Int. J. Behavioural Accounting and Finance, Vol. 1, No.

1, 2008

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Corporate social responsibility disclosure and corporate governance in Malaysia Ying Zhee Lim
Accounting Department, Faculty of Business and Law, Multimedia University, Malaysia Fax: +606-2318869 E-mail: yzlim@mmu.edu.my

Mohammad Talha*
Department of Accounting and MIS, King Fahd University of Petroleum and Minerals, KFUPM Box. 366, Dhahran 31261, Saudi Arabia Fax: +966-3-860-3489 E-mail: talha@kfupm.edu.sa *Corresponding author

Junaini Mohamed and Abdullah Sallehhuddin

Accounting Department, Faculty of Business and Law, Multimedia University, Malaysia Fax: +606-2318869 E-mail: junaini@mmu.edu.my E-mail: abdullah.sallehhuddin@mmu.edu.my
Abstract: Using 743 Malaysian public listed companies, this study attempts to investigate the impact of corporate governance mechanism on corporate social responsibility (CSR) disclosure level and to examine the difference of CSR disclosure level in government-linked companies and non-government linked companies. Employing multivariate analysis, the study reveals that the presence of larger non-executive directors and a higher involvement of institutional shareholders, which is dummied by government-linked companies cause significant increase in level of CSR disclosure. Besides, even though statistically insignificant, the duality role negatively affects disclosure level. In addition, existence of larger number of independent non-executive directors and employment of big four auditing firms contribute towards increased disclosure of CSR. This study is expected to add to the existing accounting literature by introducing instrument in measuring CSR disclosure and benefits regulators in improving corporate governance initiative in developing economic environment. Keywords: corporate social responsibility; CSR; corporate social responsibility disclosure; corporate governance; ethical business; government linked companies.

Copyright 2008 Inderscience Enterprises Ltd.

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Reference to this paper should be made as follows: Lim, Y.Z., Talha, M., Mohamed, J. and Sallehhuddin, A. (2008) Corporate social responsibility disclosure and corporate governance in Malaysia, Int. J. Behavioural Accounting and Finance, Vol. 1, No. 1, pp.6789. Biographical notes: Ying Zhee Lim is a Lecturer in Accounting in Faculty of Business and Law, Multimedia University Malaysia. She received her Master and Bachelor degrees from the same university. Her research interests focus on corporate governance, social reporting, sustainability reporting and voluntary disclosure. Dr. Mohammad Talha is currently working as an Associate Professor in the Department of Accounting and MIS, King Fahd University of Petroleum and Mineral, Dhahran, Saudi Arabia. He has published more than 90 research papers in national and international journals of repute. He has attended many national and international conferences, seminars and symposiums and has also authored three books on Management Accounting and Finance. Dr. Talha has 19 years of teaching experience at graduate and post graduate level and about 24 years of research experience. His area of specialisation is, financial accounting and reporting, merger and acquisition, segmental disclosures and international accounting. He has supervised a number of doctorate and master students at the faculty. Mrs. Junaini Mohammad is an Accounting Lecturer in the Faculty of Business and Law, Multimedia University. She has five years industry experience prior to joining the university. Her research interest is in environmental accounting and reporting. She also teaches public sector accounting and managerial accounting. Mr. Abdullah Sallehhuddin is an Accounting Lecturer, in the Accounting Department, Faculty of Business and Law, Multimedia University, Malaysia. He is currently studying for a doctorate in corporate governance.

Introduction

The demand for ethical business has resulted in formulation of various terms such as corporate social responsibilities (CSR), corporate sustainability (CS) and triple bottom line (TBL). There are abundant theories and models developed on ethical business concept (Harrison and Freeman, 1999). Godfrey et al. (2006) relate CSR with social contract theory, organisational legitimacy theory and political economy theory. CSR is defined as the duty of the organisation to respect individuals rights and promote human welfare in its operations (Manakkalathil and Rudolf, 1995; Oppewal et al., 2006). According to Carrol (2000a), businesses not only have the economic responsibility of being profitable and the legal responsibility to follow the laws or ground rules that guide their ability to achieve their economic requirements, but they also have ethical responsibilities that include a range of societal norms or standards. Carrol (1979, 2000b), suggested four perspective of being corporate citizens, which include: 1 Economic responsibility: Economic responsibility is to be profitable for principals, by delivery of quality goods, at a fair price, to customers.

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Legal responsibilities: Legal duties entail complying with the law and playing by the rules of the game. Ethical responsibilities: Ethical duties overcome the limitation of legal duties. Smith and Quelch (1993) further explained this responsibility as business entails being moral, doing what is right, just and fair, respecting peoples moral rights; and avoiding harm or social injury as well as preventing harm caused by others. Philanthropic responsibility: Interest in doing well for society, regardless of its impact on the bottom line is what is called altruistic, humanitarian or philanthropic CSR. Giving back time and money in the forms of voluntary service, voluntary association and voluntary giving are where most of the controversy over the legitimacy of CSR lies.

