Abstract
This study empirically examines the relationship between wide-ranging board diversity and the quality of corporate social responsibility (CSR) disclosure variables in Malaysia. We extend prior literature covering broader dimensions of board diversity (e.g., gender, education level, education background, age, tenure, nationality and ethnicity) and their impact on CSR after controlling for board and audit committee characteristics. Using 200 listed firms in Bursa Malaysia during 2009–2013 and applying both OLS and 2SLS instrumental variables (IV) approaches, we document significant positive effect of board education level and board tenure diversity on the quality of CSR disclosure. Further analysis using robust regression also shows positive association between gender diversity and CSR disclosure. Our findings also demonstrate that the quality of CSR disclosure is significantly negatively associated with board age and nationality diversity. These results remain consistent with using alternative measures for board diversity, and characteristics for board of director and audit committees as well as split samples between large and small firms. Additional tests exhibit complementary relationship of education level and nationality with gender, while substitutive relationship of age and tenure with gender in influencing CSR. These findings provide useful insights into the policy makers in setting regulations in respect of board diversity in Malaysia and other emerging economies in the Asian region. Our evidence is also useful for listed companies in setting the criteria to identify directors who can support their strategic decisions.
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Notes
In 2004, the then Prime Minister, Abdullah Badawi, announced a policy which stipulated that 30 percent of the decision makers in all sectors of the economy should be women. The deadline for the 30 percent target to be achieved in the public sector was set as 2010. As a continuation of this policy, in June 2011, Prime Minister Najib Tun Abdul Razak announced that listed companies had until 2016 to ensure that at least 30 percent of their board members are women (Abdullah and Ismail 2013). Therefore, 2016 is the starting point where 30 percent female directors in the board must be appointed by Malaysian listed firms.
Daske et al. (2008) examine the mandatory IFRS reporting around the world. We acknowledge that mandatory IFRS is different to mandatory CSR disclosure. However, the point we intend to highlight is the impact of mandatory disclosure itself and not referring to the types of disclosure.
For example, in China, although the government is serious to use CSR disclosures to report pollution-related breaches such as carbon emission, pollution disclosure and depletion of natural resources (Gugler and Shi 2009, p. 15), nevertheless firms in China are less likely to disclose their information related to carbon reporting when compared to other European countries (KPMG 2015). Given that pollution is still an unresolved issue in China, the manager’s decision not to disclose information on carbon and carbon emission might suggest that CSR disclosure in China is potentially a self-serving selection. In Bangladesh, high family ownership is found to be associated with lower levels of CSR disclosure (Belal and Owen 2007). In South Africa, block holders are often in few hands; thus, key governance decisions such as board appointments where block holders’ decisions are involved have been politicized in such a way that the appointed board is ineffective in monitoring the managers, thus leading to the impairment of overall corporate governance structure including internal and external mechanisms (Ntim et al. 2017). In Malaysia, the involvement of Malays (i.e., the son of soil) to the board is due to political advantage and business ethics customs are corrupted by the “Ali Baba” practices where the Malays (i.e., the son of soil) who received license or contract from the government are, in fact, re-selling the contract to the non-Malays (Lim 1985). From the regulatory perspective, although Common Law has been used by emerging economies such as Malaysia, South Africa and India due to colonization by British in the past (La Porta et al. 2000), nonetheless, investor’s protection in emerging countries is at stake since the institutional mechanisms are weak and resources are poorly governed.
We acknowledge that Bear et al. (2010) include CEO duality, but neglect other board and audit committee characteristics; Harjoto et al. (2015) include the percentage of independent directors, but not other board and audit committee characteristics; Ben-Amar et al. (2015) take board independence and CEO duality into account, but neglect board meeting and audit committee characteristics; Hafsi and Turgut (2013) include board size, board independence and CEO duality, but ignore audit committee characteristics; and Hoang et al. (2016) include CEO duality and directors’ ownership, while other board and audit committee characteristics are left behind.
Bowman and Ambrosini (2003, p. 5) differentiate a firm’s resources into inert input and human input. Inert input comprises of physical assets such as building and equipment which is valuable to the firm, but its function is not accelerating in the sense that it is not able to create new value. On the other hand, human input is capable of creating new value that contributes to the firm’s profit. Human input also is more flexible than inert input in the sense that its value can be destroyed or developed depending on the firm’s efficiencies and activities (i.e., whether firms are active in value-creating activities or value-destroying activities).
We note that it is not as unique as South Africa during pre- and post-Apartheid periods, but unique as compared to other neighboring Asian countries.
Population in Malaysia consists of Bumiputera (son of soil) (68.6%), Chinese (23.4%), Indian (7%) and others (1%)—information retrieved from official portal, Department of Statistic of Malaysia, October 18, 2016.
Barney (1991, p. 101) classifies a firm’s resources into three main categories (i.e., physical capital resources, human capital resources and organizational capital resources) (Williamson 1975; Becker 1964; Tomer 1987).
