantuan kesehatan untuk masyarakat dan/atau

masyarakat sekitar.

5. Bantuan pendidikan, beasiswa, sarana dan

prasarana pendidikan bagi masyarakat dan/atau

masyarakat sekitar.

6. Bantuan pelatihan ketrampilan bagi masyarakat

dan/atau masyarakat sekitar (pelatihan dan

training-training).

Community

1. Aid repair roads, street lighting and

environment around the company.

2. Program of handling unemployment to the

society and/or surrounding community.

3. Aid welfare and economic improvement of

society and/or surrounding communities.

4. Assistance for community health.

5. Assistance of educational, scholarships,

educational facilities and infrastructure for

society and/or local communities.

6. Skills training for society and/or local

communities (trainings).

7. Help of clean water supply for local

communities.

8. Aid of youth coaching and sport.

103

7. Bantuan pengadaan air bersih bagi masyarakat

sekitar.

8. Bantuan pembinaan kepemudaan dan olahraga.

9. Bantuan pengembangan dan pelestarian seni

dan budaya.

10. Bantuan untuk meringankan korban bencana

alam dan pasca bencana alam.

11. Bantuan sarana dan prasarana ibadah dan

public.

12. Upaya menjaga kemitraan, kerjasama dan

keharmonisan dengan masyarakat sekitar.

13. Bantuan kegiatan keagamaan dan hari besar

bagi masyarakat sekitar.

14. Membantu dan memfasilitasi dalam

membangun toleransi dan rasa kebangsaan

antarumat beragama.

15. Bantuan untuk yatim piatu dan panti jompo.

16. Melakukan kerjasama secara nasional maupun

internasional dalam meningkatkan taraf hidup

masyarakat.

17. Membantu dan mensponsori pemberantasan

narkoba dan HIV.

9. Aid the development and preservation of art

and culture.

10. Help to relieve victims of natural disasters and

post-natural disaster.

11. Help facilities and infrastructure and public

worship.

12. Efforts to maintain the partnership,

cooperation and harmony with the

surrounding community.

13. Aid of religious activities and a great day for

the people around.

14. Assist and facilitate in building tolerance and

a sense of nationhood among inter-religious.

15. Assistance for orphans and nursing homes.

16. Do cooperation nationally and internationally

in raising living standards of society.

17. Aid and sponsor drug eradication and HIV.

Energi

1. Investasi peralatan dalam rangka penghematan

energy.

2. Membangun sumber energi alternatif secara

mandiri yang ramah lingkungan.

3. Menggunakan sumber energi dengan bahan

bakar non fosil yang ramah lingkungan.

4. Komitmen penghematan energy.

5. Pelatihan-pelatihan penghematan energi.

6. Penemuan teknologi penghematan energy.

Energy

1. Investment of equipment in order to save

energy.

2. Build alternative energy sources

independently that are environmentally

friendly.

3. Using energy sources with non-fossil fuels

that are environmentally friendly.

4. Energy saving commitment.

5. Training in energy saving.

6. Discovery of energy saving technology.

Karyawan

1. Program tunjangan hari tua, insentif-insentif,

imbalan pasca kerja dan pension.

2. Jaminan kesehatan bagi karyawan.

3. Program peningkatan pendidikan dan

keterampilan karyawan.

4. Bantuan perumahan untuk karyawan.

5. Bantuan pendidikan untuk anak-anak

karyawan.

6. Serikat Pekerja.

7. Corporate code of conduct.

8. Program Lingkungan, Kesehatan dan

Keselamatan kerja (LK3).

9. Sistem MSDM, Promosi, Renumerasi dan

Motivasi.

10. Upaya menciptakan suasana kerja kondusif.

11. Program pembinaan hobi karyawan.

Employee

1. Annuity programs, incentives, honorarium,

and pension.

2. Health insurance for employees.

3. Program to improve education and skills of

employees.

4. Housing assistance for employees.

5. Educational assistance for children of

employees.

6. Worker Unions.

7. Corporate code of conduct.

8. Environment Program, Health and Safety

(LK3).

9. HRM system, Promotion, Remuneration and

Motivation.

10. Efforts to create work atmosphere conducive.

11. Program of development of employee hobby.

104

12. Program rekreasi bagi karyawan dan keluarga

karyawan.

13. Memberi program cuti.

14. Bias gender.

15. Sistem recruetmen yang tepat dan

memperhitungkan kaum minoritas.

16. Menjalin hubungan dengan media massa dan

investor dengan baik.

17. Fasilitas-fasilitas lain dalam perusahaan.

12. Recreation programs for employees and

families of employees.

13. Giving leave program.

14. Gender bias.

15. Proper recruitment system and/or take into

account the minority.

16. Establish relationships with media and

investors with good.

17. Other facilities within the company.

Produk

1. Research & development dalam kualitas dan

kesehatan produk yang dihasilkan perusahaan.

2. Memiliki SOP produksi yang mengacu pada

Standar Kualitas Produk yang diaudit oleh

pihak kompeten independen.

3. Menjalin kerjasama dengan pihak ketiga dalam

rangka menjaga kualitas dan kesehatan produk.

4. Fasilitas dan laboratorium pengendali mutu

produk dan jasa.

5. Menjalin kerjasama dengan supplier dalam

rangka menjaga kualitas bahan baku.

6. Penghargaan mutu produk.

7. Jaminan kualitas dan kesehatan produk,

termasuk jaminan produk halal.

8. Memiliki departemen layanan aduan kualitas

produk.

9. Melakukan sosialisasi dan pendidikan tentang

kesehatan dan kualitas produk.

10. Komitmen mengedepankan customer

satisfaction.

11. Melakukan penarikan produk yang out of date.

12. Melaksanakan service purna jual.

Product

1. Research & development in the quality and

health of the resulting product of company.

2. Have SOPs production that refers to Product

Quality Standards are audited by an

independent competent parties.

3. Cooperation with third parties in order to

maintain the quality and health of products.

4. Facilities and laboratory quality control of

products and services.

5. Cooperation with suppliers in order to

maintain the quality of raw materials.

6. Product quality award.

7. Quality assurance and health products,

including the assurance of halal products.

8. Have a service department about complaints

of product quality.

9. Perform socialization and education about

health and product quality.

10. Commitment emphasizes customer

satisfaction.

11. Perform withdrawal of products out of date.

12. Implement after-sales service.

Lainnya

1. Keterbukaan.

2. Akuntabilitas.

3. Tata Kelola Perusahaan.

4. Penghargaan-penghargaan.

Other

1. Transparency.

2. Accountability.

3. GCG.

4. Awards.

Source: Nor Hadi (2011:134)

105

Attachment 2: Research Data

Table Attachment 2.1

Data of Independent Variables and Dependent Variable

No Year Code Name of Companies BOC Total Assets ROE DER CSR Index

1 2009 ADRO Adaro Energy Tbk 5 42.465.408.000.000 0,25% 1,43 49 0,731343284

2 2009 BYAN Bayan Resources Tbk 5 7.180.700.000.000 5,60% 1,95 46 0,686567164

3 2009 BUMI Bumi Resources Tbk 8 69.907.000.000.000 12,95% 3,95 55 0,820895522

4 2009 ITMG Indo Tambangraya Megah Tbk 6 11.306.000.000.000 42,60% 0,52 45 0,671641791

5 2009 PTRO Petrosea Tbk 7 1.835.000.000.000 1,98% 1,43 51 0,76119403

6 2009 KKGI Resource Alam Indonesia Tbk 4 272.938.000.000 21,22% 0,81 46 0,686567164

7 2009 PTBA Tambang Batubara Bukit Asam Tbk 5 8.078.578.000.000 47,80% 0,4 55 0,820895522

8 2009 ELSA Elnusa Tbk 5 4.210.421.000.000 0,24% 1,2 51 0,76119403

9 2009 MEDC Medco Energi Internasional Tbk 5 19.248.000.000.000 2,70% 1,85 55 0,820895522

10 2009 RUIS Radiant Utama Interinsco Tbk 3 563.467.000.000 8,80% 1,67 44 0,656716418

11 2009 ANTM Aneka Tambang (Persero) Tbk 5 9.940.000.000.000 7,15% 0,21 53 0,791044776

12 2009 CITA Cita Mineral Investindo Tbk 2 745.410.000.000 10,84% 0,71 35 0,52238806

13 2009 INCO Intr Nickel Ina Tbk / Vale Ina Tbk 10 19.224.000.000.000 10.,8% 0,29 37 0,552238806

14 2009 TINS Timah (Persero) Tbk 6 4.885.712.000.000 0,09% 0,42 39 0,582089552

15 2009 CTTH Citatah Industri Marmer Tbk 3 189.632.000.000 27,40% 2,04 31 0,462686567

16 2009 MITI Mitra Investindo Tbk 3 109.355.000.000 0,31% 2,83 32 0,47761194






106




24 2010 ELSA Elnusa Tbk 5 3.678.566.000.000 0,03% 0,89 54 0,805970149




28 2010 CITA Cita Mineral Investindo Tbk 2 1.425.400.000.000 15,69% 0,98 35 0,52238806

29 2010 INCO Intr Nickel Ina Tbk / Vale Ina Tbk 10 19.664.000.000.000 0,26% 0,3 42 0,626865672

30 2010 TINS Timah (Persero) Tbk 6 5.881.108.000.000 0,23% 0,4 44 0,656716418

31 2010 CTTH Citatah Industri Marmer Tbk 3 199.626.000.000 17,30% 1,66 32 0,47761194

32 2010 MITI Mitra Investindo Tbk 4 114.925.000.000 19,40% 2,24 33 0,492537313








40 2011 ELSA Elnusa Tbk 5 4.389.950.000.000 33,50% 1,3 51 0,76119403




44 2011 CITA Cita Mineral Investindo Tbk 2 1.850.650.000.000 25.63% 0,81 35 0,52238806

45 2011 INCO Intr Nickel Ina Tbk / Vale Ina Tbk 9 21.957.000.000.000 22.30% 0,37 45 0,671641791

46 2011 TINS Timah (Persero) Tbk 6 6.569.807.000.000 19.50% 0,43 48 0,71641791

47 2011 CTTH Citatah Industri Marmer Tbk 3 218.251.000.000 1.30% 1,87 33 0,492537313

107


48 2011 MITI Mitra Investindo Tbk 4 117.967.000.000 43.75% 0,88 35 0,52238806

Source: www.idx.co.id, Fact Book 2010 and 2012 and annual reports year 2009 and 2010.

108

Attachment 3: Outputs SPSS

A. Descriptive Statistics

Statistics

CSR_Reporting Board_Size Company_Size Profitability Leverage

N Valid 48 48 48 48 48

Missing 0 0 0 0 0

Mean ,6863 5,2500 12,6193 ,2322 1,3306

Std. Deviation ,11547 1,89624 ,80794 ,15646 1,10538

Minimum ,46 2,00 11,04 ,01 ,21

Maximum ,90 10,00 13,90 ,68 5,26

Sum 32,94 252,00 605,73 11,14 63,87

B. Normality Test

109

One-Sample Kolmogorov-Smirnov Test

Unstandardized

Residual

N 48

Normal Parametersa,b

Mean 0E-7

Std. Deviation ,07829805

Most Extreme Differences

Absolute ,092

Positive ,083

Negative -,092

Kolmogorov-Smirnov Z ,636

Asymp. Sig. (2-tailed) ,814

a. Test distribution is Normal.

b. Calculated from data.

C. Classical Assumption Test

1. Multicolinearity Test

2. Heteroskedastisity Test

Coefficientsa

Model Collinearity Statistics

Tolerance VIF

1

Board_Size ,504 1,986

Company_Size ,504 1,986

Profitability ,930 1,076

Leverage ,929 1,076


1.

110

3. Autocorrelation Test

Model Summaryb


Square

Std. Error of the

Estimate Durbin-Watson

1 ,735a ,540 ,497 ,08186 1,243



D. Hypothesis Test

Coefficientsa

Model Unstandardized Coefficients

Standardized

Coefficients t Sig.

B Std. Error Beta

1

(Constant) -,781 ,234 -3,330 ,002

Board_Size -,009 ,009 -,151 -1,036 ,306

Company_Size ,118 ,021 ,827 5,673 ,000

Profitability ,078 ,079 ,106 ,992 ,327

Leverage ,004 ,011 ,043 ,401 ,690


Model Summary


Square Std. Error of the Estimate

1 ,735a ,540 ,497 ,08186



ANOVAa

Model Sum of Squares df Mean Square F Sig.

1

Regression ,339 4 ,085 12,629 ,000b

Residual ,288 43 ,007

Total ,627 47


b. Predictors: (Constant), Leverage, Board_Size, Profitability, Company_Size

CSR disclosures and its determinants:evidence from Malaysian government linkcompanies

Nor Hawani Wan Abd Rahman, Mustaffa Mohamed Zain andNorashfah Hanim Yaakop Yahaya Al-Haj

Abstract

Purpose – The main aim of this study is to assess the level of corporate social responsibility (CSR)

disclosure of 44 government-linked companies (GLCs) listed on Bursa Malaysia and to ascertain the

relationship of certain company characteristics; namely size, age, profitability and leverage on the total

CSR disclosure from the year 2005 to 2006.

Design/methodology/approach – Content analysis is deployed to determine CSR disclosure. A

disclosure index consisting of 16 items was developed based on four general themes: human resource,

marketplace, community and environment to assess the disclosure level. The relationship between

company characteristics and total disclosure was examined using multiple linear regression analysis.

Findings – The major finding of this study is that the theme of disclosure has shifted from human

resource to marketplace. This is followed by human resource, community and, finally, environment.

Ironically, companies are not only disclosing good news, but also bad/negative news. This study

provides further evidence that is, to a certain extent, some GLCs have influenced other companies’

practices to disclose CSR information. Company size was found to be positively significant associated

with the total disclosure. The remaining variables were found to be insignificant in explaining the total

disclosure.

Originality/value – This is the first paper that looks into CSR activities, extent, themes and the

determinants of CSR disclosure in the annual reports of Malaysian GLCs. The Malaysian Government,

Bursa Saham, Security Commission and other relevant parties could take heed of the findings to further

improve CSR awareness, practices and disclosures and quality in GLC.

Keywords Malaysia, Organizations, Government agencies, Corporate social responsibility, Disclosure

Paper type Research paper

1. Introduction

Currently, the traditional role of company’s corporate reporting is being extended not only to

financial information, but also to social and environmental information. The combination of

these three items of reporting is known as triple bottom-line reporting. According to Gray

et al. (1987), such an extension is predicted on the assumption that companies do have

wider responsibilities than simply making money for their shareholders. Companies’ failure

to report on these matters will cause them to be unable to find their ‘‘license to operate’’

(Thompson and Zakaria, 2004).

Currently, there are multitude of demands and concerns being voiced by the government on

Malaysian public-listed companies (PLCs) to become more socially and environmentally

responsible, and to disclose their CSR initiative and actions through its national mission,

ministers’ speeches, policies, campaigns, According to the Minister of Finance II, good CSR

is the key towards ensuring the sustainability of business and Malaysian companies in the

years ahead (Nor Mohamed Yakcop, 2004).

DOI 10.1108/17471111111141486 VOL. 7 NO. 2 2011, pp. 181-201, Q Emerald Group Publishing Limited, ISSN 1747-1117 j SOCIAL RESPONSIBILITY JOURNAL j PAGE 181

Nor Hawani Wan Abd

Rahman is an Associate

Professor,

Mustaffa Mohamed Zain is

Deputy Vice Chancellor

(Academic and

Internationalization) and

Norashfah Hanim Yaakop

Yahaya Al-Haj is a Lecturer,

all at the Universiti

Teknologi Mara (UITM),

Selangor, Malaysia.

Despite the growing pressures on the PLCs to be socially and environmentally responsible,

the government also mulls over its controlled companies, government-linked companies

(GLCs), to actively participate in the area. The uniqueness of GLCs characteristics is their

special advantages in terms of access to funds, tenders, and opportunities; the uniqueness

that barely fits into a private company and the government held major shareholding in these

companies. Thus, having recognized these conditions of GLCs and their important role in

the country’s economic growth, they are expected to share the government responsibility in

discharging their public accountability by leading others to have good corporate practices

on social and environmental matters.

Through a total number of 57 GLCs listed on Bursa Malaysia (Putrajaya Committee, 2006),

the government has highlighted the importance of ‘‘clarifying social obligations’’ as one of

the initiatives outlined in the GLCs’ transformation program as an effort to boost the

performance of GLCs. The launch of The Silver Book (initiative 5) on September 25, 2006,

which covers corporate social obligations, is a ‘‘core part of the 15-year national mission to

2020 as the government pushes the envelope further to move the economy up to the value

chain’’ (The Star Online, 2006). The Silver Book is a guide that defines donations,

contributions and other monies that are given out in the companies’ ‘‘efforts to give back to

society’’.

In spite of growing research on social and environmental reporting in Malaysia, there is only

one research (Saat et al., 2009) conducted specifically on GLCs that was focused on trend

and performance. This study goes beyond Saat et al. (2009). This study aims to investigate

whether GLCs listed on Bursa Malaysia disclose their CSR activities, extent, themes and the

determinants of CSR disclosure in the annual reports. Specifically, the current study outline

two research questions:

1. Do GLCs disclose any aspect of CSR information in their annual report?

2. What are the determinants of CSR disclosure for GLCs?

In answering these research questions, several objectives are stated.

This paper looks at the overall view of the type and the quantity of CSR disclosure practices

among the GLCs and ascertain the relationship between CSR disclosure practices and

company characteristics in the Malaysian scenario, in particular with the GLCs. This paper

will review the current practice and the development of corporate social reporting. Next the

paper will look at the social performance in the annual report and how much is disclosed with

the major themes of disclosure and its sub-categories as well as the disclosure practices are

identified. The last section will look at the association between the total amount of CSR

disclosure with company characteristics; size, age, profitability and leverage.

2. Literature review

Gray et al. (1987) define CSR as the process of providing information designed to discharge

social accountability, the responsibility to account for actions for which one has social

responsibility. In July 2001, a Green Paper Promoting a European Framework for Corporate

Social Responsibility presented by the Commission of the European Communities provides

a wider definition of CSR as ‘‘a concept whereby companies integrate social and

environmental concerns in their business operations and in their interaction with their

stakeholders on a voluntary basis’’ as they are increasingly aware that responsible behavior

leads to sustainable business success. The World Business Council for Sustainable

Development further defines CSR as the continuing commitment by the business to behave

ethically and contribute to economic development while improving the quality of life of the

workforce, their families and the local community as society at large (The Star, 2007).

In the Malaysian context, such views were echoed by the then Deputy Prime Minister, Dato’

Sri Najib Tun Abdul Razak (current Prime Minister) in a CSR conference held in June 2003,

where he delineated CSR as a concept whereby enterprise integrate social and

environmental concerns in their business operations with stakeholders on a voluntary

basis (Tay, 2005).

PAGE 182 jSOCIAL RESPONSIBILITY JOURNALj VOL. 7 NO. 2 2011

CSR is now being carried out as an extension of normal accounting practices in order to

meet different expectations of user groups of CSR. Mohamed Zain (2006) stressed that CSR

is generally understood to be the way a company achieves a balance or integration of

economic, environmental, and social imperatives while at the same time addressing

shareholder and stakeholder expectations.

2.1 The development of CSR in Malaysia

2.1.1 Malaysian empirical studies on CSR. To date, many empirical studies were focused on

CSR practices with company’s characteristics (see, for example, Mohamed Zain, 1999; Ab

Manan and Mohd Iskandar, 2003; Mohamed Zain and Janggu, 2006; Mohd Ghazali and

Weetman, 2006; Saat et al., 2009). These characteristics, such as size, profitability,

leverage, audit firm and financial performance, influence corporate social disclosure

practices.

A study by Mohamed Zain and Janggu (2006) examined the extent of social and

environmental disclosure of 37 construction companies listed on the Malaysian Stock

Exchange from 1998 to 2002 with specific company’s characteristics; size, profitability,

leverage and audit firm. Social and environmental disclosure levels were assessed by the

number of sentences in the annual report. The result provides strong evidence that the CSD

is positively related to companies’ size and profitability. This indicates that, the bigger, in

terms of size and profitability a company is, the more the company discloses its social and

environmental information. However, no significant relationship was found between the level

of CSD and financial leverage and size of audit firm. This simply means that, financial

leverage and size of audit firm do not influence the level of social information disclosed.

Saat et al. (2009) also employed sentences as measurement tool to assess the level of CSR

disclosure practices of 30 GLCs listed on Malaysian Stock Exchange from 2000 to 2004 with

companies’ performance as measured by return on assets (ROA) and return on equity

(ROE). The study revealed that the level of CSR disclosure among GLCs is high, as the trend

of disclosure among social information is increasing from one year to another throughout the

period of the study. However, the statistical result indicates that CSR is found to be not

significant to the performance of the companies. Only environment theme has a positively

weak relationship with the ROA.

On quality aspect of CSR reporting, Jaffar et al. (2002) had reviewed and documented the

environmental reporting practices from environmentally sensitive industries of Malaysian

companies listed on the First Board of Malaysian Stock Exchange for the year 1999. The

study examined the association between environmental performance, financial

performance, and size, with level of environmental disclosure. Specifically, environmental

reporting is measured based on the quality and quantity of reporting. Quality of reporting is

assessed by themes and locations of environmental information reported in annual reports.

Meanwhile, the measurement of quantity of reporting is based on the volume of reporting.

The result revealed that environmental information is not well reported in the annual reports

of Malaysian companies. Only 20 percent of the sample companies provided environmental

information in their annual reports. Furthermore, result of the study indicates that company

size can influence the quantity of environmental information but cannot influence the quality

of reporting.

Other research by Ab Manan and Mohd Iskandar (2003) investigated the quality of

information reporting in the annual report of companies listed on the Malaysian Stock

Exchange, which sought to identify company characteristics that influence the quality of

information reporting. The quality of reporting was determined on the basis of National

Annual Corporate Report Award (NACRA) criteria of good reporting. Results of the logistic

regression analysis show that two main company characteristics influence the quality of

reporting i.e. leverage and profitability.

A current study by Jaffar et al. (2007) investigated factors that influence the quality of

reporting in the annual report of 200 companies from six largest industries listed on the

Malaysian Stock Exchange for the year of 2004. The study examined the relationship

VOL. 7 NO. 2 2011 jSOCIAL RESPONSIBILITY JOURNALj PAGE 183

between the qualities of reporting (measured using unweighted index) with earnings quality

and ownership structure. It also included three control variables namely size, profitability

and leverage. The results show that ownership structures (managerial and government)

affect the quality of reporting in annual report. Size and profitability, on the other hand have

also influenced the quality of reporting in annual reports.

Based on the above studies, company characteristics, namely size, profitability and

environmental performance affect CSR disclosure in Malaysia (Mohamed Zain and Janggu,

2006; Jaffar et al., 2002; Ab Manan and Mohd Iskandar, 2003; Jaffar et al., 2007), whilst

leverage shows mixed findings.

2.1.2 CSR framework for Malaysia. The Bursa Malaysia CSR framework was established on

September 5, 2006 as a set of guidelines for Malaysian public-listed companies (PLCs) to

help them in the practice of CSR. As stressed by the Prime Minister (PM) in the 2006 budget

speech (Badawi, 2006), all PLCs are required to disclose their CSR activities. The directive

from PM is really an opportunity to emphasize on the importance of CSR. It is meant to

encourage Malaysian PLCs to become more engaged in becoming socially responsible,

and to make the way they approach the process of CSR a part of the way they normally work

and think.

Bursa Malaysia has defined CSR based on ethical values and respect for the community,

employees, the environment, shareholders and other stakeholders. It is designed to deliver

sustainable value to society at large. CSR supports triple bottom line reporting, which

emphasizes on three elements, namely economic, social and environmental bottom-line

wellness. The Bursa Malaysia CSR framework identifies four main focus areas, namely

environment, workplace, community and marketplace. On environment aspects, CSR can

focus on a variety of issues such as energy (on how to use it efficiently and how to reduce the

way its emissions damage the climate), bio fuels, biodiversity and protecting flora and fauna.

Under community aspects, supporting employee involvement in community issues enriches

the community and company. Activities such as supporting education, youth development

and under-privileged are some of the concern. With respect to marketplace, it is where the

company finds its important stakeholders such as shareholders, suppliers and customers.

Companies can interact responsibly by supporting green products or engaging in only

ethical procurement practices. Under workplace aspects, companies are required to be

socially responsible for the sake of their employees, whether dealings with basic human

rights or gender issues. Another concern is in the aspects such as quality work environment,

health and safety, human rights and labor rights are companies’ consideration.

Ideally, companies should consider all four CSR dimensions when crafting their own visions.

But this does not mean a company must do everything. The important thing is that the

company uses the framework to help it to identify its choices and priorities. However, its

choice of CSR focus and initiatives will depend on the nature of business, inclination and

resources. At times, a company will adopt initiatives that may even have indirect impact on

them and society as well.

2.2 GLCs in Malaysia

2.2.1 Definition of GLCs. Generally, GLCs are companies in which some of their shares are

controlled by the government (Fang et al., 2004). For instance, Singapore Department of

Statistics defines GLCs as companies in which the government effective ownership of voting

shares is 20 percent or more (cited in Hasan, 2006).

In the context of Malaysian GLCs, its narrowest definition refer to the companies directly held

by the government through the Minister of Finance (MoF Inc.) or 100 percent owned entities

such as Khazanah Nasional and Kumpulan Wang Amanah Pencen. In addition, GLCs are

also defined (available at www.pcg.gov.my) as companies that have a primary commercial

objective and in which the Malaysian Government has a direct controlling stake (refers to the

Government’s ability (not just percentage ownership) to appoint board members, senior

management, and/or make major decisions for GLCs, either directly or through

government-linked investment companies (GLICs).


GLICs are defined by the influence of the federal government in: appointing/approving

board members and senior management, and having these individuals report directly to the

government, as well as in providing funds for operations and/or guaranteeing capital (and

some income) placed by unit holders or federal government linked investment companies

that allocate some or all of their funds to GLCs investments. This definition currently includes

seven GLICs: Employees Provident Fund (EPF), Khazanah Nasional Bhd (Khazanah),

Kumpulan Wang Amanah Pencen (KWAP), Lembaga Tabung Angkatan Tentera (LTAT),

Lembaga Tabung Haji (LTH), Menteri Kewangan Diperbadankan (MKD) and Permodalan

Nasional Bhd (PNB). For the purpose of the current study, as defined by Putrajaya

Committee on GLC High Performance (PCG) companies are considered as GLCs if

substantial shareholders in the companies are either through the Ministry of Finance

Incorporated or through GLICs.

2.2.2 Background of GLCs. The Malaysian Government has a strong presence in the

economy. In 2004, the Malaysian Government oversaw 40 listed GLCs, accounting for

around 34 percent of the total market capitalization of Bursa Malaysia. The combined assets

of these companies are approximately RM232 billion or more than half of Malaysia’s gross

domestic product (cited in Hasan, 2006). Petronas, the oil and gas giant and by far

Malaysia’s largest company, is wholly government owned.

As at July 31, 2005, there were 57 GLCs (Putrajaya Committee, 2006) and account for

approximately RM261 billion in market capitalization or approximately 36 percent and 54

percent of the market capitalization of Bursa Malaysia and the benchmark Kuala Lumpur

Composite Index respectively with a total employee of 400,000.

Since GLCs provide mission-critical services of the country, GLCs play a vital role in the

operation of every commercial concern in Malaysia and contribute significantly towards

improving the quality of life for the public (Badawi, 2004). Their performance greatly impacts

the productivity and wellbeing of almost all companies, and almost all Malaysians, across

the country thus, the transformation of GLCs into high performing entities is critical for the

future prosperity of Malaysia. Therefore, in May 2004, the Malaysia Prime Minister, Datuk Seri

Abdullah Ahmad Badawi announced restructuring of GLCs to become more commercial in

nature, despite their social and national obligations. In order to smooth the progress of this

transformation, the PCG was established. Its objective is to design and implement

comprehensive national policies and guidelines to transfer GLCs into high performing

entities and establish the institutional framework to program, manage and subsequently to

oversee the execution of these policies and guidelines.

To raise efficiency and transparency in GLCs, ten initiatives have been identified,

developed, launched and implemented across all GLCs starting 2005/2006. These

initiatives have been set out based on their importance as levers for change, their large

potential impact on value, and the unique ability of the Putrajaya Committee to drive change

in these areas. The ten initiatives are:

1. enhance board effectiveness;

2. strengthen directors’ capabilities;

3. enhance GLICs monitoring and management functions;

4. improve regulatory environment;

5. clarify social obligations;

6. review and revamp procurement;

7. optimize capital management practices;

8. manage and develop leaders and other human capital;

9. intensify performance management practices; and

10. enhance operational improvement.


2.2.3 CSR on GLCs. In view of the important roles played by GLCs for economic growth and

developing the nation as a whole, PCG also includes responsibility of GLCs towards society

at large in their fifth initiative; clarify social obligation. In September 25, 2006, The Silver Book

was launched as a set of guidelines on how GLCs can contribute to society in a responsible

manner thus create a positive impact for their business and society. It also assists GLCs in

clarifying and managing social obligations in the most efficient and effective manner in line

with best practice regulatory framework or industry norms. In other words, GLCs are

required to set their CSR activities based on their business objectives and corporate

philosophy and thus are projected to have their own contribution towards society that is

beyond their corporate charity.

The chief executive officer of Bursa Malaysia, Datuk Yusli Mohamed Yusoff concluded that

many companies are actively pursuing CSR initiatives as they believe in the good value that

CSR brings such as the ability to attract quality investors, improved financial performance

and enhanced reputation (The Star Online, 2007). The PCG’s aspiration is that GLCs will lead

corporate Malaysia in demonstrating how businesses should contribute in a socially

responsible, sustainable and meaningful way while gaining benefits for themselves.

The ex-Prime Minister also shares this aspiration, the transformation program initiated by him

will be able to take GLCs to a new level of performance, moving them from average to

excellence, to glory, and then to distinction; thereby creating more and more global

champions and ‘‘best in class’’ companies in Malaysia and thus able to better realize

country’s dreams and aspirations, and join the league of developed nations in 2020, for the

benefit of current and future generations of Malaysians (Badawi, 2005).

3. Methodology

The population for this study consists of all GLCs listed on the Malaysian Stock Exchange

(formerly known as Kuala Lumpur Stock Exchange). The list of companies was obtained

from PCG of GLCs available at www.pcg.gov.my

As at July 31, 2005, there were 57 GLCs listed on Malaysian Stock Exchange. This study

proposed examining all companies’ annual reports from the year 2005 to the year 2006 (two

years). Of these, 44 are included in the present study. The 13 that are excluded are because

nine of the companies do not have information for the full period of study i.e. 2005 to 2006

and the other four companies are from banking and financial sectors, due to the additional

regulation imposed on them, they are not suitable to be included on the sample population.

As a rule of thumb for determining sample size, Roscoe (1975 as cited in Sekaran, 2005, p.

295), proposes that sample size of more than 30 and less than 500 are appropriate for most

research.

Annual reports from 2005 to 2006 are selected as a sample owing to several reasons. First,

the annual reports year-end 2005 and 2006 are the latest annual reports available. Second,

annual reports from two years are selected to compare whether the same independent

variables have the same effects on both years (Abd Ghaffar et al., 2004). Finally, two years of

annual reports are expected to show the pattern of CSR disclosure among GLCs. This is

justified on the basis that previous studies have typically used anywhere between a one-year

and five-years period; and, according to Moore (2001), this is to avoid the danger of rogue

figures for one particular year.

3.1 Content analysis

Content analysis method is used to measure the CSR disclosure practices of companies.

This method has been used in the social environmental reporting (SER) literature to evaluate

the extent of disclosure of various items as a process of codifying the text of a piece of writing

in annual reports of listed companies (Gray et al., 1995b; Hackston and Milne, 1996).

Content analysis of annual reports is a method for gathering data. It involves as a process of

codifying the text of a piece of writing according to pre-defined categories (Mohamed Zain

and Janggu, 2006) in order to derive patterns in the presentation and reporting of

information (Guthrie and Abeysekera, 2006).


According to Gray et al. (1995b) content analysis is a method or technique employed to

measure objectively, systematically, and qualitatively the content of communication. This is

further defined by Guthrie and Abeysekera (2006) as a ‘‘technique for gathering data

contained in the annual report and involved codifying qualitative and quantitative information

pre-defined categories in order to derive patterns in the presentation and reporting of

information’’.

Social disclosure can be measured differently. This study will measure the CSR based on the

quantity of disclosure in annual report. Belkaoui and Karpik (1999) proposed four

measurements to be used:

1. social disclosure scale by Ernst and Ernst (1973);

2. percentage of prose in annual report;

3. quality of disclosure in annual report; and

4. quantity of disclosure in annual report.

Similarly, this study will measure the CSR practices based on quantity of disclosure in annual

report and number of sentences is chosen as unit analysis. The use of number of sentences

is necessary on the basis that it is more preferable if one is seeking to infer meaning (Gray

et al., 1995b) and it applied with less issue of judgment (Unerman, 2000) and provides more

reliable measure (Hackston and Milne, 1996). According to Mohamed Zain and Janggu

(2006) each sentence of disclosure is a grammatically self-contained speech unit

expressing an idea, claim or assertion.