CSR can also be defined as the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large (World Business Council for Sustainable Development, 1999). Chan (2002), Godfrey et al. (2000), and Gray et al. (1996) describe corporate social disclosure as voluntary reporting of social and environmental information relating to an organisations interaction with its community, shareholders, physical and social environment to outsiders through corporate annual reports. One of the important debates in this area is disclosing or reporting CSR of business entities. So long it is considered as voluntary disclosure, no comprehensive laws or specialised accounting standards can be formulated to guide the disclosure of CSR. However, over the last several years, the pressure on firms to disclose their CSR has mounted. According to Godfrey et al. (2006), CSR is motivated by legal regulation, management accountability and shareholder activism. Many leaders of business organisations have responded well to these pressures, but majority of them have resisted. The KPMG (2002) showed a significant increase in the number of companies issuing environmental, social or sustainability reports, in addition to their annual financial reports. According to McWilliams and Siegel (2000) and Castka et al. (2004), one of the major concerns on managers reluctance to disclose CSR information is to strike a balance between the need for optimising return from disclosing CSR information while fulfilling the demand for this information from multiple stakeholders. Gray and Milner (2002) highlighted that even though the number of companies disclosing CSR items is on increase, they are relatively scarce and the reporting is dominated by selective disclosure and the production of information is incomplete. Corporate social responsibility disclosure can be enhanced through comprehensive corporate governance mechanism (Shahin and Zairi, 2007; Zairi, 2000). This is also concurred in the Cadbury Report (1992), which stated that a higher standard of corporate governance could be reflected through improvement in the quality of financial reporting. Corporate governance is defined as the manner in which a business is governed and controlled (Halpern, 2000). Corporate governance can also be defined as a general theory that deals with relationships, responsibilities and balances between management and shareholder interest (Schipper, 2004; Grant, 2003). Deakin and Hughes (1997) assert that corporate governance is concerned with a companys accountability and communication to outsiders. Halal (2000) found that stakeholder management is enhanced by maintaining high level of quality in reporting CSR items. Shahin and Zairi (2007) believe that

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business entity responsibility towards a society needs can be enhanced through appropriate CSR initiative and disclosure, which is achieved by strong leadership characterised in effective corporate governance. Thompson and Zakaria (2006) point out that polite persuasion from regulatory bodies alone is not enough to improve the level of CSR disclosure without a strong drive from top governance of business entities. Realising the importance of correlation between corporate social responsibility disclosure and corporate governance mechanism, this study attempts to answer two interesting research questions. Firstly, how corporate governance mechanism attributed by duality role, independent non-executive directors composition and external auditor have implications on CSR disclosure. Secondly, what is the different level of CSR disclosure in government linked companies and non-government linked companies. This study attempts to focus on Malaysian environment since the government and the relevant authorities have taken bold initiatives to further strengthen corporate governance policies vis--vis neighbouring countries. It will also increase competitiveness to attract foreign direct investment, notably from Vietnam and Singapore. Besides, under the initiative of revamping, government linked companies CSR is given top priority.

Literature review

It is well acknowledged in the extant literature that communities worldwide are becoming more conscious socially. As a result, users of financial statements tend to have high expectations of the activities, which denote social responsibility undertaken by companies. Subsequently, companies in response to this expectation will try to satisfy the users information need by providing relevant information in their financial reports. Ho and Wong (2001) however, state that since there are no standard guidelines for a companys voluntary disclosure, the quality and quantity of the information disclosed could vary quite substantially. While the study of corporate governance and corporate disclosure on their own are not new, there are a few of studies, which examine the relationship between corporate governance and corporate voluntary disclosure (Eng and Mak, 2003; Haniffa and Cooke, 2002; Ho and Wong, 2001). Although Haniffa and Cooke (2002) examine corporate governance and CSR in Malaysia, their study however, used a general rather than a detailed CSR checklist and the result is concluded from a stratified randomly selected sample (167 Malaysian public listed companies).In addition, prior CSR studies within the Malaysian context deal only with the level and type of corporate social reporting (Thompson and Fauzi, 2004; Chan, 2002; Williams, 1999;William and Ho, 1999; Andrew et al., 1989) but ignoring the impact of board of directors impact on disclosure. This study, thus, differs from prior studies in three ways in that a detailed checklist is utilised, only one type of voluntary disclosure (that is CSR) is examined and the sample size consists of all companies listed on Bursa Malaysia. Most of the studies which depicted correlation between CSR and corporate governance have been conducted in developed countries such as USA, Hong Kong and UK, therefore posing a question whether these findings can be applied to Malaysian context, Some variation is expected due to differences in financial reporting between Eastern countries compared to Western countries. One potential cause for the variation is the diversity in institutional, regulatory, economic and sociological conditions (Wallace and Gernon, 1991). It is argued that differences in cultural, political and institutional

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background may influence Malaysias market behaviour with respect to the reporting as Che Ahmad and Houghton (2001) and Jesudason (1990) imply. To date, except for Eng and Mak (2003) and Haniffa and Cooke (2002), prior studies with respect to corporate governance and voluntary disclosure tend to ignore the role of cultural and environmental factors, and institutional incentives in the process of financial and non-financial reporting (Che-Ahmad and Houghton, 2001; Baydoun and Willett, 1995). For example, in an audit related research, Baydoun and Willett (1995) argue that the audit related decision-making process might be influenced by the situation in which the decisions are made. Along this line, this study examines one institutional characteristic, which are government-controlled companies (proxy by government linked companies and existence of government control). This feature is arguably an aspect of Asia, and perhaps specifically of Malaysia, that makes the setting for this study potentially appropriate. Good governance standards ensure that managers act in accordance with shareholders interest. Good governance can also improve a companys financial reporting transparency, shielding itself from continuous market attack (Che Haat and Mahenthiran, 2003; Jensen, 1993). Companies with high disclosure quality and transparency will be able to achieve better performance and protect their minority shareholders during a crisis (Mitton, 2002; Daicon and OSullivan, 1995). Theoretically, good governance practiced by separating the role of CEO and chairman will lead to better performance by a company (Dulewicz and Herbert, 2004; Rahman and Haniffa, 2002; Baliga and Moyer, 1996; Daily and Dalton, 1993; Rechner and Dalton, 1991). The lower a companys financial distress (Simpson and Gleason, 1999), the more it will avoid fraudulent financial reporting (Beasley et al., 2000). The impact of various corporate governance structures such as duality role, proportion of independent and non-executive directors on the board and the role of a companys external auditor with respect to disclosure policy are discussed below.