Physical capital resources include the physical technology used in a firm, a firm’s plant and equipment, its geographical location, and its access to raw materials. Human capital resources include the training, experience, judgment, intelligence, relationships, and insights of individual managers and workers in a firm. Organizational capital resources include a firm’s formal reporting structure, its formal and informal planning, controlling and coordinating system, as well as informal relations among groups within a firm and between a firm and those in its environment (Barney 1991, p. 101).
Several European countries such as Norway, Spain, and Sweden have passed laws mandating firms to add more women directors on boards (Upadhyay and Zeng 2014). In Norway and Spain, 40% of gender quota was allocated for female; while in France the new law adopted in January 2011 decreed that the proportion of female directors should not be lower than 40% by the year 2017 (Galia and Zenou 2013). In Italy, the law required one-third of board members to be women by the year 2015 (Giovinco 2014). Australia has a faster progress in appointing more women to the boards of listed companies compared to most other countries where gender balance is addressed through voluntary codes of conduct and not mandatory gender quota legislation (Plessis et al. 2012). The Australian Institute of Company Directors target is 30% female board representations by the end of 2018. The KPMG Enterprise’s 2017 ASX 300+ Report shows on average ASX 300 + boards comprise only 9% female directors while ASX 200 companies have 23%. Although Japan has lagged behind other advanced countries with regard to gender equality, the Japan Prime Minister has set a goal of increasing the percentage of women in executive positions in the country’s companies to more than 30% by year 2020. The worldwide effort shows that gender diversity issues have gained attention globally. Particularly, in Malaysia, on 27 June 2011, the Prime Minister announced that the Malaysian Cabinet approved legislation where corporate companies must achieve at least 30% representation of women in decision making positions.
We acknowledge that CSR disclosure and CSR performance are two different things. CSR disclosure is a method of communication between firms and users of annual reports about the CSR activities the firm engaged (Morsing 2006; Yip et al. 2011). While CSR disclosure can be “easily observed,” CSR performance, however, is much more complicated and “multi-faceted” (Yip et al. 2011, p. 21). Wood (1991, p. 693) defines corporate social performance as “configuration of principles of social responsibility, process of social responsiveness, and policies, programs, and observable outcomes as they relate to the firm’s societal relationships.” Nonetheless, we argue that CSR disclosure and CSR performance are connected in the sense that Font et al. (2012) demonstrate a positive association between CSR disclosure and CSR performance. In a related vein, Clarkson et al. (2008) also report a positive link between environmental performance and environmental disclosure.
We note that several top business leaders such as Mark Zuckerberg, Bill Gates and Steve Jobs are among the most successful individuals who did not complete their college degree.
These studies on innovation performance are related to the development of the products (i.e., product quality and product safety) that are also a part of CSR activities.
Harjoto et al. (2015) measure CSR strength and CSR concern using KLD rating.
Financial crisis is the time that is likely to be characterized by uncertain economic and business environment. Both organizations and each party in the society try to avoid the effect of the crisis through some remedial measures such as cutting costs, laying off workers, postponing investments, reshaping budgets for the following year in a contraction manner and reducing consumption (Karaibrahimohgu 2010).
This was computed using standard deviation divided by the mean (i.e., coefficient of variation = σ/μ).
The Blau Index is calculated as follows: BI = 1 − Σ ni =1p 2i , where pi is the proportion of board members in each category and n is the total number of board members. The index indicates the extent of concentration of group members, ranging from high concentration in a single category, with index of 0 indicating complete homogeneity, to extremely low concentration or complete heterogeneity, with an index of 1.
Cohen’s kappa is an index of inter-rater reliability that is commonly used to measure the level of agreement between two sets of dichotomous ratings or scores (Sim and Wright 2005). The kappa value may range anywhere from −1.0 to +1.0, whereby a kappa of 1.0 means that two raters show perfect agreement; a kappa of -1.0 means that they show perfect and consistent disagreement, and a kappa of 0 means that the two raters show a random level of agreement/disagreement (Sim and Wright 2005). A kappa value of 0.8 and above means that the data have a satisfactory level of reliability among the coders (Dominguez 2011). We perform a pilot test to ensure the reliability of the “content analysis” undertaken. According to Malhotra (2010), the sample size for a pilot test usually ranges from 15 to 30 respondents. Therefore, 30 annual reports had been selected with two academicians as evaluators to perform the pilot test. The variables which used “content analysis” are regulatory compliance, corporate image, quality of CG disclosure and quality of CSR disclosure. Explanation was given on the codes prior to the pilot test. The kappa result of the two coders which were pretested achieves the satisfactory level.
We handle for outliers by winsorizing all of the continuous data at the top and bottom 1% following Upadhyay and Zeng (2014). We have checked the normality and linearity using skewness and kurtosis test, and we find that overall the results are within the normality range except for certain cases. We note that heteroscedasticity is not a serious problem, given that our white test shows a significant p value (Chi2 = 136.08, p = 0.000). Nevertheless, we have taken preventive action to control for heteroscedasticity in the model by using “robust” command in Stata.
We acknowledge that our data are of panel data type; hence, panel data analysis such as fixed effects and random effects might be more suitable. We, however, rely on OLS regression because we realize that corporate governance data are subject to the “stickiness” issue, where the variation of governance practice over panel data is none or very minimal (Brown et al. 2011).
