- Email: [email protected]
The Influence of CSR Disclosure Structure on Corporate Financial Performance: Evidence from Stakeholders’ Perspectives
Available online at www.sciencedirect.com
ScienceDirect Procedia Economics and Finance 7 (2013) 213 – 220
International Conference on Economics and Business Research 2013 (ICEBR 2013)
The Influence of CSR Disclosure Structure on Corporate Financial Performance: Evidence from Stakeholders’ Perspectives Haslinda Yusoffa*, Siti Salwa Mohamadᵇ, Faizah Darusᶜ ͣ Accounting Research Institute (ARI) and Faculty of Accountancy, University Teknologi MARA, Shah Alam 40450, Malaysia ᵇ,cFaculty of Accountancy, University Teknologi MARA, Shah Alam 40450, Malaysia
Abstract This study aims to understand the potential influence of CSR disclosure structure on corporate financial performance. Content analyses had been carried out on the 2009-2011 annual reports of the leading 30 public listed companies in Malaysia. For terms of methodology, sentence count was used as a unit of analysis to measure disclosure depth, while a finer-grained analysis of the CSR disclosure structure was performed to measure disclosure breadth and disclosure concentration. There was found to be a significant relationship between CSR disclosure structure and the corporate financial performance in the subsequent year. The results suggest that good financial performers are those companies that display a relatively high breadth of disclosure, while at the same time demonstrate the ability to disclose a concentrated structure of CSR disclosure to the definitive stakeholders. The findings of this study imply that it is not the volume of disclosure that matters, but the variety of items disclosed and concentration to the definitive stakeholders. On one hand, the study findings generally offer insights into the workings of successful reporting strategies for business organisations in Malaysia, while on the other hand, the study does provide inputs pertaining to the betterment of the CSR framework, for Bursa Malaysia and the relevant regulatory bodies to deliberate upon. © 2013 byby Elsevier B.V. © 2013 The TheAuthors. Authors.Published Published Elsevier B.V. Selection and peer-review under responsibility of ICEBR 2013. Selection and peer-review under responsibility of ICEBR 2013
Keywords: CSR; disclosure structure; financial performance; stakeholder
1.
Introduction Corporate social responsibility (hereafter, CSR) awareness amongst companies in Malaysia can generally
* Corresponding author. Email address: [email protected]
2212-5671 © 2013 The Authors. Published by Elsevier B.V. Selection and peer-review under responsibility of ICEBR 2013 doi:10.1016/S2212-5671(13)00237-2
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Haslinda Yusoff et al. / Procedia Economics and Finance 7 (2013) 213 – 220
be regarded as lagging rather far behind the global best practices benchmark. Specifically, a majority of the publicly listed companies in the country have low CSR performance and disclosure practice (Bursa Malaysia, 2012). To a certain extent, this indicates low corporate awareness on CSR and sustainability concepts, and high uncertainty about the potential importance of disclosing CSR information (see Ramdhony and OogarahHanuman, 2012). Such a condition demands local initiatives to improve CSR disclosure (CSRD hereafter) practice in Malaysia. This is because CSRD is an essential component of information that will impact on internal decision-making (Vurro and Perrini, 2011) and useful to manage company’s external relationships (Waddock and Bodwell, 2004). Furthermore, satisfying stakeholders’ explicit and implicit information demands, maintaining their support, while at the same time avoiding threats, would likely improve company’s financial performance (Balabanis et al.,1998). It is therefore interesting to understand whether CSRD structure is a contributing factor to a company’s financial performance. The findings of this study will contribute ideas relating to formulating a strategy for effective CSRD practice with a view to augmenting corporate financial performance, hence sustaining national economic growth. Following that, the aim of this study is twofold: 1) investigate CSRD structure; depth, breadth and concentration; 2) provide insight into how CSRD practice may influence a company’s subsequent year financial performance. 2. Literature review and generation of hypotheses 2.1 CSRD structure Prior studies have confirmed that socially responsible companies clearly exhibited the inclination to provide a high quantity of CSRD, which can be equated with disclosure depth (see Aras et al., 2010; Janggu et al., 2007; Naser et al., 2002). Previously published literature have also found that companies strategize to structure the breadth of stakeholder-related CSR information (Vurro and Perrini, 2011; Oeyono et al., 2011; Saleh et al., 2011). The concentration structure of CSRD signifies the heterogeneity of stakeholders’ demands and illustrates how a company would respond to these conflicting demands, by either endeavoring to commit equal attention to all stakeholder groups or to accord priority to the dominant stakeholders (Roberts, 1992). 