2.1 Duality
Adams (2002), Campbell (2000), and Gibbins et al. (1990), argue that a company chairmans attitude and perception towards disclosure would determine the volume of voluntary disclosure. The CEOs awareness on the importance of disseminating socially responsible information would result in more CSR disclosure from the company. If the CEO/chairman has focused on his personal interest rather than stakeholders interests, lesser disclosure can be expected. In addition, duality role is argued to cause resistance towards governance devices in the company, namely the audit committee and non-executive directors, thus discouraging better disclosure. This notion is supported by Forker (1992) who finds a negative association between duality role and quality of disclosure. The relationship between duality and voluntary disclosure, however, is inconclusive. Haniffa and Cooke (2002) and Ho and Wong (2001) find that duality role does not have an influence on a companys voluntary disclosure. The study by Beasley et al. (2000), which investigates industry traits and corporate governance mechanisms toward fraudulent financial reporting, concludes that duality role does not explain fraudulent reporting by the companies.

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2.2 Non-executive directors

Non-executive directors are also expected to have an influence on a companys disclosure level. Leung and Horwitz (2004) and Haniffa and Cooke (2002) state that non-executive directors have an important role in monitoring the managers behaviour, protecting shareholders interest, promoting better governance standard and promising the system of check and balance. Since the appointment of non-executive directors is to serve as a monitoring tool, disclosure in the financial statement is then, a method to communicate the existence of this tool to the market (Forker, 1992) and to close a legitimacy gap between management and shareholders (Haniffa and Cooke, 2005). As a result, if non-executive directors exercise their monitoring role, more disclosure can be expected (Haniffa and Cooke, 2005; Haniffa and Cooke, 2002). In addition, Cullen and Christopher (2002) argue in their study that non-executive directors are usually associated with high disclosure companies since they would tend to exercise their influence and encourage the company to provide more disclosure. Adams and Hossain (1998) further argue that monitoring on a manager is normally reflected by its disclosure policy. Thus, when the number of non-executive directors in the board increases, this would increase the amount of disclosure. A review of past studies however, reveals inconclusive results. Leung and Horwitz (2004) and Adams and Hossain (1998) find that the proportion of non-executive directors is positively related to companies voluntary disclosure and its quality of disclosure. On the other hand, no relationship is found between governance disclosure and non-executive directors in the studies by Cullen and Christopher (2002), Haniffa and Cooke (2002) and Forker (1992).

2.3 Independent non-executive directors

Independent directors are argued to serve as a means of monitoring managements behaviour since they are detached and independent from the company. A higher proportion of independent directors on the board will result in more effective monitoring. As a result, monitored board will become more responsive to the stakeholders and then improve the companys compliance with the disclosure requirements which, in turn, will enhance the comprehensiveness and quality of disclosure.(Chen and Jaggi, 2000). In addition, Fama and Jensen (1983) argue that independent directors will have an incentive to increase the disclosure level of the company as they want to be associated with monitoring experts of good reputation. If the independent directors conceal negative information from outsiders, it may tarnish their reputation when the news becomes publicly known (Abrahamson and Park, 1994). The results from past studies, however, are inconclusive. Xiao et al. (2004), Chau and Gray (2002), Klein (2002), Chen and Jaggi (2000), and Abrahamson and Park (1994) found that the proportion of independent non-executive directors on the board and the companys disclosure are positively associated. On the other hand, Eng and Mak (2003) concluded that outside directors and corporate disclosure tend to be negatively related.

2.4 Auditor
According to agency theory, an auditor is required as a monitoring tool to govern the conflict of interest between a manager (agent) and shareholders (principal). If the board