For the current study, the total disclosure is counted based on the aggregate number of

sentences reported on four social disclosure themes (16 sub-categories identified) that the

companies supply in their annual reports to shareholders. Total number of sentences for

each theme is derived based on the aggregate number of sentences disclosed for each of

its sub-categories. For example, total number of environment theme is a sum of the total

number of sentences identified on its sub-categories, namely pollution, waste and general

environment:

Total disclosure ¼ Total sentences of human resource þ Total sentences of community

þ Total sentences of marketplace þ Total sentences of environment:

In the event that one sentence has more than one possible classification or category, then

the sentence should be classified or allocated as the activity most emphasized in the

sentence. Any disclosure that is repeated shall be recorded as a CSR sentence each time it

is discussed. There are four independent variables to be tested that may motivate the

voluntary disclosure of CSR disclosure information. Previous studies have investigated the

relationship between certain firm characteristics and voluntary disclosure. The areas of

interest include company size, age, profitability and leverage.

3.2 Analysis of data

In order to investigate the relationship of key variables on CSR disclosure patterns Statistical

Package for Social Science (SPSS) is applied in the present study. First, descriptive

statistics regarding the variables, including mean, median, standard deviation, skewness,

and kurtosis as well as minimum and maximum values, are computed to analyze the pattern

and normality of CSR practices by GLCs. In addition, Kolmogorov-Smirnov Test is used to

check whether variables tested are normally distributed. Usually, if the significance level is

less than probability value, the distribution is said to be normal.

To have a meaningful result, multiple regression analysis is used to test for hypothesized

relationships. Normally, regression analysis is used to:

B determine whether the independent variables explain a significant variation in the

dependent variable;


B determine how much of the variation in the dependent variable can be explained by the

independent variables;

B determine the structure or form of relationship (strength of the relationship);

B predict the values of the dependent variables; and

B control for other independent variables when evaluating the contributions of a specific

variable or a set of variables (Malhotra, 2002, p. 541).

3.3 Model development

The model that is used in the present study can be specified as:

CSRD ¼ aþ b1SIZE þ b2AGE þ b3PROFITABILITYb4LEVERAGE þ 1

where:

CSRD ¼ total CSR disclosure.

SIZE ¼ log of total assets.

AGE ¼ number of AGM.

PROFITABILITY ¼ net profit after tax by sales ratio.

LEVERAGE ¼ total liabilities by total assets ratio

11 ¼ standard normal, randomly distributed error term.

4. Analysis of data and discussion

Annual reports of 44 GLCs listed on the Malaysian Stock Exchange for the year ending 2005

and 2006 were collected and analyzed using SPSS version 12.0. The results are as

illustrated in the Table I.

4.1 Compan’s characteristics

As recorded in the descriptive statistics, the company characteristics in this study

demonstrate the mean for the assets value to be RM5,527,021,764, age 28.09 years,

profitability 0.507251 and leverage 0.424823 in 2005. On profitability and leverage,

respectively it implies that, for every RM1 of sales, the company yields a profit of RM0.51,

while for every RM1 of assets, RM0.42 is financed through liabilities.

Later, in 2006 the study records an increase of mean for assets value to RM10, 454,673,451,

age of 29.09 years but with a slight decline for leverage to 0.421591 and profitability to

0.252785. Included in Table I are the results of skewness and kurtosis. As a rule of thumb,

according to De Vaus (2002), a skewness in the range of 21 and þ1 indicates a symmetrical

or normal distribution. In this study, age, leverage and profitability (2006) are found to have a

symmetrical distribution. However, three variables are found to have non-symmetrical

distributions namely size 2005, profitability 2005 and size 2006. To solve this problem, asset

Table I Company’s characteristics

No. Min. Max. Mean SD Skew Kurt.

2005

Size 44 22,909,441 49,863,600,000 5,527,021,764 9,766,284,217.42 3.459 12.995

Age 44 2 90 28.09 20.547 1.000 1.239

Leverage 44 0.056599 0.948467 0.42482325 0.246414856 0.293 20.761

Profitability 44 21.5038 17.3602 0.507251 2.6291374 6.400 41.935

2006

Size 44 24,140,369 51,761,700,000 5,921,709,329 10,454,673,451 3.199 10.879Age 44 3 91 29.09 20.547 1.000 1.239

Leverage 44 0.061005 0.931300 0.42159073 0.242405814 0.366 20.687

Profitability 44 20.5301 0.9163 0.161443 0.2527852 0.865 2.275


variable is transformed into log specification and profitability variable is transformed into

percentage value to enable further statistical analyses to be done.

However, the gaps between the minimum and maximum values are high for all company

characteristics. For instance, the minimum value of assets for all 44 companies in 2006 is

RM24,140,369 and the maximum is RM51,761,700,000, indicating that certain companies

are enjoying a good financial position. The leverage ratio in 2006 also highlights the

increasing trends of companies to finance the assets by using liabilities instrument, where

the minimum value of ratio is 0.061005 and the maximum value is 0.931300. On profitability

ratio aspect, the maximum value is 0.9163 and the minimum is 20.5301, indicating that

certain companies are enjoying a good financial performance while some are not. High gap

between the minimum and maximum values between all samples for the period of two years

indicates that the samples are well represented within the population.

4.1.1 General overview of CSR disclosure. Table II provides an overview of the disclosure

made for the period of two years, 2005 and 2006, based on the four categories or themes:

human resources, community, marketplace and environment. The four major themes are

identified and defined as follows to ensure the coding process is reliable:

1. Disclosure is classified as human resource aspect if it contained primarily related

information about socially-oriented activities which are beneficial to their employees.

2. Disclosure is classified as community aspect if it contained primarily related information

about socially-oriented activities which are beneficial to the general public.

3. Disclosure is classified as marketplace aspect if it contained primarily related information

about socially oriented activities which is beneficial to their customers as well as to

shareholders.

4. Disclosure is classified as environmental aspect if it contained primarily related

information about socially-oriented activities which are directed toward alleviating or

preventing environmental deterioration.

The results presented in Table II are taken from the number of disclosing companies as a

percentage of total samples (44 companies). It is assumed that, the amount of disclosure is

related to the importance placed on certain issues, and hence, the higher the disclosure

made on such issue, the higher its perceived importance. Results of Table II indicate that the

disclosure of CSR information is considerably high, with all companies providing at least one

theme of social information. Marketplace information is the most disclosed theme by

companies with a percentage of disclosure of 100 percent and 95 percent for the year 2005

and 2006 respectively. The possible reason for the change in disclosure is due to less

information disclosed on three sub-categories of marketplace, namely product quality and

safety, research and development, and customer service. It is then followed with the

disclosure on human resource, community, whilst environmental information is the least

disclosed.

4.1.2 Amount of disclosure. This study focuses on number of sentences as a measurement

tool for disclosure and is consistent with studies by Hackston and Milne (1996), Mohamed

Zain (1999), Saat et al. (2009), and Mohamed Zain and Janggu (2006).

Table III highlights the minimum, maximum and mean number of sentences for four CSR

disclosure categories, human resource, community, marketplace, and environmental for the

year under review. The analysis of Table III reveals that the amount of CSR disclosure range

Table II Number and percentage of companies making corporate social responsibility disclosure over time

Human resource Community Marketplace EnvironmentalYear No. % No. % No. % No. %

2005 36 81.8 31 70.5 44 100 19 43.22006 37 84.1 31 70.5 42 95.5 30 68.2


from a low of 0 sentence for all four categories (except for marketplace category in the year

2005) to a high of 83 sentences for marketplace disclosure in 2005. Even though

marketplace disclosure scores the highest number of sentences, the amount of disclosure is

not consistent as the maximum number of sentences disclosed in year 2006 was reduced to

77 sentences. It might be due to less information on marketplace to be reported, as there

were less issues or activities being carried out in year 2006.

However, disclosure for other categories on the other hand, shows an increasing trend from

year 2005 to 2006 as the maximum number of sentences keeps on increasing from year to

year. For instance, on community aspect, the maximum sentences were 43 for the year 2005

and increased to 70 sentences in 2006. The increasing trends can also be seen for human

resource category as the number of sentences increased to 67 in 2006 as compared to 58

numbers of sentences in 2005, yielding an increase of 15.5 percent. The increasing pattern

of disclosure will be best explained as CSR disclosure became mandatory for public listed

companies (financial year ending December 31, 2007) and also the introduction of The Silver

Book for GLCs on September 2006. The above result seems to suggest that the GLCs are

concerned and have taken initiatives to disclose the above mentioned aspects, thus

adhered to the regulatory requirements and Prime Minister’s directions to report CSR

activities in the annual report.

4.2 Themes of disclosure

The themes or subcategories of disclosure are divided into four categories, human resource,

community, marketplace and environment. Table IV shows the amount and percentage of

disclosure for the year 2005 and 2006. Percentage of disclosure on each theme was derived

by taking the number of sentences disclosed (for each theme) over total sentences

disclosed for the year times 100 percent. For example, percentage disclosure on human

resource indicates a decreasing trend from year 2005 to 2006, even though the numbers of

sentences are increasing. This is because, the percentage of disclosure is based on the total

sentences for the year, which is in year 2006, the total sentences is higher than 2005, which

lead to decrease in percentage of disclosure on human resource aspect for 2006.

Disclosure on marketplace is the most favorite with a total of 1,766 sentences or an average

of 883 sentences per year. This implies that marketplace is the most important theme of

disclosure and recognized annual reports as a medium to transfer information to customers

about products and services offered. Other than that, GLCs want to convince their users that

products or services offered are at par compared to others. This is followed by disclosure on

human resource and community with an average of 558 and 547 sentences per year

Table III Social disclosure by general themes

Total sentences Min. Max. MeanTheme 2005 2006 2005 2006 2005 2006 2005 2006

Human resource 550 566 0 0 58 67 12.5 12.86Community 452 642 0 0 43 70 10.27 14.59Marketplace 894 872 3 0 83 77 20.32 19.82Environment 141 229 0 0 25 38 3.2 5.2Total CSR 2,037 2,309 3 4 150 184 46.29 52.47

Table IV Amount and percentage of disclosure by general themes

Human resource Community Marketplace Environment TotalNo. % No. % No. % No. % No.

2005 550 27 452 22.2 894 43.9 141 6.9 2,0372006 566 24.5 642 27.8 872 37.8 229 9.9 2,309Total 1,116 51.5 1,094 50 1,766 81.7 370 16.8 4,346Average 558 25.8 547 25 883 40.9 185 8.4 2173


respectively. Disclosure on environment is the least popular amongst the GLCs under study

with an average of 185 sentences per year. This may be due to the perception that their

company does not have any environmental impact to the society and not much

environmental information to be released in the annual report.

4.2.1 Marketplace. Marketplace information is the most favorite theme of disclosure, where

894 (2005) and 872 (2006) total number of sentences were reported in the annual report. The

minimum number of reported information is 0, indicating that not all GLCs disclose

information on marketplace in their annual report, while Malaysia Airport Holding Berhad

leads this area of disclosure with the total number of 83 sentences.

Table V summarizes the disclosure made for sub-categories of marketplace information.

Information on shareholder communication channel and product quality and safety are the

two most favorite themes of disclosures by GLCs from 2005 to 2006. This corresponds with

the objectives of the Ninth Malaysia Plan, where, in order to promote economic growth, the

government will aggressively undertake initiatives to seek new markets, promote exports,

attract investments by strengthening the position in traditional market and exploring new

markets.

Trend analysis of amount disclosed shows that the amount of disclosure dropped by 22

sentences because of less information reported on customer service and research and

design. According to Mohamed Zain and Janggu (2006), research culture is new in

Malaysia; therefore less emphasis is placed on this area. Another reason might be because

of the fact that CSR disclosure is voluntary in nature, as no mandatory requirement to provide

such disclosure is currently being exercised in Malaysia for the years 2005 and 2006, even

though stress on R&D is given an extra emphasis in 9th Malaysian Plan and where more

money is budgeted for.

4.2.2 Human resources. Human resource is the second most popular theme disclosed by

most GLCs in this study with a maximum total of 566 sentences in 2006 and minimum of 550

sentences in 2005 (see Table III). The minimum disclosure for both period of study is 0

sentences, indicating that not all GLCs disclosed human resource information in their annual

report, while the maximum number of disclosures by a single company is 67 sentences by

Petronas Gas Bhd in 2006.

Table VI summarizes the total and sub-categories of human resource disclosure made about

employee-related matter from 2005 to 2006. The table shows the increasing number of total

disclosure by 2.9 percent (an increase of 16 sentences). The increase is mainly contributed

by an increase in all three subcategories of human resource (except sports and wellness

disclosure). The increasing trend is contributed mainly by health and safety by 14 percent

Table VI Amount of sub-categories of human resource disclosure

Sub-categories 2005 2006

Health and safety 172 196Training and development 228 253Employees’ welfare 74 76Sports and wellness 76 41Total 550 566

Table V Amount of sub-categories of marketplace disclosure


Product quality and safety 270 283Research and design 137 100Shareholder communication channel 301 313Customer service 186 176Total 894 872


(an increase of 24 sentences), followed by training and development by 11 percent or

increase in sentences disclosed by 25 and employee welfare category by 2.7 percent or

increase by two sentences. These definitely might be due to most companies regard their

employees as the most valuable assets and would secure their health and safety, provide

training and development program together with concern of their welfare in order to maintain

an impetus sense of being appreciated and loyalty among employees. Other than that, this

is actually consistent with the policy undertaken by the GLCs on occupational safety and

health (OSH).

The stress on OSH policy is consistent with the Occupational Safety and Health Act (OSHA)

1994, which requires the workers be given a safe and healthy workplace that is reasonably

free of occupational hazard. An OSHA 1994 aim is to make further provision for securing the

health, safety and welfare of persons at work, for protecting others against risks to safety and

health in connection with activities of persons at work.

Section 4.2.3 until 4.2.2 [d] onwards will provide examples of disclosure practice pertinent to

human resource sub-categories that are extracted from the sample annual reports.

4.2.3 Community. Next to human resource disclosure, community data are another most

favorite theme of disclosure with the total of 452 sentences reported in 2005 and increased

to 642 sentences being disclosed in year 2006, or an increase of 42 percent (see Table VII).

The score of 0 sentences (min value) indicates that not all GLCs disclose their community

details in the annual report, while the maximum number of disclosure by a single company is

70 sentences in the year 2006 and 43 sentences in the year 2005, both of which were

reported by Telekom Malaysia Bhd.

Table VII summarizes the data for community disclosure since 2005 to 2006 of the 44

companies under study. The table shows the increasing number of total disclosure by 190

sentences. This increasing trend of disclosure is mainly contributed by disclosure on the

sub-category of education, disaster relief and charity and donations. The increasing trend of

disclosure in these areas might be due to the introduction of the ‘‘Caring society policy’’ and

‘‘Vision 2020’’ (Janggu and Mohamed Zain, 2006) by the government in the early 1990s and

the third thrust of the National Mission based on the Ninth Malaysian Plan (2006-2010) where

the government strongly believes in eradicating poverty, generating more balanced growth

in ensuring the benefits of growth are enjoyed by the Malaysian people in a fair and just

manner. As stressed by Mohamed Zain (1999) disclosing companies might want their

readers to know that they are good corporate citizen, adhering to the government policy and

they are accountable to the wider public. Apart from legitimizing their business, GLCs are

expected to enjoy benefits from contribution to the society such as increase in ceiling for tax

deduction (contribution to charitable organizations), extension of tax deduction, and enjoy

favorable consideration by KWSP and KWAP in their investment decisions.

Educational sub-category is seen as the most favorable theme to be reported by GLCs with

total sentences of 186 in year 2005, and increased to 261 in year 2006. This pattern is

expected as this is part of GLCs’ contribution to supporting the Ministry of Finance and

Khazanah Nasional’s Project PINTAR, the acronym for Promoting Intelligence, Nurturing

Talents, and Advocating Responsibility. The project was incepted to encourage GLCs to

play a more active role in helping raise awareness of the importance of education and to

Table VII Amount of sub-categories of community disclosure


Education 186 261Disaster relief 53 95Poor 72 83Charity 85 126Sports and culture 56 77Total 452 642


improve the academic standards of underprivileged children. This project has been outlined

in The Silver Book as one of the ten initiatives identified under the GLC Transformation

Program (Managing Director of MAHB, 2006 Annual Report).

Section 4.2.3 [a] until 4.2.4 onwards will provide examples of disclosure practice pertinent to

community sub-categories that are extracted from the sample annual reports.

4.2.4 Environment. The degree of disclosure on environment by GLCs is the least favored

among the four themes discussed above. Despite the number of companies providing

voluntary environmental disclosure may have increased or appears to be encouraging

(Thompson and Zakaria, 2004; Elijido-Ten, 2004) factors such as lack of government and

public pressure, fear of readers’ reaction and perception on their organizations, which did

not have environmental impact, are said to contribute to low level of reporting (see

Thompson and Zakaria, 2004). Jaffar et al. (2002) also pointed out that the reluctance to

disclose on environmental theme occurs if companies feel that such disclosure will have

negative implications on their social and financial performance.

The current study shows that the total sentence disclosed is 229 in year 2006, increased by

88 sentences as compared to year 2005. On average, each GLCs reported 3.2 sentences in

year 2005 and increased to 5.2 sentences in 2006. However, there are GLCs that did not

report any aspect of environmental information, while the maximum disclosure is by Malaysia

Airport Holding Berhad with the total sentences of 88 in 2006.

Disclosure on environmental theme is sub-categorized into pollution, waste and general

environment as shown in Table VIII. Increasing trend of disclosure is supported by

disclosure by all sub-categories especially on general environment and waste. This trend is

consistent with a survey by ACCA (Malaysia), which revealed that the number of reporting

companies has grown and this might be due to positive respond towards professional

accounting bodies’ promotion on environmental reporting such as NACRA’s Best Annual

Report Awards for Environmental Reporting and Malaysian Environmental Reporting Awards

(MERA).

Currently, the government’s effort to step up enforcement and increase preventive measures

on environmental issue being carried out to ensure there is a balance between development

and environmental sustainability. According to the Ex-Prime Minister (YAB Dato’ Seri

Abdullah Ahmad Badawi) while tabling of the motion on the 9th Malaysian Plan on March 3,

2006, in order to maintain environmental sustainability, government has allocated RM510

million for cleaning, preserving and beautifying rivers; RM350 million for coral management;

RM200 million for reforestation; and another RM70 million for the management of wildlife

protected areas in order to maintain environmental sustainability.

4.3 Statistical analysis

Before examining the association between total CSR disclosure and company

characteristics, data obtained from the annual report for the period of two years, year

2005 and 2006 is tested for its normality and correlation among variables. In order to meet

the above stated objectives, test of normality (Kolmogorov-Smirnov Test) and

multicollinearity are undertaken.

4.3.1 Multiple regression analysis. In examining the relationship between CSR disclosure

and company characteristics, the statistical technique employed is multiple regressions.

Table IX shows the result using multiple regression test. Adjusted R 2 value of 32.8 percent in

Table VIII Amount of sub-categories of environment disclosure


Pollution 28 43Waste 39 47General environment 74 139Total 141 229


2005 indicates that only 32.8 percent of variance in total CSR disclosure is significantly

explained by the four IV considered in this study and another 67.2 percent was left

unexplained. As in 2006, adjusted R 2 value of 30 percent indicates that only 30 percent of

the variance in total CSR disclosure is significantly explained by the four IV considered in this

study which still leaves 70 percent unexplained.

Multiple regression suggests that only size is significant to CSR disclosure. However, the

adjusted r square is still numerically small which could indicate that there may be other

factors that might affects the relationship of CSR such as types of industry, ownership,

composition of directors, etc. These, however, are not part of the study. Another factor that

might influence that small adjusted R 2 R 2 is the small number of sample which is only 44

numbers. However, as indicated by Sekaran (2005), a sample of 30 is more than sufficient to

make a generalization.

4.3.2 Relationship between total CSR disclosure and company sizes. The objective is to

identify whether the company size is associated to the CSR disclosure. The test conducted

is at 5 percent significance level. The variable used to measure the company size is total

assets.

Company size was hypothesized to have positive relationship with the total CSR disclosure

in the annual report. The statistical result reveals that total assets is positively and

significantly related to total CSR disclosure in year 2005 and 2006 with a value of t ¼ 4:980

(p ¼ 0:000) and t ¼ 4:183 (p ¼ 0:000) respectively. This implies that GLCs with high total

assets tend to disclose more CSR information than GLCs with lower total assets. This is

consistent with evidence found in Singhvi and Desai (1971); Gray et al. (1995a); Naser et al.

(2002); and in Malaysia by Mohamed Zain (1999); Jaffar et al. (2002); Ismail (2002); Abd

Ghaffar et al. (2004) and Mohamed Zain and Janggu (2006) which found that there is a

positive relationship between total CSR disclosure and company size. Therefore, it can be

concluded that for Malaysian GLCs, the firm size is a significant item to measure disclosure

of CSR information.

4.3.3 Relationship between total CSR disclosure and company ages. The objective is to

identify whether the company age is associated to the CSR disclosure. The test conducted is

at 5 percent significant level. The variable used to measure the company age is the number

of annual general meeting notices.

Company’s age was hypothesized to have positive relationship with total CSR disclosure.

Statistical results show the positive but insignificant association in year 2005 (t ¼ 0:452 and

p ¼ 0:654), and negative and insignificant relationship in year 2006 (t ¼ 20:560 and

p ¼ 0:579). In other words, company age has no significant relationship with CSR disclosure

Table IX Multiple regression analysis

t-value Sig ( p)

2005Log size 2005 4.980 0.000*Age 2005 0.452 0.654Profitability 2005 20.544 0.590Leverage 2005 21.244 0.221R square 0.391Adjusted R square 0.328

2006Log size 2006 4.183 0.000*Age 2006 20.560 0.579Profitability 2006 0.738 0.465Leverage 2006 20.064 0.949R square 0.365Adjusted R square 0.300

Note: *Significant at the 0.05 level


for both years under study. Therefore, H2 is rejected and can be concluded that there is no

significant association between total CSR disclosure and company age. This finding,

however, contradicts the study by Abdul Hamid (2004). In her study, she found that CSR

disclosure was significantly affected by age of the company.

4.3.4 Relationship between total CSR disclosure and company leverage. The objective is to

identify whether the company leverage is associated to the CSR disclosure. The test

conducted is at the 5 percent significant level. The variable used to measure the company

leverage is total liabilities over total assets.

Company leverage was hypothesized to have positive relationship with total CSR disclosure.

Statistical result shows negative and insignificant association for both period of study, value

of t ¼ 21:244 and p ¼ 0:221 in 2005 and t ¼ 20:064 and p ¼ 0:949 in 2006. These results

provide evidence that leverage variable has a negative and no significant correlation with the

total CSR disclosure. This finding rejects H3. This is consistent with studies by Mohamed

Zain and Janggu (2006), Abd Ghaffar et al. (2004) and Katmun and Ab Rashid (2007), which

found no statistical association between company leverage and disclosure.

4.3.5 Relationship between total CSR disclosure and company profitability. The objective is

to identify whether the company profitability is associated to the CSR disclosure. The test

conducted is at 5 percent significant level. The variable used to measure the company

profitability is net profit after tax over sales.

Company profitability was hypothesized to have positive relationship with total CSR

disclosure. The statistical result shows that t ¼ 20:544 (p ¼ 0:590) and t ¼ 0:738

(p ¼ 0:465) for the year 2005 and 2006 respectively. These results imply that profitability

variable is insignificant in measuring the association with total CSR disclosure; therefore

provide enough evidence to reject H4. This finding is consistent with study by Gray et al.

(1995a), Hackston and Milne (1996), Abd Ghaffar et al. (2004,; Katmun and Ab Rashid

(2007), Abdul Hamid (2004), and Mohamed Zain (1999). Gray et al. (1995a) claimed profit is

not related to voluntary disclosure in the same period, but may be related to the lag profit.

This finding, however, contradicts the studies by Singhvi and Desai (1971), Naser et al.

(2002), Jaffar et al. (2007), and Mohamed Zain and Janggu (2006). In their studies, they

found that profitability was significantly affected by the total social disclosure.

4.4 Discussion of findings

Table III shows the total amount of disclosure reported by the GLCs for 2005 and 2006. Total

CSR disclosure is based on the total number of sentences calculated on all four themes,

namely human resource, community, marketplace and environment. In year 2005, total

number of sentences reached 2037 and increased to 2309 in year 2006, indicating an

increasing trend of disclosure for both period of study.

The result also indicates that all or 100 percent of GLCs disclosed at least one sentence of

social and environment disclosure for both period under study, 2005 and 2006 with a

minimum number of sentences of three and four respectively. The highest disclosure is 150

sentences in 2005, increased to 184 sentences in 2006, disclosed by Golden Hope

Plantation Berhad and Malaysia Airport Holding Berhad respectively. This indicates a

healthy and growing level of awareness among GLCs in this aspect. The result is consistent

with other studies for example Mohamed Zain (1999); Jaffar et al. (2002); Thompson and

Zakaria (2004); Saat et al. (2009); Mohamed Zain and Janggu (2006) which found the

amount of social and environmental disclosure by Malaysian companies to be limited but

growing. Additionally, Amran and Susela (2007) stated that companies that are owned

significantly by the government via government agencies do have better CSR disclosure.

The descriptive analysis indicates that there is a general trend of increasing total disclosure

and major themes of disclosure during the period of 2005 to 2006 except for marketplace

disclosure. The slight drop of marketplace disclosure in 2006 by 22 sentences (or 2.5

percent) may be best explained in the reduction of disclosure of two sub-categories, namely

R&D by 37 sentences (or reduced by 27 percent), and customer service by ten sentences


(or reduced by 5.4 percent). As research culture is new in Malaysia, therefore less disclosure

is expected on this area (Mohamed Zain and Janggu, 2006).

Based on the analysis of descriptive statistics, marketplace is the most popular theme of

disclosure with the higher average of disclosure per year (883 sentences), followed by the

human resource (558 sentences), community (547 sentences) and lastly environment (185

sentences). This implies that marketplace disclosure is considered more important than

other CSR themes. The trend seems to be changing. Previous studies indicate that human

resources are the most favorite theme (see Mohamed Zain, 1999, Mohamed Zain and

Janggu, 2006). This could suggest that companies are realizing that annual reports are

another tool or avenue for them to promote their products. This is consistent with finding by

Nik Ahmad et al. (2003) and Abdul Hamid (2004) which reveals that product-related

disclosure was highest and among the suggestions provided were that players from sample

industry try to introduce more competitive product to attract depositors and public to use

their products and another possible reason is to create confidence among depositors,

investors, and the public to place their money with their institutions and also to maintain its

goodwill.

Detailed analysis of data reveals that high disclosure on marketplace is contributed largely

by disclosure on shareholder communication channel. This is true in a sense that, as GLCs

are significantly owned and closely watched by the government, a medium of transferring of

information must be put in the right place so that shareholders (including government) will be

able to retrieve information desired at any time as required.

Previous studies suggest that certain firm characteristics, size, age, profitability and

leverage were found to have a significant relationship with total CSR disclosure. However,

the current study found only size (as measured by total assets) has positive significant

relationship with CSR disclosure. This implies that, the higher the company’s total assets, the

higher would be the amount of CSR disclosure. This is consistent with studies by Jaffar et al.

(2002), Abd Ghaffar et al. (2004); Mohamed Zain and Janggu (2006), Alsaeed (2006), and

Jaffar et al. (2007)

Other variables, on the other hand, show an insignificant relationship. Therefore, this rejects

the assumption that age, profitability and leverage can influence the level of CSR disclosure.

These findings support findings by Alsaeed (2006), Abdul Hamid (2004), Mohamed Zain

and Janggu (2006), Saat et al. (2009), Abd Ghaffar et al. (2004), and Katmun and Ab Rashid

(2007).

In general, the prospects of CSR disclosure in Malaysia especially in GLCs appear

encouraging and growing. The relationship tested between total CSR disclosure and certain

firm characteristics in this current study and other past studies shows mixed results. Hence,

it is impetus to find out the reasons behind it. However, this thesis does not wish to reside on

this, it aims to assess the extent of disclosure and its association with the variables being

tested.

5. Conclusion

The main objective of the study is to examine the type and quantity of CSR disclosure

practices from the year 2005 to 2006. The second or final objective is to ascertain the

relationship between company’s characteristics and CSR disclosure among GLCs.

Descriptive results have shown an increasing trend of CSR disclosure, where the total

number of sentences disclosed in 2005 is 2,037 with an increase to 2,309 sentences in the

year 2006 with all GLCs disclosing CSR information in their annual reports as the minimum

number of total disclosure is three and four sentences in year 2005 and 2006 respectively

(see Table III). This is supported by recent studies which acknowledged the increasing

pattern of CSR disclosure in the annual reports (ACCA, 2002; Thompson and Zakaria, 2004;

Mohamed Zain and Janggu, 2006; Amran and Susela, 2007; Saat et al., 2009) while focus or

role by government and regulatory organization may be the main reason why disclosures by

Malaysian companies (including GLCs) are on the rise (see: Mohamed Zain and Janggu,


2006; Saat et al., 2009) and implies that the level of social and environment awareness

among GLCs is already in place.

A review of the amount of CSR disclosure indicates that marketplace is the most popular

theme of disclosure at an average of 20 sentences per company per year or a total of 1,766

sentences for two years. The second most popular theme of disclosure is human resource

with a total of 1,116 sentences or an average of 13 sentences per company per year. This is

not surprising as greater awareness, greater social commitment, announcement of making

CSR mandatory for public-listed companies year ending December 31, 2007, establishment

of CSR framework and introduction of The Silver Book specifically for GLCs could result in

increasing trend of disclosure among GLCs.

This study assumes that the total disclosure is related to the importance placed on certain

issues, therefore, the higher the perceived importance, the higher is the disclosure on such

issue. According to Haron et al. (2004) as CSR is voluntary in nature, the choice of social

issues disclosed tends to reflect the Malaysian Government’s priority or the particular

obligations which companies have. This can be best explained with a strong awareness by

GLCs of the importance of marketplace disclosure during the period of study and disclosure

through annual report might help to ensure their end products are acceptable to the users

and consequently, companies are able to get some respect or recognition from them.

Another possible reason for the increase in marketplace disclosure could be due to the

pressure made by customers and consumer associations on the importance of reliable

information about the product quality and safety, customer service and product

enhancement or innovation through research and design. Shareholders or investors stress

the need for companies to improve their disclosure and transparency regarding company

practices could be the other potential grounds for disclosure, as their right to information

gives very important influence on the decision for disclosure.

On the statistical results, company size as measured by total assets is found to have a

significant relationship with total CSR disclosure. This signifies that large companies tend to

disclose a greater amount of CSR information than small companies. This is consistent with

previous Malaysian studies which concluded that larger companies tend to disclose more

information than small ones. There are several reasons for this but most importantly, large

companies are closely watched by investors, and those companies have the ability to

absorb extra costs for greater disclosure (Alsaeed, 2006), to maintain their good image and

reputation (Naser et al., 2002), to make sound investment decisions (Jaffar et al., 2002), and

to retain customer loyalty and talented employees (Idowu and Towler, 2004).

However, no significant relationship was found between the CSR disclosure and other

company attributes; namely age, profitability and leverage. This rejects the assumption that

the level of CSR disclosure increases as the age of the company increases. Hence, the

possibility that the old companies will improve social disclosure practices over time is not

found.

No relationship between total CSR disclosure with profitability and leverage simply means

that profitability and leverage do not influence the level of CSR disclosure. Moreover, in

Malaysia, the most popular source of financing is via banks and other financial institutions,

and it is expected that debt has less significant effect on voluntary disclosure (Abd Ghaffar

et al., 2004). These practice scenarios differ from other countries where public debt (debt

security) is their main sources of financing. Abd Ghaffar et al. (2004) claimed that, due to this

different scenario, most research studies found no significant relationship between voluntary

disclosure and leverage.

The current study also provides evidence that Malaysian CSR is coming of age as disclosure

practices by some of GLCs are rather open. A good example is the disclosure made by

Malaysia Airport Holding Berhad on employee health and safety aspect where CSR

information is not totally dominated by good news, but also bad news. This will in turn,

promote corporate transparency. Additionally, disclosure on shareholder communication

channel signifies that information disclosed in the annual reports is seen to be useful and

relevant to the stakeholders. This is because stakeholders, especially shareholders, can


directly access and retrieve information needed not only through company annual reports,

but also via company web sites and they are able to present themselves during the press

conference and dialogue session conducted by the company. With such number of

communication channels offered, it will indirectly reduce the information gap between

preparer and user. According to Deputy Prime Minister participation of multiple stakeholders

is important in bringing about an environment where CSR disclosure can become more

transparent (The SIDC Bulletin, 2004).

Some degree of recognition also needs to be given to Petronas, Sime Darby, Tenaga

Nasional and Telekom Malaysia for their commitment in developing the nation’s human

capital through education, scholarship, and the founding of major private universities. Other

than that, the initiative by the GLCs to disclose information on disaster relief represents the

company awareness pertaining to their obligation to the society as Zinkin (2004) claimed

that business is said to have a compulsion to help society.

On the environmental front, companies such as Golden Hope, Plus, Malaysia Airport

Holding Berhad and Pharmaniaga have adopted and shown their commitment towards the

environment by implementing zero burning technique, promoting of automated toll

collection to reduce the exhaust emission and minimizing impact of waste water.

The economic tendency these days make it beneficial to analyse GLCs and other private

companies separately as the term private sector is supposed to describe the sector within

the economy that is not owned by the state; where private individuals make private choices

with private resources for private gains or losses. The current global economic recessions

has made the future scenarios harder to foresee as such most companies are exposed to

greater risk and government’s aid is really obligatory. Consequently, companies transformed

to government’s owned companies becoming more common in the participation of business

in driving the economic growth of the country. Hence, GLCs are now increasingly imperative

in the commerce world as the engine of growth with added responsibility to the society. They

are expected to share the government responsibility in discharging their public

accountability by leading others to have good corporate practices on social and

environmental matters.