2.2 Stakeholder theory, CSRD structure and corporate financial performance Previous studies have used the stakeholder theory as the underpinning theory in understanding management behaviour (e.g. Yusoff and Lehman, 2008; Balabanis et al., 1998; Roberts, 1992). Prevailing literature also have furnished significant evidence on the positive relationship between CSRD structure and future corporate financial performance (e.g. Siregar and Bachtiar, 2010; Teoh et al., 1998), while other studies also found inconsistent results (e.g. Fauzi et al., 2007; Teoh et al., 1998; Belkaoui and Karpik, 1989), which disproves the relationship theory. A company that increased the quantity of CSRD intended for their key stakeholders (Masruki et al., 2012). Naser et al., 2002, found a positive association between financial performance and the depth of CSRD; hence CSRD is deemed as a strategic tool in ensuring the continued existence of the company. The study also found that enhanced positive information about employees would attract the interest of potential employees, as well as improve the goodwill of existing employees. This would then contribute to higher productivity and consequently result in profitable financial outcomes. Therefore, it is hypothesized that: H1:
The higher the depth of CSRD, the higher a company’s financial performance in the subsequent year.
Haslinda Yusoff et al. / Procedia Economics and Finance 7 (2013) 213 – 220
Balabanis et al., 1998, found that a combination of high CSR performance and high disclosure could lead to a positive effect on firms’ overall profitability. The research findings indicate a company’s preference to extend their disclosures, by covering a wide range of stakeholder-related themes, as well as offering up a positive corporate image. This study put forward the idea that, if CSR is viewed as a management strategy focused on improving financial performance, more companies will then be able to expand the scope of their social and environmental responsibilities over a broad set of stakeholders and related issues (disclosure breadth), and thereby enhancing their financial performance. Thus, this study hypothesized that: H 2:
The larger the breadth of CSRD, the higher a company’s financial performance in the subsequent year.
In line with the stakeholder theory, companies should be able to consider the interest of all legitimate stakeholders equally because of their intrinsic value (Donaldson and Preston, 1995) in order to be seen as responsible. Nevertheless, in reality, companies may incline to prioritize some stakeholder claims at the expense of others. For instance, Mitchell et al., 1997, suggest that management should account for stakeholder ‘salience’ or focus on certain stakeholders groups for the survival of the company. Similarly, in this study, concentration was used to mirror such a disproportionate weight of attention to the stakeholders. Pfarrer et al., 2008, indicate that disproportionate attention to more definitive stakeholder groups could help the company to gain legitimacy thus gaining better financial performance. Therefore, it is hypothesized that: H 3:
The more concentration in the dissemination of CSRD to definitive stakeholders, the higher the company’s performance in the subsequent year.
3. Methodology This study focused on a sample of the leading 30 companies listed on Bursa Malaysia based on their market capitalization as at 31 December 2009. Company data obtained for the two years (2009 and 2010), yielded a final sample size of 60 company-year observations. All data were gathered from the respective corporate annual reports. Corporate financial performance was used as a dependent variable for this study to reflect the monetary benefits a company could potentially gain as a result of their CSRD practices (also Aras et al., 2010; Fauzi et al., 2007). The proxy used to represent corporate financial performance encompasses the sum of relevant accounting-based measures i.e. return on assets (ROA), return on equity (ROE) and return on sales (ROS) (also Orlitzky et al., 2003; Teoh et al., 1998). The data had been gathered from DataStream online for the period 2010 – 2011. The one year lapse between the dependent and independent variables was designed to assess the impact of the company’s CSRD structure on the subsequent year’s financial performance. The related measurement approach and formulas for the study variables are as elaborated in Table 1.
