Effect of Corporate Governance elements on CSR Disclosure - Free Essay Example

Sample details Pages: 5 Words: 1553 Downloads: 10 Date added: 2017/06/26 Category Finance Essay Type Analytical essay Did you like this example? Introduction This chapter analyses the methodology for conducting research which has the objective to know whether the structure of corporate governance has an effect on CSR disclosure. Furthermore it attempts to undertake an in-depth analysis of CG and CSR disclosure and the need to draw a framework to develop and implement such system within a business which will promote CSR disclosure. It will also discuss the type of research to be carried out for this research. For the purpose of this study, several hypotheses based on the literature review will be developed. The research will be intensively based on the collection of secondary data and analysis of the data. The major reliance of the research design is collection of secondary data through annual report for the year 2009-10 and companys websites. Finally multiple regressions analysis will be used to find the relationship between CSR disclosure and the corporate governance structure. Don’t waste time! Our writers will create an original "Effect of Corporate Governance elements on CSR Disclosure" essay for you Create order Research design Hypothesis Development The hypothesis that will be developed will take into consideration the relationship between CSR disclosure and the independent variables, namely the board size, board independence, duality, managerial ownership and foreign ownership after statistically controlling the effects of a firms size and the profitability of the companies. Hypothesis 1: The greater the board size, the lower the level of CSR disclosure. When looking back at previous researches, it comes to be known that small boards have less managerial conflicts. Therefore when there are fewer conflicts between management, the quality of financial disclosure will be enhanced and more attention is put in CSR disclosure. Hypothesis 2: There is a positive relationship between proportion of independent directors and the level of CSR disclosure. In a study done by Webb, it was found that socially responsible firms have more independent directors as the latter has the objective to safeguard the interest of its shareholders and enhance the image of the business. Hence companies with more independent directors will undertake more social responsibilities, leading to an increase in CSR disclosure. Hypothesis 3: Companies, which having CEO Duality, are more likely to have a lower extent of CSR disclosure. When there is CEO duality in a business, it results in situation whereby a person has more control than the board on the business. In this condition the person will prefer to improve quality of the business rather maximizing shareholders wealth. Hence when focusing on the improvement of business quality, there will less social activities and consequently less CSR disclosure. Hypothesis 4: There is a positive relationship between proportion of independent non-executive directors sit in audit committee and the level of CSR disclosure ownership concentration and corporate social disclosure. Audit Committee and its composition play a vital role in reporting of financial and non financial information. According to Mauritian Code of Corporate Governance (First Edition, Revise April 2004), the board should establish an audit committee with majority of independent directors. As mentioned above independent directors are more concerned with maximizing shareholders wealth, thus they will try to make maximum of disclosures which will be beneficial to the shareholders. Hypothesis 5: There is a negative relationship between the proportions of shares held by executives directors with the extent of corporate social disclosure. According to the agency theory, conflicts arise between shareholders and managers when the latter holds equity in the business as managers can take opportunity of the situation. However previous studies have shown that this conflict can be reduced when management holds more equity and it motivates managers to make more disclosures as creating a good image of the business will be beneficial to them. Hypothesis 6: There is a positive relationship between the proportions of shares held by foreign ownership with the extent of corporate social disclosure. Previous studies revealed that corporate social disclosures in Mauritius are still generally low. If a company has more contact with foreign stakeholders through ownership and trade, it may be encouraged more to adopt the GRI Guidelines and disclose CSR and this help to attract more investors. Conversely, if a company keeps closer ties with its domestic partners, it may be more reluctant to adopt the product of the Western concept, or simply less conscious of it (Granovetter 1973). Internationally competitive industries seem to be much better able to innovate in response to environmental regulation (Porter and van der Linde 1995: 108; Chapple et al. 2001). The Sample The initial sample was the listed companies on the Stock Exchange of Mauritius which consists of 47 companies for the year ended 2010. Then the stratified sampling was used to determine the final sample size. Out of 47 companies, only 35 companies were used to represent the final sample. The twelve companies excluded were those that did not have a website whereby they could make additional CSR