In conclusion, this study suggests that, government participation through its policies and

regulations has increased the level of willingness among GLCs to report on CSR matter. The

introduction of Vision 2020, the launching and establishment of The Silver Book and CSR

framework, both in September 2006, and the announcement making CSR disclosure

mandatory for company with financial year ending December 31, 2007 greatly influence

GLCs to undertake CSR practices more effectively. Perhaps, with the strong commitment by

the government, high demands from stakeholders and together with companies’ awareness

and concern for reporting, CSR disclosure level would be improved further. Therefore, this

study proposes that, in order to create user confidence on the truthfulness of the disclosure,

social audits should be conducted. However, since CSR disclosure is just becoming

mandatory, social audits are slow in coming.

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Commission, Kuala Lumpur, June.

Teoh, H.Y. and Thong, G. (1986), ‘‘Another look at corporate social responsibility and reporting:

an empirical study in a developing country’’, Malaysian Management Review, Vol. 21 No. 3, pp. 36-51.

Corresponding author

Mustaffa Mohamed Zain can be contacted at: [email protected]


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Disclosures About CSR Practices: A Literature Review 45

Disclosures About CSR Practices:A Literature Review

Corporate Social Responsibility (CSR) is now prominent and evident more than everdue to the emphasis laid on businesses regarding environmental, social and ethicalissues. The level of CSR activities of the firms is made known to public only throughthe disclosures. This paper reviews the literature on CSR disclosures and the effect ofthese disclosures. There are various factors which determine the extent of disclosureslike the size of the firm, industry, high visibility, etc.

IntroductionCorporate Social Responsibility (CSR) is now prominent and evident more than ever due to theemphasis laid on businesses regarding environmental, social and ethical issues. This is becauseover the recent years, there have been social, political and economic pressures on corporatemanagement to pay attention on social and environmental consequences of corporate activities.These pressures motivated the corporate management to actively participate in a wide rangeof social welfare activities. CSR now-a-days covers almost all issues like the use of child labor;inequality of employment; environmental impact; involvement in local community; products’safety; company cultures; brand image and reputation. Apart from this, companies are nowdisclosing these activities in their annual reports, and one of the parameters to judge theperformance of a company is CSR reporting.

Corporate Social ResponsibilityCSR is defined by Naylor (1999) and mentioned in the work of Douglas et al. (2004) as “theobligation of managers to choose and act in ways that benefit both the interests of theorganization and those of society as a whole.”

Commission of the European Communities defines CSR as a concept by which “companiesdecide voluntarily to contribute to a better society and a cleaner environment”. It states thatbehaving in a socially responsible way amounts to “going beyond compliance and investing‘more’ into human capital, the environment and the relations with stakeholders”.

Fraser (2005) describes CSR as sustainable development which needs to be carried out byall the publicly held companies. These companies need to be responsible not only for theirshareholders, but also its stake holders like the employees, customers, suppliers, governmentand non-governmental organizations.

* Research Scholar, IBS, Hyderabad, India. E-mail: [email protected]

** Research Scholar, IBS, Hyderabad, India. E-mail: [email protected]

© 2011 IUP. All Rights Reserved.

Kavitha W * and Anita P **

The IUP Journal of Corporate Governance, Vol. X, No. 1, 201146

Gray et al. (1996) defined CSR as the “process of communicating the social andenvironmental effects of organizations’ economic actions to particular interest groups withina society and to society at large”. Rajtongakal et al. (2006) identified three theories on CSR—legitimacy theory, stakeholder theory and political economic theory.

According to the legitimacy theory, firm is a part of a broader social construct whoseexpectations must be met if the firm wants to sustain itself without extreme societal sanctionsbeing forced.

The stakeholder theory focuses on the various stakeholder groups within the society.This theory is divided into two branches. They are the positive/managerial branch and theethical/normative branch.

The political theory comprises the economics, politics and society. It treats them asindivisible.

The growth in the awareness of CSR has encouraged researchers across the globe to studyvarious aspects of CSR. The CSR activities of the corporations are made public through thereporting that they make. This paper attempts to review the literature on CSR reportingand explores some of the important aspects of CSR.

The paper first discusses the nature of CSR and its disclosures, followed by an analysisof the effect of disclosures on the performance of the firm. It then identifies the antecedentsfor the disclosures and subsequently talks about the users of CSR information beforeconcluding.

Corporate Social Reporting

Definition

Sutantoputra (2009) in his work has defined CSR reporting (borrowed from Gary et al., 1987)as “the process of providing information designed to discharge social accountability”, and thisinformation could be provided by annual reports, special publications or reports or evensocially orientated advertising.

Companies used CSR reporting as a way to communicate to their stakeholders about theirsocial performance. This external communication known as corporate social reporting helps afirm to build a positive image among its stakeholders. Sometimes it is also called socialaccounting, social disclosure, social auditing, social review, social reporting or sustainabilityreporting (Douglas et al., 2004).

Generally the main medium of disclosing CSR activities is the annual report. However, if theyare not disclosed in the annual report, and are published separately, then they are known associal and environmental report or CSR reports or sustainability report (Sutantoputra, 2009).

Douglas et al. (2004) note that reporting of the CSR behavior is different in differentcountries, which is attributed to the government policies, cultural differences, and stage ofeconomic development. Further, they also state that the volume of disclosure does notnecessarily reflect the quality of corporate social reporting.


It has been noted that companies with the highest public profile are more willing to presenta positive social image through community involvement activities than those less well-known,in part because such activities are not only deemed to attract consumers, but also justify theirexistence to the society (Branco and Rodriques, 2006). They also observed that although thelisted companies are not subject to extensive disclosure requirements with respect to socialresponsibility activities than unlisted ones, they receive more attention from the general publicand are subject to more extensive media coverage.

Branco and Rodriques (2006) state that it is the choice of medium and the target publicwhich are important for the kind of disclosures. They say that if the cost of producing anddistributing is reduced, then the companies discuss in greater depth the topics of particularinterest to other sectors of the general public. They state that internet allows companies toprovide information targeted to different stakeholders and obtain feedback from them.

Information related to human resources and environmental activities of the organization areavailable more in the annual reports as compared to the internet. Annual reports are directedtowards important resources—investors and human resources. Therefore, it is natural for aninvestor to be interested in it. On the other hand, since company websites are intended at abroader audience, public companies give prominence to community involvement, products andconsumers information (Branco and Rodriques, 2006).

Classification of CSR DisclosuresEvery organization provides information to its stakeholders. The information provided by theorganization can be broadly classified into mandatory and voluntary. Mandatory informationis that which appears in the director’s report in accordance with the requirements of law.On the other hand, voluntary environmental disclosures are those appearing in sections otherthan the directors’ report. The voluntary sections of the report permit a greater amount ofdiscretion to the organization on the content of material included as they are not mandatory(Cowan and Gadenne, 2005).

Mandatory Disclosures

Cowan and Gadenne (2005) in their study stated that the mandatory information in the annualreport provides users of the annual report with factual account of the entity’s compliance withregulations over the reporting period. They further state that the mandatory disclosures willplace reporting companies in a position of increased scrutiny. Cowan and Gadenne (2005)observed that the material included in the director’s report should command a differentdisclosure behavior than that adopted in the voluntary section.

Voluntary Disclosures

These disclosures are considered in the decision-making process of several user groups.Organizations do not provide voluntary disclosures only as a means to satisfy the user’s right toknow but also a way in which the organization would be deemed legitimate by the society andsubsequently reap the rewards of such legitimacy (Cowan and Gadenne, 2005). Sometimes,organizations use self puffery to a great extent in voluntary reporting (Cowan and Gadenne, 2005).


There are a few guidelines which the companies need follow to measure their CSR activities.The most important guidelines are those which deal with the environment, supply chainmanagement, hiring practices, community relations, internal management or corporategovernance, and charitable donations.

The Global benchmarks for the same are United Nations Declaration of Human Rights, theInternational Labor Organization’s (ILOs) labor standards, and several globally recognizedvoluntary standards, such as the Organization for Economic Cooperation and Development(OECD) guidelines for multinationals and the United Nations Global. However, the most widelyaccepted reporting guideline is the Global Reporting Initiative (GRl), based in Amsterdamand launched in 1997 and declared as a common framework for sustainable reporting(Fraser, 2005).

Categories of Disclosures

As indicated earlier, apart from the mandatory social disclosures, companies also disclose CSRpractices in their annual reports voluntarily. Waller and Lanis (2009) have found that out of thesix advertising companies, four have voluntarily presented a CSR section in their annual reports.The level of disclosure is different in different companies depending on their institutionalenvironment and the impact of their relevant public, whereas Ingram (1978) in his study foundthat informational content of social responsibility disclosures depends upon the market segmentthrough which the firm is identified. While analyzing the annual reports of advertising agencies.Waller and Lanis (2009) observed that the companies disclose CSR information in the categories:CSR Strategy—which is given in the form of a vision statement or guidelines or CSR committee;General CSR issues—like human resource issues, social commitment, community involvement,environment issues, etc.

Following are the types and categories of disclosures (both mandatory and voluntary) whichare disclosed by the companies in their annual reports as identified by various researchers:

• Environment: Environment issue is one of the major concerns which a modernorganization is facing because industrial pollution is considered as one of the mainsources of global warming. So, companies disclose the activities which theyundertake to prevent the environment degradation in their annual reports. Ingram(1978), Abbott (1979), Deegan and Rankin (1996), Hackston and Milne (1996) andW ebb et al. (2009) have found that environment is one of the issues which hasreceived substantial attention in the annual reports of the companies. Researchersacross the globe have observed the following categories of the environmental issue:

Abbott (1979) has analyzed the annual reports of Fortune 500 companies and foundthe following information categories of environment which companies disclose:

– Pollution control

– Product improvement

– Repair of environment


– Recycling of waste materials

– Other environmental disclosures

Deegan and Rankin (1996) have found that the companies disclose policies relatedto information on environment in their annual report which is given as under:

– Environmental policies

– Cost of environmental programs

– Cost of environmental compliance

Ingram and Beal (1980) in their study have concentrated only on environmentdisclosure and environment performance. They found the following dimensions(with definitions) of content analysis with their categories by using varimax rotatedfactor analysis:

– Evidence: (a) Monetary—a statement showing information regarding a firm’spollution activities in monetary terms; (b) Non-monetary—a statement showinginformation regarding a firm’s pollution activities in qualitative terms;(c) Qualitative—a statement showing information regarding a firm’s pollutionactivities in qualitative terms; (d) Declarative—a statement declaring firm’spollution activities; and (e) None—a statement not showing a firm’s pollutionactivities.

– Time: (a) Past—a statement referring to past events; (b) Present—a statementreferring to present events; and (c) Future—a statement referring to presentevents.

– Specificity: (a) Specific—a statement showing firm’s own activities; and(b) General—a statement not referring to firm’s own activities.

– Theme: (a) Public interest—a statement showing the benefits of firm’s activitieson external parties; (b) Economic consequences—a statement showing the costof pollution control measures to external parties; (c) Irrational activists—astatement showing the irrational behavior environmental activists; (d) Governmentregulation—a statement showing unrealistic government standards;(e) Litigation—a statement showing firm’s involvement in legal proceedings;(f) Regulatory compliance—a statement showing firm’s interest in compliance ofregulatory standards; (g) Actual accomplishments—a statement showing firm’scompleted activities; (h) Proposed accomplishments—a statement showing firm’sproposed actions; and (i) Environmental Concern—a statement showing firm’scommitment to environmental activities.

• Fair Business: Ingram (1978) in his paper defined fair business practices as practicesof employment of advancement of minorities (based on race and sex) and supportfor the minority businesses and observed that the US firms disclose fair businessinformation in their annual reports as CSR practice.


• Equal Opportunity: Abbott (1979) found that companies across the globe alsodisclose such information in their annual reports and treat this information as CSRdisclosure. Under this category, various other types of disclosures—minorityemployment, advancement of minorities, employment of women, advancement ofwomen, minority business, other disadvantaged groups, other statements on equalopportunity, advancement of racial minorities or women and hard core racialminority employment were also found.

• Personnel or Human Resources: In this category, firms disclose all those activitiesundertaken for the welfare and betterment of their employees. Ingram (1978), Abbot(1979), Deegan and Rankin (1996) and Hackston and Milne (1996) have observed thatcompanies make such disclosures very frequently. A few of these observations arementioned below.

– Employee health and safety—Abbot (1979), Deegan and Rankin (1996)

– Employee policies—Deegan and Rankin (1996)

– Diversity and human resources, health and safety, human rights and supplychain—Webb et al. (2009)

– Other employee disclosures like training, personnel counseling, assist displacedemployees locate new work—Abbot (1979)

• Community Involvement: The activities of the corporation have also relevance tocommunity involvement. Ingram (1978), Abbot (1979), Deegan and Rankin (1996),Hackston and Milne (1996) and Webb et al. (2009) have observed companyinvolvement as a CSR information which companies disclose in their annual reports.Abbot (1979), while analyzing the annual reports of fortune 500 companies havefound some of the categories of company involvement such as community activities,public health, education or the arts, other community activity disclosures.

• Product quality or safety/Consumers: According to Ingram (1978), Abbot (1979),Deegan and Rankin (1996) and Hackston and Milne (1996) , product is anothercategory of CSR information which companies disclose.

• Political: Webb et al. (2009)

• Energy: Energy related issues were found in the annual reports of New Zealandcompanies (Hackston and Milne, 1996).

Effects of DisclosuresCSR is related to social performance of the company which includes all of environmental,economic and social effects on the society. These effects could be positive and negative andactual and potential. Douglas et al. (2004) noted that organizations which fail to meet thesocietal expectations lose their legitimacy and subsequently their survival is endangered.


The effects of CSR disclosure can be seen in two ways—on CSR performance, and on firms’financial performance (relationship between CSR disclosure and firm’s financial performance).

Effect of CSR Disclosure on CSR Performance

Some of the studies which are done on CSR disclosures have tried to find the relationship

between CSR disclosure and CSR performance.

Abbot (1979) developed a quantitative scale on the basis of self-reported disclosures which

was identified as Social Involvement Disclosure (SID) scale. The scale was obtained through

content analysis of the annual reports of Fortune 500 companies and it was observed that selfreporting of such disclosures had a positive impact on the measurement of CSR. Relationship

between disclosure level and CSR is also examined by Gelb and Strawser (2001) by analyzing

annual reports of 233 firms. They have regressed the firm’s percentile rank within its(Association for Investment Management and Research (AIMR) corporate information committee

reports) industry group (as dependent variable) against firm’s CSR rating, the total market

capitalization of the firm, the annual market-adjusted stock return for the current fiscal year,the standard deviation of market-adjusted annual returns over the preceding 10 fiscal years,

a dummy variable set to one if the firm publicly issued debt or equity securities in the current

or following two fiscal years (as independent variables) by using Ordinary Least Square (OLS)regression. The results indicate that there exists a positive relationship between the disclosure

level and CSR. This indicates that those firms which undertake social activities are more socially

responsible and they provide more disclosures on CSR in the annual reports. But results aredifferent in case of analysis done by Ingram and Beal (1980) on 40 firms in four different

industries—electric utilities, iron and steel, petroleum refining and pulp and paper. In order to

examine the relationship between the Council on Economic Priorities (CEP) index scores andenvironmental disclosures of firm, they used product moment correlation. A weak association

was found between quantitative measures of disclosures and social performance independent

measures. The reason of such weak association is that weak performers are biased in selectingthe information to be disclosed in order to appear better as the management has its own

discretion to select the information to be disclosed in the annual reports.

Furthermore, Rockness (1985) analyzed the statement of the users of companies which make

voluntary environmental disclosures. He tested whether these users are able to make accurate

judgments regarding the US firms’ environmental performance on the basis of annual reportdisclosures. He used experimental analysis on 26 largest firms in steel, oil and pulp and paper

industries and participants were the members of environmental protection organizations,

environmental regulators, financial analysts and MBA students. The results indicate thatenvironmental disclosures helped in forming opinions of the users of the company and also

facilitated the comparison of environmental performance of the firm with other firms in the

industry. But these results are not similar to the interpretations of actual performance made byCEP. So, the usefulness of the disclosures is questionable at best.


Effect of CSR Disclosure on Firms’ Financial Performance: RelationshipBetween the Two

Intuitively, the aim of any business organization is to earn maximum profits and to improve itsfinancial performance. To achieve this, besides mandated disclosures, companies makevoluntary disclosures of CSR information in their statements. So, it is assumed that more theCSR disclosure, better is the financial performance. Several researchers across the globe havetried to explore the relationship between CSR disclosure and firm’s financial performance.

In order to provide some empirical evidence relevant to the social performance disclosure,Spicer (1978) has analyzed 18 firms listed on New York Stock Exchange in pulp and paperindustry and tested the association between economic and financial indicators of investmentvalue, i.e., profitability, size and systematic risk, price/earnings ratio and corporate performanceindicator of a key issue, i.e., pollution control record (proxy-pollution index—compiled by CEP)by using Spearman Rank Correlation Coefficient. As paper and pulp industry is a pollution proneindustry, pollution index which is a key issue is taken as an indicator for CSR. It was foundthat the companies which have better pollution control records are of large size and have highprofitability, high price/earnings ratios, low risk (total and systematic), whereas the companieswhich have poor pollution control records are of small size and have low profitability, low price/earnings ratio and low risk. Douglas et al. (2004) have found a positive association betweencompany’s reputation index (proxy for social performance) and its return on equity (proxy forfinancial performance).

Determinants of CSR DisclosuresApart from the CSR practices and its categories followed by the organizations, amount, formatand location of disclosure of CSR information in annual reports is also gaining attention ofresearchers. Attempts were also made to find out the determinants of CSR disclosures, or thefactors which explain CSR disclosures.

Hackston and Milne (1996) examined 47 largest firms listed on New Zealand Stock Exchangeand found that the amount of social disclosure made by these companies in their annual reportsis on an average three fourths of a page. They also used regression in order to find out thedeterminants of CSR disclosures. Size and industry are found to be significantly related with theamount of disclosure, whereas profitability was not. The relation of size and disclosure is moresignificant in high profile firms than the low profile firms. The study also concluded that firmshave high social disclosures if they have dual and multiple listings. Webb et al. (2009) also foundsize and industry driven differences in CSR disclosures in their study on 50 US listed firms infive industries (simple manufacturing (MFG), R&D intensive manufacturing (R&D), extractivenatural resources (OIL), intellectual property generation (SOFTWARE), sales (RETAIL)), and thedifferences were found in the volume and pattern of disclosure of the US firms when comparedwith the international studies done on global enterprises. As far as the format of disclosure isconcerned, they found seven format categories which are mandatory, website, government doc,product fact sheet, CSR report or brochure, press release and others.


By using content analysis Douglas et al. (2004) analyzed six Irish banks and found thatlargest companies disclose almost all types of CSR information. They observed that significantfactors affecting corporate social reporting patterns are country of the head office, size ofcompany and industry group.

Branco and Rodrigues (2006) observed that the industries which have higher potentialenvironmental effect disclose more CSR information in their annual reports because oflegitimacy reasons.

Users of the CSR InformationAnother concern regarding CSR is how various classes of annual report users assess theimportance of environmental disclosures. There are very limited studies in this regard.

Deegan and Rankin (1997) tried to investigate whether various class of users of annualreports consider environmental information to be material while taking various decisions andalso tried to find how these users rank environment information relative to other CSRinformation and financial information such as net profits, cash flows, assets and dividendpayments. A survey was conducted on 118 respondents in Australia who were shareholders,accounting academics, research analysts, stockbrokers and representatives of financialinstitutions. Their results indicate that annual report is considered as the most important sourceof information than any other source by all the categories of users except shareholders andinternal users who consider environmental information material as important. All the usergroups had consensus that although financial information such as profitability, cash flows, etc.,are important, environment information is of their material interest. According to Douglas etal. (2004) the main audience of the information disclosed in annual report is shareholders andsocial reporting mainly addresses this audience.

ConclusionThe paper gives an overview of the current literature on various aspects of CSR disclosures.CSR disclosures are of two kinds—mandatory and voluntary. Voluntary disclosures are given bycompanies to improve the firm’s performance and reputation. The various categories of CSRdisclosures are environmental, equal opportunity, human resource, community involvement,product quality, political, energy, etc. These disclosures affect the firm’s CSR and financialperformance. There are various factors which determine the amount of disclosure like the sizeof the firm, industry, high visibility, etc. Although financial information is important for the stakeholders of the firm, environment information is also of their material interest.

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Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.

Corporate social reporting:empirical evidence fromIndonesia Stock Exchange

Sylvia Veronica Siregar and Yanivi BachtiarDepartment of Accounting, University of Indonesia, Depok, Indonesia

Abstract

Purpose – The purpose of this paper is to investigate the effect of board size, foreign ownership, firmsize, profitability, and leverage on corporate social responsibility (CSR) reporting and the possibleeffect of CSR reporting on a firm’s future performance.

Design/methodology/approach – Annual reports were analyzed by content analysis method andmultiple regression was used to test hypotheses.

Findings – Evidence was found that board size has a positive and non-linear (quadratic and concave)relationship with CSR. This result confirms predictions that a larger board will be able to exercisebetter monitoring, but that too large a board will make the monitoring process ineffective. Firm sizehas a positive effect on CSR. This suggests that larger firms have more resources to devote to socialactivities and a larger asset base over which to spread the costs of social responsibility. They also facemore pressure to disclose their social activities for various groups in society. Profitability and leverage,however, do not have significant influence. Little evidence was found of positive impact of CSR onfuture performance. This result could encourage firms to disclose their CSR activities because thereseems to be a positive affect on future performance.

Research limitations/implications – The measure of CSR may involve subjective judgement andis only limited to annual reports.

Practical implications – The paper shows that it is important for a company to increase itsawareness on corporate social activities and also its disclosure in the annual report.

Originality/value – The paper shows that board size has a positive and non-linear effect on CSR,which has been rarely examined in previous research.

Keywords Indonesia, Annual reports, Corporate social responsibility, Boards of Directors, Profit,Stock exchanges


1. IntroductionIn the past, firms were considered to have met their responsibilities if they operatedwithin the confines of the law, generated profit, and provided employment for membersof society (Epstein et al., 1976). Recently, however, firms are also expected to be moresocially responsible towards the community in which they operate. Firms are expectedto reduce pollution, utilize natural resources effectively and efficiently, maintain adiverse work force, provide employment for minorities and women, eliminate racialand sexual discrimination, and more (Adebayo, 2000).

In spite of increased community awareness on socially responsible activities, thereare still many cases of socially less responsible firms. In Indonesia, for example, theTeluk Buyat case (which cause health problems to citizens living in Teluk Buyat) andthe Lapindo case (mud floods covering a huge area in Sidoarjo, forcing people living inthose areas to evacuate). There are many similar cases in other countries, for example:

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ManagementVol. 3 No. 3, 2010

pp. 241-252q Emerald Group Publishing Limited

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Exxon Valdez (legendary environmental tragedy), Bhopal-Unior Carbide (caused deathand injury of citizens), and Nike (employment of underage children).

Concern with corporate social responsibility (CSR) in Indonesia has been increasing.Initially, in Indonesia, Company Act No. 1 Year 1995 did not consider CSR, but later, in2007 when the Company Act was revised and enacted (Company Act No. 40 Year2007), the act included CSR in article 74, which states that a company having itsbusiness activities in the field of and/or related to natural resources shall be obliged toperform its social and environmental responsibility. This probably was triggered byseveral problems related to CSR, such as environmental problems caused by largepopulations, destruction of forests, poor labour standards, etc.

The increasing concern with CSR has impacted also on growing attention to itsreporting in companies’ annual reports. CSR reporting has been a research subject ofmany academicians for over two decades (Haniffa and Cooke, 2005). Two major issuesof those studies are factors that determine the level of CSR reporting and whether CSRreporting affects a firm’s future performance. The purpose of this research is toinvestigate the effect of board size, foreign ownership, firm size, profitability, andleverage on CSR reporting; and the possible effect of CSR reporting on a firm’s futureperformance.

There are several contributions of this research. First, it contributes to the CSRliterature, especially in Indonesia. Second, we accommodate the non-linear relationshipbetween board size and CSR reporting, which has not been examined yet in mostprevious studies. Third, the majority of CSR studies were conducted in developedcountries that use a one-tier board system, hence they only include board of directorssize in their studies. Indonesia adopts a two-tier board system, where there are twoboards: board of commisioners and board of directors. It is important to consider theeffect of both boards on CSR reporting.

2. Literature review and hypotheses developmentBowen (1953) published a book, Social Responsibilities of the Businessman, which islargely credited with coining the phrase “corporate social responsibility” and isconsidered as the Father of CSR. Bowen also provided a preliminary definition of CSR.He defined social responsibility as the obligation of businessmen to pursue thosepolicies, to make those decisions, or to follow those lines of action which are desirablein terms of the objectives and values of our society (Bowen, 1953). But afterwardsthere have been many definitions of CSR. For example, according to CSR Europe(www.csreurope.org/aboutus/FAQ_page396.aspx, accessed June 26, 2007), CSR refersto the way a company manages and improves its social and environmental impact togenerate value for both its shareholders and stakeholders by innovating its strategy,organisation, and operations.

Firms could prepare CSR to inform shareholders and other stakeholders about a firm’sCSR activities. What is CSR? According to Global Reporting Initiatives (GRI) (www.globalreporting.org/AboutGRI/FAQs/FAQSustainabilityReporting.htm, accessedJune 26, 2007), corporate social reporting/sustainability reporting is a process forpublicly disclosing an organization’s economic, environmental, and social performance.Many organizations find that financial reporting alone no longer satisfies the needs ofshareholders, customers, communities, and other stakeholders for information aboutoverall organizational performance. Meanwhile, according to Gray et al. (1987), CSR is the

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process of communicating the social and environmental effects of organisations’ economicactions to particular interest groups within society and to society at large. As such,it involves extending the accountability of organizations (particularly companies) beyondthe traditional role of providing a financial account to the owners of capital, in particular,shareholders. Such an extension is predicated upon the assumption that companiesdo have wider responsibilities than simply to make money for their shareholders.

CSR generally is still prepared on a voluntary basis, resulting in firms choosingdifferent items to disclose and diverse disclosure forms. Consequently, it becomesdifficult to compare social activities among firms. To address this issue, GRI wasfounded in 1997 with a purpose to develop guidance that can be applied globally foreconomic, environment, and social performance reporting (Bhimani and Soonawalla,2005). GRI has issued sustainability reporting guidelines that can be accessed throughits web site: www.globalreporting.org

Many studies regarding CSR have been done in many countries. These studiesindicated that firms in different countries did disclose different items regarding theirsocial activities. Guthrie and Parker (1989) find that 56 percent of Australian firms,98 percent of UK firms, and 80 percent of US firms disclose social information (humanresources, community involvement, environment, and energy and product disclosure).Singh and Ahuja (1983) examined annual reports of 40 public sector companies in Indiaand found that 40 percent of those firms have social disclosures. A study by Savage(1994) in South Africa found that 50 percent of his samples have social disclosure withhuman resources as the main subject (89 percent), followed by involvement incommunity (72 percent) and environment disclosures (63 percent). Tsang (1998) alsofound consistent results in Singapore, where 52 percent of his samples have socialdisclosures. In Indonesia, a study by Utomo (1999) investigated CSR disclosures, andfound that most disclosures related to products and consumers. Hartanti (2003) alsoinvestigated social disclosure of public firms in Indonesia. She found that the averagelevel of disclosure is still low. Highest disclosures related to product, labour, followedby involvement in society, environment, and energy.

The most common form of disclosing CSR is disclosure in annual report. Adams et al.(1998) found that firms in Germany, France, Switzerland, the UK, and Dutch firms,generally disclose their CSR activities through annual reports. Based on those studies,our study focuses on the annual report also as the source of CSR. Kent and Chan (2003)provided a number of reasons why it is justified to use the annual report:

. annual report is the principal source of corporate communications to investorsand it is widely used by firms to disclose their social activities;

. the presentation of financial and social information within one document (whichis the annual report) is one way of reducing costs of disclosure;

. annual report is also the type of information most actively sought by pressuregroups; and

. disclosures through other media, such as the popular press, are subject to the riskof journalistic interpretations and distortions, whereas disclosures throughannual report are completely editorially controlled by management.

There are several factors that could contribute to the level of CSR. Collier and Gregory(1999) argued that larger board of directors’ size will make it easier to control the CEO


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and the monitoring process will be more effective. But, a very large board could limit thecommunication and coordination among board members and consequently will hampermonitoring process. A very small board as well as very large board will not be effective,so we expect there is non-linear (quadratic and concave) relationship between board sizeand CSR, where larger board size will have positive influence on CSR, but a very largeboard size will have negative effect on it. Since Indonesia adopts a two-tier board system,board size relates to total of board of commissioners’ and board of directors’ size:

H1. Board size positively affects corporate social reporting.

H2. Relationship between board size and corporate social reporting is concave.

Other variables that could explain social disclosures are ownership structure (Cormierand Gordon, 2001) and type of financial statement user (Deegan and Rankin, 1997).Different shareholders could demand different disclosures and the demand would behigher if foreign investors have higher ownership (Schipper, 1981; Bradbury, 1991;Craswell and Taylor, 1992). Therefore, we expect that the higher the foreign ownership,the higher the level of corporate social reporting:

H3. Foreign ownership positively affects corporate social reporting.

Many of previous studies find positive relationship between firm size and CSR andreporting. Larger firms may have more resources to devote to social activities and alarger asset base over which to spread the costs of social responsibility (Lerner, 1991).This will also positively affect the level of CSR. Larger firms deal with more scrutinyfrom government and also various groups in society, hence they will be under morepressure to disclose their social activities (Cowen et al., 1987). We use total assets as aproxy for company size:

H4. Total asset positively affects corporate social reporting.

The same argument as for firm size could also be proposed for profitability. Profitablefirms may have more resources to devote to social activities and a larger profit base overwhich to spread the costs of social responsibility. Another argument is management ofprofitable firms has more freedom and flexibility to engage in and to disclose socialactivities. Profitable firms also disclose more of their social activities to show theircontribution to society. Edwards (1999) finds a positive link between environmental andfinancial performance. Profitability is measured using return on equity (ROE), becausethis ratio shows how much money a company is making for its investors:

H5. ROE positively affects corporate social reporting.

Belkaoui and Karpik (1989) show that leverage has a negative and significantrelationship with CSR. This is based on agency theory where management with highleverage will reduce its CSR to avoid creditor scrutiny:

H6. Debt-to-equity ratio (DER) negatively affects corporate social reporting.

Porter and van der Linde (1995) suggest that well-designed environmental regulationswill induce innovation and productivity, which will increase firms’ competitive advantage.Their argument is that with good management, higher competitive advantage willdecrease costs, increase productivity, and reduce or eliminate resources inefficiencies.

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CSR can enhance a firm’s reputation and establish good relationships with banks,investors and government, which in turn are reflected in the company’s performance. Healand dan Garret (2004) conclude that CSR could contribute to a firm’s long-termprofitability. That is why we also argue that there is a lag on the effect of CSR on firmperformance, because it takes time for CSR to have an effect on a firm’s reputation and,in turn, on firm performance:

H7. Corporate social reporting positively affects future firm performance.

3. Research method3.1 Research modelWe use following model to test H1-H6:

CSRt ¼ a0 þ a1BOARDSZt þ a2BOARDSZ2t þ a3FORt þ a4SIZEt þ a5ROEt

þ a6DERt þ e ð1Þ

Expectation: a1 . 0; a2 , 0; a3 . 0; a4 . 0; a5 . 0; a6 . 0where:

CSR ¼ corporate social reporting, measured by:

corporate social disclosure index (CSDI); and

corporate social disclosure length (CSDL).

BOARD_SZ ¼ total board of commissioners and board of directors size;

FOR ¼ percentage of foreign investor ownership;

TASSET ¼ natural logarithm of total asset;

ROE ¼ return on equity; and

DER ¼ debt-to-equity ratio.

Whereas to test H7, we use following research model:

ROEtþ1 ¼ b0 þ b1CSRt þ b2ROEt þ b3MCAPtþ1 þ e ð2aÞ

RETtþ1 ¼ b0 þ b1CSRt þ b2ROEtþ1 þ b3MCAPtþ1 þ e ð2bÞ

Expectation: b1 . 0, c1 . 0where:

ROE ¼ return on equity; and

RET ¼ stock return.

We use two measures of firm performance:

(1) accounting measures (ROE); and

(2) market measure (stock return) measured using market adjusted return for aone-year period.

We include ROE and MCAP as control variables. ROE one year ahead will be affectedpositively by current ROE (b2 . 0) and larger firms (measured using natural logarithm


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of market capitalization) tend to have larger profitability (b3 . 0). Profitability willhave a positive affect on stock return (c2 . 0) and market capitalization is used tomeasure firm size as a proxy for firm’s risk (c3 . 0).

To measure CSR, we use content analysis method. Our corporate social reportingchecklist includes six subjects (environment, energy, labour, product, community, andothers). This checklist is modified from a checklist used by Haniffa and Cooke (2005)and Sembiring (2005). We use two measures:

(1) number of corporate social reporting items stated in index (CSDI); and

(2) number of disclosure sentences (CSDL).

Our samples consists of all public firms listed in the Indonesian Stock Exchange (IDX)in 2003, with complete data. Because of much missing data (incomplete annual report),our final total consisted of 87 firms.

4. Results4.1 Descriptive statisticsTable I Panel A shows descriptive statistics of CSR. Mean CSR disclosure (CSDI) is 13.74percent, while mean of disclosure length (CSDL) is 39 sentences. Most disclosed item isproduct. It indicates that firms considered disclosure about products as the most importantissue to be disclosed. This is not surprising, because product has a direct relationship withthe economic benefit that a firm will receive, which is increasing in revenue.

Descriptive statistics of other variables used in this study are presented in Table IPanel B. Mean board size is 9, and there is only a small variation within samples.Foreign ownership is only about 20 percent, which indicates that, on average, foreigninvestors do not have significant ownership of public firms in IDX. SIZE does not showmuch variation. On average, our samples are profitable firms, hence our results maynot be generalized to losing firms and also produce positive returns. Total debt of oursamples was approximately twice their equity.