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Table 1: Measurement approach for study variables Definition Measurement Return on assets (ROA), return on Dependent variable: equity (ROE), return on sales Corporate financial performance (ROS). Independent variables: Sentence count as a unit of 1. CSRD depth analysis and converted into weighted index. (volume of CSRD presented by company i at time t)
Formula DV= ROA + ROE + ROS
Disclosure depth index
¦
m i 1
stk jit
¦ stk ¦ ¦ stk n i 1
m j 1
jit
n i
, jit
where stkji
= number of sentences disclosed by company i for stakeholder j at time t m = the number of stakeholders included in the analysis (i.e. the eight stakeholder groups) n = the number of companies under review
2.
CSRD breadth (diversity of stakeholder-related themes covered by company i at time t to represent the quality of CSRD from stakeholders’ perspectives)
3.
CSRD concentration (measuring emphasis of disclosure to a selected group of influential stakeholders)
The existence and non-existence of specific stakeholder-related themes
e.g. if company i satisfied seven themes for human resources, four out of seven themes for shareholders, and six themes fulfilled for customers, the disclosure breadth score is equal to: (7/14 + 4/7 + 6/7)
Gini coefficient was applied in which data relating to disclosure depth in all stakeholders level was used.
Gini coefficient
1§ 2 · ¨ ¸ y1 2 y 2 .... mym m ¨© m 2 y ¸¹ where y1 … ym
= a sequence of disclosure levels for the stakeholders covered by company i in decreasing order of size ȳ = the mean disclosure level for each stakeholder in firm i m = the number of stakeholder groups included in the analysis
Control variable: Size of company
Market capitalization
4. Analysis and results 4.1 Descriptive statistics Table 2 displays the descriptive statistics of the variables. This study found that the greater the CSRD depth, the more pronounced the quantity of CSR information disclosed (mean score of 244.49). With respect of CSRD breadth, the results suggest that companies in Malaysia were able to expand their CSRD,
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Haslinda Yusoff et al. / Procedia Economics and Finance 7 (2013) 213 – 220
encompassing 59.13 per cent of the stakeholder-related themes and attaining a mean score of 4.73/8.0. The CSRD concentration score, meanwhile, suggests that companies in Malaysia tend to practice a concentrated structure of CSRD, as reflected by the mean score of 0.77. According to the Gini coefficient, CSRD concentration will only range from zero to 1; whereby a zero score corresponds with perfect equality, meaning that a company has distributed an equal number of CSRD to every stakeholder and a score of 1 corresponds with perfect inequality, signifying a disclosure of a large volume of CSRD to a lesser number of stakeholder groups (concentrated structure). Table 2. Descriptive statistics Variables Corporate financial performance CSRD depth CSRD breadth CSRD concentration Size of company (millions)
Mean 0.44 244.49 4.73 0.77 18.93
Minimum -0.01 76.24 2.64 0.63 1.54
Maximum 3.17 559.21 7.38 0.84 68.30
Std. Deviation 0.52 133.18 1.00 0.04 17.60
Prior to conducting the multiple regression analysis, it was vital to ensure that all initial assumptions were complies with. At first, there exists a violation of normality for the variable relating to corporate financial performance as the skewness and kurtosis values were not within the acceptable range i.e. +/- 1.96 for skewness and +/- 2 for kurtosis (see Abdul Rahman and Mohamad Ali, 2006). Corrective measures were subsequently adopted in which the outliers were removed, resulting in only 57 cases studied. Additionally, relevant tests were then carried out to examine the probable existence of multicollinearity. As a result of the above, the degree of multicollinearity of the study variables was found to be acceptable †; with all tolerance values shown to be higher than 0.194, whereas the VIF values were lower than 5.154 (refer to Table 3). Table 3. Multicollinearity test: Tolerance and Variance Inflation Factor (VIF) Variable Market capitalization CSR Disclosure depth CSR Disclosure breadth CSR Disclosure concentration
Tolerance
VIF
0.472 0.194 0.198 0.276
2.119 5.154 5.038 3.617
N = 60
4.2 The influence of CSRD structure on companies’ financial performance A multiple regression analysis was then performed to investigate the relationship between CSRD structures and corporate financial performance in Malaysia. The regression model used is as follows: CFP = β0 + β1(CSRD_depth) + β2(CSRD_breadth) + β3(CSRD_concentration) + β4 (SIZE) + εt where: CFP CSRD_depth CSRD_breadth
†
= corporate financial performance, = CSRD depth index, = CSRD breadth,
According to Field, 2009, multicollinearity is expected to exist when tolerance is less than 0.1 and VIF is greater than 10.