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of directors is the internal governance mechanism, an auditor then, serves as an external governance tool. Traditionally, audits of financial statements have been viewed as homogeneous across audits on the notion that auditing and ethical standards will impact homogeneously across different-sized audit firms (Arnett and Danos, 1979). However, DeAngelo (1981), Dopuch and Simunic (1980) and Simunic (1980) argue that like most other products, audit services are likely to be subjected to product differences. DeAngelo (1981) assert that audit quality will normally be associated with the auditors size. Supporting this, Dopuch and Simunic (1980) stated that audit credibility is related to audit firm or its brand name. They argued that audit firms like the big-four would have more credibility as compared to other firms. Thus, they are likely to urge their clients to provide more information, hoping to be perceived as offering high quality services (DeAngelo, 1981) as this can signal the quality of their audit (Inchausti, 1997). Moreover, big audit firms tend to have a greater reputation to be maintained, thus, they will take steps in ensuring transparency and minimising mistaken reporting in their clients financial statements (DeAngelo, 1981). Besides, a large audit firm is exposed to greater legal liability (Abrahamson and Park, 1994). According to the deep-pocket theory, when there are fraudulent or misleading annual reports, investors will go after the auditor for negligence or misconduct (Palmrose, 1997). As a result, big audit firms will conduct their audit work with due care and diligence (Owusu-Ansah, 1998). It can be further concluded that big audit firms are expected to enhance the credibility of their audited annual reports (Patton and Zelenka, 1997) and, in turn, more disclosure can be expected. The relationship between auditor and disclosure however, is still inconclusive. For example, Xiao et al. (2004), Archambault and Archambault (2003), Junaini et al. (2003), Cullen and Christopher (2002), Mitton (2002), Inchausti (1997), Patton and Zelenka (1997), Abrahamson and Park (1994) and Craswell and Taylor (1992) find a positive relationship between big audit firms and the amount of disclosure. However, a negative association is reported in studies by Chen and Jaggi (2000) and Forker (1992). Hassan et al. (2004), Eng and Mak (2003), Chau and Gray (2002), Haniffa and Cooke (2002), Lennox (2001), Ahmed and Courtis (1999), Owusu-Ansah (1998), Hossain et al. (1995), Raffournier (1995), Wallace and Naser (1995), Wallace et al. (1994) and Tan et al. (1990), fail to conclude on the relationship between the type of auditor and the volume of disclosure.

2.5 Government controlled companies

Government linked companies (GLC) are actively taking part in this disclosure, including Tenaga National Berhad, Telekom Malaysia, Petroleum Nasional Berhad and Sime Darby which have shown great commitment in fulfilling their corporate social responsibility. Their actions are hoped to stimulate more CSR disclosure within public listed companies in Malaysia. To further motivate companies to engage in CSR disclosure, the Association of Certified Charted Accountants (ACCA), Malaysia, has introduced the Malaysia Environmental and Social Reporting Awards (MESRA) in 2004. The award gives recognition to companies, which voluntarily disclose social and environmental information. However, there are limited empirical researches, which deal with the association between level of voluntary disclosure, and government controlled

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companies. Therefore, this study is seeking an evidence to support the notion that government controlled companies have good corporate practice and CSR disclosure.

2.6 Behavioural factors affecting corporate governance and CSR1

This paper analyses the effect of corporate governance on CSR in Malaysia. Some research exists analysing whether, due to behavioural factors, firms will voluntarily engage in CSR practices, independently of corporate governance mechanisms. Much of the literature focuses on environmental CSR. For example, Lyon and Maxwell (2007) state that, numerous explanations have been advanced for the recent surge of environmental CSR. Perhaps a new generation of green consumers is willing to pay higher prices for clean products, and firms are simply responding to this shift. Kanniainen and Pietarila (2006), and Fairchild (2008), develop game-theoretic models where firms may voluntarily invest in CSR, in order to differentiate themselves form their competitors in the product market competition. A key factor underpinning these models is the existence of consumers who not only derive utility from the intrinsic value of a good, but also from whether the good is produced ethically. KP incorporates behavioural factors, such as social norms and moral sentiments, into their model. Indeed, KP state, our approach is a formalisation of the sociological theory of self-esteem, as in Franks and Marolla (1976), who conceptualise self-esteem in terms of the individuals feelings derived from his own perceptions and appraisals of significant others in the form of social approval. As a real-world example of consumers paying for CSR, KP cite the example of fair-trade coffee, which commands a price-premium compared to regular coffee, although both types of coffee may be of similar quality. Fairchild (2008) develops KPs analysis by considering the effect of green consumers and investors on competing manufacturing firms incentives to voluntarily invest in environmentally-friendly production. As in KP, Fairchild incorporates a behavioural factor, into consumers and investors preferences, reflecting psychic utility from purchasing clean products. Fairchilds model suggests that, an increase in green behaviour can be induced by a combination of governmental subsidies for firms that invest in environmentally clean production processes, together with an education program that promotes green awareness amongst consumers, investors and the managers themselves. Fairchild considers the policy implications of his model in relation to the specific example of Slovenia, since Rojsek (2001) argues that firms in Slovenia do not appear to act voluntarily in the interests of the environment. Sacconi (2007) develops a social contract approach to CSR, in which firms voluntarily make costly investments in CSR in a repeated trust game. Sacconi (2007) considers the reputation mechanism as a means of enforcing CSR over time. However, the reputation mechanism may not work, due to cognitive fragility (e.g. unforeseen contingencies and bounded rationality) and motivational problems. This literature shows that the relationship between CSR and corporate governance may be a complex one, due to behavioural factors. In this paper, we have focussed on CSR and corporate governance in Malaysia. For future research, it would be useful to examine the effect of behavioural factors in more detail.