4.2 Factors affecting corporate social reportingRegression result is presented in Table II (Panel A shows CSDI as dependent variablewhereas Panel B for CSDL). F-statistic of both panels shows that it is significant only inPanel A (CSDI) but insignificant in Panel B (CSDL). All of the independent variablesaffecting CSR are only able to explain significantly the variation of dependentvariables, if the dependent variable is CSDI.

Both panels show relatively consistent results. BOARD_SZ and BOARD_SZ2 aresignificant and, respectively, have positive and negative sign (H1 and H2 are notrejected). These results confirm our prediction that a larger board will be able toexercise better monitoring (including monitoring on CSR in annual reports), but toolarge a board will make the monitoring process ineffective (negative impact).

FOR has no significant affect on CSR (H3 is rejected). This finding is inconsistentwith evidence found in Schipper (1981), Bradbury (1991), Craswell and Taylor (1992)that foreign investors will demand higher disclosure. This result may be due toinability of foreign investors to exercise greater monitoring due to lower level ofownership (see statistics descriptive result). Or foreign investors are not as concernedwith CSR because of their short-term investment horizon in public firms in Indonesia.

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Firm size, measured by total asset, has a positive and significant effect on CSR (H4 isnot rejected). This suggests that larger firms have more resources to devote to socialactivities and a larger asset base over which to spread the costs of social responsibility(Lerner, 1991). Larger firms also face more pressure to disclose their social activitiesfrom various groups in society. This result is consistent with Belkaoui and Karpik(1989), Hackston and Milne (1996), Gray et al. (2001) and Sembiring (2005).

ROE and DER do not have significant influence on CSR (H5 and H6 are rejected).This indicates that profitability and leverage do not have significant influence on CSR.This evidence is contrary to Edwards (1999) who found a positive link betweenenvironmental and financial performance and also contrary to Belkaoui and Karpik(1989) who found leverage has a negative and significant relationship with CSR.The insignificant result of ROE could be due to firms not finding it necessary to engagein CSR activities, although profitable (and consequently do not disclose it) because theyconsider CSR activities only add cost without any direct benefits. Meanwhile, theinsignificant result of DER probably results from using DER as a proxy for leverage.

Minimum Maximum Mean SD

Panel A: corporate social reportingCSDI

Total 0.0250 0.4000 0.1374Environment 0.0000 0.5714 0.0858Energy 0.0000 0.3333 0.0144Labour 0.0000 0.3846 0.1376Product 0.0000 0.6364 0.2345Society 0.0000 0.7500 0.1049Others 0.0000 1.0000 0.3678

CSDLTotal 3.0000 245.0000 39.0000Environment 0.0000 21.0000 1.6437Energy 0.0000 3.0000 0.1034Labour 0.0000 56.0000 9.7931Product 0.0000 214.0000 23.3908Society 0.0000 54.0000 2.5862Others 0.0000 14.0000 1.4828

Panel B: variables usedCSDI 0.0250 0.4000 0.1374 0.0846CSDL 3.0000 245.0000 39.0000 46.6820BOARD_SZ 5.0000 20.0000 9.1149 3.3111FOR 0.0000 0.8814 0.2043 0.1818TASSET 21.0242 31.4633 27.354002 1.6546139ROE 20.9763 2.2164 0.0857 0.3841DER 228.9800 38.5700 2.1398 8.1523ROEtþ1 20.5169 1.6432 0.1167 0.2790RETtþ1 20.0029 0.8349 0.0130885 0.0943523MCAPtþ1 22.4028 31.8511 26.518983 2.0073281

Notes: CSDI, corporate social disclosure index; CSDL, corporate social disclosure length; BOARD_SZ,total board of commissioners and board of directors size; FOR, percentage of foreign investorownership; TASSET, natural logarithm of total asset; ROE, return on equity; DER, debt-to-equityratio; RET, stock return; MCAP, natural logarithm of market capitalization

Table I.Descriptive statistics


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DER may not be a good measure of the power of creditors to exercise monitoring ofmanagement. Different debt contracts have different covenants which entail differentcreditor’s monitoring abilities.

We perform an additional test where board size is divided into board ofcommissioners’ size and board of directors’ size. The results (not tabulated) show thatboard of commissioners size has a positive and concave relationship with CSDI, whileboard of directors has a positive and concave relationship with CSDL. This maysuggests that boards of directors are more concerned with the length of disclosure,while boards of commissioners are more concerned with items to be disclosed.

4.3 The impact of CSR future performanceRegression result is presented in Tables III and IV. Panel A uses ROE as a measure offuture performance, while Panel B uses stock return. The only significant F-statistic isin Panel A using CSDL to measure CSR. Both panels show consistent results regardingthe impact of CSR on future performance, where only CSDI has positive and significantaffect whereas CSDL does not. This result shows that it is not the length of disclosurethat matters, but the variety of items disclosed.

Positive affect of CSR on performance may be due to positive impact of disclosureon firm’s reputation; more social activities probably will increase customers’loyalty and other stakeholders’ (including investors’) support, which in turn increase

Variable Hypothesis Coefficient t-statistics p-value

Panel A: CSDIC 20.3817 22.2581 0.0269 *

BOARD_SZ H1. þ 0.0097 1.7752 0.0400 * * *

BOARD_SZ2 H2. 2 20.0010 21.5985 0.0571 * *

FOR H3. þ 20.0001 20.0012 0.4995TASSET H4. þ 0.0161 2.4668 0.0080 * * *

ROE H5. þ 20.0056 20.2296 0.4095DER H6. 2 0.0007 0.5606 0.2884Adjusted R 2 0.1080F-statistic 2.6338p-value (F-statistic) 0.0226 * *

Panel B: CSDLC 2151.0442 21.6590 0.1013 *

BOARD_SZ H1. þ 5.3567 1.8182 0.0365 * * *

BOARD_SZ2 H2. 2 20.6946 22.0590 0.0215 * *

FOR H3. þ 219.1604 20.6817 0.2487TASSET H4. þ 5.5410 1.5719 0.0601 * *

ROE H5. þ 0.6513 0.9990 0.1605DER H6. 2 25.8173 20.4443 0.3291Adjusted R 2 0.0397F-statistic 1.5574p-value (F-statistic) 0.1715

Notes: Significance at *10, * *5, and * * *1 percent, respectively; see equation (1); CSDI, corporatesocial disclosure index; CSDL, corporate social disclosure length; BOARD_SZ, total board ofcommissioners and board of directors size; FOR, percentage of foreign investor ownership; TASSET,natural logarithm of total asset; ROE, return on equity; DER, debt-to-equity ratio

Table II.Factors affectingcorporate social reporting

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firm’s performance. Positive valuation from the market may indicate that investorsconsider the firm’s CSR activities have net positive benefits in the future.

We also try to investigate which disclosed items have significant affect on futureperformance (results not tabulated). For accounting measure (ROE), it is environmental


Panel A: ROECSDI

C 20.3569 20.9481 0.3463CSDIt H7. þ 0.6564 1.8012 0.0380 * *

ROEt þ 0.3125 3.7106 0.0002 * * *

MCAPtþ1 þ 0.0177 0.8786 0.1913Adjusted R 2 0.0157F-statistic 1.3500p-value (F-statistic) 0.2663

CSDLC 20.5457 21.4521 0.1509CSDL t H7. þ 0.0003 0.4526 0.3261ROEt þ 0.2922 3.4311 0.0005 * * *

MCAPtþ1 þ 0.0315 1.6168 0.0552 *

Adjusted R 2 0.1871F-statistic 6.6782p-value (F-statistic) 0.0005 * * *

Notes: Significance at *10, * *5, and * * *1 percent, respectively; see equation (2a)

Table III.The impact of corporate

social reporting on futureperformance


Panel B: returnCSDI

C 0.1128 0.7220 0.4730CSDIt H7. þ 0.3342 2.0083 0.0245 * *

ROEtþ1 þ 20.0210 20.4562 0.3249MCAPtþ1 þ 20.0073 20.8760 0.1922Adjusted R 2 0.0157F-statistic 1.3500p-value (F-statistic) 0.2663

CSDLC 0.0760 0.4735 0.6375CSDLt H7. þ 0.0003 1.0236 0.1550ROEtþ1 þ 20.0044 20.0960 0.4619MCAPtþ1 þ 20.0037 20.4400 0.3307Adjusted R 2 20.0300F-statistic 0.3546p-value (F-statistic) 0.7859

Notes: Significance at *10, * *5, and * * *1 percent, respectively; see equation (2b); ROE, return onequity; RET, stock return; CSDI, corporate social disclosure index; CSDL, corporate social disclosurelength; MCAP, natural logarithm of market capitalization

Table IV.Regresi CSR terhadap

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disclosure that has positive impact. While for market measure (RET), energydisclosure has more consistent positive affect on stock return.

5. ConclusionRecently, community awareness has put more pressures on firms to engage in CSR.Eventually, this pressure will result in firms doing social activities which they disclosein the CSR report. Since the CSR reporting is still based on voluntary disclosure, it isinteresting to observe factors that determine the level of CSR reporting within firms.This paper is intended to investigate the effect of board size, foreign ownership, firmsize, profitability, and leverage on CSR reporting. Furthermore, since it is believed thatsocial activities have negative impact on profitability, this paper is also intended toinvestigate the effect of CSR reporting on firm’s future performance.

We find consistent evidence that board size has a positive and non-linear (quadraticand concave) relationship with CSR. These results confirm our prediction that largerboards will be able to exercise better monitoring (including monitoring of CSR in theannual report), but boards which are too large will make the monitoring processineffective (negative impact). Firm size, measured by total assets, has a positive andsignificant effect on CSR. This suggests that larger firms have more resources todevote to social activities and a larger asset base over which to spread the costs ofsocial responsibility. Larger firms also face more pressure to disclose their socialactivities from various groups in society.

We also find little evidence of positive impact of CSR on future performance, whereonly CSDI has a positive and significant affect whereas CSDL does not. This resultcould encourage public firms to disclose their CSR activities because there seems to bea positive affect of this disclosure on future performance.

There are several limitations of this study. First, because of limited availability ofannual reports, this study does not examine all public firms. Second, this study useslength of disclosure to measure CSR. Firms often use pictures, tables and diagrams todisclose some information. For simplicity, all this kind of disclosures only counted as onesentence. Third, we only examined the factors affecting CSR limited to board size, firmsize, profitability, foreign ownership, and leverage. Fourth, some regression results showinsignificant F-statistics which suggest the model use here is not yet the best model.

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Further reading

Belakoui, A. (1976), “The impact of the disclosure of the environmental effects of organizationalbehavior on the market”, Financial Management, Vol. 5 No. 4, pp. 26-31.

Corresponding authorSylvia Veronica Siregar can be contacted at: [email protected]

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Multinational corporations’corporate social and

environmental disclosures(CSED) on web sites

Prem Lal JoshiDepartment of Accounting, University of Bahrain, Manama, Bahrain, and

Simon S. GaoSchool of Accounting, Economics and Statistics, Napier University,

Edinburgh, UK

Abstract

Purpose – The purpose of this paper is to investigate multinational corporations’ (MNCs) voluntarypractice of including corporate social and environmental disclosure (CSED) on their web sites andcharacteristics that inspire MNCs to be more accountable in this regard.

Design/methodology/approach – This study adopts discrimination analysis to test sixhypotheses to determine which variables influence the MNCs to post their CSED on the web sites.Data from a sample of 49 MNCs were analyzed with STATISTICA. The independent variables testedinclude log of total assets (size) and log of total equity (size), return on assets (profitability), debt ratio(risk), auditor (Big4 and non-Big4), country effect (origin the USA or non-USA) and industry effect(manufacturing versus services).

Findings – The results show that companies with a strong equity base and in a good financialcondition have a propensity to voluntarily disclose more environmental information. For socialdisclosure, company size and the profitability discriminate the most. MNCs disclose a number of itemspertaining to the two areas. These results are in line with evidence found in some prior studies.

Research limitations/implications – This study has its limitations. First, the results would bemore conclusive if more companies had been included in the sample. Second, only six variables aretested and there may be scope for explaining the extent of the internet disclosure using other variables.Third, this research does not look into the quality of CSRD.

Practical implications – This study provides an empirical analysis of practices and characteristicsof MNCs relating to CSRD on their web sites. The findings from this study help understand MNCs’corporate behavior in terms of CSED.

Originality/value – This study has, for the first time, included three more variables (financial risk,profitability, and country effect) to investigate the disclosure of social and environmental informationby MNCs through their web sites, on which there is limited evidence.

Keywords Information disclosure, Financial reporting, Multinational companies, Internet,Corporate governance


1. IntroductionIn the last decade, corporate social and environmental responsibilities have risen toprominence as corporate social interests are increasingly recognized, and theimportance of environmental protection is globally accepted. Under the pressure ofvarious stakeholders and the public, multinational corporations (MNCs) have begun to

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Multinationalcorporations’

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International Journal of Commerceand Management

Vol. 19 No. 1, 2009pp. 27-44

q Emerald Group Publishing Limited1056-9219

DOI 10.1108/10569210910939654

deal with social and environmental issues firmly, which is evidenced by an increase inthe communication of social and environmental issues, in addition to, the customaryfinancial disclosure (Gray and Bebbington, 2001). Several companies have alreadyestablished a corporate responsibility promotion department to ensure that theyuphold all their economic, environmental and social responsibilities as a corporation.Through communication, companies are attempting to ensure the public that they havemanaged their activities also in the interest beyond the shareholders (e.g. in areas ofenvironmental conservatism, corporate compliance, and social contribution). Severalgiant organizations like Coca Cola, Pepsi, Colgate, Unilever, ABB, etc. have establishedcitizenship programs in this direction. Many corporations have learned that consumersand business customers often seek to align themselves with firms that have areputation for social responsibility. Many corporations now realize that the benefits ofa strong reputation for corporate citizenship can include greater access to capital,reduced operating costs, improved financial performance, and enhanced brand image(Williams et al., 1993).

The internet facilitates rapid communication of information at very low cost(Gowthorpe, 2004). The internet reporting is a recent but fast-growing phenomenon(Oyelere et al., 2003). Many companies around the world have launched internetreporting, which is used to communicate financial and non-financial information toanyone who is interested and who possesses the technological resources to access it.A number of studies have well-documented the practices of internet financial reporting(Debreceny et al., 2002; Deller et al., 1999; Marston and Polei, 2004; Oyelere et al., 2003;Xiao et al., 2004). The FASB (2000) found that 99 percent of the top 100 companies inthe Fortune 500 have established web sites.

While the literature has given a considerable attention to internet financial reportingover the last few years, a limited number of studies have emerged to explain andpredict corporate behavior relating to corporate social and environmental reporting(CSER) on web sites. This study attempts to fill the gap by investigating the disclosureof social and environmental information by MNCs through their web sites andexamining the characteristics that are inspiring these MNCs to be more accountable inthis regard. This study, however, does not intend to analyze the content ofenvironmental disclosures on the internet and their relevance and consequence.

In the present study, we contribute to the literature in an important sense byanalyzing corporate social and environmental data from MNCs on which there islimited evidence. While previous studies test for company size, industry type andauditor size, we add three more variables, namely risk (financial), profitability, andcountry effect. The results are analyzed by using discriminant analysis which is atechnique for classifying a set of observations into predefined classes. The purpose ofdiscriminant analysis is to determine the class of an observation based on a set ofvariables known as predictors or input variables.

2. Corporate reporting and the internetCorporate use of the internet for a variety of business purposes is now commonplace(Oyelere et al., 2003). The majority of the largest listed companies in developedcountries now have an internet web site on which they publish financial information(Ettredge et al., 2001). Owning and occupying internet space is almost essential forpublicly traded companies, either as a place to do business or as a place to exchange

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information about business (Jones and Xiao, 2004). It has also been documented thatthe internet provides a global meeting ground for those interested in social andenvironmental communication (Scott and Jackson, 2002; Adams and Frost, 2004). Thetwo ideas are now combining, leading to a situation in which corporations areincreasingly using their web sites to provide social and environmental informationrelating to their activities as part of their corporate governance strategy (Williams andHo, 1999; Shepherd et al., 2001; Adams and Frost, 2004).

In 2005, 52 percent of the world’s 250 biggest companies issued separate reports oncorporate social information, compared to 45 percent in 2002 (KPMG, 2005). A fewstudies have examined the state-of-the-art in the disclosure of CSER in hard copyformat (Deegan and Gordon, 1996; Gamble et al., 1995; Wiseman, 1982). Indeed, using amedia such as the internet allows a bigger flexibility, ability and availability fordisclosure of social and environmental information. This has been demonstrated bystudies such as UNEP (1999), the Environmental Resources Management (2000) andAdams and Frost (2004). Allam and Lymer (2002) examined the type of informationavailable on the internets of 50 companies from five countries, namely, the USA, UK,Canada, Australia and Hong Kong. Of particular relevance to this study are thefindings of the USA and Australian companies’ web sites. Of the 50 companiessurveyed, only 23 (46 per cent) of the US companies’ web sites had environmentalinformation, despite Debreceny et al. (2002) noting that there are more internet users inthe USA. Other international comparative studies specifically on corporate socialreporting are documented by Williams (1999) and Williams and Ho (1999).

KPMG’s (2002) survey, which looks at the reporting practices of the top 100companies in 19 countries, found that 72 percent of Japanese companies, 49 percent ofUK companies and 36 percent of US companies issue environmental, social, orsustainability reports, in addition to, their financial reports. The voluntary reporting ofenvironmental impacts and initiatives in company’s annual reports has becomewidespread among organizations accepting an obligation to extend theirenvironmental responsibilities beyond regulatory compliance (Brophy and Starkey,1996).

A number of studies (Moneva and Llena, 2000; Deegan and Gordon, 1996; Hackstonand Milne, 1996; Adams et al., 1995) reported that environmental data provided aremore or less qualitative or narrative in character. Such disclosures are made to link thecompanies’ image. At the same time, level of disclosure and nature of theenvironmental reporting were largely depending on the company’s country-of-origin(Moneva and Llena, 2000) or ownership (Adams et al., 1995; Guthrie and Parker, 1990).Owing to social consciousness, countries like Sweden and Canada provide moreinformation (Gamble et al., 1995). Bullough and Johnston (1995) reported that the USresource companies, on average, disclose low levels of environmental informationeither in hard-copy or internet-based annual reports. Their study attributes theconservative levels of environmental disclosure on different motivations that USresource companies have in disclosing in different mediums.

3. TheoriesCSER has attracted considerable interests in the literature (for reviews, see, Mathews,1997). A number of theories regarding corporate social and environmental disclosure(CSED) emerged during the 1970s including legitimacy theory, stakeholder theory, and


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accountability theory. Legitimacy theory and stakeholder theory have developed fromthe broader political economy perspective (Gray et al., 1996; Deegan, 2002). While thereare differences between stakeholder and legitimacy theory, they both focus attentionon the nexus between the organisation and its operating environment (Neu et al., 1998).

3.1 Legitimacy theoryLegitimacy theory has become one of the most cited theories within the CSER area(Preston and Post, 1975; Guthrie and Parker, 1989). It offers researchers a way tocritically unpack corporate disclosures. “Legitimacy is a generalized perception orassumption that the actions of an entity are desirable, proper, or appropriate withinsome socially constructed system of norms, values, beliefs, and definitions” (Suchman,1995, p. 574). There are two major types of legitimacy theory: institutional legitimacytheory dealing with how organisational structures as a whole have gained acceptancefrom society at large and strategic legitimacy theory which is a process by which anorganization seeks approval (or avoidance of sanction) from groups in society (Kaplanand Ruland, 1991, p. 370). Mathews (1993, p. 350) defines legitimacy at the strategiclevel as:

[. . .] organisations seek to establish congruence between the social values associated with orimplied by their activities and the norms of acceptable behaviour in the larger social systemin which they are a part.

Legitimacy is also considered as an operational resource that organizations extract –often competitively – from their cultural environments in order to pursue their goals(Suchman, 1995). Certain corporate actions and events increase that legitimacy andothers decrease it. Low legitimacy will have particularly disastrous consequences for acorporation, which could ultimately lead to the forfeiture of their right to operate. Highlegitimacy will enable corporations to attract resources (Hearit, 1995; Hybels, 1995;Patten, 2002; Deegan et al., 2002). However, legitimacy is a dynamic construct. This isbecause community expectations are not considered static, but rather, change acrosstime thereby requiring corporations to be responsive to the environment in which theyoperate (Deegan et al., 2002). Indeed, companies try to manage their legitimacy as it:

[. . .] helps to ensure the continued inflow of capital, labour and customers necessary forviability [. . .] It also forestalls regulatory activities by the state that might occur in theabsence of legitimacy [. . .] and pre-empts product boycotts or other disruptive actions byexternal parties (Neu et al., 1998, p. 265).

Corporations’ voluntary disclosure of social and environmental information is a way tomanage its legitimacy. Deegan et al. (2000) finds that companies do appear to changetheir disclosure policies around the time of major company- and industry-related socialevents. Legitimacy theory claims that corporations disclose social and environmentalinformation with the intention to enhance the public respect or to legitimize theiractivities in social, political, and environmental areas. Legitimacy theory suggests thatcompanies with high-public profiles like MNCs will likely to be seen as cognizant andacting to support the wider interests of the society. A number of studies have utilizedlegitimacy theory to explain the extent of disclosure of environmental and/or socialperformance (Deegan and Gordon, 1996; Patten, 1991, 1992). Hogner (1982) andGuthrie and Parker (1989) test the applicability of legitimacy theory to CSER with

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inconsistent results. However, neither is inconclusive as each was confined to onesingle company and the annual report.

3.2 Stakeholder theoryStakeholder theory is closely aligned with legitimacy theory and the two are often usedto complement each other (Deegan, 2002). Stakeholder theory is concerned with theway that an “organisation manages its stakeholders” (Gray et al., 1997, p. 333).Freeman (1984) defines a stakeholder as any group or individual who can affect or isaffected by the achievement of a firm’s objectives. He further develops the stakeholderconcept into a corporate social responsibility model of stakeholder management. Thefocus of stakeholder theory is articulated in two perspectives concerning the purpose ofthe firm and the responsibility of managers to stakeholders (Freeman, 1984; Freemanet al., 2004). The second perspective pushes managers to articulate how they want to dobusiness, specifically what kinds of relationships they want and need to create withtheir stakeholders to deliver on their purpose. Managers must develop relationships,inspire their stakeholders, and create communities where everyone strives to give theirbest to deliver the value the firm promises (Freeman et al., 2004). Stakeholder theoryclaims that whatever the ultimate aim of the corporation or other form of businessactivity, managers must take into account the legitimate interests of those groups andindividuals who can affect (or be affected by) their activities (Donaldson and Preston,1995; Freeman, 1984). The corporation’s continued existence requires the support of thestakeholders and their approval must be sought and the activities of the corporationadjusted to gain that approval. The more powerful the stakeholders, the more thecompany must adapt (Gray et al., 1995). Based on Freeman’s model, Ullmann (1985)develops a 3D model to analyze the relationships among corporate social performance,social disclosure, and economic performance. The 3D are stakeholder power, thecorporation strategic posture toward corporate social activities, and the company’spast and current economic performance. Ullmann (1985) argues that the power ofstakeholders is related to the strategic posture adopted by the corporation and anorganisation’s strategic posture “describes the mode of response of an organization’skey decision makers towards social demands” (Ullmann, 1985, p. 552). The way acorporation manages its stakeholders is dependent upon the strategic posture adoptedby the corporation. Organisations may adopt an “active” or “passive” strategic posture.Corporations that adopt an “active” posture “seek to influence their organization’srelationship with important stakeholders” (Ullmann, 1985, p. 552). In contrast, thecorporation with a “passive” posture is “neither involved in continuous monitoringactivities [of stakeholders] nor deliberately searching for an optimal stakeholderstrategy” (Ullmann, 1985, pp. 552-3). The lack of stakeholder engagement inherent in a“passive” strategic posture is expected to result in “low levels of social disclosure” and“low levels of social performance” (Ullmann, 1985, p. 554). CSER is seen, understakeholder theory, as part of the dialogue between the corporate and its stakeholders(Roberts, 1992; Gray et al., 1995, 1997). Roberts (1992) provides evidence thatstakeholder theory is an appropriate foundation for further empirical analysis of CSER.

3.3 Accountability theoryUnder accountability theory, the organization is held accountable by society formaintaining acceptable social (including environmental) outputs, methods and goals,


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and organizations use CSED to discharge their social and environmentalaccountability (Gray et al., 1987). In essence, accountability theory is based uponeconomic agency theory. Jensen and Meckling (1976) define an agency relationship as acontract under which one or more persons (principals) engage another person (theagent) to perform some service on their behalf, which involves delegating somedecision-making authority to agent. Accountability is about the provision ofinformation between two parties where the one who is accountable, explains or justifiesactions to the one to whom the account is owed (Gray et al., 1997). It is concerned withthe rights of stakeholders and the society to information. The information/disclosureflowing through such a relationship is determined by the power of the parties todemand it and/or the willingness/desire of the organization to provide it (Gray et al.,1997). Such rights to information can be either legal (positive) or normal (normative)rights (Likierman and Creasey, 1985). Accountability theory dictates that managersdisclosure social and environmental information only if they are required to do sobecause of the “statutory enforcement – power,” and only if there is willingness/desirefrom managers because of clear benefits to the organization such as raising corporateimage and PR promotion. Under accountability theory, it appears that there willbe different patterns of disclosure between industries. For example,environment-sensitive companies are expected to provide more environment-relateddisclosure than other sectors.

During the past 30 years, empirical researchers investigating CSER have explainedthe results within the above theoretical perspectives. By and large, many researchersbelieve that social contract theory and legitimacy theory as well as stakeholder theoryprovide a more comprehensive perspective on CSER because they recognize thatorganizations evolve within a society that encompasses many political, social, andinstitutional framework (Patten, 1991; Gray et al., 1995; Deegan et al., 2002; Cormieret al., 2005). It is further argued by Neu et al. (1998) that CSER is considered aconstructed image in which a firm is conveying to the outside world to control itspolitical or economic position.

A survey by KPMG (2005) reported that economic considerations, ethicalconsiderations, and innovation and learning are the main business forces for MNCsto disclose corporate social information. Disclosure of social and environmentalinformation may also be considered useful for determining the managerialcompensation (Lanen, 1999).

4. Data and hypothesis4.1 Data and variablesThis study examines the disclosure of social and environmental information by MNCson their web sites. Data on a number of variables such as total assets, profits, equity,total debts, auditors, country-of-origin, and disclosure of social- andenvironmental-related information were collected from the web sites of 49 MNCs(www.geneva.ch/multinationals.htm). This web site provides links to the web sites of128 MNCs. From this population, we dropped companies which were engaged infinancial operations, like banks, as such companies are less prone to environmentalactivities. Also, a total of 15 companies’ web sites could not be accessed because oferror messages. Other companies which did not provide any information on social andenvironmental activities were also dropped. Finally, a total of 49 companies were

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selected for the analysis. The data were collected during April-June 2005. Data wereanalyzed on STATISTICA. STATISTICA is a statistics and analytics softwarepackage developed by StatSoft, Inc. It provides a selection of data analysis, datamanagement, data mining, and data visualization procedures.

Corporate variables are defined and measured resembling most of the earlier studiesin the literature (Deegan et al., 2000; Debreceny et al., 2002; Chappal and Moon, 2005;Xiao et al., 2004). Company size[1] was measured using the natural log of total assetsand log of total equity of each selected company and converted to US dollars usingFXconveter (www.oanda.com/convert/classic). Profitability was calculated usingreturned on total assets. Debt ratio (financial risk) was measured using the ratio oflong-term debt to the book value of equity. Industry type was partitioned intoindustrial versus service organization. Auditor size (Big4 versus non-Big4) wasdichotomous variables. Country effect was a dummy variable. If the origin of the firmwas in the USA, a score of one was assigned; otherwise zero.

4.2 HypothesisThis section provides the hypotheses and their developments.

4.2.1 Firm size. The agency, signaling, legitimacy theory, and cost-benefit analysis,all indicate that there may be a positive relationship between size and disclosure ofinformation. For example, researchers argue that larger firms tend to have a moredispersed shareholding which resulted in higher information asymmetry betweenmanagers and shareholders and in turn this could lead to a higher cost of capital(Watts and Zimmermann, 1978). These higher costs (e.g. monitoring costs) can bereduced by voluntary disclosure of social and environmental information. Both Chowand Wong-Boren (1987) and Bujaki and McConomy (2002) find that large firms tend todisclose more in their annual reports than smaller firms. Signalling theory suggeststhat companies with superior performance (or good companies) use information to sendsignals to the market (Ross, 1979; Morris, 1987). Employing signaling theory, Inchausti(1997) finds that management with high profits, or “good news,” disclose moreinformation than that with “bad news.” Signaling theory has been adopted to explainmotivation for voluntary disclosures of social and environmental information. It isargued that managers can be motivated to disclose social and environmentalinformation voluntarily. This is because they expect this to provide (and to beinterpreted as) a good signal about their company’s social and environmentalperformance to the outside market and as reducing information asymmetry. Also, theempirical evidence has supported the political cost theory predication that largercompanies have a stronger incentive to enhance their corporate reputation and publicimage, as they are more publicly visible (Watts and Zimmermann, 1978). Largercompanies tend to receive more attention from the public and are under greater publicpressure to exhibit social responsibility (Cowen et al., 1987). Larger companies alsoattract the attention of governmental bodies. Increased disclosure generally reducesgovernment intervention. Larger companies can be expected to disclose more socialand environmental information to prove their corporate citizenship, therebylegitimizing their existence. That is because additional disclosure may influencesociety’s perceptions about the company (Neu et al., 1998).

Moreover, large firms are also likely to have lower proprietary costs associatedwith disclosure as their activities are exposed by other sources of information


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(Hossain et al., 1995). Further, larger firms are also more complex and more informationdisclosure is necessary to allow existing and potential investors to make investmentdecisions. On the one hand, these firms have a greater need for capital and can thereforebe expected to disclose at a higher level. On the other hand, nondisclosure would beinterpreted as bad news that could, in turn, have an adverse effect on the company’sshare price (Verrecchia, 1983). Furthermore, it can be argued that the relative costs ofinformation production are lower for larger firms than for smaller ones that might nothave the resources to collect and provide extensive disclosures, for example, via theinternet. Given the need for greater disclosure by larger firms, it is expected that largerfirms will be inclined to adopt various disclosure manners including web sites, whichallows large amounts of disclosures at low-incremental costs and in user-friendly ways.Disclosure through web site is particularly effective for MNCs, as information can beefficiently disseminated to a large dispersed audience at no geographical boundary.Firm size has frequently been assumed as a factor determining CSER (Cormier et al.,2005; Oyelere et al., 2003; Richardson and Welker, 2001; Craven and Otsmani, 1999;Hackston and Milne, 1996). It is expected that larger companies will disclose more socialand environmental information on their web sites. Hence, we hypothesize:

H1. There is a significant association between company size and the extent ofsocial- and environmental-related disclosure on the internet.

4.2.2 Profitability. Signaling theory suggests that profitable firms have the incentive todistinguish themselves from less successful firms to raise capital at the lowest possiblecost. Voluntary disclosures of corporate social and environmental information can beone way to achieve this. Investors are generally thought to perceive the absence ofvoluntary disclosure as an indication of “bad news” about a firm. This providesaverage-or-better performing firms with an adverse selection incentive to disclose(Lev and Penman, 1990; Lang and Lundholm, 1993; Clarkson et al., 1994). WhileBelkaoui and Karpik (1989), Patten (1991), Hackston and Milne (1996) and Richardsonand Welker (2001) documented a weak association between corporate social disclosureand profitability, Balabanis et al. (1998) found some statistically significant evidence ofa positive association between corporate social disclosure and profitability. Given theinconclusiveness of the findings in the literature, in this study we will test the followinghypothesis:

H2. There is no significant association between profitability and the extent ofsocial- and environmental-related disclosure on the internet.

4.2.3 Industry type. The influence of industry variable is suggested by political costtheory and signalling theory (Inchausti, 1997; Oyelere et al., 2003). Whilst some studiesreported mixed results (Marston and Shrives, 1996), others indicated thatindustry-related factors have an influence on social and environmental reporting(Craven and Otsmani, 1999). A few other studies (Halme and Huse, 1997; Jaggi andZhao, 1996; Gamble et al., 1995) also reported significant differences between industriesin respect of quality and quantity of disclosure of environmental information in annualreports. Oyelere et al. (2003) and Craven and Otsmani (1999) found that there is astatistically significant association between companies disclosing social andenvironmental information on their web sites and their industry group. Followingthe literature, thus, we hypothesize:

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H3. There is no significant association between industry type and the extent ofsocial- and environmental-related disclosure in the internet.

4.2.4 Debt ratio (risk). Agency theory predicts that restrictive covenants may beincorporated in the debt contracts in order to protect the bondholder’s economicinterest (Schipper, 1981). Consequently, management may attempt to increase theextent of disclosure of accounting information for monitoring purposes. As MNCs alsoface debt covenant restrictions, debt ratio is also included in this study. However, theempirical evidence on debt-ratio and its association with disclosure level is mixed(Wallace and Naser, 1995; Tai et al., 1990; Robbins and Austin, 1986). Therefore, wewould like to test the following hypothesis:

H4. There is no significant association between risk and the extent of social- andenvironmental-related disclosure on the internet.