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CSRD_concentration SIZE εt
= CSRD concentration, = size of company = error
The results achieved in Table 4 indicate significant positive relationship between CSRD breadth and subsequent CFP. Such a finding is in line with the stakeholder theory which suggests that when a company is perceived to be proficient in managing their stakeholders’ related issues, the level of loyalty among the stakeholders will facilitate the growth in sales, thus leading to higher profitability. Similarly, the significant positive relationship between CSRD concentration and subsequent corporate financial performance indicate that, an increased concentration on definitive‡ stakeholders will lead to greater financial performance in the subsequent year. The results also imply that an increase in the sentence relating to CSR information may lead to a decrease in company’s profitability. Company size was found to yield a positive and significant influence on a company’s subsequent year’s financial performance. Table 4. Multiple regression results Dependent variable: Corporate financial performance (CFP) R Square = 0.197, Adjusted R² = 0.135, F = 3.189, Sig. = 0.02 Variables
Coefficient (Beta)
t-statistics
P-value
(Constant) 0.340 0.000 CSRD depth -0.875 -3.101 0.003*** CSRD breadth 0.621 2.228 0.030** CSRD concentration 0.701 2.965 0.005*** SIZE 0.361 1.995 0.051* Notes: ***Significant at 0.01 level, ** Significant at 0.05 level, *Significant at 0.1 level
VIF
Tolerance
0.194 0.198 0.276 0.472
5.154 5.038 3.617 2.119
4.3 The strength of CSRD structure in influencing corporate financial performance This study then further extended its objective to investigate the strength of each CSRD structure in influencing corporate financial performance. In this regard, analysis on partial correlation was counted on to provide evidence to support or disprove the three predicted hypotheses. Accordingly, the said analysis was undertaken and the results are as shown in Table 5.
Table 5. Partial correlation analysis CSRD depth
‡
CSRD breadth
CSRD concentration
Control variables: SIZE Corporate financial performance (CFP)
-.239
-.175
.216
Control variables: SIZE and others Corporate financial performance (CFP)
-.395**
.295*
.380**
Pfarrer et al., 2008, stated that definitive stakeholders are those who possessed the power, legitimacy and urgency claims against the company.