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Hypotheses development

According to Weir and Liang (2001), duality exists when a person holds both the position of chairman and chief executive officer (CEO). There is an increasing trend to promote the separation between the role of chairman and CEO around the world since it has been argued that when there is duality role, the dual CEO-Chairman would tend to pursue his personal interest rather than the interests aligned to the companys shareholders (Simpson and Gleason, 1999). As a result of this divergent interest, the governance role would not be fulfilled (Rhoades et al., 2001; Simpson and Gleason, 1999). Backing this is Ho and Wong (2001) who state that when there is duality role, the CEO-Chairman would tend to withhold unfavourable information from outsiders. Consequently, duality role is usually associated with poor disclosure quality (Forker, 1992). Forker (1992) also stated that the duality role reduces monitoring quality and creates an opportunity for the accumulation of personal gain by withholding information, thus impairing the quality of reporting. Empirical result in Xiao and Yuan (2007) and Forker (1992) indicates a negative relationship between the abovementioned variables. Hence, it is expected that level of CSR disclosure is negatively associated with duality. H1 The companys level of CSR is negatively associated with duality role, ceteris paribus. Non-executive director is defined in the Malaysian Code of Corporate Governance (2000) as a capable person who will provide independent judgment and objectivity in running the companys operations. Such directors are usually independent from the company. Tsui and Gul (2000), Myllys (1999) and Dare (1998) argue that non-executive directors served as an effective monitoring device on the activities of the company. They are expected to provide independent judgment, govern the future direction of a company and prevent the company from making inefficient decisions. Companies where the proportion of non-executive directors is higher will take the initiative to adopt new accounting standards early (Wan-Hussin et al., 2004) and thus, more disclosure can be expected from the company (Haniffa and Cooke, 2002). This is because non-executive directors, who normally want to be associated with a company of high disclosure, tend to exercise their influence and encourage the company to disclose more (Carson and Simnett, 1997). This is in line with Adams and Hossain (1998) and Forkers (1992) assertion that a higher percentage of non-executive directors on the board will increase the monitoring of financial disclosure quality and the amount of voluntary disclosure. Following the assertion by Adam and Hossain (1998) and Forker (1992), a positive relationship is expected between CSR disclosure and the proportion of non-executive directors on the board. H2 The companys level of CSR is positively associated with the proportion of non-executive directors sitting on the board, ceteris paribus. KLSE Listing Requirement 2001 provides that independent directors are directors outside of the company who are independent of management and free from any business or other relationships pertaining to the company. They serve as an effective monitoring tool and are more able to make independent judgements, support the organisation, settle confronted problems and cater to the interests of shareholders (Weir and Liang, 2001; Daily and Dalton, 1993). Since the interests of independent non-executive directors are less aligned to management, they might have more initiative to encourage the company to

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disclose more information to outsiders and thus, can be an effective tool to facilitate the company in making more disclosure (Eng and Mak, 2003; Ho and Wong, 2001). Beasley et al. (2000) and Beasley (1996) found that the greater the number of independent directors on the board, the lesser the chance of the company committing financial statement frauds. Independent non-executive directors will ensure the overall credibility of the companys annual report and look after shareholders interests. Similar empirical results are also found in Xiao and Yuan (2007) and Chen and Jaggi (2000) where a positive association between the number of independent non-executive directors and a companys financial disclosure level is reported. Consequently, this study predicts a positive association between CSR disclosure level and the proportion of independent non-executive directors sitting on the board. H3 The companys level of CSR is positively associated with the proportion of independent non-executive directors sitting on the board, ceteris paribus. According to Abrahamson and Park (1994), big audit firms normally stand out in public; they will be exposed to greater legal liability. Thus, under the deep-pocket theory, investors will usually keep an eye on the auditor and go after the auditor for negligence or misconduct when there are fraudulent or misleading reporting. Due to this, big audit firms tend to conduct their audit work with due care and diligence (Owusu-Ansah, 1998) and are expected to enhance the credibility of the audited annual reports (Patton and Zelenka, 1997). As a result, in order to be perceived as providing higher quality services, big audit firms may urge their clients to provide more disclosure to ensure transparency and take steps to minimise mistaken reporting in their clients financial statements as this can signal the quality of their audit (Inchausti, 1997; DeAngelo, 1981). Hence, more disclosure is expected from the auditors of big audit firms. Empirical evidence by Xiao et al. (2004); Archambault and Archambault (2003); Junaini et al. (2003); Cullen and Christopher (2002); Mitton (2002); Inchausti (1997); Patton and Zelenka (1997); Abrahamson and Park (1994) and Craswell and Taylor (1992) shows a positive relationship between big audit firms and the amount of disclosure. Thus, this study expects a positive association between CSR disclosure level and big-four auditors. H4 The Companys CSR disclosure level is positively associated with the big-four auditors, ceteris paribus. Government linked companies (GLCs)2 are controlled3 by the government (such as Khazanah, Ministry of Finance, and Bank Negara Malaysia), or by federal (PNB, Tabung Haji and EPF) and other state agencies (such as Selangor, Johor, Pahang, Perak, Sarawak, and Terrenganu which are particularly active) where the government has an interest by virtue of a financial or legal exposure, contingent or otherwise. Prior literature on government control and disclosure level is limited. According to Eng and Mak (2003), in addition to other private commercial enterprises, government linked companies have to consider the goals which are related to the interest of the nation apart from merely making profit. As a result, increasing the shareholders value may not be the main concern of GLCs. Since there is a conflict in the very objective (taking care of the nations interest rather than profit making), government linked companies have to provide more information to its shareholders. When the government has a greater influence in a company, management will make serious effort to meet the demands of the government. Corporate social reporting may then be a means for them to fulfil the

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government obligation (Roberts, 1992). Besides, Nazri (2007) states that when government controls a company, the company can be considered owned by the public in general. Thus, in order to legitimise its existence, more voluntary disclosures are needed to signal that the company is functioning within the nations expectation. With this, it is expected that with the existence of the governments influence in the company, it can potentially affect the companys decision making and thus more disclosure can be expected. H5 The companys CSR disclosure level is positively associated with Government Controlled Companies, ceteris paribus.