4.2.5 Auditor size. Under agency theory, auditing contributes to alleviating the agencyproblem. It is generally held that larger audit firms maintain more independentauditing service and abide by audit standards more strictly than smaller audit firms inview of the fact that larger auditors suffer more serious damage to their reputation(DeAngelo, 1981; Malone et al., 1993). For that reason, firms with greater potentialgains from external monitoring would be more likely to employ larger audit firms.Signaling theory also explains this expectation. As larger auditors have greaterincentives to demand higher quality disclosure, the appointment of larger auditors forexternal monitoring by a company would provide a signal of their acceptance ofdemand of higher quality disclosure (Datar et al., 1991; Healy and Palepu, 2001).

Also, Healy and Palepu (1993) assert that managers can improve theircommunication with investors by developing disclosure strategies. To reinforce itscredibility, a firm has greater motivation to choose appropriate reporting strategies toact as quality signal to the market. It is proposed that such a signal would include theuse of a Big4 audit firm. This proposition is based on some evidence in the literaturethat suggests Big5 firms providing higher quality audits than non-Big5 firms.Furthermore, empirical evidence of Craswell and Taylor (1992) and Inchausti (1997)confirms the expectation that the level of disclosure is positively related to firmsemploying larger auditors. Therefore, we test the following hypothesis:

H5. There is no significant association between auditor size and the extent ofsocial- and environmental-related disclosure on the internet.

4.2.6 Country effect. Empirical evidence indicates that the country in which a companyreports affects the voluntary financial reporting system of that company (Samanthaand Tower, 1999; Guthrie and Parker, 1990). While Chappal and Moon (2005)concluded that MNCs are more likely to adopt corporate social reporting than thoseoperating solely in their home country, the profile of their social reporting tends toreflect the profile of the country of operation rather than the country-of-origin.Furthermore, Radebaugh et al. (2006) argue that the country-of-origin effect wouldinclude culture, economic development, legal system, taxation, and political and civilsystems. Similarly, as Gray and Robert (1989) suggest, when considering voluntaryinformation disclosure, variations among countries have been observed becausefinancial executives have different perceptions of costs and benefits when they makedisclosure decisions. Therefore, our hypothesis is:


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H6. There is no significant association between country effect and the extent ofsocial- and environmental-related disclosure on the internet.

5. Results and discussions5.1 Overall resultsIn the sample, 68.83 percent of the companies were audited by Big4 audit firms and therest by non-Big4. The study classifies the amount of disclosure both for social andenvironmental as detailed, summarized and none. A numeric value of 3 (detailed), 2(summarized) and 1 (none) were assigned to the data. Results are presented in Tables Iand II, respectively.

Table I shows that 30 (61.2 percent) of total sampled companies disclosed detailedsocially related information, while 13 (26.5 percent) of companies disclosed onlysummarized information. About 27 (55.1 percent) of total sampled companies discloseddetailed environmental information on their web sites and 10 (24.5 percent) disclosedsummarized information. Analyses of the above data apparently indicate that MNCstend to disclose detailed social and environmental information on their web sites.Companies have been following this practice because they might believe that ifinvestors think that managers are withholding information, they will view theundisclosed information as negative and will lower their estimation of the firm’s value.Hence, to gain public trust, managers have started disclosing detailed information onsocial- and environmental-related issues.

Table II presents the type of social and environmental activities in which MNCsmake contributions. More than 60 percent of companies provided information relatingto health care, medical scholarships and funding rising and charity activities. In termsof environmental information, 67 percent of companies reported their expenditures onwater and energy conservation and air pollution prevention.

Social information Environmental informationDegree of disclosure No. of companies Percentage No. of companies Percentage

Detailed 30 61.2 27 55.1Summarized 13 26.5 12 24.5None 6 12.3 10 20.4Total 49 100.0 49 100.0

Table I.Number of companiesdisclosing social andenvironmentalinformation in theirweb sites

No. Social-related information Environmental-related information

1 Health care activities Water and energy conservation2 Medical research programs Air pollution prevention3 Education (scholarship) Waste reduction and recycling4 Helping handicapped and orphans Land management protection and enhancement5 Supporting children Greenhouse campaigns6 Red cross Animal welfare7 Fund raising campaigns and charity8 Sponsoring sports teams

Table II.Type of informationdisclosed by the sampledcompanies

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5.2 Discrimination analysisDiscrimination analysis was performed on the collected data to determine whichvariables influence the MNCs in such disclosures. The dependent variablewas measured by using 1 (if disclosed) and 0 (not disclosed). The independentvariables tested are: log of total assets (size), or log of total equity (size), return onassets (profitability), debt ratio (risk), auditor (Big4 and non-Big4), country effect(origin the USA or non-USA) and industry effect (manufacturing versus services).

Results for social disclosure are presented in Tables III and IV, while Tables V andVI contain the information about environmental disclosure.

Table III shows the classification matrix for social disclosure. The percentage ofgroups classified is 89.13 percent. Table IV reveals that there is a strong bond ofrelationship between disclosure of social information and the company size as well asthe profitability of the company. Log of assets ( p , 0.05) and profitability ( p , 0.05)are significant variables in the discrimination model for the disclosure of sociallyrelated information. The explanation is that as the size of the company increases and ismore profitable, the more amount of information is disclosed, and there is greaterability of such a firm to engage in social activities. This is in line with the priorevidence shown in the literature (Roberts, 1992) that CSER was positively associatedwith corporate profitability. In this regard, Parsa and Kouhy (2001) state that profitablecompanies can use social disclosure to deviate attention from their weaknesses and toproject the image of a company with future prospects.

Classification matrixPercentage of correct G 1.0 G 2.0

Group 1.0 40.0 2 3Group 2.0 95.12 2 39Total 89.13 4 42

Table III.Classification matrix for

social disclosure

Variables Wilks’ l Significance

Log of assets (size) 0.952 0.010Log of return of assets (profitability) 0.902 0.039Log of debt ratio (risk) 0.847 0.190

Notes: Eigen value ¼ 0.228; Canonical R ¼ 0.43; Wilks’ l ¼ 0.814; x 2 ¼ 8.734; df (3); p , 0.05

Table IV.Discrimination functionanalysis (social model)

Classification matrixPercentage of correct G 1.0 G 2.0

Group 1.0 20.0 2 8Group 2.0 94.7 2 36Total 79.2 4 44

Table V.Classification matrix forenvironment disclosure


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Table V presents the classification matrix for environmental disclosure. Results showthat the percentage of groups classified is 79.2 percent. The environmental model(Table VI) shows that log of equity (size) discriminates the most and the predictivepower of the model is 79.2 percent. The model is also significant at 0.05 level(x 2 ¼ 8.27; df (3); p , 0.05). This is explained by the fact that companies with a strongequity base and in a good financial condition have a propensity to voluntarily disclosemore environmental information since the potential costs to be incurred following therelease of such information is likely to be less. A company is more likely to releaseinformation on environmental incidents when it lessens outside stakeholders’uncertainty. Hence, large size companies disclose more environmental-relatedinformation.

6. ConclusionThis study was carried out to determine the extent of disclosure of social andenvironmental information by MNCs on their web sites and also to establish thevariables that mostly influence such decisions. Discrimination analysis shows thatcompanies with a strong equity base and in a good financial condition have apropensity to voluntarily disclose more environmental information. For socialdisclosure, company size and the profitability discriminate the most. MNCs disclose anumber of items pertaining to the two areas. These results are in line with evidencefound in some prior studies.

It has been argued that adopting corporate social responsibility allows companies tobuild brand values and costs of building brand value through social responsibilityinitiatives are usually cheaper than trying the same effect through advertising andpublic relations. A conference of the Center for Corporate Citizenship, Boston College,in 2004, cited the reasons that pressures for greater transparency and disclosure aboutenvironmental and social practices aimed at long-term ecological, social, and businesssustainability have been growing in the wake of the growth of power of MNCs as thearray of scandals have plagued business institutions since the collapse of Enron andArthur Anderson. MNCs are generally much ahead in disclosing social- andenvironmental-related information because of their size advantage. Our findingssupport the empirical evidence that size and profitability are important variables involuntary disclosure of information related to social and environmental activities.In this regard, the PriceWaterhouseCoopers survey of 2001 reported that the increasinglevel (quality and quantity) of voluntary public disclosure by industry and the financesector has resulted in environmental and social performance becoming a competitivebusiness issue as well as increased analysis of environmental and social business risksby financial sector institutions.

Variables Wilks’ l Significance

Log of equity (size) 0.943 0.036Country effect 0.863 0.150Log of debt ratio (risk) 0.858 0.161

Notes: Eigen value ¼ 0.22; Canonical R ¼ 0.425; Wilks’ l ¼ 0.819; x 2 ¼ 8.27; df (3); p , 0.05

Table VI.Discrimination functionanalysis (environmentalmodel)

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This study has, for the first time, included three more variables, namely risk (financial),profitability and country effect in determining the level of CSER by MNCs. However,this study also has its limitations. For example, the results would be more conclusive ifcompanies from other countries had been included in the sample. Additionally, only sixvariables were tested and there may be scope for explaining the extent of the internetdisclosure using other variables, such as corporate management attitudes towardsadopting of newer technology, corporate governance, etc. The social andenvironmental reporting by MNCs on the internet could also be examined in termsof their contents, timeliness, technology, and user support. Despite these limitations,the findings from this study contribute to our understanding of CSER by MNCs. As thegrowth in the internet continues, we expect more companies will be creating web siteswithin next few years. Therefore, it would be interesting to update this study to see ifan increase in the use of the internet has occurred not only in developed countries butalso in emerging economies. Audit implications and extent of the use of web-basedsocial and environmental information by investors may need to be examined. Furtherresearch should also focus on the quality of CSER.

Note

1. The size of a company can be measured in a number of ways, such as capital employed,turnover, and number of employees, company’s market value, and equity. For example, Firth(1979) used sales turnover and capital employed to measure the company size, and Cooke(1991) used number of shareholders, total assets, and turnover to measure the size of thecompany.

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Corresponding authorPrem Lal Joshi can be contacted at: [email protected]

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Jurnal akuntansi usu 19, 2009

FAKTOR-FAKTOR YANG MEMPENGARUHI PENGUNGKAPAN

INFORMASI SOSIAL DALAM LAPORAN TAHUNAN PADA

PERUSAHAAN MANUFAKTUR YANG TERDAFTAR

DI BURSA EFEK JAKARTA

ANDRE CHRISTIAN SITEPU

Fakultas Ekonomi Universitas Sumatera Utara

HASAN SAKTI SIREGAR

Fakultas Ekonomi Universitas Sumatera Utara

Abstract

The purpose of this research is to examine the effect of corporate characteristics, consist

of size of board of commisioner, leverage, company size and profitability to corporate social

responsibility disclosure. This research can explain the decision making about the corporate

social responsibility disclosure done by manufacturing companies listed in JSX for the year

2007. The data used are in form of annual reports from 33 companies used as sample for the

year 2007. The statistical methods use in this research is multiple regressions. The result of

this research shows that size of board of commisioner and profitability have significant

effect to corporate social responsibility disclosure , while leverage and company size have

insignificant efect to corporate social responsibility disclosure.

Keywords : Corporate Characteristics, Corporate Social Responsibility Disclosure

1. Pendahuluan

Sejarah perkembangan akuntansi, yang berkembang pesat setelah terjadi revolusi industri,

menyebabkan pelaporan akuntansi lebih banyak digunakan sebagai alat pertanggungjawaban

kepada pemilik modal (kaum kapitalis) sehingga mengakibatkan orientasi perusahaan lebih

berpihak kepada pemilik modal. Dengan keberpihakan perusahaan kepada pemilik modal

mengakibatkan perusahaan melakukan eksploitasi sumber-sumber alam dan masyarakat

(sosial) secara tidak terkendali sehingga mengakibatkan kerusakan lingkungan alam dan pada

akhirnya mengganggu kehidupan manusia.

Di dalam akuntansi konvensional (mainstream accounting), pusat perhatian yang dilayani

perusahaan adalah stockholders dan bondholders sedangkan pihak yang lain sering diabaikan.

Dewasa ini tuntutan terhadap perusahaan semakin besar. Perusahaan diharapkan tidak hanya

mementingkan kepentingan manajemen dan pemilik modal (investor dan kreditor) tetapi juga

karyawan, konsumen serta masyarakat. Akuntansi konvensional telah banyak dikritik karena

tidak dapat mengakomodir kepentingan masyarakat secara luas, sehingga kemudian muncul

konsep akuntansi baru yang disebut sebagai Social Responsibility Accounting (SRA) atau

Akuntansi Pertanggungjawaban Sosial, yang menuntut diungkapkannya informasi

pertanggungjawaban sosial oleh perusahaan.

Standar akuntansi keuangan di Indonesia belum mewajibkan perusahaan untuk

mengungkapkan informasi sosial terutama informasi mengenai tanggung jawab perusahaan

terhadap lingkungan. Perusahaan akan mempertimbangkan biaya dan manfaat yang akan

diperoleh ketika mereka memutuskan untuk mengungkapkan informasi sosial. Bila manfaat

yang akan diperoleh dengan pengungkapan informasi tersebut lebih besar dibandingkan biaya

yang dikeluarkan untuk mengungkapkannya maka perusahaan akan dengan sukarela

mengungkapkan informasi tersebut.

Berdasarkan penelitian Hackston & Milne (1996) ukuran perusahaan dan tipe industri

memiliki hubungan signifikan dengan pengungkapan informasi sosial, sebaliknya tidak

ditemukan hubungan antara laba dengan pengungkapan informasi sosial. Fitriani (2001)

menemukan bahwa pengungkapan informasi sosial dipengaruhi oleh size perusahaan, status

perusahaan, profitabilitas dan KAP. Penelitian Sembiring (2005) menemukan bahwa ukuran

perusahaan, profile dan ukuran dewan komisaris berpengaruh positif terhadap pengungkapan

informasi sosial perusahaan, namun tidak menemukan hubungan signifikan antara

profitabilitas dan leverage dengan pengungkapan informasi sosial. Anggraini (2006)

menemukan hubungan signifikan antara persentase kepemilikan manajemen dengan

pengungkapan informasi sosial, namun tidak berhasil membuktikan pengaruh ukuran

perusahaan, leverage dan profitabilitas terhadap kebijakan pengungkapan informasi sosial

oleh perusahaan.

Berdasarkan latar belakang di atas, maka rumusan masalah dalam penelitian ini adalah

apakah ukuran dewan komisaris, tingkat leverage, ukuran perusahaan dan profitabilitas

memiliki pengaruh terhadap jumlah informasi sosial yang diungkapkan baik secara simultan

maupun secara parsial? Berdasarkan rumusan masalah penelitiannya, maka tujuan dari

penelitian ini adalah untuk mengetahui apakah ukuran dewan komisaris, tingkat leverage,

ukuran perusahaan, dan tingkat profitabilitas perusahaan berpengaruh terhadap jumlah

informasi sosial yang diungkapkan baik secara simultan maupun secara parsial.

2. Tinjauan Pustaka

2.1. Akuntansi Pertanggungjawaban Sosial

Pertanggungjawaban Sosial Perusahaan atau Corporate Social Responsibility (CSR)

adalah mekanisme bagi suatu organisasi untuk secara sukarela mengintegrasikan perhatian

terhadap lingkungan dan sosial ke dalam operasinya dan interaksinya dengan stakeholders

yang melebihi tanggung jawab organisasi di bidang hukum (Darwin, 2004).

Pertanggungjawaban sosial perusahaan diungkapkan di dalam laporan yang disebut

Sustainability Reporting. Darwin (2004) mengatakan bahwa Corporate Sustainability

Reporting terbagi menjadi 3 kategori yaitu kinerja ekonomi, kinerja lingkungan dan kinerja

sosial. Selanjutnya tiga kinerja utama ini dibagi dalam beberapa subkategori. Pembagian

Corporate Sustainability Reporting menurut Darwin dapat dilihat pada lampiran 1.

2.2. Tujuan Akuntansi Pertanggungjawaban Sosial Perusahaan

Pada dasarnya tujuan akuntansi pertanggungjawaban sosial perusahaan adalah

menyediakan informasi yang memungkinkan dilakukan evaluasi pengaruh kegiatan

perusahaan kepada masyarakat. Pengaruh kegiatan perusahaan ini bisa negatif, yang berarti

menimbulkan biaya sosial pada masyarakat, atau positif, yang berarti menimbulkan manfaat

sosial pada masyarakat.

2.3. Pengungkapan Dalam Laporan Tahunan

Pengungkapan (disclosure) didefinisikan sebagai penyediaan sejumlah informasi yang

dibutuhkan untuk pengoperasian optimal pasar modal secara efisien (Hendriksen, 1996).

Dalam interpretasi yang lebih luas, pengungkapan terkait dengan informasi baik yang

terdapat dalam laporan keuangan maupun komunikasi tambahan (supplementary

communication) yang terdiri dari catatan kaki, informasi tentang kejadian setelah tanggal

laporan, analisis manajemen atas operasi perusahaan di masa datang, prakiraan keuangan

operasi, serta informasi lainnya (Wolk dan Tearney dalam Widiastuti, 2000).

Selain itu tujuan pengungkapan dalam hal ini yang berkaitan dengan akuntansi

pertanggungjawaban sosial adalah menyediakan informasi yang memungkinkan dilakukan

evaluasi pengaruh perusahaan terhadap masyarakat. Pengaruh kegiatan ini bisa bersifat

negatif, yang berarti menimbulkan biaya sosial pada masyarakat. Sebaliknya pengungkapan

dapat bersifat positif, yang berarti menimbulkan manfaat sosial bagi masyarakat (Yuningsih,

2001).

2.4. Pelaporan Informasi Sosial dan Pemilihan Kebijakan Akuntansi

Pengungkapan sosial perusahaan bersifat sukarela (voluntary disclosure), yaitu

diungkapkan oleh perusahaan secara sukarela tanpa diharuskan oleh standar yang ada.

Standar pelaporan pertanggungjawaban sosial masih belum memiliki standar yang baku,

sehingga jumlah dan cara pengungkapan informasi sosial bergantung kepada kebijakan dari

pihak manajemen perusahaan. Hal ini mengakibatkan timbulnya variasi luas pengungkapan

informasi sosial dalam laporan tahunan masing-masing perusahaan.

Karakteristik perusahaan dapat menjelaskan variasi luas pengungkapan sukarela dalam

laporan tahunan, karakteristik perusahaan merupakan prediktor luas pengungkapan [Lang and

Lundholm (1993) dalam Anggraini (2006)]. Dalam penelitian ini, karakteristik perusahaan

yang mempengaruhi pengungkapan informasi sosial diproksikan dalam ukuran dewan

komisaris, tingkat leverage, ukuran perusahaan dan profitabilitas.

Ukuran Dewan Komisaris

Ukuran dewan komisaris adalah jumlah anggota dewan komisaris. Berkaitan dengan

ukuran dewan komisaris, Coller dan Gregory (1999) dalam Sembiring (2005) menyatakan

bahwa semakin besar jumlah anggota dewan komisaris, maka akan semakin mudah untuk

mengendalikan CEO dan monitoring yang dilakukan akan semakin efektif. Dikaitkan dengan

pengungkapan tanggung jawab sosial, maka tekanan terhadap manajemen juga akan semakin

besar untuk mengungkapkannya.

Financial Leverage

Rasio leverage merupakan proporsi total hutang terhadap ekuitas pemegang saham. Rasio

tersebut digunakan untuk memberikan gambaran mengenai struktur modal yang dimiliki

perusahaan, sehingga dapat dilihat tingkat resiko tak tertagihnya suatu utang. Tambahan

informasi diperlukan untuk menghilangkan keraguan pemegang obligasi terhadap

dipenuhinya hak-hak mereka sebagai kreditur [Schipper (1981) dalam Marwata (2001) dan

Meek, et al (1995) dalam Fitriany (2001)] Oleh karena itu perusahaan dengan rasio leverage

yang tinggi memiliki kewajiban untuk melakukan ungkapan yang lebih luas daripada

perusahaan dengan rasio leverage yang rendah.

Ukuran Perusahaan

Bukti bahwa pengungkapan tanggung jawab sosial dipengaruhi oleh ukuran perusahaan

telah ditemukan dalam penelitian sebelumnya. Menurut Meek, Roberts dan Gray (1995)

dalam Fitriani (2001) perusahaan besar mempunyai kemampuan untuk merekrut karyawan

yang ahli, serta adanya tuntutan dari pemegang saham dan analis, sehingga perusahaan besar

memiliki insentif untuk melakukan pengungkapan yang lebih luas dari perusahaan kecil.

Selain itu, perusahaan besar merupakan emiten yang banyak disoroti, pengungkapan yang

lebih besar merupakan pengurangan biaya politis sebagai wujud tanggung jawab sosial

perusahaan.

Profitabilitas

Profitabilitas merupakan faktor yang membuat manajemen menjadi bebas dan fleksibel

untuk mengungkapkan pertanggungjawaban sosial kepada pemegang saham [Heinze (1976)

dalam Hackston & Milne (1996)]. Sehingga semakin tinggi tingkat profitabilitas perusahaan

maka semakin besar pengungkapan informasi sosial. Hackston & Milne (1996) menemukan

tidak ada hubungan yang signifikan antara tingkat profitabilitas dengan pengungkapan

informasi sosial.

2.5. Kerangka Konseptual

Berdasarkan latar belakang masalah dan tinjauan pustaka diatas maka kerangka

konseptual penelitian adalah sebagai berikut:

Variabel Independen Variabel Dependen

Ukuran Dewan Komisaris

(KOM)

Tingkat Leverage

(LEV)

Ukuran Perusahaan

(SIZE)

Profitabilitas

(PM)

Jumlah Informasi Sosial yang Diungkapkan

(IS)

Menurut Coller dan Gregory dalam Sembiring (2005), ada hubungan positif antara ukuran

dewan komisaris dengan jumlah informasi sosial yang diungkapkan perusahaan. Tekanan

terhadap manajemen untuk mengungkapkan informasi sosial akan bertambah besar dengan

semakin besarnya ukuran dewan komisaris.

Berbagai penelitian seperti Belkaoui dan Karpik (1989), Hackston dan Milne (1996), dan

Sembiring (2005) menemukan hubungan positif antara ukuran perusahaan dengan

pengungkapan informasi sosial. Hal ini dikaitkan dengan pendapat bahwa perusahaan besar

merupakan emiten yang banyak disoroti, pengungkapan yang lebih besar merupakan wujud

tanggung jawab sosial perusahaan.

Jensen dan Meckling (1976) serta Schipper (1981) menyatakan adanya hubungan positif

antara tingkat leverage dan junlah informasi sosial. Schipper (1981) berpendapat bahwa

tambahan informasi diperlukan untuk menghilangkan keraguan pemegang obligasi terhadap

dipenuhinya hak-hak mereka sebagai kreditur. Belkaoui dan Karpik (1989) menyatakan

sebaliknya, bahwa semakin tinggi tingkat leverage (rasio utang/ekuitas) semakin besar

kemungkinan perusahaan akan melanggar perjanjian kredit sehingga perusahaan akan

berusaha untuk melaporkan laba sekarang lebih tinggi, salah satunya dengan mengurangi

biaya yang dibutuhkan untuk pengungkapan informasi sosial.

Secara teoritis, menurut Heinze (1976) dalam Hackston & Milne (1996) terdapat

hubungan positif antara kinerja ekonomi suatu perusahaan dengan pengungkapan tanggung

jawab sosial. Sebaliknya, seperti dinyatakan oleh Donovan dan Gibson (2000) dalam

Sembiring (2005), profitabilitas berpengaruh negatif terhadap pengungkapan tanggung jawab

sosial perusahaan.

2.6. Hipotesis

Berdasarkan perumusan masalah dan kerangka konseptual di atas, maka hipotesis

penelitian ini adalah: ukuran dewan komisaris, tingkat leverage, ukuran perusahaan dan

profitabilitas memiliki pengaruh terhadap jumlah informasi sosial yang diungkapkan baik

secara simultan maupun secara parsial.

3. Metode Penelitian

Jenis penelitian yang dilakukan adalah penelitian asosiatif kausal. Menurut Sugiyono

(2006:11) penelitian asosiatif kausal adalah “penelitian yang bertujuan untuk menganalisis

hubungan antara satu variabel dengan variabel lainnya atau bagaimana suatu variabel

mempengaruhi variabel lain”. Populasi penelitian ini adalah seluruh perusahaan sektor

manufaktur yang telah terdaftar (listing) di Bursa Efek Jakarta pada tahun 2007.

Sampel dipilih dengan metode purposive sampling, yaitu mengambil sampel yang telah

ditentukan sebelumnya berdasarkan maksud dan tujuan penelitian. Peneliti menetapkan dua

kriteria pengambilan sampel, yaitu:

1. perusahaan-perusahaan yang menjadi sampel adalah perusahaan yang

mempublikasikan laporan keuangan lengkap (termasuk catatan atas laporan

keuangan) dan laporan tahunan melalui situs Bursa Efek Indonesia,

2. perusahaan-perusahaan yang menjadi sampel adalah perusahaan yang mengungkapkan

informasi sosial melalui laporan tahunannya.

Data yang dikumpulkan berupa data kuantitatif, yaitu data yang diukur dalam suatu skala

numerik. Sumber data penelitian ini merupakan data sekunder, berupa laporan keuangan dan

laporan tahunan yang dipublikasikan di Pusat Referensi Pasar Modal Bursa Efek Indonesia

untuk tahun 2007.

Variabel dependen dalam penelitian ini adalah jumlah pengungkapan informasi sosial,

yang dinyatakan dalam indeks pengungkapan informasi sosial yang diungkapkan oleh

perusahaan dalam laporan tahunannya. Penghitungan indeks pengungkapan informasi sosial

akan dilakukan sesuai dengan kategori informasi sosial menurut Darwin (2004). Variabel-

variabel independen, yaitu faktor-faktor yang akan diuji pengaruhnya terhadap kebijakan

perusahaan dalam melakukan pengungkapan informasi sosial adalah ukuran dewan


4. Metode Analisis Data

4.1. Pengujian Asumsi Klasik

Metode analisis data yang digunakan adalah model analisis regresi berganda dengan

bantuan software SPSS for Windows. Penggunaan metode analisis regresi dalam pengujian

hipotesis, terlebih dahulu diuji apakah model tersebut memenuhi asumsi klasik atau tidak.

Pengujian meliputi uji normalitas, uji multikolinearitas, uji heteroskesdastisitas dan uji

autokorelasi.

4.1.1. Uji Normalitas

Uji Pengujian ini dimaksudkan untuk mengetahui apakah dalam model regresi, variabel

pengganggu atau residual mempunyai distribusi normal. Berdasarkan hasil uji statistik

dengan model Kolmogorov-Smirnov seperti yang terdapat dalam lampiran 2 dapat

disimpulkan bahwa data berdistribusi normal. Hal ini dapat dilihat dari nilai Asymp.Sig (2-

tailed) adalah 0.714>0.05.

4.1.2. Uji Multikolinearitas

Pengujian bertujuan mengetahui ada tidaknya multikolinearitas antar variabel-variabel

independen. Model regresi yang baik seharusnya tidak terjadi korelasi antara variabel

independen. Deteksi dilakukan dengan melihat nilai VIF (Variable Inflation Factor) dan

toleransi. Semua variabel independen memiliki VIF sekitar 1, atau VIF<10. Selain itu nilai

toleransi untuk setiap variabel independen lebih besar dari 0,1 (tolerance>0,1) Dengan

demikian disimpulkan tidak ada multikolinearitas dalam model regresi ini.

4.1.3. Uji Heteroskesdastisitas

Uji heteroskedastisitas bertujuan menguji terjadinya perbedaan variance residual suatu

periode pengamatan ke periode yang lain. Setelah diuji dengan grafik scatterplot dapat dilihat

bahwa tidak ada pola yang jelas, serta titik-titik menyebar di atas dan di bawah 0 pada sumbu

Y, maka dapat disimpulkan tidak terjadi heteroskedastisitas pada model regresi ini.

4.1.4. Uji Autokorelasi

Uji ini bertujuan untuk melihat apakah dalam suatu model linear ada korelasi antar

kesalahan pengganggu pada periode t dengan kesalahan periode t-1 (sebelumnya). Dari tabel

Durbin-Watson dapat dilihat bahwa untuk jumlah sampel sebanyak 33 dan variabel bebas

sebanyak 4 maka Dl= 1.19 dan Du= 1.73. Maka nilai D-W berada di antara 4- Du dan Dl

(2,27>1,858>1,19). Hal ini bermakna bahwa tidak terjadi autokorelasi dalam model regresi.

4.2. Koefisien Korelasi dan Koefisien Determinasi (Goodness of Fit)

Nilai koefisien korelasi (R) menunjukkan seberapa besar korelasi atau hubungan antara

variabel-variabel independen dengan variabel dependen. Koefisien korelasi dikatakan kuat

jika nilai R berada di atas 0,5 dan mendekati 1. Adapun koefisien determinasi (goodness of

fit), yang dinotasikan dengan merupakan suatu ukuran yang penting dalam regresi.

Determinasi ( ) mencerminkan kemampuan model dalam menjelaskan variabel dependen.

Nilai koefisien korelasi (R) sebesar 0,626 berarti bahwa korelasi antara variabel dependen

dengan variabel-variabel independennya adalah kuat dengan didasarkan pada nilai R yang

berada di atas 0,5. Nilai (Adjusted R Square) menunjukkan nilai 0,305, artinya keempat

variabel independen dalam penelitian yaitu ukuran dewan komisaris, tingkat leverage, ukuran

perusahaan dan profitabilitas dapat menjelaskan 30,5% dari jumlah informasi sosial yang

diungkapkan. Adapun sisanya dijelaskan oleh sebab-sebab lain di luar model.

4.3. Pengujian Hipotesis

Dari hasil analisis regresi, didapat F-hitung adalah 4,513 dengan signifikansi sebesar

0,006 (p = 0,006; p < 0,05). Adapun nilai F tabel untuk α = 0,05 dengan pembilang sebesar

4 dan penyebut sebesar 32 adalah 2,67. Maka diperoleh bahwa F hitung > F tabel (4,513 >

2,67). Dengan demikian dapat disimpulkan bahwa jumlah informasi sosial yang diungkapkan

dalam laporan tahunan dipengaruhi secara simultan atau bersama-sama oleh ukuran dewan


Dari hasil uji t dapat diperoleh model persamaan regresi berganda sebagai berikut:

IS= -0,335 + 0,034KOM + 0,051 LEV + 2,480 PM + 0,025 Ln_SIZE

Setelah diuji melalui uji t, dapat diketahui pengaruh masing-masing variabel independen

terhadap variabel dependen.

a. Ukuran dewan komisaris memiliki nilai signifikansi sebesar 0,045 yang berarti nilai

ini lebih kecil dari 0,05, sedangkan nilai t hitung diperoleh sebesar 2,104. Nilai t

hitung ini lebih besar dari nilai t tabel sebesar 2,0395 (2,104 > 2,0395). Maka

disimpulkan bahwa ukuran dewan komisaris memiliki pengaruh signifikan terhadap

jumlah informasi sosial yang diungkapkan.

b. Tingkat leverage memiliki nilai signifikansi sebesar 0,205 yang berarti nilai ini lebih

besar dari 0,05, sedangkan nilai t hitung diperoleh sebesar 1,296. Nilai t hitung ini

lebih kecil dari nilai t tabel sebesar 2,0395 (1,296 < 2,0395). Maka disimpulkan

bahwa tingkat leverage tidak memiliki pengaruh signifikan terhadap jumlah

informasi sosial yang diungkapkan.

c. Ukuran perusahaan memiliki nilai signifikansi sebesar 0,307 yang berarti nilai ini

lebih besar dari 0,05, sedangkan nilai t hitung diperoleh sebesar 1,040. Nilai t hitung

ini lebih kecil dari nilai t tabel sebesar 2,0395 (1,040 < 2,0395). Maka disimpulkan

bahwa ukuran perusahaan tidak memiliki pengaruh signifikan terhadap jumlah

informasi sosial yang diungkapkan.

d. Profitabilitas memiliki nilai signifikansi sebesar 0,026 yang berarti nilai ini lebih kecil

dari 0,05, sedangkan nilai t hitung diperoleh sebesar 2,355. Nilai t hitung ini lebih

besar dari nilai t tabel sebesar 2,0395 (2,355 > 2,0395). Maka disimpulkan bahwa

profitabilitas memiliki pengaruh signifikan terhadap jumlah informasi sosial yang

diungkapkan.

4.4. Pembahasan Hasil Analisis

Hasil analisa statistik menunujukkan bahwa secara simultan, variabel ukuran dewan

komisaris, tingkat leverage, ukuran perusahaan dan profitabilitas secara bersama-sama

memiliki pengaruh terhadap jumlah informasi sosial yang diungkapkan sebesar 30,5%

(Adjusted =0,305). Sisanya sebesar 69,5% dipengaruhi oleh variabel lain di luar variabel

yang digunakan. Tingkat Adjusted yang rendah ini menunjukkan perlunya dilakukan

penelitian lanjutan dengan menambahkan variabel lain sebagai penduga pengungkapan

tanggung jawab sosial perusahaan. Walaupun demikian, apabila dilihat dari signifikansinya,

secara simultan variabel yang digunakan berpengaruh secara signifikan dengan nilai F hitung

sebesar 4,513 yang lebih besar dari F tabel (4,513 > 2,67) dan p = 0,006 ( p <0,05).

Dalam pengujian secara parsial ditemukan bahwa dua variabel independen yaitu ukuran

dewan komisaris dan tingkat profitabilitas memiliki pengaruh signifikan terhadap jumlah

informasi sosial yang diungkapkan, sedangkan dua variabel independen lainnya yaitu tingkat

leverage dan ukuran perusahaan memiliki pengaruh yang tidak signifikan.