Haslinda Yusoff et al. / Procedia Economics and Finance 7 (2013) 213 – 220
Notes: Ns = not significant (p >.05), *p < .05, **p < .01, ***p < .001, (1-tailed)
The results outlined in Table 5 confirm that there is a low, negative and partial correlation between CSRD depth and CFP when SIZE, CSRD breadth, CSRD concentration are controlled. CSRD depth will highly influence CFP in a negative way if other variables do not exist. Hence, Hypothesis 1 is rejected. On the other hand, Hypothesis 2 is accepted, as evidenced by the minimal, positive and partial correlation between CSRD breadth and CFP, when the effects of SIZE, CSRD depth, CSRD concentration were controlled. In summary, disclosure breadth alone could strongly influence the financial performance in a positive direction without the presence of CSRD depth and CSRD concentration and SIZE. Finally, to top it all up, there is also a low, positive and partial correlation between disclosure concentration on definitive stakeholders and the company’s subsequent financial performance. Therefore, Hypothesis 3 cannot be rejected. 5. Discussion and conclusions The empirical evidence gathered in the course of undertaking this study, suggest the formation of the building blocks to further evaluate the link between CSRD structure and corporate financial performance. The results indicated that efficient financial performers were those who increased the breadth of their CSRD in which they enhanced the coverage of disclosure to multiple stakeholders as well as those who provided higher concentration to the definitive stakeholders. Greater concentration on the definitive stakeholder groups could expedite the revitalizing of a company’s legitimacy and consequently increasing its financial performance. By proficiently managing the interests of more stakeholders, a company would be seen as being more socially responsible. As a result, it would gain better support from stakeholders thereby deriving uplift in the company’s financial performance. The overall concept of the current study is consistent with the stakeholder theory which underpins its theoretical framework (CSRD–corporate financial performance) (see Fauzi et al., 2007; Waddock and Graves, 1997). The study findings also suggest that the stakeholder theory is a relevant premise in the attempt of understanding the relationship between CSRD structure and corporate financial performance (e.g. Aras et al., 2010; Ramasamy et al., 2007) in Malaysia. In light of the findings that have been discovered earlier, two significant implications can be observed. Firstly, this study offers a new methodological perspective relating to a finer-grained analysis on CSR disclosure structures and practices. Secondly, this study provides positive insights into an improved CSR related disclosure framework, in which related regulatory bodies such as Bursa Malaysia and other public/private sector organizations can benefit in developing future reporting policies. Acknowledgement The researchers would like to thank the Ministry of Higher Education Malaysia (MOHE) and Universiti Teknologi MARA for the research grant received. References Abdul Rahman, R., & Mohamed Ali, F. (2006). Board, audit committee, culture and earnings management: Malaysian evidence. Managerial Auditing Journal, 21(7), 783-804. Aras, G., Aybars, A., Kutlu, O., 2010. Managing Corporate Performance: Investigating the Relationship between Corporate Social Responsibility and Financial Performance in Emerging Markets. International Journal of Productivity and Performance Management, 59(3), p. 229-254. Balabanis, G., Phillips, H. C., Lyall, J., 1998. Corporate Social Responsibility and Economic Performance in the Top British Companies: Are They Linked?. European Business Review, 98(1), p. 25-44.
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Belkaoui, A., Karpik, P. G., 1989. Determinants of the Corporate Decision to Disclose Social Information. Accounting, Auditing & Accountability Journal, 2(1). Bursa Malaysia, 2012. Sustainability. Retrieved July 2012, http://www.bursamalaysia.com/market/listedcompanies/sustainability/ Donaldson, T., Preston, L. E., 1995. The Stakeholder Theory of the Corporation: Concepts, Evidence and Implications. The Academy of Management Review, 20(1), p. 65-91. Fauzi, H., Mahoney, S. L., Abdul Rahman, A., 2007. The Link between Corporate Social Performance and Financial Performance: Evidence from Indonesian Companies. Issues in Social and Environmental Accounting, 1(1), p. 149159. Field, A., 2009. "Discovering Statistics Using SPSS", 3rd edition. SAGE Publications Ltd, London. Janggu, T., Joseph, C., Madi, N., 2007. The Current State of Corporate Social Responsibility among Industrial Companies in Malaysia. Social Responsibility Journal, 3(3), p. 9-18. Masruki, R., Ibrahim, N., Azizan, N., 2012. Incorporating Corporate Social Responsibility (CSR) into Sustainable Financial Performance of Islamic Banks in Malaysia. Mitchell, R. K., Agle, B. R., Wood, D. J., 1997. Toward a Theory of Stakeholder Identification