Research methodology

4.1 Research model

To examine the association of corporate governance and social reporting, the following model is adapted from the studies by Eng and Mak (2003), Ho and Wong (2001) and Haniffa and Cooke (2002). Thus the model is formed as: CSRLEV = 0 + 1 DUAL + 2 NONEX + 3 INDNE + 4 AUD + 5 GLC + where, CSRLEV DUAL NONEX INDNE AUD GLC 0 - 5 = Corporate social reporting level = Duality for the post of chairman and CEO = Proportion of non-executive directors in the board = Proportion of independent non-executive directors in the board = Type of external auditor = Government linked company = Regression coefficient = Error term

4.2 Measurement of variables

Corporate governance is measured by duality (DUAL), non-executive directors (NONEX), independent non-executive directors (INDNE), auditors (AUD), and government linked companies (GLC}, whereas, corporate social reporting level (CSRLEV) is measured by using an index developed based on previous studies by Kuasirikun and Sherer, 2004; Chan, 2002; Haniffa and Cooke, 2002; Tan, 2001; Williams and Ho, 1999; Gray et al. 1995; Roberts, 1991; and Wiseman, 1982. The CSR checklist contains 27 items, which are divided into four main sections, namely employees welfare, community activities, environment protection, and product/ services improvements and contributions. Based on the annual reports of the listed companies, a score of one (1) is given if an item is disclosed, while zero (0) is given for non-disclosure of the item. CSR disclosure level is computed as the ratio of the total

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score with the maximum disclosure score as indicated in the formula below (Haniffa and Cooke, 2005; Ferguson et al., 2002; Haniffa and Cooke, 2002; Ho and Wong, 2001; Chen and Jaggi, 2000; Patton and Zelenka, 1997; Cooke, 1996; Hossain et al., 1995; Meek et al., 1995; Wallace and Naser, 1995). Full disclosure of all items in the list leads to a maximum score of 27.

CSRLEV

Total disclosure of a company (i) otal maximum disclosure score (27)

The measurement method and definition for each of the included variables in the study are summarised in Table 1 below. The information has been collected from the Malaysian public listed companies 2003 annual reports.
Table 1 Variable Measurement method and predicted signs for the variables Definition Predicted sign None Measurement method

Dependent variable CSRLEV Corporate social reporting level Duality Total score divided by the maximum possible disclosure score 1 if the post of chairman and CEO are held by the same person in a company and 0 if otherwise Total number of non-executive directors divided by the total number of directors on the board Total number of independent non-executive directors divided by the total number of directors on the board 1 if the auditor is one of the big four and 0 if otherwise 1 if the company is a government linked company and 0 if otherwise

Independent variables DUAL

NONEX

Proportion of non-executive directors on the board Independent non-executive directors on the board Company auditor Government linked company

INDNE

AUD GLC

+ +

4.3 Sample and data

The sample of this study comprises all companies listed on the main and second board of Bursa Malaysia. However, finance, trust, and closed-end fund companies are excluded since they are categorised as highly regulated sectors (Haniffa and Cooke, 2002; Schadewitz and Blevins, 1998). Data are gathered from the annual reports for the year 2003. Annual reports from the listed companies in the sample are analysed because annual reports are important source of CSR. Information provided in the annual reports usually has high credibility (Tilt, 1994), since they are the only sources of information for various parties (Deegen and Rankin, 1997) and widely distributed (Unerman, 2000). Furthermore, empirical results by Ho and Wong (2001) indicate that analysts view the

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annual reports and individual meeting between managers and analysts/investors as the most important source of communication from the company.

Analysis and results

5.1 Descriptive analysis

Table 2 summarises the descriptive analysis for the variables included in the sample. The CSR disclosure has a mean of 0.18 indicating that the level of corporate social reporting in Malaysia is still low. The means for non-executive and independent non-executive directors stand at 0.61 and 0.39 respectively, which indicate that Malaysian listed companies, have fulfilled the Malaysian Code on corporate governance requirement where one-third of the board members are non-executive (independent) directors. Besides, only a small number of Malaysian public listed companies are practicing duality. In addition, a mean of 0.67 indicates that majority of Malaysian public listed companies have big four as their external auditor.
Table 2 Variables Corporate social reporting level Duality Proportion of non-executive directors Proportion of independent non-executive directors Company auditor Government linked companies N = 743 Descriptive analysis for other included variables Min. 0.00 0.00 0.20 0.00 0.00 0.00 Max. 0.69 1.00 0.67 0.88 1.00 1.00 Mean 0.18 0.17 0.61 0.39 0.67 0.04 Std. dev. 0.11 0.37 0.20 0.11 0.47 0.20

5.2 Multivariate analysis

Table 3 presents the Pearsonian correlations for the sample companies used to test Ho1 and Ho5. The highest correlation between independent variables is 0.258, which is between NONEX and INDNE. From the correlation table, it is noticed that the correlations are less than 0.8 and, as such, do not pose a multicollinearity problem (Kennedy, 1985). Furthermore, the results presented in the table are consistent with the prediction except for INDNE where a negative correlation is found. Variance inflation factor (VIF) is conducted before the regression. The result is summarised in Table 4. The test shows that none of the included variables has the correlation problem since the VIF value falls within the acceptable range-less than ten. Heteroskedasticity is controlled in running the regression test. In addition, the results for ordinary least squares (OLS) regressions are also presented in Table 4. It displays the coefficient, standard errors, significance and goodness of statistic for the OLS regressions. It also indicates that the model is significant (p< 0.001) with a R2 of 14.36%.