5. Kesimpulan dan Saran

5.1. Kesimpulan

Setelah menganalisis dan melakukan pembahasan dalam penelitian ini, penulis

memberikan lima kesimpulan sebagai berikut:

1. penelitian ini memberikan hasil bahwa ukuran dewan komisaris, tingkat leverage,

ukuran perusahaan dan profitabilitas secara bersama-sama atau simultan memiliki

kemampuan mempengaruhi jumlah informasi sosial yang diungkapkan dalam laporan

tahunan perusahaan manufaktur yang terdaftar di Bursa Efek Jakarta pada tingkat

kepercayaan 95%,

2. penelitian ini sejalan dengan penelitian Sembiring (2005) memberikan hasil bahwa

secara parsial, ukuran dewan komisaris secara statistik berpengaruh signifikan

terhadap jumlah informasi sosial yang diungkapkan dalam laporan tahunan

perusahaan manufaktur yang terdaftar di Bursa Efek Jakarta pada tingkat kepercayaan

95% ,

3. penelitian ini sejalan dengan penelitian Fitriany (2001) memberikan hasil bahwa

secara parsial, profitabilitas secara statistik berpengaruh signifikan terhadap jumlah

informasi sosial yang diungkapkan dalam laporan tahunan perusahaan manufaktur

yang terdaftar di Bursa Efek Jakarta pada tingkat kepercayaan 95% ,

4. penelitian ini sejalan dengan penelitian Sembiring (2005) dan Anggraini (2006)

memberikan hasil bahwa secara parsial, tingkat leverage secara statistik tidak

berpengaruh signifikan terhadap jumlah informasi sosial yang diungkapkan dalam

laporan tahunan perusahaan manufaktur yang terdaftar di Bursa Efek Jakarta pada

tingkat kepercayaan 95%,

5. penelitian ini sejalan dengan penelitian Anggraini (2006) memberikan hasil bahwa

secara parsial, ukuran perusahaan secara statistik tidak berpengaruh signifikan

terhadap jumlah informasi sosial yang diungkapkan dalam laporan tahunan

perusahaan manufaktur yang terdaftar di Bursa Efek Jakarta pada tingkat kepercayaan

95%.

5.2. Keterbatasan Penelitian

Penelitian ini tidak terlepas dari keterbatasan-keterbatasan yang memerlukan perbaikan

dan pengembangan dalam penelitian-penelitian berikutnya. Keterbatasan-keterbatasan

penelitian ini adalah:

1. dalam penelitian ini sampel yang digunakan hanyalah perusahaan manufaktur saja

sehingga perusahaan yang dijadikan sampel tidak dapat mewakili keseluruhan

perusahaan yang ada di Indonesia,

2. periode waktu yang diambil dalam penelitian ini hanya tahun2007, sehingga kondisi

tersebut tidak dapat digeneralisir untuk hasil penelitian yang telah ada,

3. variabel-variabel yang digunakan dalam penelitian ini hanya lima yaitu, empat

variabel independen ; ukuran dewan komisaris, tingkat leverage, ukuran perusahaan

dan profitabilitas serta satu variabel dependen, jumlah informasi sosial yang

diungkapkan, sehingga variabel-variabel independen tersebut tidak begitu mampu

menjelaskan jumlah informasi sosial yang diungkapkan.

5.3. Saran

Berdasarkan keterbatasan di atas penulis mengajukan beberapa saran sebagai berikut:

1. analisis regresi dalam penelitian ini menghasilkan Adjusted R Square ( ) yang

cukup rendah walaupun model regresinya secara statistik signifikan dalam

menjelaskan pengaruh variabel-variabel independen terhadap variabel dependen,

dengan demikian penelitian selanjutnya dapat menambahkan atau menggunakan

variabel lain seperti profile, jenis maupun status perusahaan untuk menjelaskan

jumlah informasi sosial yang diungkapkan oleh perusahaan,

2. peneliti selanjutnya sebaiknya menggunakan jumlah sampel yang lebih besar,

3. bagi peneliti selanjutnya, item-item pengungkapan informasi sosial hendaknya

senantiasa diperbaharui sesuai kondisi masyarakat serta peraturan yang berlaku, hal

ini mungkin dapat dilakukan dengan melibatkan para aktivis sosial serta pihak

berwenang terkait dengan masalah sosial.

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Determinants of Corporate Social

Responsibility Disclosure Ratings

by Spanish Listed Firms Carmelo Reverte

ABSTRACT. The aim of this paper is to analyze whether

a number of firm and industry characteristics, as well as

media exposure, are potential determinants of corporate

social responsibility (CSR) disclosure practices by Spanish

listed firms. Empirical studies have shown that CSR dis-

closure activism varies across companies, industries, and

time (Gray et al., Accounting, Auditing & Accountability

Journal 8(2), 47–77, 1995; Journal of Business Finance &

Accounting 28(3/4), 327–356, 2001; Hackston and Milne,

Accounting, Auditing & Accountability Journal 9(1), 77–108,

1996; Cormier and Magnan, Journal of International Finan-

cial Management and Accounting 1(2), 171–195, 2003; Cor-

mier et al., European Accounting Review 14(1), 3–39, 2005),

which is usually justified by reference to several theoretical

constructs, such as the legitimacy, stakeholder, and agency

theories. Our findings evidence that firms with higher

CSR ratings present a statistically significant larger size and

a higher media exposure, and belong to more environ-

mentally sensitive industries, as compared to firms with

lower CSR ratings. However, neither profitability nor

leverage seem to explain differences in CSR disclosure

practices between Spanish listed firms. The most influen-

tial variable for explaining firms’ variation in CSR ratings is

media exposure, followed by size and industry. Therefore,

it seems that the legitimacy theory, as captured by those

variables related to public or social visibility, is the most

relevant theory for explaining CSR disclosure practices of

Spanish listed firms.

KEY WORDS: corporate social responsibility disclosure,

Spain

Introduction

Over the last few decades there has been a growing

public awareness of the role of corporations in

society. Many of the firms which have been credited

with contributing to economic and technological

progress have been criticized for creating social

problems. Issues such as pollution, waste, resource

depletion, product quality and safety, the rights and

status of workers, and the power of large corpora-

tions have become the focus of increasing attention

and concern. In this context, companies have been

increasingly urged to become accountable to a wider

audience than shareholder and creditor groups. As a

matter of fact, public awareness and interest in

environmental and social issues and increased

attention in mass media have resulted in more social

disclosures from corporations in the last two decades

(Deegan and Gordon, 1996; Gray et al., 1995;

Hooghiemstra, 2000; Kolk, 2003). In the European

Union context, the publication of the Green Paper

(2001) by the European Commission launched a

wide debate on how the EU could promote cor-

porate social responsibility (CSR). Although there is

still no universal definition of CSR (Godfrey and

Hatch, 2007), most definitions describe it as a con-

cept whereby companies integrate social and envi-

ronmental concerns in their business operations and

in their interaction with their stakeholders on a

voluntary basis. By acting in a responsible way to the

variety of social, environmental, and economic

pressures, companies respond to the expectations of

the various stakeholders with whom they interact,

such as employees, shareholders, investors, con-

sumers, public authorities, and non-governmental

organizations (NGOs).

Companies usually inform of their CSR activities

in the annual report or in separate social reports

(CSR Report or Sustainability Report). However,

there is no standardization or uniformity in terms

of the items reported, or the way of reporting.

Journal of Business Ethics (2009) 88:351–366 � Springer 2008DOI 10.1007/s10551-008-9968-9

Consequently, various NGOs have started devel-

oping models or frameworks for reporting on CSR,

such as the ISO 14001 (Internationally Standards

Organization), World Resources Institute (WRI)

and the Global Reporting Initiative (GRI).

With regard to the empirical research on CSR,

three types of empirical studies characterize the

research in this field. The first one relates to

‘descriptive studies,’ which report on the nature and

extent of CSR with some comparisons on countries

and periods. The second one is related to ‘explicative

studies,’ which focus on the potential determinants

of social and environmental reporting. The third one

is interested in the ‘impact of social and environ-

mental information’ on various users, mainly on

market reaction. Our study adopts the second

orientation, as it is focused on analyzing whether a

number of firm and industry characteristics, as well

as media exposure, are potential determinants of

CSR disclosure practices by Spanish listed firms.

Empirical studies have shown that CSR disclosure

activism varies across companies, industries, and time

(Gray et al., 1995, 2001; Hackston and Milne, 1996).

They have also shown this behavior to be impor-

tantly and systematically determined by a variety of

firm and industry characteristics that influence the

relative costs and benefits of disclosing such infor-

mation (Belkaoui and Karpik, 1989; Cormier and

Magnan, 2003; Cormier et al., 2005; Hackston and

Milne, 1996; Patten, 2002a, b).

This paper is focused on the Spanish setting for

three reasons. First, most of the present literature is

based on Anglo-American countries (US and UK)

and evidence should be added about other institu-

tional contexts. Second, there is scarce empirical

research on CSR determinants by Spanish compa-

nies. Previous studies (Archel, 2003; Archel and

Lizarraga, 2001; Carmona and Carrasco, 1988;

Garcıa-Ayuso and Larrinaga, 2003; Moneva and

Llena, 1996, 2000) have mainly focused on one

dimension of CSR such as environmental disclosure,

and the sample periods analyzed in these papers were

previous to the first compulsory regulations in Spain

in the area of environmental disclosure (i.e., the

Royal Decree 437/1998 and the Resolution enacted

on March 25, 2002 by the Institute of Accounting

and Auditing – ICAC-). Our sample period follows

the previous mandatory regulations and also the GRI

Sustainability Reporting Guidelines, which have

been generally adopted by Spanish listed firms in the

last years as the benchmark for CSR reporting. As a

result, CSR disclosures by Spanish firms in our

sample period are much more richer and extensive as

compared to previous studies in the Spanish context

in which that information was very scarce and

anecdotical. Moreover, our measure of CSR not

only captures environmental issues but also a number

of social aspects included in the latest developments

in CSR worldwide, specially those stemming from

the GRI Sustainability Reporting Guidelines and the

United Nations Norms on the Responsibilities of

Transnational Corporations and Other Business

Enterprises with regard to Human Rights. Third, in

contrast to the understanding of CSR from common

law English-speaking countries (Australia, Canada,

UK, US), the determinants of CSR in Continental

Europe are still relatively unknown. Therefore, our

main goal is to analyze whether the specific features

of Spain regarding its capital market and companies’

financing structure result in a significant difference

between the factors influencing CSR disclosure

practices of Spanish listed firms when compared to

firms from other different institutional contexts. In

particular, Spain is less capital market oriented than

other EU countries and financing policies are bank

oriented.

The remainder of the paper is organized as fol-

lows. In the following section, the theoretical

framework used is presented. Section ‘‘Determinants

of CSR disclosure: development of hypotheses’’

discusses the determinants of CSR disclosure prac-

tices. Section ‘‘Data and method of estimation’’

focuses on the methodology and data. Section

‘‘Results’’ presents the main results of our empirical

analysis. Finally, some conclusions are drawn.

A multi-theoretical framework for CSR

disclosure

Despite widespread academic and business interest in

the issue, a comprehensive theoretical framework of

the underlying determinants of corporate social and

environmental reporting is still elusive. The empir-

ical investigations of CSR practices have produced a

very diverse body of academic literature which

engages different theoretical perspectives in support

of corporate social reporting, such as the agency

352 Carmelo Reverte

theory, the legitimacy theory, and the stakeholder

theory, among others.

For instance, there is extensive evidence that

social and environmental information is useful

for decision-making by financial stakeholders

(Blacconiere and Northcut, 1997; Blacconiere and

Patten, 1994; Graham et al., 2000; Richardson and

Welker, 2001). However, with its financial stake-

holders’ focus, it fails to provide a comprehensive

theoretical foundation to explain CSR disclosure,

especially since most of that disclosure is non-

financial. In response to this conceptual gap, other

alternative explanations for CSR disclosure have also

been offered in the literature. Following its emer-

gence as an explanatory model for corporate finan-

cial reporting (Watts and Zimmerman, 1986),

economic agency theory (or positive accounting the-

ory) became an appealing proposition as a rationale

for CSR disclosure (Belkaoui and Karpik, 1989).

Agency theory views the firm as a nexus of contracts

between various economic agents who act oppor-

tunistically within efficient markets. In this context,

social and environmental disclosure may prove use-

ful in determining debt contractual obligations,

managerial compensation contracts, or implicit

political costs. However, as indicated by Cormier

et al. (2005), agency theory’s focus on monetary or

wealth considerations among agents who trade in

informationally efficient markets does limit the scope

of relevant social and environmental disclosure as

well as its intended purpose, insofar as many

potential users of this kind of information may not

act in these markets at all (e.g., pressure groups such

as Greenpeace).

In contrast to agency theory, the legitimacy theory

provides a more comprehensive perspective on CSR

disclosure as it explicitly recognizes that businesses

are bound by the social contract in which the firms

agree to perform various socially desired actions in

return for approval of their objectives and other

rewards, and this ultimately guarantees their con-

tinued existence (Brown and Deegan, 1998; Dee-

gan, 2002; Guthrie and Parker, 1989). Gray et al.

(1995) and Hooghiemstra (2000), among others,

argue that most insights into CSR disclosure ema-

nate from the use of this theoretical framework

which posits that social and environmental disclosure

is a way to legitimize a firm’s continued existence or

operations to the society. Perrow (1970) defines

legitimacy as a generalized perception or assumption

that the actions of an entity are desirable, proper, or

appropriate within some socially constructed system

of norms, value, beliefs, and definitions. Although

firms have discretion to operate within institutional

constraints, failure to conform to critical, institu-

tionalized norms of acceptability can threaten the

firm’s legitimacy, resources, and, ultimately, its sur-

vival (DiMaggio and Powell, 1983; Oliver, 1991;

Scott, 1987). Meyer and Rowan (1977) assert that:

‘as the issues of safety and environmental pollution

arise, and as relevant professions and programs

become institutionalized in laws, union ideologies

and public opinion, organizations incorporate these

programs and professions’ (Meyer and Rowan,

1977, p. 345). Jennings and Zandbergen (1995)

argue that the type of institutional pressure, be it

coercive, mimetic, or normative, influences the rate

at which sustainable development practices diffuse

among firms. Reinforcing the previous arguments,

many prior studies on corporate disclosures have

provided evidence that firms do voluntarily disclose

information in their annual reports as a strategy to

manage their legitimacy (Campbell, 2000; Deegan

and Rankin, 1996; Hutchings and Taylor, 2000;

Nasi et al., 1997; Patten, 1991; Woodward et al.,

2001). Thus, CSR disclosure can be viewed as a

constructed image or symbolic impression of itself

that a firm is conveying to the outside world to

control its political or economic position (Neu et al.,

1998).

Finally, the stakeholder theory explicitly considers

the expectations impact of the different stakeholder

groups within society upon corporate disclosure

policies. Under the managerial branch of stakeholder

theory, the central thesis that emerges is that cor-

porate disclosure is a management tool for managing

the informational needs of the various powerful

stakeholder groups (employees, shareholders, inves-

tors, consumers, public authorities and NGOs, …).

Managers use information to manage or manipulate

the most powerful stakeholders in order to gain their

support which is required for survival (Gray et al.,

1996). In relation to the overlap between legitimacy

theory and stakeholder theory, Deegan (2002,

p. 295) state that ‘‘both theories conceptualise the

organisation as part of a broader social system

wherein the organisation impacts, and is impacted

by, other groups within society. Whilst legitimacy

Determinants of Corporate Social Responsibility Disclosure 353

theory discusses the expectations of society in gen-

eral (as encapsulated within the ‘social contract’),

stakeholder theory provides a more refined resolu-

tion by referring to particular groups within society

(stakeholder groups). Essentially, stakeholder theory

accepts that because different stakeholder groups will

have different views about how an organisation

should conduct its operations, there will be various

social contracts ‘negotiated’ with different stake-

holder groups, rather than one contract with society

in general. Whilst implied within legitimacy theory,

stakeholder theory explicitly refers to issues of

stakeholder power, and how a stakeholder’s relative

power impacts their ability to ‘coerce’ the organi-

sation into complying with the stakeholder’s

expectations.’’

While there are some similarities, the previous

three alternative theories essentially differ on the

basis of fundamental assumptions. Unlike the agency

or positive accounting theory, legitimacy theory and

stakeholder theory make no assumption of rational,

wealth-maximizing individuals operating within the

environment of efficient capital markets. On the

other hand, while Woodward et al. (1996) have

shown that both legitimacy theory and stakeholder

theory consider an organization to be part of the

wider social system, legitimacy theory looks at

society as a whole, whereas stakeholder theory

recognizes that some groups within the society are

more powerful than others. We posit that the

alternative theories which are of value in studies of

CSR disclosure policies focus upon distinct per-

spectives of the same issue. Hence, the different

theories outlined should not be seen as competing

perspectives, but rather as alternative ways of com-

prehending and studying organizational decisions to

disclose different kinds of information to the public.

Determinants of CSR disclosure:

development of hypotheses


activism varies across companies, industries, and time

(Gray et al., 1995, 2001; Hackston and Milne, 1996).

They have also shown this behavior to be impor-

tantly and systematically determined by a variety of

firm and industry characteristics that influence

the relative costs and benefits of disclosing such

information (Belkaoui and Karpik, 1989; Cormier

and Magnan, 2003; Cormier et al., 2005; Hackston

and Milne, 1996; Patten, 2002a, b). The theories

that seem to have been most successful in explaining

the content and extent of social and environmental

reporting are system-oriented theories, above all

legitimacy and stakeholder theories (Gray et al.,

1995; Milne, 2002). According to these theories,

social disclosure is in first hand used in order

to guard corporations’ reputation and identity

(Hooghiemstra, 2000). Both Adrem (1999) and

Cormier et al. (2005) argue, however, that disclo-

sures are a complex phenomenon that cannot be

explained by one single theory. As pointed out by

Gray et al. (1995), if the aim of the study is to ex-

plain an empirical phenomenon, it could be a

problem when theories are looked upon as com-

petitive instead of complementary. Hence, in this

study we have an eclectic approach and use a multi-

theoretical framework in order to explain the dif-

ferences in CSR disclosure practices between

Spanish listed firms. Next, we discuss each of the

explanatory factors analyzed.

Size

The public pressure perspective of legitimacy theory

is concerned with public and, consequently, gov-

ernment intrusions into the activities of organiza-

tions that are deemed to violate their social contract.

This perspective parallels Watts and Zimmerman’s

(1986) political cost hypothesis in that larger com-

panies are deemed to be more highly exposed to

public scrutiny. Watts and Zimmerman (1986) argue

that large companies are more visible to the public,

have more market power, and are more newswor-

thy. Hence, they are more likely to be subject to

public resentment, consumer hostility, militant

employees, and the attention of government regu-

latory bodies. Large corporations do have a bigger

effect on the community, and therefore normally

have a bigger group of stakeholders that influence

the corporation (Hackston and Milne, 1996; Knox

et al., 2006). Hence, voluntary disclosures can be

explained as an effort to avoid regulations and reduce

political costs (Adams et al., 1998; Clarke and

Gibson-Sweet, 1999; Gray et al., 1995; Ness and

Mirza, 1991). Dowling and Pfeffer (1975) argue that

354 Carmelo Reverte

larger firms are more politically visible, thus they are

expected to engage more heavily in legitimating

behavior. From an empirical perspective, various

studies have found that there is a positive relation-

ship between CSR disclosure and firm size or

political visibility (Adams et al., 1998; Cullen and

Christopher, 2002; Hamid, 2004; Haniffa and

Cooke, 2005; Hossain et al., 1995; Neu et al., 1998;

Patten, 1991). Hence, the discussion above leads us

to the hypothesis that:

H1: There is a positive significant relationship

between firm size and CSR disclosure.

Industry sensitivity

In previous research, industry, together with size, is

the most common variable in order to explain the

content and extent of social and environmental dis-

closures (Adams et al., 1998; Cowen et al., 1987;

Gray et al., 1995). The results from these studies show

that corporations from industries whose manufac-

turing process has a negative influence on the

environment disclose and report considerably more

information than corporations from other industries.

In general, corporations from the mining, oil, and

chemical industries emphasize information regarding

environmental, health, and safety issues (Clarke and

Gibson-Sweet, 1999; Jenkins and Yakovleva, 2006;

Line et al., 2002; Ness and Mirza, 1991), while the

finance and service industries in general seem to

report more regarding social issues and philanthrop-

ical deeds (Clarke and Gibson-Sweet, 1999; Line

et al., 2002). A body of empirical literature associates

the metals, resources, paper and pulp, power gener-

ation, water, and chemicals sectors with high envi-

ronmental impacts (Bowen, 2000; Hoffman, 1999;

Morris, 1997). In contrast, other industries, particu-

larly newer manufacturing industries and the service

sector, have significantly lower environmental

impacts and are associated with fewer visible envi-

ronmental issues. Therefore, companies in these

industries are expected to be subject to significantly

less stakeholder pressure regarding their environ-

mental performance, and so would be expected to

display a lesser degree of disclosure activism. Hence,

the discussion above leads us to the hypothesis that:

H2: There is a positive significant relationship be-

tween industry environmental sensitivity and

CSR disclosure.

Profitability

There are several studies, mainly based on the

stakeholder theory, that suppose a positive relation-

ship between social disclosure policy and profit-

ability (Belkaoui and Karpik, 1989; Cowen et al.,

1987; Ismail and Chandler, 2005; Roberts, 1992;

Ullmann, 1985), although it should be noted that the

empirical results do not always confirm that positive

relationship (Archel, 2003; Brammer and Pavelin,

2008; Carmona and Carrasco, 1988; Garcıa-Ayuso

and Larrinaga, 2003; Moneva and Llena, 1996;

Roberts, 1992). According to Belkaoui and Karpik

(1989), the underlying cause of a positive relation-

ship between social disclosure policy and profit-

ability is management’s knowledge. A management

that has the knowledge to make a company profit-

able also has the knowledge and understanding of

social responsibility, which leads to more social and

environmental disclosures. In the context of the

agency and political cost theories, Giner (1997)

points out that management in very profitable

corporations provide more detailed information in

order to support their own position and compensa-

tion. Ng and Koh (1994) point to the fact that

profitable corporations are more exposed to political

pressure and public scrutiny, and therefore use more

self-regulating mechanisms, for instance voluntary

disclosure of information, in order to avoid regula-

tion. The most obvious and explicit explanation

might be that profitable corporations have the nec-

essary economical means – the so-called organiza-

tional slack (Cowen et al., 1987; Hackston and

Milne, 1996; Pirsch et al., 2007). In a corporation

with less economical resources, management will

probably focus on activities that have a more direct

effect on the corporation’s earnings than the pro-

duction of social and environmental disclosures

(Roberts, 1992; Ullmann, 1985). However, from a

legitimacy theory perspective, profitability can

be regarded to be either positively or negatively

related to CSR disclosure (Neu et al., 1998). As

these authors point out, where the organization is


profitable, environmental disclosures would, for

those stakeholders who value the environment, give

confirmation that profit has not been at the expense

of the environment. Conversely, in periods of rela-

tive unprofitability, these same disclosures might be

either directed at convincing financial stakeholders

that current environmental investments will result in

long-term competitive advantages or at distracting

attention from the financial results. Thus, we do

not make any a priori assumption about the sign

of the association between CSR disclosure and

profitability.

H3: There is a significant relationship between

profitability and CSR disclosure.

Ownership structure

The degree to which ownership of company stock is

concentrated in the hands of a few large investors or

dispersed among many has been proposed as an

influence on disclosure policy (Roberts, 1992;

Ullmann, 1985). Opportunistic management

behavior and conflict of interests between agents and

principals are more likely to occur in corporations

with more dispersed ownership. In a widely held

company, voluntary disclosure can act as a bonding

and monitoring tool reducing agency conflicts

between managers and shareholders (Jensen and

Meckling, 1976). Evidence suggests that ownership

dispersion across many investors contributes to

increased pressure for voluntary disclosure (Cullen

and Christopher, 2002; Ullmann, 1985). Hence,

corporations with many owners are in general

expected to disclose more information than corpo-

rations with concentrated ownership in order to

reduce information asymmetries between the orga-

nization and its shareholders (Prencipe, 2004). Firms

whose shares are widely held are more likely to

improve their financial reporting policy by using

their CSR disclosure in order to reduce these

asymmetries. On the contrary, firms with a con-

centrated ownership structure are less motivated to

disclose additional information on their CSR, insofar

as the shareholders of these firms can obtain infor-

mation directly from the firm. Reinforcing the

previous arguments, Brammer and Pavelin (2008)

evidence, in the context of environmental infor-

mation, that having greater ownership concentration

makes a firm less likely to disclose an environmental

policy. Thus, we hypothesize that:

H4: There is a negative relationship between CSR

disclosure and concentrated ownership.

International listing

According to Cooke (1989), when a firm is listed on a

foreign exchange, it will disclose more detailed

information since it may need to observe the disclo-

sure rules of two or more stock exchanges, and it will

attract more analyst coverage. In this respect, disclo-

sure serves to limit the monitoring and agency costs

resulting from the existence of a greater number of

shareholders. Reinforcing the previous arguments,

Singhvi and Desai (1971), Cooke (1989), Hossain

et al. (1994, 1995) and Robb et al. (2001) find

international listing status to be a significant deter-

minant of the voluntary disclosure level. Thus, we

hypothesize that:


between CSR disclosure and international listing.

Media exposure

Legitimacy theory research extends to examining the

role media coverage plays in increasing the public

policy pressures faced by companies (Patten, 2002b).

The total amount of media coverage raises the firm’s

visibility, inviting further public attention and scru-

tiny. The media can play an important role in

mobilizing social movements such as environmental

interest groups. In doing so, it becomes part of the

institution-building process, shaping the norms of

acceptable and legitimate CSR practices. According

to Simon (1992), the media is the main source of

environmental information. The media not only

plays a passive role in shaping institutional norms,

but also a more active one by choosing the stories

worth reporting and framing them to reflect editorial

values. Empirical studies have shown that the media

has been particularly influential on corporate envi-

356 Carmelo Reverte

ronmental responses (Bansal and Clelland, 2004;

Bansal and Roth, 2000; Bowen, 2000; Henriques

and Sadorsky, 1996). Based on these arguments, the

following hypothesis is tested:


between CSR disclosure and media exposure.

Leverage

Within the context of the agency theory, Jensen and

Meckling (1976) argue that more highly leveraged

firms disclose voluntary information in order to

reduce their agency costs and, as a result, their cost of

capital. However, Brammer and Pavelin (2008)

sustain that a low degree of leverage ensures that

creditor stakeholders will exert less pressure to

constrain managers’ discretion over CSR activities,

which are only indirectly linked to the financial

success of the firm. Purushothaman et al. (2000) also

predict a negative relationship between leverage and

CSR disclosure in that companies with high leverage

may have closer relationships with their creditors and

use other means to disclose social responsibility

information. Thus, we do not make any a priori

assumption about the sign of the association between

CSR disclosure and leverage. The following

hypothesis is thus tested:

H7: There is a significant relationship between

CSR disclosure and leverage.1

Data and method of estimation

CSR ratings: the dependent variable

Our data on CSR disclosure ratings come from the

Observatory on corporate social responsibility

(OCSR). This is an association integrated by four-

teen organizations that represent civil society,

NGOs, trade unions, and consumer organizations. It

is a network that fosters participation and coopera-

tion between social organizations that, from different

points of view, are interested in CSR. The OCSR

issues each year a very exhaustive report on CSR

disclosures by Spanish listed firms included in the

IBEX35 index, which comprises the largest 35 firms

in terms of market capitalization. Each of the cov-

ered firms is assigned a numerical rating (ranging

from 0 to 4 in a continuous scale) based on the

adherence of their CSR disclosures to the following

rules/recommendations: (a) Global Reporting Ini-

tiative (GRI)’s Guidelines (G2 and G3); (b) United

Nations Norms on the Responsibilities of Transna-

tional Corporations and Other Business Enterprises

with Regard to Human Rights [U.N. Doc. E/

CN.4/Sub.2/2003/38/Rev.2 (2003)]; (c) AA1000

Accountability Principles issued by the Institute of

Social and Ethical AccountAbility); (d) New Eco-

nomics Foundation (NEF) Principles and (e) Cor-

porate Governance recommendations issued by the

Spanish stock market regulator and, in the case of

US cross-listed firms, the Sarbanes-Oxley Law. We

focus on the following three ratings reported by the

OCSR:

a) Total CSR score (TCSR), which captures the

overall adherence of a firm’s CSR disclosure

practices to the previous rules/recommenda-

tions;

b) CSR Content Rating (CR), which evaluates

the concordance of the information provided

by a firm to the recommendations reported in:

• GRI Performance Indicators section related

to:

• economic perfomance

• environmental performance

• social performance

– human rights

– labor practices and decent work

– society

– product responsibility

• United Nations Norms on the Responsibili-

ties of Transnational Corporations and Other

Business Enterprises with Regard to Human

Rights (especially in the fields of protection

of consumer rights and corruption);

c) CSR Management Systems Rating (MSR),

which evaluates the adherence of the pro-

cesses and management systems in the CSR

area to those outlined in:


• GRI’s Profile section.

• GRI’s Principles (relevance/materiality,

stakeholder inclusiveness, reliability/audit-

ability, neutrality, sustainability context,

accuracy, comparability, clarity, complete-

ness, timeliness, transparency).

• AA1000 Principles (completeness, material-

ity, regularity and timeliness, quality assur-

ance, information quality, embeddedness,

continuous improvement, accessibility).

• NEF’s Principles (inclusivity, completeness,

comparability, embeddedness, disclosure,

external verification, continuous improve-

ment, evolution).

Explanatory variables measurement

Media exposure

To develop a measure of the companies’ media

exposure, the number of articles in the two main

Spanish business newspapers (‘Expansion’ and

‘Actualidad Economica’) was counted. Company

exposure was measured by using the search facilities

present on the web pages of those newspapers for

each of the 2 years analyzed (2005 and 2006).2

Profitability

In order to measure corporate performance, either

accounting- or market-based measures can be used.

In contrast with accounting-based measures, market-

based measures are less subject to bias by managerial

manipulation and they do not rely on past perfor-

mance (McGuire et al., 1988). However, they are

based on investors’ viewpoints on company perfor-

mance, thus ignoring other important stakeholder

groups. This is the main reason for adopting an

accounting-based variable in our paper, such as

return on assets (ROA) (Belkaoui and Karpik, 1989;

Bewley and Li, 2000; Brammer and Pavelin, 2008;

Cormier et al., 2004; Patten, 1991).

Industry sensitivity

In this study, ‘‘more sensitive’’ industries are con-

sidered to be those with more risk of being criticized

in CSR matters because of their activities involving

higher risk of environmental impact. Based on prior

literature, the following ‘‘more sensitive’’ sectors are

identified: mining, oil and gas, chemicals, forestry

and paper, steel and other metals, electricity, gas

distribution, and water. All others are considered as

‘‘less sensitive.’’ A one/zero variable is used to des-

ignate companies from these industries: one if the

company is from a more sensitive industry and zero

if it is from a less sensitive industry.

International listing

International listing is measured by the number of

foreing stock markets in which the firm is listed.

Company size

Following prior research, size is measured as the

natural logarithm of market capitalization.3

Ownership concentration

This variable is measured from data concerning

significant shareholdings from 2005 and 2006 annual

reports of the sample companies. Thus, if a firm has a

majority shareholder we assign it a value of 1 and if

not it is assigned a zero value.

Leverage

This variable is measured as long-term debt/book

value of equity (Cormier et al., 2005).4

Sample

Our sample comprises those firms covered by the

OCSR report, i.e., Spanish firms listed on the

Madrid Stock Exchange and included in

the IBEX35 index. However, due to the fact that

most of our explanatory variables are based on

accounting data, we have excluded financial firms

because of the particular characteristics of their

accounting system. Moreover, since all firms under

study present consolidated accounts and they had

to be prepared in accordance with International

Financial Reporting Standards (IFRS) issued by the

IASB from 2005 onward – Regulation 1606/2002 of

the European Commission – we have chosen fiscal

years 2005 and 2006 so as to ensure comparability in

accounting data. After eliminating firms with

extreme values for some of the explanatory variables,

the final sample comprises 46 observations.5

358 Carmelo Reverte

Empirical models

The statistical analysis conducted in this study

includes the use of linear regression models to ana-

lyze the relationship between CSR ratings and each

of the influencing factors referred to in the previous

section. The three estimated models differ in their

dependent variables: Total CSR (TSCR), CSR

Content Rating (CR), and CSR Management Sys-

tems Rating (MSR). The approach adopted in the

empirical analysis is summarized by the following

general form of the models:

CSR ratingi ¼ b0 þ b1MEi þ b2ILi þ b3INDi

þ b4SIZEi þ b5OWNERi

þ b6ROAi þ b7LEVi þ ei

where, ME: media exposure; IL: International list-

ing; IND: Industry environmental sensitivity;

SIZE: Firm’s size; OWNER: Ownership concen-

tration; ROA: Profitability (return on assets); LEV:

Leverage.

Results

Table I reports the descriptive statistics of the

dependent and independent variables considered in

our study. It can be seen a high variability in CSR

practices across Spanish listed firms, as the total CSR

rating varies from 0.170 to 1.940. As the maximum

value is 4, we can assert that the degree of infor-

mation on CSR by Spanish listed firms is still rather

low.

Table II reports the correlation coefficients among

our set of independent variables. It can be seen that

some correlations are statistically significant at a 1%

level, such as those between size and media exposure

(q = 0.599), industry and leverage (q = - 0.465) and

leverage and return on assets (q = - 0.526). How-

ever, none of the variance inflation factors (VIFs)

– not reported – exceed the critical value of 10. Thus,

it can be said that multicollinearity is not a serious

problem in our study.