disclosure. The sample consists of both financial and non financial companies. The study will be based on secondary data which will be collected from annual reports and companies websites. The annual reports of selected companies will be examined after being collected from the different companies or downloaded from their respective official web sites. Dependent Variables For this thesis, the content analysis was used that is a method of codifying the text or content of a report and this will depend on the selection criteria (Weber, 1988). In fact content analysis has been used extensively in researches about CSR reporting research (Abbot and Monsen, 1979; Ernst Ernst, 1976; Guthrie and Matthews, 1985; Haniffa and Cooke, 2005). Content analysis has been defined by Abbot and Monsen (1979) as: A technique for gathering data that consists of codifying qualitative information in subjective and literary form into categories in order to derive quantitative scales of varying levels of complexity. When considering past studies, predominantly the studies done by Ernst and Whinney (1978), Hackstone and Mine (1996), Haniffaa and Cooke (2005), the disclosed items were classified into five categories which were environmental, community involvement, human resource/employee information, product and energy. The CSR disclosure items were extracted from annual report and companies websites. The CSR disclosure index was constructed after combining both CSR disclosure items disclosed in annual report and companies websites. The CSR disclosure index (number of disclosures made by companies) was developed by adding all the items covering the five themes, which were environment, community, human resource, energy and product. This CSDI was developed by using the dichotomous, which the scores of 1, if the company disclose the items and 0, if it is not. The process will add all the scores and equally weighted. Independent Variables The independent variables which were considered in this study are as follows along with their description: Independent Variables Description Board size Numbers of directors sit on the board Board Independence Percentage of non-executive directors to total directors Duality A dichotomous variable will be used for the presence of dual leadership, where it will take the value of 1 if the CEO is also the Chairman of the board, and 0 otherwise Audit Committee Independence Percentages of non-executive directors to total of directors sitting on audit committee Managerial Ownership Percentage of shares owned by executive directors to total number of shares issued Foreign Ownership Percentage of shares owned by foreign shareholders to total number of shares issued Control Variables Two control variables were used in this study and they are: Firms size i.e. total assets and Profitability i.e. returns on assets and return on assets. These two variables has been extensively been used by past researchers in their study. The motive behind using these two variables is that it will enhance the relationship between corporate governance and CSR disclosure. This study will use total assets as a substitute to firms size and ROE as a measurement for profitability. These variables have been used by other researches (Hackston and Milne, 1996; Ho and Wong, 2001; Eng and Mak, 2003; Barnea and Rubins, 2004; Eng and Mak, 2003; Mohd Nasir and Abdullah, 2004; Haniffa and Cooke, 2005) as well while doing their research in CSR reporting. Analysis of Data The data that was collected in this research was examined using hierarchical regression method to know the effect of corporate governance structure on CSR disclosure index and the independent variables. Two models of regression were used in this study. The first one has only considered the effect of the control variables on CSR disclosure while the second model integrates both the independent and control variables. The reason behind this is to find out the level of variation which is only caused by the CG elements in CSR disclosure. The control variables were taken to be all other factors which could affect the level CSR disclosure. In order to see if the model was appropriate several tests underlying the regression model namely normality, linearity, and multicollinearity were carried out (Roshima Said, Yuserrie Hj Zainuddin and Hasnah Haron). In testing the model, it is involved two fold that are testing the individual independent variables and testing the overall relationship after model estimation (Hair et al., 1998). The regression model is as follows: Model1: CSD= ÃÆ'Ã… ½Ãƒâ€šÃ‚ ²0 + ÃÆ'Ã… ½Ãƒâ€šÃ‚ ²8ROA + ÃÆ'Ã… ½Ãƒâ€šÃ‚ ²9TA + ÃÆ'ˆÃ ¢Ã¢â€š ¬Ã‚ ¡ Model 2: CSD = ÃÆ'Ã… ½Ãƒâ€šÃ‚ ²0 + ÃÆ'Ã… ½Ãƒâ€šÃ‚ ²1BD SIZE + ÃÆ'Ã… ½Ãƒâ€šÃ‚ ²2NED + ÃÆ'Ã… ½Ãƒâ€šÃ‚ ²3DUAL + ÃÆ'Ã… ½Ãƒâ€šÃ‚ ²4AC + ÃÆ'Ã… ½Ãƒâ€šÃ‚ ²5MGR + ÃÆ'Ã… ½Ãƒâ€šÃ‚ ²6FRGN +ÃÆ'Ã… ½Ãƒâ€šÃ‚ ²7ROE + ÃÆ'Ã… ½Ãƒâ€šÃ‚ ²8ROA + ÃÆ'Ã… ½Ãƒâ€šÃ‚ ²9TA + ÃÆ'ˆÃ ¢Ã¢â€š ¬Ã‚ ¡ Where CSD= CSR disclosure index: ÃÆ'Ã… ½Ãƒâ€šÃ‚ ²1BD SIZE : board size. ÃÆ'Ã… ½Ãƒâ€šÃ‚ ²2NED : Percentage of non-executive directors to total directors. ÃÆ'Ã… ½Ãƒâ€šÃ‚ ²3DUAL : CEO duality. ÃÆ'Ã… ½Ãƒâ€šÃ‚ ²4AC : Proportion of non-executive directors to total of directors that sit in audit Committee ÃÆ'Ã… ½Ãƒâ€šÃ‚ ²5MGR : Managerial ownership. ÃÆ'Ã… ½Ãƒâ€šÃ‚ ²6FRGN : Foreign ownership. ÃÆ'Ã… ½Ãƒâ€šÃ‚ ²7ROE : Return on equity (proxy for profitability). ÃÆ'Ã… ½Ãƒâ€šÃ‚ ²8ROA : ROA (proxy for profitability). ÃÆ'Ã… ½Ãƒâ€šÃ‚ ²9TA : TA (proxy for size). : Error term