and Salience: Defining the Principle of Who and What Really Counts. Academy of Management Review, 22(4), p. 853-886. Naser, K., Al-Khatib, K., Karbhari, Y., 2002. Empirical Evidence on the Depth of Corporate Information Disclosure in Developing Countries: the Case of Jordan. International Journal on Corporate Management, 12(3 & 4), p. 122152. Oeyono, J., Samy, M., Bampton, R., 2011. An Examination of Corporate Social Responsibility and Financial Performance: a Study of the Top 50 Indonesian Listed Corporations. Journal of Global Responsibility, 2(1), p. 100-112. Orlitzky, M., Schmidt, F. L., Rynes, S. L., 2003. Corporate Social and Financial Performance: a Meta Analysis. Organization Studies, 24(3), p. 403-441. Pfarrer, M. D., Decelles, K. A., Smith, K. G., Taylor, M. S., 2008. After the Fall: Reintegrating the Corrupt Organization. Academy of Management Review, 33(3), p. 730-749. Ramasamy, B., Ting, H. W., Yeung, M. C., 2007. Does it Pay to be Good in Developing Countries? The Relationship between CSR and Financial Performance in Malaysia. Asian Academy of Management Journal of Accounting and Finance, 3(1), p. 21-36. Ramdhony, D., Oogarah-Hanuman, V., 2012. Improving CSR Reporting in Mauritius- Accountants' Perspectives. World Journal of Social Sciences, 2(4), p. 195-207. Roberts, R. W., 1992. Determinants of Corporate Social Responsibility Disclosure: an Application of Stakeholder Theory. Accounting, Organizations and Society, 17(6), p. 595-612. Saleh, M., Zulkifli, N., Muhamad, R., 2011. Looking for Evidence of the Relationship between Corporate Social Responsibility and Corporate Financial Performance in an Emerging Market. Asia-Pacific Journal of Business, 3(2), p. 165-190. Siregar, S. V., Bachtiar, Y., 2010. Corporate Social Reporting: Empirical Evidence from Indonesian Stock Exchange. International Journal of Islamic and Middle Eastern Finance and Management, 3(3), p. 241-252. Teoh, H. Y., Pin, F. W., Joo, T. T., Ling, Y. Y., 1998. "Environmental Disclosures-Financial Performance Link: Further Evidence from Industrialising Economy Perspective". Paper presented at the APIRA 98, Osaka, Japan. Vurro, C., Perrini, F., 2011. Making the Most of Corporate Social Responsibility Reporting: Disclosure Sturucture and its Impact on Performance. Corporate Governance, 11(4), p. 459-474. Waddock, S. A., Graves, S. B., 1997. The Corporate Social Performance - Financial Performance Link. Strategic Management Journal, 18(4), p. 303-319. Waddock, S., Bodwell, C., 2004. Managing Responsibility: What Can Be Learned from the Quality Movement?. California Management Review, 47(1), p. 25-37. Yusoff, H., Lehman, G., 2008. International Differences on Corporate Environmental Accounting Developments: A Comparison between Malaysia and Australia. Accounting and Finance in Transition, Vol. 4, Greenwich University Press, p.92-124.
ScienceDirect Procedia Economics and Finance 7 (2013) 213 – 220
International Conference on Economics and Business Research 2013 (ICEBR 2013)
The Influence of CSR Disclosure Structure on Corporate Financial Performance: Evidence from Stakeholders’ Perspectives Haslinda Yusoffa*, Siti Salwa Mohamadᵇ, Faizah Darusᶜ ͣ Accounting Research Institute (ARI) and Faculty of Accountancy, University Teknologi MARA, Shah Alam 40450, Malaysia ᵇ,cFaculty of Accountancy, University Teknologi MARA, Shah Alam 40450, Malaysia
Abstract This study aims to understand the potential influence of CSR disclosure structure on corporate financial performance. Content analyses had been carried out on the 2009-2011 annual reports of the leading 30 public listed companies in Malaysia. For terms of methodology, sentence count was used as a unit of analysis to measure disclosure depth, while a finer-grained analysis of the CSR disclosure structure was performed to measure disclosure breadth and disclosure concentration. There was found to be a significant relationship between CSR disclosure structure and the corporate financial performance in the subsequent year. The results suggest that good financial performers are those companies that display a relatively high breadth of disclosure, while at the same time demonstrate the ability to disclose a concentrated structure of CSR disclosure to the definitive stakeholders. The findings of this study imply that it is not the volume of disclosure that matters, but the variety of items disclosed and concentration to the definitive stakeholders. On one hand, the study findings generally offer insights into the workings of successful reporting strategies for business organisations in Malaysia, while on the other hand, the study does provide inputs pertaining to the betterment of the CSR framework, for Bursa Malaysia and the relevant regulatory bodies to deliberate upon. © 2013 byby Elsevier B.V. © 2013 The TheAuthors. Authors.Published Published Elsevier B.V. Selection and peer-review under responsibility of ICEBR 2013. Selection and peer-review under responsibility of ICEBR 2013
Keywords: CSR; disclosure structure; financial performance; stakeholder
1.