In Malaysia, there is an old proverb that has been widely used by the older generation to defend their action and decision—“the older eat the salt earlier than the younger.” This proverb means that in many aspects of life the older generations always know better than the younger generations, so the older generations are supposed to be better qualified in decision making. The idea, opinion, suggestion and recommendation from the younger generation are often undermined by the older generation and usually viewed as less matured and less valuable due to lack of the experience of the young generation.
The highest nationality in our sample in 2013 is Singapore (45 directors), followed by Taiwan (16) and British (14). We argue that kiasu principle (being afraid to lose out or over-competitiveness) and low corruption level in Singapore, punctuality and low level of corruption in Britain and low corruption level in Taiwan, etc., are in contrast to Malaysian sociopolitical environment where corruption is high (Transparency International, 2015), frequent lateness is tolerated in the society, and kiasu has not been embedded in Malaysian life. While the presence of more board members from different nationality, particularly from high transparency country, is one of the firm’s assets that are expected to build firm strength in transparency, nevertheless Ferreira (2010) highlights that communication breakdown and conflict among board members from different demographics might impair board members’ relationships.
During colonization phase of the British, they bring Chinese and Indian from China and India to fulfill the job in mining and rubber estate, respectively. The Malay is recognized as the son of soil and given certain privilege compared to Chinese and Indian. This increases the dissatisfaction between ethnics in Malaysia, and this is something very common among countries that have been colonized in the past. Malaysia has been colonized for more than 400 years by Portuguese, Japan, Denmark and British. While the resources of the country have been taken away by other countries and this might create a sentiment among the Malaysian, the foreigner is viewed as the robber of the country.
We thank the reviewer for highlighting this point.
In Model 6 shown in Table 4, we use alternative measurement for diversity variables. In this instance, GENDER was measured using dummy variable with value “1” for firms with at least one female director and “0” otherwise (Abdullah 2014); EDULEVEL is measured using the proportion of directors having other than academic degree to total number of directors [academic degree is selected as benchmark for educational level, following Amran and Che Ahmad (2011)]; AGE is measured using standard deviation of director ages (Dagsson and Larsson 2011); ETHNIC is measured using the proportion of directors excluding majority of race/ethnic to total number of directors (Shukeri et al. 2012); TENURE is measured using the proportion of directors serving as board of director less than 3 years to total number of directors (the proportion of serving as measurement diversity is following educational level diversity and ethnic diversity, while the average of 3 years is following Harjoto et al. (2015); NATION is measured using a dummy variable with value “1” for the existence of foreign directors and “0” otherwise (Rasmini et al. 2014). In Model 7 shown in Table 4, alternative measurement for BODSIZE is taken using a dummy variable with value “1” as high BODSIZE, while “0” as low BODSIZE; BODMEET is measured using a dummy with value “1” for high frequency of board meeting, while “0” for low frequency of board meeting; BODIND is valued “1” if the percentage of independent directors (excluding chairman) is more than 50%, “0” otherwise (Katmon 2012). In Model 8 shown in Table 4, the alternative measurement for audit committee characteristics is taken consistent with the alternative measurement of BODSIZE, BODMEET and BODIND. Therefore, ACSIZE is measured by a dummy variable with value “1” as high ACSIZE, while “0” as low ACSIZE. ACMEET is valued as “1” for high frequency of ACMEET, while “0” for low frequency of ACMEET. ACIND is measured using a dummy variable with value “1” if the percentage of ACIND is more than 50%, “0” otherwise.
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Appendix: Corporate Social Responsibility Disclosure Index
Appendix: Corporate Social Responsibility Disclosure Index
Company name and year
3 (quantitative) | 2 (non-quantitative but specific) | 1 (common qualitative) | 0 (not disclose) | |
|---|---|---|---|---|
(A) Employee relation | ||||
1. Employee health and safety | ||||
2. Training and education | ||||
3. Employees benefits | ||||
4. Employees profile | ||||
5. Share option for employees | ||||
6. Health and safety award | ||||
(B) Community involvement | ||||
1. Cash donation program | ||||
2. Charity program | ||||
3. Scholarship program | ||||
4. Sponsor for sport activities | ||||
5. Supporting national pride | ||||
6. Public project | ||||
(C) Product | ||||
1. Product development | ||||
2. Product safety | ||||
3. Product quality | ||||
4. Customer services | ||||
(D) Environment | ||||
1. Pollution control | ||||
2. Prevention or reparation program | ||||
3. Conservation and recycled materials | ||||
4. Award in environment program | ||||
Sub total | ||||
Grand total | ||||
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Katmon, N., Mohamad, Z.Z., Norwani, N.M. et al. Comprehensive Board Diversity and Quality of Corporate Social Responsibility Disclosure: Evidence from an Emerging Market. J Bus Ethics 157, 447–481 (2019). https://doi.org/10.1007/s10551-017-3672-6
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DOI: https://doi.org/10.1007/s10551-017-3672-6