Table III reports the mean values of the explan-

atory variables under analysis across the several CSR

disclosure ratings for both firms with a rating higher

than the median and those with a rating lower than

the median. To test the statistical significance of the

mean differences in the explanatory variables

between both groups of firms, we perform a t-test (if

the variable is normally distributed) and a Wilcoxon

signed-rank test (if the variable is non-normally

distributed). It can be observed that firms with a

total CSR rating higher than the median operate in a

more environmentally sensitive industry (p = 0.008),

have a higher media exposure (p = 0.000), a larger

size (p = 0.010), and a less concentrated ownership

(p = 0.004), as compared to those firms with a CSR

rating lower than the median. However, although

firms disclosing more on CSR activities are listed on a

higher number of foreign stock markets, have a lower

leverage and are more profitable, these differences are

not significantly different, at a 5% level, between

both groups of firms. It should be noted that the

results are generally consistent across the other two

CSR ratings.

Table IV reports the results of regressing the

explanatory factors on the various CSR ratings. The

first rows of each panel present the results of

regressing the explanatory factors one by one on the

CSR ratings, while the last row combines all the

explanatory variables together. When considered

individually, it can be seen that firms with higher

CSR ratings present a statistically significant larger

size, and a higher media exposure. Also, firms with

higher CSR ratings belong to more environmentally

sensitive industries, and are listed in a higher number

of foreign stock markets. As regards ownership

structure, firms with higher CSR ratings have a less

concentrated ownership. However, neither ROA

nor leverage seem to explain differences in CSR

disclosure practices between Spanish listed firms. In

terms of R2, the most influential variable for

explaining firms’ variation in total CSR ratings is

media exposure (R2 = 0.338), followed by size

(R2 = 0.186) and industry (R2 = 0.164). When

pulling all the explanatory factors together, they

explain between 42.9% and 47.5% of the variation of

the several CSR ratings. The variables that are sta-

tistically significant for all the CSR ratings are those

related to public or social visibility (i.e., size, media

exposure, and industry environmental sensitivity).

According to these results, it seems that the legiti-

macy theory is the most relevant theory for

explaining CSR disclosure practices of Spanish listed

firms. Thus, Spanish firms report on CSR activities

in order to respond to public pressures and build or


sustain corporate legitimacy. In this regard, CSR

disclosure can be viewed as a constructed image or

symbolic impression of itself that a firm is conveying

to the outside world to control its political or eco-

nomic position (Neu et al., 1998).

Concluding remarks

The goal of this study is to analyze whether a

number of firm and industry characteristics, as well

as media exposure, are potential determinants of

CSR disclosure practices by Spanish listed firms.


activism varies across companies, industries, and

time (Gray et al., 1995, 2001; Hackston and

Milne, 1996). They have also shown this behavior

to be importantly and systematically determined

by a variety of firm and industry characteristics

that influence the relative costs and benefits

of disclosing such information (Belkaoui and

Karpik, 1989; Cormier and Magnan, 2003;

Cormier et al., 2005; Hackston and Milne, 1996;

Patten, 2002a, b).

TABLE I

Descriptive statistics for the dependent and independent variables

Variable Mean Median SD Minimun Maximum

Dependent variables

TCSR 1.150 1.245 0.485 0.170 1.940

CR 0.835 0.855 0.491 0.020 1.670

MSR 1.194 1.315 0.614 0.020 2.210

Independent variables

ME 69.369 43.000 57.047 6.000 268.000

IL 5.783 6.000 3.039 1.000 12.000

IND 0.456 0.000 0.504 0.000 1.000

SIZE 15.935 15.965 0.936 14.280 18.190

OWNER 0.283 0.000 0.455 0.000 1.000

ROA 0.052 0.047 0.033 0.003 0.174

LEV 3.804 3.032 2.769 0.659 13.789

Notes: TCSR: Total corporate social responsibility index; CR: CSR Content rating; MSI: CSR Management Systems

rating; ME: Media exposure; IL: International listing; IND: Industry environmental sensitivity; SIZE: Firm’s size;

OWNER: Ownership concentration; ROA: Return on assets; LEV: Long-term debt/book value of equity. See variables

measurement in the text.

TABLE II

Correlation coefficients among independent variables

ME IL IND SIZE OWNER ROA LEV

ME 0.345* 0.370* 0.599** -0.307* 0.018 -0.071

IL -0.021 0.325* 0.045 0.062 0.076

IND 0.063 -0.381** 0.035 -0.465**

SIZE -0.093 0.317* 0.059

OWNER 0.043 0.302*

ROA -0.526**

Notes: ME: Media exposure; IL: International listing; IND: Industry environmental sensitivity; SIZE: Firm’s size;



*Significant at a 5% level, **Significant at a 1% level.

360 Carmelo Reverte

Our findings evidence that firms with higher CSR

ratings present a statistically significant larger size and

a higher media exposure, and belong to more envi-

ronmentally sensitive industries, as compared to firms

with lower CSR ratings. However, neither profit-

ability nor leverage seem to explain differences in

CSR disclosure practices between Spanish listed

firms. The most influential variable for explaining

firms’ variation in CSR ratings is media exposure,

followed by size and industry. Therefore, it seems that

the legitimacy theory, as captured by those variables

related to public or social visibility, is the most rele-

vant theory for explaining CSR disclosure practices

of Spanish listed firms. Thus, Spanish firms report on

CSR activities mainly to act and be seen acting within

the bounds of what is considered acceptable accord-

ing to the expectations of stakeholders on how their

operations should be conducted.

Moreover, the results of this study suggest that

factors which influence CSR practices of Spanish

listed companies are not significantly different than

those which influence CSR of companies in other

TABLE III

Differences in the value of the explanatory variables between firms with higher and lower CSR ratings

Variables Firms with TCSR > median Firms with TCSR < median Difference (p-value in parentheses)

Panel A: Total CSR rating (TCSR)

ME 98.522 40.217 58.305 (0.000)

IL 6.304 5.261 1.043 (0.076)

IND 0.652 0.261 0.391 (0.008)

SIZE 16.287 15.583 0.704 (0.010)

OWNER 0.087 0.478 -0.391 (0.004)

ROA 0.057 0.047 0.010 (0.095)

LEV 3.016 4.592 -1.576 (0.191)

Variables Firms with CR > median Firms with CR < median Difference (p-value in parentheses)

Panel B: CSR Content Rating (CR)

ME 102.261 36.478 65.783 (0.000)

IL 6.739 4.826 1.913 (0.031)

IND 0.739 0.174 0.565 (0.000)

SIZE 16.302 15.568 0.734 (0.007)

OWNER 0.217 0.348 -0.131 (0.331)

ROA 0.055 0.049 0.006 (0.286)

LEV 3.468 4.139 -0.671 (0.448)

Variables Firms with MSR > median Firms with MSR < median Difference (p-value in parentheses)

Panel C: CSR Management Systems Rating (MSR)

ME 99.087 39.652 59.435 (0.000)

IL 6.304 5.261 1.043 (0.250)

IND 0.696 0.217 0.479 (0.001)

SIZE 16.274 15.596 0.678 (0.013)

OWNER 0.087 0.478 -0.391 (0.004)

ROA 0.057 0.047 0.010 (0.062)

LEV 2.742 4.865 -2.123 (0.063)

Notes: ME: Media exposure; IL: International listing; IND: Industry environmental sensitivity; SIZE: Firm’s size;




TA

BLE

IV

Reg

ress

ion

resu

lts

of

CSR

ratings

on

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expla

nat

ory

fact

ors

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rcep

tM

EIL

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elA

:T

otal

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ing

(TC

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0.8

07

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0.3

38

0.8

74

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0.9

72

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99

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**

0.0

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42)

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53

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72

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0.1

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tent

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es:T

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port

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ere

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om

regre

ssin

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ese

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the

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row

ofea

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.

362 Carmelo Reverte

environments. This is consistent with the results of

Cormier and Magnan (2003), which lead them to

suggest that the similitude in the way in which dis-

closure strategies are determined, irrespective of a

given country’s socio-cultural environment, is ‘‘an

illustration of the strong impact of globalised stock

markets on fostering convergence in corporate

practices’’ (2003, p. 58).

Notes

1 Results are similar if a market-based measure of risk,

such as beta, is used instead of leverage in the regression

models.2 Most of the literature in this area assumes a contem-

porary relationship between media exposure and CSR

disclosure (e.g., Bansal and Clelland, 2004; Cormier

et al., 2004, 2005). But this relationship could be prob-

ably delayed, i.e., more media coverage one year could

result in more CSR disclosure in future years. In order

to test this delayed relationship, I have re-estimated the

models introducing the variable ‘Media exposure’ (ME)

with a one-year lag (MEt-1). However, this lagged var-

iable has not turned out to be statistically significant.

This result could be due to the high correlation

(q = 0.832) between media exposure in year t (MEt)

and year t - 1 (MEt-1), i.e., those firms with a high

media coverage in one period tend also to be highly

followed by media in the following period.3 Results are similar is size is proxied by the log of

total assets.4 If leverage is measured by the ratio total debt/total

assets the results remain unchanged.5 Taking every year as a separate observation may

aggravate the problem of extreme values. In order to

test the existence of extreme observations that could

unduly influence our results, I have applied the most

usual diagnostic tests for detecting outliers, such as the

studentized residuals, the Cook’s D, DF-betas, and least

absolute values (LAV). These additional tests indicate

that the main results of our study are not driven by

outliers.

Acknowledgment

This work is part of the research project ECO2008-

06238-C02-01/ECON funded by the Spanish Ministry

of Education and Science and ERDF.

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Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.

25

THE ANALYSIS OF COMPANY CHARACTERISTICINFLUENCE TOWARD CSR DISCLOSURE:

EMPIRICAL EVIDENCE OF MANUFACTURING COMPANIES LISTED IN JSX

Arief Rahman Universitas Islam Indonesia

E-mail: [email protected]

Kurnia Nur WidyasariUniversitas Islam Indonesia

Abstract

This paper investigates the influence of company characteristic toward Cor-porate Social Responsibility disclosure. The research is using the proxy of manage-ment ownership, leverage, size, profitability and company profile as the variable of company characteristic, while the CSR disclosure, unlike the previous researches, is proxied by dummy score from the companies’ mandatory disclosure based on the items of Public Environmental Reporting Initiative (PERI) and Global Reporting Ini-tiative Social Performance (GRISP) issued by Global Reporting Initiative (GRI). Our research found that simultaneously, company characteristics significantly influence CSR disclosure. Whereas based on the partial test, amongst the characteristics ob-served, only company profile which significantly influences CSR disclosure. The re-sult indicates that legitimacy from the society is the big concern of companies and therefore drives the actions of companies. However, the disclosure presumably de-pends on the awareness of the management toward social and environmental pros-perity because the pressure from investors and market is still weak.

Keywords: Corporate Social Responsibility, management ownership, leverage, size, profitability, company profile

INTRODUCTIONA company is not living in a vacuum

room. Or in other words, it is inevitable for a company to interact with its social environ-ment. Many companies get many critics be-cause of lack of social awareness. Indone-sians witness various protest action con-ducted by some stockholders at management levels related to its performance. Labors and employees often demonstrate, even they strike caused by wages and salaries that make them unsatisfied. The public societies

protest, even demonstrate to the company since the pollution and the company waste destroy the environment.

The above phenomenon shows that there are social conflicts faced by Indonesian companies. It is proven that there are still many companies ignoring social harmony. If those bad relations are done in the long run, it will affect the company growth itself. To recover this bad relation, the companies do several activities to build a better relation-ship with their environment. Although some

JAAI VOLUME 12 NO. 1, JUNI 2008: 25– 35

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companies are managing environmental and social issues in an ad hoc manner, others are controlling through established management systems, and in some cases supported by a company culture that promoted certain be-haviors. And recently, we have observed a growing trend of companies addressing envi-ronmental and social issues through a more defined and organized process, some strate-gies in interacting and communicating with its environment (Lyon, 2004).

Part of the strategies is changing the communication strategy from the company to the stakeholders. In recent years there has been increasing dissatisfaction with tradi-tional financial reporting and its ability to provide stakeholders with sufficient informa-tion on a company’s ability to create wealth. In the early 2000s for instance, Pricewater-house Coopers conducted a survey to find out the type of information investors need (Bozzolan, Favotto and Ricerri, 2003). Sur-prisingly, among the top ten type of informa-tion, only three of them are financial infor-mation, while the other seven are the “intan-gibles” or non financial. And among those 7, some of them are information which refer to the social or environment information or disclosure.

The United States has had such kind of information format that has been agreed together to identify company that has and has not fulfilled the disclosure about the en-vironment. Whereas in Indonesia, Social Responsibility Disclosure still be voluntary. It means if the advantage achieved by the company is more than cost expensed to do this disclosure, so the company will disclose the information about their social activities. Conversely, if the cost to do the disclosure is greater than the activity, so the company will not disclose. Although there is no require-ment that specifically roles about obligation to do this disclosure, in the PSAK No. 1 in the ninth paragraph implicitly suggested dis-

closing the responsibility about environment and social problem.

Some scholars have been examining the implementation of Corporate Social Re-sponsibility. Belkaoui (1989) cited in Ang-graini (2006) found that : (1) social disclo-sure has positive relation with the company social performance (2) there is a positive relation between social disclosure and poli-tics visibility; (3) there is a negative relation between social disclosure and the rate of fi-nancial leverage. Eipsten & Freedmen (1994) cited in Anggraini (2006) found that individual investors are attracted to social information reported in the financial report. That information is in the form of security and product quality and the environment ac-tivity. Beside that, the investor also wants the information about employee and public society relationship. Filbeck and Gorman (2004) conducted a research to examine the relationship between environmental and fi-nancial performance of public utilities and the results state that there is no positive rela-tionship between them.

COMPANY DISCLOSUREDisclosure is defined as information

needed to optimalize the operation of effi-cient stock market (Hendriksen, 1997). In-formation disclosed in the company annual report can be divided into two; they are mandatory disclosure and voluntary disclo-sure. Company have flexibility to do volun-tary disclosure in the annual report so it will emerge many kinds or wider variety of inter company voluntary disclosure.

One of voluntary disclosure is com-pany social responsibility disclosure which is often called by social disclosure, corporate social reporting, social accounting or corpo-rate social responsibility is communication process of social effect and environment from organization economics activity toward interest special group and toward public so-

The Analysis of Company Characteristic Influece Toward CSR ... (Arif Rahman & Kurnia Nur Widyasari)

27

ciety as a whole (Hackton & Milne, 1996) cited in Sembiring (2005). This particularly shows that there is another organization re-sponsibility besides preparing financial statements for capital owner, especially stockholder. It is made by the assumption that company has wider responsibility than just find a profit for stockholder (Gray et. al., 1987) cited in Sembiring (2005)

In Indonesia, the motivation for social disclosure by Indonesian companies is to serve the interest of not only investors but also stakeholders such as Indonesian Gov-ernment, labor union, potential employees and the surrounding community. These and other stakeholder groups appear to have con-siderable power to place pressure on compa-nies in determining company strategy and policy (Pets & Sanderson, 2000) cited in Ca-haya et.al. (2006). This social responsibility disclosure is very important at the present time, especially for Indonesia because there are many government activities and also companies that emerge social disease like ecosystem destruction, pollution, criminality, monopoly, village backwardness, debt in-creasing, discrimination, poverty, etc. These are particularly realized and concerned now by NGO movement (Non Governmental Or-ganization) (Harahap, 2005).

STIMULATING FACTORS TO SOCIAL DISCLOSURE

One factor which stimulate the exis-tence of responsibility disclosure emerge mainly is the changes of experts behavior and decision maker toward business role and government. They tend to change their concernfrom individual prosperity to social prosper-ity. Tendency from profit oriented activity without looking at the effect to the profit oriented direction that understands the envi-ronment condition. All of those tendencies according to Harahap (2005) in the Accounting Theory can be seen from several paradigms.

Tendency toward Social Prosperity In the human life, the real public pros-

perity can be born from cooperation behav-ior amongst the society itself. It is the same thing as a company that cannot be developed without support from their customer and also the social environment. And all of the reality are progressively realized and required the responsibility.

Tendency toward Environment Aware-ness

In this paradigm literature known as the human exceptionalism paradigm is to head the new environment paradigm. The first paradigm is to consider that human be-ing is unique creature in this earth that has their own culture that cannot be limited by other creatures’ importance. Conversely, the last paradigm considers that human being is a creature amongst various creatures in the earth that cannot life alone (depending on another) and is limited by trait of the world itself, whether social, economics or politics. At the present time, human being is more considered that the last paradigm is the right choice and becomes direction, so the envi-ronment concern increases.

Economization versus SocializationEconomic consideration only concerns

with individual satisfaction as entity that al-ways consider cost and benefit without con-sidering about public society interest. Con-versely, socialization focuses on social inter-est and always considers the social effect caused by the activity. Company Legitimacy

Another reason that encourages com-pany to do social responsibility disclosure is to keeping the company legitimacy operation(Suwaldiman, 2005). From Legitimacy The-ory point of view, companies do certain ac-tivity, including information disclosure to


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get legitimacy from surrounding society where the companies do their operation.

Society expectation toward company in the long run will automatically wider. So-ciety does not only expect the financial per-formance but also company care toward en-vironment and social. Wider society expecta-tion will bring consequence that company success depends on how to include human aspect, and other social aspect into company activity. According to Tinker & Neinmar (1987) cited in Suwaldiman (2005), society at the present time has an expectation about business institution to produce products/ ser-vices which are able to prevent and improve physical environmental damage, to guarantee customer health and safety, labor and every-one who lives in the environment where the products/ service are produced and where garbage/ waste are be thrown.

Ullman (1985) cited in Suwaldiman (2005), stated that the stronger the influence and position of stakeholder toward company, the greater the stakeholder’s expectation that has to be accommodated by the company. Many social responsibility activities done by a company include public reporting, that will relate directly to certain stakeholder groups. A company will get an incentive if it is able to disclose company social responsibility. Stakeholder theory also suggests a company to identify many things that can satisfy and searched by the stakeholder of the related company. A company will try to fulfill stakeholder satisfaction which has the strongest or the highest rights groups to know the company operation.

COMPANY CHARACTERISTICS AND SOCIAL RESPONSIBILITY DISCLOSURE

Company characteristics can be a pre-dictor guidelines of quality disclosure (Lang & Lundholm, 1993) cited in Rizal (2004). Theoretically and empirically, some litera-

ture reviews explain company characteristics that capable to explain variation of voluntary disclosure in the Annual Report.

Each company has special characteris-tic that different between one entity to an-other. Lang & Landholm (1993), Willance (1994) cited in Rizal (2004) divide company characteristics into three, there are structured related variables, likes company size, lever-age and type of stock ownership. Second, performance related variables like profitabil-ity, company type and company basis. The third is market related structured like indus-try type. Company characteristics explain wider variation of voluntary disclosure in the financial reports. Company characteristics in this research refer to size, leverage, man-agement ownership, profitability and profile.

SizeCompany Size is the independent vari-

able which is usually used to explain disclo-sure variation in the company financial re-port. As in the researches done by Susanto (1992); Subiantoro (1997); Suripto (1998); Yusniarti Gunawan (2000); and Marwat (2000) in Anggraini (2006) which found positive influence between size and social disclosure rating. It is caused by agency the-ory, where the company which has bigger agent cost will disclose wider information to decrease the agency cost. Beside that, big company is more illuminated by the public, wider disclosure is the decreasing politic cost as a form of social responsibility. Small company then will disclose lower quality information compare to big company (Buzby, 1975) cited in Sembiring (2005). It is caused by limited resources and bigger funds needed to perform the annual report. Most of researches that have done support the relationship between size and company social responsibility (Gray et.al. (2001) in Sembiring (2005)).


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ProfitabilityProfitability is a factor that makes the

management free and flexible to disclose social responsibility to the stockholder Heinze (1976), Hackston & Milne (1996) cited in Anggraini (2006). The higher com-pany profitability rating so the bigger the social information disclosure Bowman & Haire (1976), Preston (1978), and Hackston & Milne (1996) cited in Anggraini (2006). Hackston & Milne (1996) found that there is no significant relation between profitability and social responsibility disclosure. Accord-ing to Belkoui and Karpik (1989) cited in Anggraini (2006), social care wants the company (management) to make the com-pany profitable. Therefore, we may assume that profitability has positive relation with company social responsibility rate.

ProfileCompany profile is the description

about the company operation field. Research related to the company profile mostly sup-port that high-profile industry discloses in-formation about social responsibility more than low-profile industry Hackton & Milne (1996); Utomo (2000) cited in Sembiring (2005). High-profile company there are companies in the field of mining and petro-leum, chemistry, forestry, automotive, paper, agribusiness, cigarette and tobacco, food and beverage, media and communication, health, transportation and tourism (Sembiring, 2005; Henny, 2001; Utomo, 2001).

Management OwnershipThe bigger the management owner-

ship (manager ownership) in the company will make manager performance more pro-ductive in order to maximizing company value. Company manager will disclose social information in order to increase the company image, though he/she has to sacrifice re-sources for those activity (Fraser, 2005)

LeverageLeverage is the use of various finan-

cial instruments or borrowed capital, such as margin, to increase the potential return of an investment. Leverage can be created through options, futures, margin and other financial instruments. According to Belkaoi & Karpik (1989) cited in Sembiring (2005), decision to disclose the social information will follow certain outflow for disclosure that decreases the company income. If so, companies that have high leverage rate will decrease social disclosure.

RESEARCH METHODPopulation and Sample

Population of this research is all manufacturing companies that have been listed in the Jakarta Stock Exchange. The choosing of manufacturing companies as the sample is based on the report explained that manufacturing companies have the most complete financial report. Beside that, this company is considered sensitive toward events. Manufacturing sector also has the biggest company portion compared to an-other sector in the Jakarta Stock Exchange. Sample is chosen by judgement samplingmethod.


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Table 1: The Election of Research SampleExplanation Amount

Manufacturing companies listed in JXX year 2003-2005

Companies that have been delisted Companies that have < 50% managerial ownership

Companies that have negative NPM Companies that have year book not 31st December

Total sample used in this research

138

(24)(20)(18)(1)

76

Based on the above criteria, there are 76 companies chosen each year so that the total is 228 companies for the period of three years.

VariablesDependent variable

Dependent variable researched in this research is social disclosure in the financial statements of certain manufacturing com-pany. Social disclosure shows how far the disclosure items that have been required to be disclosed by that company. By adopting Public Environmental Reporting Initiative(PERI) and Global Reporting Initiative So-cial Performance (GRISP) issued by GRI and also correspond to the items in the SAK. Global Reporting Initative (GRI) is an inter-national, multi stakeholder process and inde-pendent institution whose mission is to de-velop and disseminate global sustainability reporting guidelines. Started in 1997 by Coa-lition for Environmentally Responsible Economies (CERES), the GRI became inde-pendent in 2002 and is an official collaborat-ing center of the United Nations Environ-ment Programme (UNEP) (GRI, 2002). The concern item in the PERI concept is about environmental performance and the concern in the GRISP are labor practices and decent work, human rights, society and product re-sponsibility. Dependent variable within this research is the company social disclosure that consists of:a. Company Profile

Show the company profile so there is founded the description about those companies.

b. Environment Management System Including environment policy imple-mented by the company where company identified probability of environment destruction caused by they company ac-tivities.

c. Pollution resulted from company activ-ity that can influence the emerge of con-tingency loss (PSAK No. 8)

d. Obedient toward law and regulation. � Company taxation � Product standardization (SNI,

LPOM etc)e. Cost related to the environment that

have been specified (according to PSAK No. 32 and No. 33)

f. Company achievement received by the company because of they contribution in the environment conservation.

g. Stakeholder involvement. The involve-ment of certain interest groups (stock-holders, the owners, academia, NGO, organization, Industry association) to-ward environment issues. This social disclosure measured by

disclosure-scoring got from mandatory dis-closure. Variable will be valued by 0, if there is no disclosure for the particular item and valued by 1, if the social disclosures for the particular item exist.


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Independent Variable Size: is proxied by total assets as the com-pany size measurements parameter. Profitability: same with the previous re-search, profitability measured by Net Profit Margin.Profile:dummy variable used to classify high-profile and low-profile company. High-profile company valued by 1, there are com-panies in the field (Sembiring, 2005; Henny, 2001; Utomo, 2001): mining and petroleum, chemistry, forestry, automotive, paper, agri-business, cigarette and tobacco, food and beverage, media and communication, health, transportation and tourism. 0 (zero) value, will be given for low-profile company, cov-ering construction, finance and banking, medical tools suppliers, retailer, textile and textile product, personal product and house-hold product. Management Ownership: management own-ership measured based on stock ownership percentage owned by management.Leverage: that used is leverage ratio.

Research Models Regression analysis used as tools to

test the influence of company characteristics toward Corporate Social Respon-sibility/Social Disclosure. Structural equa-

tion model that proposed as an empirical model is as follows: CSR = α + β1MO + β2LEV + β3PRO

+ β4PROFILE + β5SIZE + e

Notation:CSR = Corporate Social DisclosureMO = Management OwnershipLEV = LeveragePRO = ProfitabilityPROFILE = Company ProfileSIZE = Size

= Intercepte = Error

Data AnalysisSimultaneous Regression Analysis

F test is done to test whether inde-pendent variables altogether can influence the dependent variable (Ghozali, 2005). We can see the F test result in the table 2.

In the F test, if the F significant value is less than 0,05 so the alternative hypothesis cannot be rejected or with K = 5% inde-pendent variables statistically altogether can influence dependent variable. In the above table, it is shown that p-value is 0,019 in the K = 5%. It means that independent variables simultaneously and significantly influence dependent variable.

Table 2

ANOVAb

,068 5 ,014 2,767 ,019a

1,092 222 ,0051,160 227

RegressionResidualTotal

Model1

Sum ofSquares df Mean Square F Sig.

Predictors: (Constant), SZ, PROFILE, PROFIT, LEV, MOa.

Dependent Variable: CSRb.


32

Partial Regression Analysis

Table 3: Regression AnalysisCoefficientsa

,822 ,055 14,906 ,000-,010 ,005 -,133 -1,909 ,058 ,879 1,138,028 ,025 ,075 1,123 ,263 ,947 1,056

-,005 ,019 -,016 -,242 ,809 ,969 1,032,040 ,012 ,223 3,284 ,001 ,923 1,083

-,003 ,004 -,043 -,604 ,546 ,849 1,178

(Constant)MOLEVPROFITPROFILESZ

Model1

B Std. Error

UnstandardizedCoefficients

Beta

StandardizedCoefficients

t Sig. Tolerance VIFCollinearity Statistics

Dependent Variable: CSRa.

Table 4: Partial Regression ResultIndependent variable ρ -Value H 0

Profitability 0.809 accepted H 0 because ρ >0.05Size 0.546 accepted H 0 because ρ >0.05Profile 0.001 Rejected H 0 because ρ < 0.05Leverage 0.263 accepted H 0 because ρ >0.05 Mgmt. Ownership 0.058 accepted H 0 because ρ >0.05

Regression analysis is used to find how significant the influence of each inde-pendent variable toward corporate social responsibility as the dependent variable.

Hypothesis AnalysisThe influence of Company Size toward CSR Disclosure

The first hypothesis states that com-pany size influence on company social re-sponsibility disclosure. The research result shows that p-value 0.546 > 0.05 with the positive direction so that company size fails to be accepted or H0 is accepted. It means that company size does not influence social responsibility disclosure as the implementa-tion of CSR of the company. We might as-sume that social responsibility disclosure does not relate to the company size. CSR

disclosure might be influenced by the con-cern of the management or the environ-mental awareness. This result particulary differs to or not support the several previous research done by Kelly (1981; Trotman Bradley (1981) Hackton & Milne (1996), Adams .et,al (1998) cited in Sembiring (2005) and also Cerf (1961), Shingvi & Desai (1971), Susanto (1992) cited in Rizal (2004) which stated that company size proxied in the total assets will influence the company social responsibility disclosure.

The influence of Profitability toward CSR Disclosure

The second hypothesis states that company profitability negatively influence toward corporate social responsibility disclo-sure. This research result shows that p-value


33

is 0.809 > 0.05 in the positive direction, so H0 is accepted. It means that profitability does not influence corporate social responsi-bility disclosure of the company. This is par-ticularly supports the research done by De-vey (1982); Cowen et.al. (1987); Hackston & Milne (1996), Kokobu et.al. (2001) cited in Sembiring (2005).

The influence of Company Profile toward CSR Disclosure

Third hypothesis states that company profile positively influence on corporate so-cial responsibility disclosure. The reseach results p-value which is 0.001 < 0.005 in the positive direction so that company profile rejected H0 This particularly shows that so-cial responsibility disclosure of the company is influenced by company profile. High company profile will disclose higher quality of social responsibility disclosure in order to keep the company life. High profile com-pany will get higher monitoring portion from the government, so they always concern the social effect from their company operation. Beside that, high profile company also keep the “good image“ to keep their customers loyalty to them and finally aline with their good image will support the company profit in the future too. This research result sup-ports the several previous research done by Hackton & Milne (1996), Utomo (2000), Kokobu et, al., (2001), Henny (2001) cited in Sembiring (2005).

The influence of Managerial Ownership toward CSR Disclosure

The fourth hyphothesis states that managerial ownership influence company corporate social responsibility disclosure. The research result shows that p-value is 0.058 > 0.05 with positive direction so that management ownership fail to be accepted or H0 is accepted. It means that managerial

ownership does not influence corporate so-cial responsibility implementation.

This result might be caused by the behavior of management which tends to fo-cus on the company performance (economic performance) in order to increase the com-pany value that will be profitable for them as the company management and the company owner than CSR. The result does not support theory explained by Gray et.al.(1988) cited in Anggraini (2006) that there is positive relation between managerial ownership and social disclosure.

The influence of Company Leverage to-ward CSR Disclosure

The fifth hypothesis states that com-pany leverage negatively influence on corpo-rate social responsibility disclosure imple-mentation. The research result shows p-valuewhich is 0.263 >0.05 in the positive direc-tion, so that company leverage fails to be accepted or H0 is accepted. It means that company leverage does not influence social responsibility disclosure of the company.

This research result supports the re-search done by Suda & Kokobu (1994); Kokobu et.al. (2001) cited in Anggraini (2006). They found that leverage does not significantly influence corporate social re-sponsibility disclosure of the company.

The influence of Company Characteristics simultaneously toward CSR Disclo-sure

The sixth hypothesis states that com-pany characteristics simultaneously influ-ence company social responsibility disclo-sure. The simultaneous result shows that p-value is 0.019 < 0.05 in the positive direc-tion, so company characteristics are rejected H0. This particularly shows that social re-sponsibility disclosure which is proxied by the company size, leverage, company pro-file, management ownership and profitability


34

simultaneously influence company social responsibility disclosure. This result support the research done by Shingvi & Desai (1971) in Rizal (2004). This result is interesting be-cause although partially only profile which influences CSR disclosure, simultaneously all company characteristics significantly in-fluence CSR disclosure.

CONCLUSIONThis empirical research shows that

there is significant influence between com-pany characteristics (that are proxied by the management ownership, leverage, size, prof-itability and company profile) and social re-sponsibility disclosure of the manufacturing companies listed in the Jakarta Stock Ex-change. However, among those variables only company profile which significantly influence social responsibility disclosure. Conversely, the other variables such as man-agement ownership, leverage, company sizeand company profitability have no signifi-cant influence on social responsibility dis-closure.

The result indicates that legitimacy from the society is the big concern of com-panies and therefore drives the actions of companies. However, the CSR practice pre-sumably depends on the awareness of the management toward social and environ-mental prosperity because the pressure from investors and market is still weak. The CSR practices tend to be done based on the emerging pressures for “doing good to look good” (Urip, 2007). External and global pressure, such as UN Millennium Declara-tion to achieve MDG, the government regu-lation and the green consumer movement, is needed to make the quality of CSR practice and the disclosure better.

REFERENCESAnggraini, Fr. Reni. Retno. (2006). ”Pen-

gungkapan Informasi Sosial dan

Faktor-Faktor yang Mempengaruhi Pengungkapan Informasi Sosial dalam Laporan Keuangan Tahunan (Studi Empiris pada Perusahaan-Perusahaan yang terdaftar Bursa Efek Jakarta)”, Simposium Nasional Akuntansi 9, Padang.

Belkaouli, Ahmed Riahi. (2001). Teori Akuntansi, Salemba Empat, Jakarta,.

Bozzolan, Saverio, Favotto, Fransesco, and Ricerri, Federica. (2003). “Italian In-telellectual Capital Disclosure; An Empirical Analysis”, Journal of In-tellectual Capital, Vol. 4 No. 4

Cahaya, Porter, Brown. (2006). ”Nothing to Report? Motivation for Non-Disclosure of Social Issues by Indo-nesian Listed Companies”, The Journal Of Contemporary Issues, Business & Government, vol 12. Number 1.

Cannon, Tom and Gerda, Felicia. (1998). Corporate Responsibility, PT. Gramedia, Jakarta,.

Deegan, Craig, and Gordon, Ben. (1996). A Study of the Environmental Disclo-sure Practices of Australian Corpo-rations, Auditing and Research, Vol. 26, No.3.

Filbeck, Greg and Gorman, Raymond F. (2004). ”The Relationship between the Environmental and Financial Performance of Public Utilities” in Environmental and Resource Eco-nomics 29.

Fraser, Bruce W. (2005). ”Corporate Social Responsibility”, Internal Auditor,

Global Reporting Initiative (GRI). (2006). 3G Guidelines on www.globalreporting.org/guidelines/06g3oct06.asp.


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Global Reporting Initiative. (2002). Sustain-ability Reporting Guidelines, GRI, Boston.

Harahap, Sofyan Safri. (2005). Teori Akun-tansi. Edisi kelima, Jakarta : PT Grafindo Perkasa

Hendriksen, Eldon S, Nugroho W. (1997). Teori Akuntansi jilid 2, Edisi keem-pat, Erlangga, Jakarta.