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Pearson correlation test for all the included variables, N = 743 CSRL DUAL 1 .046 .048 .002 .092(*) 1 .258(**) .135(**) .189(**) 1 .020 .017 1 .100(**) 1 NONEX INDNE AUD GLC

CSRLEV DUAL NONEX INDNE AUD GLC

1 .082(*) .194(**) .003 .103(**) .347(**)

Notes: *Correlation is significant at the 0.05 level of significance (2-tailed). **Correlation is significant at the 0.01 level of significance (2-tailed).

The first hypothesis tests whether duality role (DUAL) leads to lower levels of CSR disclosure. The dual leadership style is argued to reduce the boards independence and objectivity in terms of decision making (Daily and Dalton, 1993; Jensen, 1993). As a result, the interests of shareholders will be ignored and the governance role will not be fulfilled. Subsequently, this practice reduces monitoring quality and creates room for personal advantage by withholding information, thus impairing the quality of reporting (Forker, 1992; Rechner and Dalton, 1991). Contrary to the theory, the variable of DUAL shows lack of statistical significance (p>0.01) even though it shows a negative coefficient. Despite that the result contradicts with the findings in Xiao and Yuan (2007) and Forker (1992), it is consistent with the findings in Barako et al. (2006), Haniffa and Cooke (2002) and Ho and Wong (2001). The potential justification might be the CEO-Chairmen of Malaysian public listed companies concerned more on the companys day-to-day operations and strategic planning and less and less focus is put on how the voluntary disclosure level of the company is as long as the mandatory disclosures are complied. Hypothesis 2 tests whether the presence of more non-executive directors in companies leads to a higher level of CSR disclosure. Non-executive directors who play the monitoring role will encourage more voluntary disclosure from the company to satisfy the information needs of outsiders (Haniffa and Cooke, 2002; Tsui and Gul, 2000; Myllys, 1999; Dare, 1998). From Table 4, the variable of interest is the proportion of non-executive directors on the board (NONEXE), which is positive and significant at p<0.05 levels the result is consistent with the findings in Adams and Hossain (1998). The results prove that non-executive directors can play an effective monitoring tool in Malaysia. They may not dominate board membership, but they did have an influential role in directing and monitoring the company in comparison with independent non-executive directors. Hypothesis 3 predicts a positive association between independent non-executive directors and a companys CSR disclosure. Eng and Mak (2003), Ho and Wong (2001), Weir and Liang (2001) and Daily and Dalton (1993) argue that independent directors are less attached to the company; therefore, they can act as good monitoring tool and will insist the company for more disclosure. However, the variable INDNE is not significant at any conventional level for both the regressions. Although the result is consistent with the findings in Barako et al. (2006), Judge et al. (2003), Ho and Wong (2001) and Forker (1992), it is inconsistent to Chen and Jaggi (2000). One potential reason for the insignificance might be due to that Malaysian companies have a tendency to comply

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minimally with newly-imposed rules or recommendations and would then diminish the real role of independent non-executive directors in a company. The inclusion of independent non-executive directors is probably one method of satisfying the code to avoid future mandatory compliance. Hypothesis 4 predicts that companies hiring big-four auditors (AUD) are associated with higher levels of CSR disclosure. DeAngelo (1981) argued that in order to signal high quality auditing services, big auditors (big-four) will take the initiative to encourage their clients to disclose more information to outsiders. Contrary to expectations, the variable AUD is not significant at any conventional levels. This indicates that big-four auditors do not seem to exert differential audit quality. The results are similar to prior findings in Xiao and Yuan (2007), Barako et al. (2006), Eng and Mak (2003), Haniffa and Cooke (2002), and several others4. The results imply that the big-four auditing firms in Malaysia may not have much influence in the CSR disclosure level among public listed companies as the auditors tend to be more concerned about how far their clients comply with mandatory disclosure rather than voluntary reporting. They will not exercise their influential powers to demand for more disclosure than necessary. Consequently, the decision to provide more CSR (voluntary) disclosure is still in the hands of their clients.
Table 4 Multiple linear regressions for the hypotheses model, N = 743 Coefficient 0.015 0.078 0.283 0.132 0.182 0.137 Std. err. 0.009 0.027 0.037 0.008 0.024 0.167 T 1.602 2.919 0.766 1.599 7.565 8.236 p 0.110 0.004* 0.444 0.110 0.000* 0.000 VIF 1.13 1.08 1.06 1.03 1.01 14.36% 0.000

Explanatory variables Dual Nonex Indne Aud Glc Constant R Square Prob>F

The last hypothesis of the study suggests that government linked companies lead to a higher level of CSR disclosure than non-government linked companies. Eng and Mak (2003) argued that companies with government control are focused on the overall interest of the nation rather than the companys profit. As a result, with this conflicting business objective, they have a greater need to communicate with outsiders, and thus, more disclosure is expected. In addition, Roberts (1992) also argued that when the government has greater influence on a company, it can exercise its power to encourage more disclosure from a company. Management, in turn, will make greater efforts to meet the governments demand. As a result, corporate social reporting may be a tool for them to fulfil the governments obligation and thus a positive association is expected. The variable of interest is government-linked companies (GLC) which is positive and significant at p<0.01. The result is consistent with the findings in Nazri (2007) and Eng and Maks (2003) study, which implies that the Malaysian Government acts to enhance accountability and transparency of financial reporting in the country. The government (through its control mechanism in listed companies), takes steps to practice high

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governance standards and CSR disclosure level. This will serve as a good model for other companies in the country.