Henny, Murtanto. (2001). ”Analisis Pen-gungkapan Sosial Pada Laporan Ta-hunan”, Media Riset Akuntansi, Au-diting dan Informasi, Vol 1, No.2.

Ikatan Akuntansi Indonesia. (2004). Standar Akuntansi Keuangan, Salemba Em-pat, Jakarta.

JSX. (2004). Indonesian Capital Market Di-rectory Institute For Economic And Finance Research (ECFIN).

JSX. (2005). Indonesian Capital Market Di-rectory Institute For Economic And Finance Research (ECFIN).

Lyon, David. (2004). “How Can You Help Organizations Change To Meet The Corporate Responsibility Agenda?”, Corporate Social Responsibility and Environmental Management 11.

Qomar, Saiful. (2004). “Akuntansi Pertang-gungajawaban Sosial (Sosial Re-sponsibility Accounting) dan Kore-lasinya dengan Akuntansi Islam”, Media Akuntansi 41.

Rizal, Muhammad. (2004). “Pengaruh Karakteristik Perusahaan Terhadap Pengungkapan Sosial (Social Dis-closures) Perusahaan Go Public di Indonesia”, Balance 2, Jakarta.

Sembiring, Eddy Rismanda. (2005). ”Karak-teristik Perusahaan dan Pengungka-pan Pertanggungjawaban Sosial (Studi Empiris pada Perusahaan-Perusahaan yang terdaftar Bursa Efek Jakarta)”, Simposium Nasional Akuntansi 8, Solo.

Suharto, Harry. (2004). ”Pemikiran Lokal: Menuju Standar Lingkungan”, Me-dia Akuntansi 41.

Suharto,Harry. (2004). ”Standar Akuntansi Lingkungan: Kebutuhan Mendesak”, Media Akuntansi 41.

Suwaldiman. (2005). Tujuan Pelaporan Keuangan, Edisi Pertama, Ekonisia, Yogyakarta.

Suwardjono. (2005). Teori Akuntansi Perekayasaan Pelaporan Keuangan, Edisi Ketiga, BPFE, Yogyakarta.

Utomo, Muhammad Muslim. (2001). “Prak-tek Pengungkapan Sosial Pada La-poran Tahunan Perusahaan di Indo-nesia (Studi Perbandingan Antara Perusahaan-Perusahaan High-Profile dan Low-Profile)”, Simposium Na-sional Akuntansi 4.

Urip, Sri. (2007). ”Corporate Social Respon-sibility”, a paper presented in Train-ing and Directorship Certification Program for Commissioners and Di-rectors, Indonesian Institute of Commissioners and Directors, Ja-karta.

Zebua, F. (2004). ”Akuntansi Lingkungan”, Media Akuntansi 41.

Social Responsibility JournalVolume 3 Number 3 2007

�

The Current State of Corporate Social Responsibility Among Industrial Companies in Malaysia

Tamoi Janggu, Corina Joseph & Nero Madi

AbstractPurpose – The main aim of the study is to find out the level and trend of CSR disclosure pattern of industrial companies in Malaysia and its relationship with companies’ characteristics.Design/methodology/approach – Content analysis is used to analyse the data from the corporate annual reports of the companies from 1998 to 2003. Samples are selected using simple random sampling technique.Findings – Research findings, inter alia, indicate that there is positive relationship between CSR and companies’ turnover but no apparent relationship is noticed with companies’ capital. Relationship between CSR and companies’ profitability is also found to be positive but weak. More disclosure by local companies as compared to their foreign counterparts is another noteworthy finding. Overall, CSR level of industrial companies in Malaysia is increasing both in terms of amount of the disclosure and the number of participating companies.Research limitations/implications – The use of annual reports may not give a complete picture of the disclosure practices as the company may use other medium to disseminate the information. In addition, his study focuses on industrial companies in Malaysia. Thus all conclusions derived cannot be generalized to other industries.Originality/value – The current research is the only study in Malaysia thus far that covers a disclosure pattern of six years thereby widens the horizon of CSR research. Besides that it extends the previous research to cover new variables such as individual and corporate ownership, influence of the chairman’s race on the disclosure and exploring the disclosure pattern by paid-up capital.Keywords Corporate social responsibility, Information disclosure, Disclosure, Business environment, MalaysiaPaper type

IntroductionThe call for more transparency and accountability of the corporation to the stakeholders and society at large is the main motivational factor of this study. The corporate scandals indeed have become the “wake up” calls for the entire corporation to be more responsible for their deeds to the society at large. Companies should recognize that society too have the powers to “terminate” their license to operate. Therefore, promotional CSR is seemed to be at the right place and regarded as one of the important elements towards realising the aspirations and goals of national development. Tay Kay Luan (2005a), cited the Malaysian government’s stand on CSR issues is that all organisations in the country should take account of the economic, social and environmental impacts of their activities, and should be encouraged to act and address the key challenges which arise from these impacts on their core competencies. Moreover, he government is taking stand that the existing legal framework and regulations are sufficient to improve corporate behaviour.

There are different interpretations and definitions among local corporate leaders on what constitutes CSR. Some view CSR as corporate responsibility, corporate citizenship, corporate philanthropy, community development and some relate it to the triple bottom-line; economic, environment and social performance. In a simple term, he researchers perceive CSR as about the way in which companies fulfilling its social obligation both to the employees and to a wider community such as donations, contribution to charity events or compliance with regulations and social requirements.

Gray et al. (1�87) define social reporting as:

“… …the process of communicating the social and environmental effects of organisations’ economic actions to particular interest groups within society and to society at large. As such, it involves extending the accountability of organizations (particularly companies), beyond the traditional role of providing a financial account to the owners of capital, in particular, shareholders. Such an extension is predicted upon the assumption that companies do have wider responsibilities than simply to make money for their shareholders”.

Boyce (2000) views CSR as social accounting which involves the communication of information concerning the impact of an entity and its activities on society, and environmental accounting is accounting that is concerned with the communication of information on the impact of an entity and its activities on the environment. Both social and environmental accounting could involve not only the measurement or calculation of costs and benefits (social and environmental) but could also include accounting for impacts not quantifiable in monetary terms.

The Head of the ACCA Malaysia, Tay Kay Luan (2005a) sees CSR as falling into four areas:i. Commitment to obey the law and basic ethical standardsii. Improving community well-beingiii. Being responsible for the consequences of its actions andiv. Contribution and sustaining business as a corporate citizenMalaysian Government’s point of view by our Deputy Prime Minister, Dato’ Sri Najib Tun Abdul Razak in a

CSR conference held in June 2003 at PWTC, Kuala Lumpur referred to CSR as “a concept whereby corporation integrate social and environmental concerns in their business operations and their interactions with stakeholders on a voluntary basis”. It is a process of providing information which does not have purely financial implications designed to discharge social accountability. This accountability issue has become the spotlight of various groups such as academia and accounting profession especially in the wake of corporate scandals. Since then, here has been call for more transparency,


10

integrity and accountability among the corporations. Corporations should recognize their corporate responsibilities not only to their shareholders but also to the society they operate in. This sustainability concept calls for a corporation to operate in a responsible manner that takes full account of their business impact on the environment, people and the community. The growth of public awareness about CSR has put pressure on corporations, profession and governments to increase the amount of social information in corporate reports.

Scope, Objectives and Motivation of the StudyThe issue of corporate social responsibility emerges from the general rise in the interest and concern of the environment, product or services, employees’ welfare and health and safety among the community. It is generally perceived that companies make profit to survive as profits affect the wealth of shareholders through its impact on share price and dividends. Then the question arises whether companies should reduce or contribute part of their profit to the community. Wartick and Wood (1��8), point out that business carries out the economic functions at the expense of society. Therefore, business has some form of responsibility to society. With this assumption, he researchers of the current study are motivated to investigate what areas do companies contribute back to society and to what extent is their contribution.

Although the importance of CSR has been recognized, its disclosure is still voluntary in the annual report. In that regard it would be interesting to find out reaction of the corporation in Malaysia on this CSR issue. The main aim of this study is therefore to find out what types of social information (if any) and how much (in number of sentences) disclosed by Malaysian industrial companies. In particular, the researchers try to find out the trend of CSR disclosures by carrying out analysis of CSR from 1��8 to 2003.

The last objective would be to find out whether there is any relationship between amounts of social information disclosure and the size of company’s external auditor as well as company’s characteristics such as size, profitability, leverage and ownership (individual or corporate and local or foreign) and the directorship (number of directors and who is the chairman of the board). The study is motivated by the fact that, to the best of our knowledge, there is no prior academic research in Malaysia studying both social and environmental disclosure particularly on industrial companies.

Literature ReviewDoing business today is not like doing it in the past ten or twenty years ago. With the rapid advances in information and technology, globalization and liberalization, businesses are faced with stiff challenges to survive and maintain a competitive edge. This is what some of the literature referred to as sustainability concept. Tay Kay Luan (2005b) for example, explained in his article that company should operate in a more responsible manner that should take full account of their business impact on environment, people and community. Due to the rising concern over the adverse impacts of business operations on the natural environment and the call for more transparency on the corporation side to the public at large, therefore the research on this area is also increasing.

Wartick and Wood (1��8) further stress that due to the fact that business carries out the economic functions of society and therefore has some forms of responsibility to society. The “wider public” for example the employees, rade unions, government agencies and the general public are also affected by the actions of the corporations. Regardless whether or not an individual or an entity has an economic relationship with the enterprise, it is clear that the enterprise’s existence and the externalities it produces have an effect on all society (Mohamed Zain, 1��). Educated society therefore should be provided with the information necessary for evaluating each enterprise’s net contribution to social welfare (Mohamed Zain, 1��).

The Development of Corporate Social ResponsibilityCorporate social disclosure has seen substantial advancement in developed countries such as US, UK, Europe, Australia and New Zealand, in recent years. This may be seen as a reflection of the increased public awareness and concern with the negative impacts that businesses inflict on the natural environment (Abdul Latif Shaari, Nik Nazli Nik Ahmad and Maliah Sulaiman, 2004) and other stakeholders such as suppliers of raw materials and other resources, customers, employees, local community, society and the government.

An increasing public awareness of corporate social responsibility has developed a criticism towards the use of profit as an all-inclusive measure for corporate performance (Hackston & Milne, 1��6). This in turn has led to a growing attention by the accountancy bodies to consider CSR in accounting practices including Malaysia. As mentioned above, social and environmental accounting is a growing area of development and research. Europe has traditionally been a forerunner in the area of social accounting. France and Germany, for example, have published the Bilan Social and Socialberichtbilanz as early as in the 1�70’s and 1�80’s. Later developments like environmental reporting, Eco-Management and Audit-Shemes; EMAS, he Okobilanz are parts of today’s European landscape (Ramsay, 2003). A report entitled “Management Barometer survey” by Pricewaterhouse Coopers in 2002 shows that in Western Europe, two-third (68 per cent) of large corporations report economic, social and environmental issues in addition to required financial information; in the US, 41 per cent provide such information. Companies are experimenting with different types of indicators for measuring and reporting their performance in the area of corporate social responsibility.

The legislative development concerning social and environment is at somewhat different stages. Mandatory reporting has developed mainly on the environmental side of the issue and many countries have regulations concerning the companies’ environmental impacts on society. The social accounting side is still in its cradle but growing. There is no consistent standard or regulations concerning the disclosure of social and environmental issues; each country has its own (if any) legislative regulations. Malaysia for example has its own Environmental Act but still does not impose a mandatory disclosure in annual reports.


11

Influencing VariablesPrevious studies found that a number of companies’ characteristics such as size, profitability, leverage, size of audit firm, industry in which the company is identified and country of ownership influence corporate social disclosure practices. Gray et al. (1��5) summarize the previous studies as:

i. CSR does appear to be related to company size but results are not reliable.ii. There is some evidence to industry effects but studies are not clear.iii. CSR does not appear to be related to profitability in the same period but some evidence suggests that it might

be related to lag profit.iv. Country of ultimate ownership seems to have a significant effect.The following section will highlight various concluded findings from previous studies on relationship between

CSR and various companies’ characteristics.

SizeMost of previous researchers investigated the effect of the company size as indicated by firm’s assets and paid-up share capital on CSR. Some studies suggested a positive correlation between size and social disclosure. Spicer (1�78) suggests firm size as a factor influencing pollution control, as larger companies had a better record in this regard than smaller firms. Watts and Zimmerman (1�78) argue that because political costs reduce management wealth, companies attempt to reduce costs by such devices as social disclosure campaigns. Cowen, Ferreri and Parker (1�87) found out that larger corporations tend to disclose more information because larger corporations are highly visible, make greater impact to the society, and have more shareholders who might be concerned with social activities undertaken by corporations. Other studies which found similar findings include: Trotman and Bradley (1�81); Cowen et al. (1�87); Hackston and Milne (1��6) which concluded that size is an explanatory variable, insomuch as their findings indicated that firms supplying information on social responsibility are of a larger size, are more concerned with longer-term events, and have a positive systematic risk.

However, the findings of the above studies are contradicted by environmental disclosure. Halme and Huse (1��7) conducted a study on annual report for the year 1��2 from Scandinavian countries (Sweden, Finland, Spain and Norway) and found no significant relationship between environmental reporting and companies’ size.

In the Malaysian context, the conclusions derived from previous studies are mixed. Mohamad and Ahmad (2001) concluded that firm’s size is not significant while Zauwiyah Ahmad, Salleh Hassan and Junaini Mohamad (2003) concluded that there is no association between environment disclosure and company’s size.

In addition, studies by Mohamed Zain (1��) and Romlah et al. (2003) revealed that company’s size as measured by total assets provides an explanation on the variability of environmental disclosure among Malaysian companies. This is further confirmed by latest study on construction companies in Malaysia which concluded that firms’ size as measured by firms’ profitability and turnover is positively related with CSR (see Mohamed Zain and Tamoi Janggu, 2006).

ProfitabilityThe relationship between corporate profitability and CSR also produces mixed results. Gray et al. (1�87) claim that profitability is not related to CSR in the same period, but may be related to lagged profits. Other earlier studies that failed to find any positive relationship between profitability and amount disclosed include Hackston and Milne (1��6); Pattern (1��1); In Malaysia, it is also found that the relationship between social involvement and profitability is not significant (Mohamed Zain, 1��; Mohamad and Ahmad, 2001)

In contrast, Abbot and Monsen (1�7�), indicate that there is positive correlation between amount of disclosure and profitability. This means that companies are more likely to disclose social responsibility expenditures when their financial statements indicate favourable financial performance. In addition, Inchausti (1��7) argues that managers of very profitable companies would use external information in order to obtain personal advantages such as continuance of their positions and compensation arrangements, which provides some agency notion in this variable. On the other hand, Holmes (1�76) finds that profitability was not an important feature in the thinking of management in social involvement. He argues that corporate involvement in social responsibility is because of three main reasons; matching of social need to corporate skill, need or ability to help, he seriousness of the social need and the interest of top executives.

According to Ulmann (1�85) the reason for these mixed results lies in the weaknesses in methodology of most of the studies; generally intervening variables are not taken into consideration for example, the effect of size and industry variables were not controlled. He identifies the primary role of business is to produce goods and services that society wants and needs, however there is inter-dependence between business and society in the need for a stable environment with an educated workforce.

LeverageThere are only few studies conducted to find out the relationship between social responsibility and financial leverage of the corporation. Jensen and Meckling (1�76) and Myers (1�77) relate disclosures on social responsibility with agency theory that predicts the level of voluntary disclosure increases as the leverage of the firm grows. Letfwich et al.(1�81) conclude that voluntary disclosure increase with shareholder–debt holder–manager conflicts. In addition, companies with high leverage may disclose more information to satisfy the needs of long term creditors (Malone, Fries and Jones, 1��3) and to remove suspicion of debt holders regarding wealth transfer (Myers, 1��7). Positive relationship has been found between financial leverage and the extent of voluntary disclosure (Trotman and Bradley, 1�81). However, Chow and


12

Wong Boren (1�87) and Ahmed and Nicolls (1��4) and Mohamed Zain and Tamoi Janggu (2006) found no statistical relationship between financial leverage and voluntary disclosure.

Audit FirmEmpirical evidence on relationship between size of audit firm and amount of disclosure are also mixed. Hossain et al. (1��4), and Ng and Koh, (1��3, 1��4) found a positive relationship between auditor and voluntary disclosure.

Some found no relationship between audit firm and disclosure. For example, Malone et al. (1��3) found no relationship between auditor and disclosure in the United States oil and gas industry. A study by Tan, Kidman and Cheong (1��0) and Mohamed Zain and Tamoi Janggu (2006) also found no support to the audit firm and disclosure relationship in Malaysia. This is not consistent with recent study by Mohamad and Ahmad (2001) who found that environmental disclosure is negatively related to audit firm.

OwnershipA company’s ownership structure will also, according to the literature, affect its reporting strategy. Publicly-owned firms are expected to face pressure to disclose additional information due to visibility and accountability issues resulting from the larger group of stakeholders than privately-owned companies. Companies concerned with the investors’ risk will also provide more social and environmental information than other firms (Cormier and Gordon, 2001). There are also differences in the nature of social and environmental disclosure depending on the company’s country of ultimate ownership. Companies in countries with high levels of social consciousness (example, Sweden and Canada) are more likely to provide more information of voluntary disclosure (Moneva and Llena, 2000). In addition, societal values, a political and legal system and country of domicile were found to be variables influencing social accounting disclosure (Adams and Harte, 1��8).

Previous studies have focused on country of ownership and social disclosure. However, his study will look at ownership from different point of view; i.e based on shareholding of top five shareholders. The corporation is classified as “individual” owner if majority of the shares are held by individual shareholders and likewise, if majority of shares are owned by “corporate or other companies” then the corporation is classified as “corporate” ownership. To date, here is no empirical evidence on this.

Figure 1 depicts the theoretical framework used in this study. In sum, he study examines the relationship between corporate social and environmental disclosures in the annual reports and company’s characteristics. The dependent variable is the total CSR in the annual reports as measured by number of sentences. The independent variables are the company’s characteristics: size, profitability, leverage, audit firm and ownership. In this study, independent variables are tested for their relationship with total CSR. The nature and expected effect of these variables have been explained and discussed in previous section.

Figure 1 Theoretical Framework of the Current Study

The Theoretical Foundations of Corporate Social DisclosureThe disclosure of social and environmental information attracts attention as the information itself involves the living quality despite the fact that its reporting is voluntary in nature (Mohamad and Ahmad, 2001). There are various theories cited in previous studies on why companies disclose social and environmental issues. Legitimacy theory relates the extent


13

and types of corporate social disclosure in the annual report to be directly related to management’s perceptions about the concerns of the community. Lindblom (1��4) in his legitimacy theory identified four reasons why companies disclosed social information. Firstly, is to inform the “relevant public” the organization’s performance and activities in response to any environmental changes. Secondly, is to change the perception of relevant public. Thirdly, is to deflect attention from issues concerned. The last reason is to change the outside expectation of their performance when they feel its “relevant public” have unrealistic expectation of its social and environmental performance. Social disclosures are made to please the readers or users of the financial statements. Pattern (1��2), asserts that disclosing of information can be used to maintain its freedom, status and reputation (Hogner, 1�82) and projecting an image to society that the corporations are socially responsible (Abbot and Monson, 1�7�; Pattern, 1��2).

Another theory, stakeholder theory (Watts and Zimmerman, 1�78) assume that disclosure on social and environmental information by an organisation is as a result of the pressure from stakeholders such as communities, customers, employees, environment, shareholders and suppliers. This theory concludes that CSR is a way to show a good image to these stakeholders to boost long-term profits because it would help to retain existing customers and attract new ones. Therefore, under this theory the larger company tend to disclose more social and environmental information in the annual reports.

Accountability theory in addition, implies that corporate social and environmental disclosure is as a result of corporation’s obligation to provide the information needed by the users. The company should furnish information when and only needed and should not go beyond the scope of the requirement in order to avoid crossing the boundary of legitimacy theory (Mohamed Zain, 1��).

Next, is social contract theory, which is developed based on concept that there exists contract between business and wider society, whereby business (is deemed to) agrees to perform various society desired actions in return for approval of its objectives, other rewards and its ultimate survival (Guthrie and Parker, 1�8�).

The other theory, the agency theory assumes the voluntary social and environmental disclosure by corporations as a means for the reduction of agency costs that could arise in the form of legislation and regulation. Social and environmental disclosure is seen as an important element in the corporation’s maintenance of its freedom, status and reputation with influential “publics” or “stakeholders (Hogner, 1�82).

MethodologyThis study focused on all (16�) industrial companies listed on the Malaysian Stock Exchange (MSE) for the period from 1st January 1��8 to 31st December 2003.The study applied simple random method to select sample from the population and later checked against the availability of the annual report at Sarawak own state library and MSE library. Companies that do not have all complete set of the corporate annual report from 1��8 to 2003 will be excluded from our sample thus leaving only 45 companies for our sample. The non-availability of the annual report could be due to the fact that these companies may be listed during that period or it may change its principal activities during the period covered or any other reasons.

The amount of disclosure (dependent variable) will be grouped into four different categories (thereafter referred to as theme of disclosure) namely human resource, community involvement, product and environment. This is consistent with previous studies by Gray et al. (1��5); Hackston and Milnes (1��6) and Mohamed Zain (1��). These four dependent variables are further divided into 17 sub-categories of variables as shown in Table 1.

Table 1: Themes of Social Disclosure

Human Resource Products

Appreciation General statement

Training & Development Product quality /safety

No. of employees Research & design

Employees welfares

Staff cost Environmental

Employees Option Scheme (ESOS) Pollution

Waste management

Community Landscaping

Sports and culture General – Policies

Health & safety - Management performance

Charity


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Number of SentencesIn this study, he amount of social and environment disclosure is measured by using content analysis that is by counting the number of sentences. This is based on an assumption that each sentence of disclosure is a grammatically self-contained speech unit expressing an idea, claim or assertion. It seems logical that a number of ideas, claims or assertion would be more significant than the number of lines (Mohamed Zain, 1��). The use of the number of sentences and page length is justified on the basis that more accuracy can be attributed to the counting of sentences than words (Hackston and Milne, 1��6) The number of sentences is counted for each 17 sub-category items wherever possible. In the event that one sentence includes more than one sub-category, hen the number of sentences would be allocated to only major categories of disclosure such as human resource, community, products or environment. The sub-categories such as acknowledgement, training and development, employee welfares and others are then identified as “yes”, if these are mentioned and “no”, if they are not.

There are other ways that amount of disclosure can be investigated such as by counting the words or number of pages. Determining the number of pages is the easiest technique to employ, but it could cause loss of information and also difficult to interpret (Mohamed Zain, 1��). Counting the number of words is not only tedious but it is also difficult to assign the words to a category (Mohamed Zain, 1��).

Research HypothesesCSR have been tested against company’s size, profitability, financial leverage and size of audit firm engaged. But prior researchers mostly used one year sample and different variables measurements of content analysis. The results are mixed therefore not useful. This research is no exceptional but will extend further to find out the nature of the relationship (if any) between CSR and ownership as well as directorship, which have never been statistically tested before. Based on prior research findings, four testable hypotheses are formulated to reconcile and confirm statistically the previous findings. H1. The total CSR in the annual reports is positively related to firms’ size. H2. The total CSR in the annual reports is positively related to firms’ profitability. H3. The total CSR in the annual reports is negatively related to firms’ financial leverage. H4. There is no significant relationship between CSR disclosure and the size of audit firm.

Results and DiscussionOverview of CSR in Malaysia from 1998 to 2003The descriptive analysis of data from 1��8 to 2003 revealed that the overall level of social responsibilities amongst industrial companies in Malaysia can be described as growing. The overall amount or level of disclosure shows an increasing trend both in total number of sentences and average disclosure per company during the period under examination (see Figure 2).

Figure 2 Trend of CSR Level from 1998 to 2003

The above finding is similar and consistent with the latest longitudinal analysis on construction companies in Malaysia by Mohamed Zain and Tamoi Janggu (2006). Prior research by Romlah et al. (2003) also reports similar finding that the amount of social and environmental disclosure by Malaysian companies is limited but growing. However, further analysis revealed that two of the companies in 2000 did not even express their appreciation to its staff for their contributions. This exclusion cannot be considered as an overlook as the researchers captured another two non-disclosure on appreciation; one for 2002 for the same company and another one in 2003 from a different company. This finding implies that it is deliberately done for reasons unknown and beyond the scope of this current research to explore.

The human resource theme reported the highest amount of disclosure for the entire six years in both number of sentences and participating companies which comprise 82% of total amount of disclosure (see Figure 3). The most popular sub-theme of disclosure is under the category of Employees Share Option Scheme (ESOS). The disclosure is merely passing a statement and almost the same for all the companies; that is to inform users what they offer to its employees,


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conditions and the right to exercise it. Next most popular theme is appreciation and awards where the chairman of the board expresses gratitude to employees for their hard work and commitments. This is consistent with previous studies by Mohamed Zain and Tamoi Janggu (2006), Hasnah, Sofri, Sharon and Ishak (2006) and Mohamed Zain (1��).

Figure 3 Breakdown of Total Amount of Disclosure

The second most popular theme of disclosure is the disclosure on products which made up of � per cent of total disclosure (see Figure 3 above). The information on this merely stresses on the product development efforts and achievement, product quality and safety standards. Environmental information ranked third most important in terms of number of sentences of disclosure and participating company. Overall, it shows a slight improvement as compared to previous study on construction companies by Mohamed Zain and Tamoi Janggu (2006) which placed environmental disclosure as least important. Study by Hasnah (2006) found that environmental information placed second in terms of number of participating companies in 1��8. This finding therefore implies that companies in Malaysia are reacting positively to effort made by the authorities to protect the environment.

The least important is community involvement information. This theme includes disclosure on company’s involvement in community projects such as giving donation to the poor or charity drive, involvement in sport and education. It falls short of our national aspiration to become a “caring society”.

CSR and Firms’ CharacteristicsThe second research objective is to find out the relationship between the CSR practices and firms’ characteristics

such as size, profitability, leverage, size of audit firm employed and ownership.The statistical results shown in Table 2 reveal that CSR is positively related to firm size as measured by firm’s

turnover but quite weak in nature. This finding is consistent with previous research by Mohamed Zain and Tamoi Janggu (2006) which found that there is a positive relationship between CSR and company’s size. With regard to the relationship with size as measured by paid-up share capital, he finding is inconclusive. This is because the results for three years show a positive and weak relationship and another three years show a negative relationship. This result may be due to the fact that paid-up share capital does not fluctuate with the economic situation unlike turnover and fixed assets utilization. Moreover, it is unlikely to be affected by the decision of the board on CSR matters. There were no previous research studying the relationship of capital as a measurement of size and therefore no comparison can be made.

The relationship between CSR and profitability is quite noteworthy where the significant and positive relationship is found. This implies that profitable companies tend to disclose more social issues as compared to less profitable ones. This further confirms the previous findings on construction companies by Mohamed Zain and Tamoi Janggu (2006) and

Table 2: Summary of Statistical Results

Characteristics Coefficient Correlation

Years Turnover Capital Profit Leverage

1��8 0.1�6 0.0�2 0.302* 0.01�

1�� -0.072 -0.002 -0.036 -0.001

2000 -0.121 -0.045 -0.082 -0.176

2001 0.153 0.044 0.357** -0.174

2002 0.224 -0.0�5 0.470** -0.20�

2003 0.446** 0.120 0.328* -0.023

Notes: *Significant at 0.05 level; **Significant at 0.01 level.


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contradicts findings by Hackston and Milne (1��6); Mohamed Zain (1��) which test relationship by using one year data. This finding may best relate to what the chairman of Marks and Spencer PLC said; “Business only contributes fully to a society if it is efficient, profitable and socially responsible”. In addition, Inchausti (1��7) argues that profitable companies would use external information to obtain personal advantages of their positions and compensation arrangements.

Previous studies on construction companies in Malaysia from 1��8 to 2002 have concluded that the relationship between CSR and leverage is positive but weak (Mohamed Zain and Tamoi Janggu, 2006). Other studies found no relationship (Trotman and Bradley, 1�81, Mohamed and Ahmad, 2001). However, the current study finds that there is negative relationship between CSR and leverage even though it is weak. This means that the higher the company’s debt, the lower will be their CSR level. High-leveraged companies might use the strategy of hiding information from maximum exposure from educated and inquisitive public.

In relation to size of audit firm, current study concludes that size of audit firm does not matter. It was found that Big Four audit firms do not necessarily disclose more. It may be unjustified to expect audit firms to disclose more social information regarding the audited companies. Every user of the audited financial statements must be informed that it is the responsibility of the top management to prepare financial reports. Auditors, however, are in the position to advise top management of the companies on what to be included in the published reports apart from the standard requirements of the accounting standards in order to react to calls for good corporate governance by the authorities and at the same gain mileage by projecting good corporate image. Therefore, it is quite sad to note that four of the companies audited by Big4 audit firm did not even express their appreciation to employees for their hard work.

In addition to the above, he current study noted that there is a weak degree of positive relationship between CSR and firm owned by individuals and corporation. Corporate companies are found to be more socially responsible than individual-owned companies in terms of amount of disclosure. Comparing CSR by local and foreign companies, statistical data concluded that local firms are more socially responsible than its foreign counterparts because they disclosed more information than foreign firms.

Initial investigation on chairmanship of the companies revealed that Chinese-managed companies seem to disclose more social information as compared to Malays. Further analysis however reveals that there is no significant difference between CSR of companies managed by Chinese or Malays. This may be due to our sample that is mostly chaired by Malay directors.

Summary of Findings and Concluding RemarksIt can be concluded that the CSR level of industrial companies in Malaysia is improving both in terms of amount of disclosure and the number of participating companies. The most popular theme of disclosure is human resource then followed by environmental information and disclosure on product. This observation implies that companies do appreciate their employees and concern about environmental issues. The least popular theme of disclosure is information on companies’ involvement with community, which indicates that our corporate citizens are not doing enough to complement the government’s effort in making Malaysia a “caring society”.

The statistical results that confirm three of four testable hypotheses are supported by the findings of the current study. Only hypothesis (H4) is disconfirmed because there is no statistical evidence to reject it. The relationship between CSR and company’s size as measured by turnover is confirmed to be positive in nature. It is also concluded that profitability has a weak positive relationship with CSR while the relationship between CSR and leverage is found to be negative. Other findings with respect to the size of audit firm indicated that it does not have influence on CSR level. There is no significant difference in the mean disclosure level between companies audited by Big Four and Non-Big Four.

On ownership, it is concluded that local companies disclose more than their foreign counterparts and corporate ownership is more socially responsible than its individual ownership.

Overall, his current research has been, not only successful in achieving its objectives, but also to some extent has enriched the current pool of literature on CSR disclosure particularly in Malaysia.

The Contribution of the Current StudyThe strengths of the current research, inter alia, are: (i) it is the only study thus far that covers a disclosure pattern of six years, spanning from 1��8 through 2003; (ii) it focuses on industrial companies in Malaysia thereby widens the horizon of CSR research; (iii) it extends the previous research to cover new variables such as individual and corporate ownership, influence of the chairman’s race on the disclosure and exploring the disclosure pattern by paid-up share capital.

Specific finding with regard to the overall disclosure pattern for the six-year period can be confidently described as quite encouraging in that it steadily projects an increasing trend over the years. Statistical test results support hypothesis (H1) where the CSR disclosure is confirmed to be positively related to the firms’ size as measured by the firms’ turnover though weak in nature. Corporate Social Responsibility disclosure by paid-up share capital, on the other hand, dilutes the above finding in that it cannot be generalized because the result is not conclusive. In other words, bigger firms as measured by paid-up share capital might not disclose more social information in their published annual reports.

Another finding with respect to both individual and corporate ownership is that the relationship between CSR and the said variables are positive, but weak. More disclosure by local firms as compared to foreign counterparts based on the top five (5) highest shareholdings is also noted as useful finding. It can therefore be concluded that foreign firms might not necessarily be more aware of CSR disclosure issues that have attracted the concerns of the educated public than the local ones.


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Finding regarding the racial influence of the company’s chairman disclosure attitude is quite interesting. Chinese-managed firms tend to disclose more social information as compared to Malay-chaired companies. The actual attitude of Chinese or Malay chairmen towards CSR issues is, however, not obvious because there is insufficient statistical evidence to prove it. Statistically, he means difference of the extent or amount of disclosure between the two groups of chairmen is not found to be significantly different.

Limitation of the StudyThe present study is not without its limitations. First, he use of corporate annual reports may not give a complete picture of the disclosure practices as the company may use other medium to channel the information such as the media, separate environmental and social reporting and interim financial statements. ACCA (2002) for example acknowledges this in its study by extending the scope of its investigation to include standalone environmental reports and companies’ websites.

Secondly, even though the research design use of content analysis by counting the number of sentences of CSR disclosure is commonly used method and regarded as the most accurate (Hackston and Milne, 1��6), his method is subject to human error as it involves the exercise of judgment as to what constitutes social information. Mohamed Zain (1��), pointed out that counting the number of sentences is not only tedious but it is also difficult to assign the words to a category.

Finally, his study focuses on industrial companies in Malaysia. Thus all conclusions derived cannot be generalized to other industries. In summary, his current study does not reveal a full picture on the CSR practices in Malaysia.

Nevertheless, his study adds substantially to the existing literature on CSR in Malaysia. It presents an up-to-date overview of CSR particularly in industrial sector which is the first empirical analysis time-series studies in Malaysia.

Future ResearchThis research should be extended into other industries in order to paint a meaningful comparison about the whole picture of CSR practices in Malaysia. The future study should also consider other forms of communication such as standalone report and websites. Another useful topic for future research would be to compare the management or accountant’s perception on social and environmental disclosure and the actual CSR by their respective organization.

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