5.2 T-tests
Table 5 documents the test of means of CSR disclosure level for GLCs and non-GLCs. The results indicate that the means for CSR disclosure level for GLCs and non-GLCs are significantly different from each other at 0.01 level of significance. The result supports the study from Nazri (2007) and Roberts (1992) that to legitimise its existence and fulfil the corporate citizenship, more CSR information is provided by Malaysian GLCs. Furthermore, this result implies that Malaysian GLCs are setting a role model to other public listed companies by taking the initiatives to disclose more CSR information. This is, thus, consistent with Malaysian Government efforts to promote greater transparency and accountability among public listed companies in Malaysia.
Table 5 Group 0 1 Combined Diff Degree of freedom: 741 Ho: mean (0) mean (1) = diff =0 Ha: diff < 0 T = 10.080 P < t = 0.000 Ha: diff~= 0 T = 10.080 P > |t| = 0.000 Ha: diff > 0 T = 10.0780 P > t = 1.000 T-test for GLCs vs. non-GLCs with CSR disclosure level Obs. 713 30 743 Mean 0.171 0.374 0.179 0.203 Std. err. 0.004 0.023 0.004 0.020 Std. dev. 0.107 0.128 0.115 [95% Conf. interval] 0.163 0.326 0.171 0.243 0.179 0.422 0.187 0.164

Conclusions

This study is timely at least for two reasons. First, it helps to reduce the gap in the literature particularly on the relationship between CSR disclosure and corporate governance initiative in Malaysian environment. Secondly, it attempts to examine how corporate governance initiative among Malaysian public listed companies has succeeded in improving level of CSR disclosure, as the regulator introduced Code of Corporate Governance in 2000. Conclusively, the multivariate analysis provides that duality role causes a decrease in CSR disclosure; however the result is not statistically significant. Secondly, it is found that the presence of more non-executive directors improves the level of CSR disclosure and the result is indeed significant. Thirdly, the presence of more independent non-executive directors also lead to enhanced CSR reporting, but the result is not significant. Fourth, the analysis indicates that the engagement of big four auditing firms does not contribute significantly in improving the level of CSR disclosure. Lastly, the analysis shows that the involvement of institutional shareholders, such as government investment arms or public pension funds result in increased CSR disclosure. The result is further supported by the outcome of t-test, which shows significant difference between

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government linked companies and non government linked companies when it comes to CSR reporting. This study contributes to the accounting literature by introducing alternative technique or construct in measuring the level of CSR disclosure. In general, the new construct reveals that the quality of CSR disclosure among public listed companies in Malaysia improved as compared to previous findings by Thompson and Zakaria (2006), but, there is still a long way to be covered for coming at par with other developed countries. Secondly, with larger sample size, which includes companies from finance and banking sector, which was previously dropped by Haniffa and Cooke (2002), it provides strong ground for generalisation. The most important finding of the study indicates the importance of companies to have more non-executive directors and permit larger institutional shareholders representative at board level, in order to enhance CSR reporting. However, this study inherits several limitations. First, the explanatory power of the model stands at 14.63%. Even though, the study has incorporated several studies as proposed in the literature, it seems that other variables are yet to be explored. Secondly, the corporate governance mechanism employed is restricted to duality role, presence of non-executive directors, independent non-executive directors, engagement of big four auditing firms and institutional shareholders involvement. Thirdly, the proposed technique in measuring level of CSR disclosure may not be perfect and may invite further debates and arguments and furthermore the construct may not be applicable in different corporate reporting environment. Realising the limitations, it is always hoped that the study can be extended in future by adopting extensive framework, measurement, sample size and other variables. There are several corporate governance mechanisms that may be incorporated in future studies such as the function of committee at board level like nomination committee and remuneration committee; existing of internal auditor, and size of board. Comparison study is also needed with other developing countries especially, in order to enhance understanding on CSR disclosure and corporate governance initiative. The outcome of cross analysis study would enhance understanding on cross-cultural behaviour of managers in corporate reporting policy choices (Hofstede, 1983). Further studies are also needed to verify why presence of independent non-executive directors and involvement of big four auditing firms as external auditors did not significantly contribute towards enhancement of CSR disclosure. Finally, the authors hope that this study will tremendously contribute in helping developing countries like Malaysia to further enhance its corporate governance policies, practices and initiatives in the wake of close competition to attract more foreign direct investment.

Acknowledgements
Dr. Talha acknowledges the logistical support provided by King Fahd University of Petroleum and Minerals.

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Notes
1 2 3 We are grateful to Richard Fairchild for suggesting and providing this section. The definition is taken from the speech given by the managing director of Khazanah National Berhad, Mohamad Mokhtar during the Kuala Lumpur Business Club Dinner (October 2004). According to the speech (Mokhtar, 2004), control is usually defined as the ability to appoint BOD members, senior management, and make major decisions (e.g. contract awards, strategy, restructuring and financing, acquisitions and divestments etc.). It is more than just the percentage of ownership. Hassan et al. (2004); Xiao et al. (2004); Chau and Gray (2002); Lennox (2001); Ahmed and Courtis (1999); Owusu-Ansah (1998); Hossain et al. (1995); Raffournier (1995); Wallace and Naser (1995); Wallace et al. (1994); and Tan et al. (1990).