Introduction Corporate social responsibility (hereafter, CSR) awareness amongst companies in Malaysia can generally
* Corresponding author. Email address: [email protected]
2212-5671 © 2013 The Authors. Published by Elsevier B.V. Selection and peer-review under responsibility of ICEBR 2013 doi:10.1016/S2212-5671(13)00237-2
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Haslinda Yusoff et al. / Procedia Economics and Finance 7 (2013) 213 – 220
be regarded as lagging rather far behind the global best practices benchmark. Specifically, a majority of the publicly listed companies in the country have low CSR performance and disclosure practice (Bursa Malaysia, 2012). To a certain extent, this indicates low corporate awareness on CSR and sustainability concepts, and high uncertainty about the potential importance of disclosing CSR information (see Ramdhony and OogarahHanuman, 2012). Such a condition demands local initiatives to improve CSR disclosure (CSRD hereafter) practice in Malaysia. This is because CSRD is an essential component of information that will impact on internal decision-making (Vurro and Perrini, 2011) and useful to manage company’s external relationships (Waddock and Bodwell, 2004). Furthermore, satisfying stakeholders’ explicit and implicit information demands, maintaining their support, while at the same time avoiding threats, would likely improve company’s financial performance (Balabanis et al.,1998). It is therefore interesting to understand whether CSRD structure is a contributing factor to a company’s financial performance. The findings of this study will contribute ideas relating to formulating a strategy for effective CSRD practice with a view to augmenting corporate financial performance, hence sustaining national economic growth. Following that, the aim of this study is twofold: 1) investigate CSRD structure; depth, breadth and concentration; 2) provide insight into how CSRD practice may influence a company’s subsequent year financial performance. 2. Literature review and generation of hypotheses 2.1 CSRD structure Prior studies have confirmed that socially responsible companies clearly exhibited the inclination to provide a high quantity of CSRD, which can be equated with disclosure depth (see Aras et al., 2010; Janggu et al., 2007; Naser et al., 2002). Previously published literature have also found that companies strategize to structure the breadth of stakeholder-related CSR information (Vurro and Perrini, 2011; Oeyono et al., 2011; Saleh et al., 2011). The concentration structure of CSRD signifies the heterogeneity of stakeholders’ demands and illustrates how a company would respond to these conflicting demands, by either endeavoring to commit equal attention to all stakeholder groups or to accord priority to the dominant stakeholders (Roberts, 1992). 2.2 Stakeholder theory, CSRD structure and corporate financial performance Previous studies have used the stakeholder theory as the underpinning theory in understanding management behaviour (e.g. Yusoff and Lehman, 2008; Balabanis et al., 1998; Roberts, 1992). Prevailing literature also have furnished significant evidence on the positive relationship between CSRD structure and future corporate financial performance (e.g. Siregar and Bachtiar, 2010; Teoh et al., 1998), while other studies also found inconsistent results (e.g. Fauzi et al., 2007; Teoh et al., 1998; Belkaoui and Karpik, 1989), which disproves the relationship theory. A company that increased the quantity of CSRD intended for their key stakeholders (Masruki et al., 2012). Naser et al., 2002, found a positive association between financial performance and the depth of CSRD; hence CSRD is deemed as a strategic tool in ensuring the continued existence of the company. The study also found that enhanced positive information about employees would attract the interest of potential employees, as well as improve the goodwill of existing employees. This would then contribute to higher productivity and consequently result in profitable financial outcomes. Therefore, it is hypothesized that: H1:
The higher the depth of CSRD, the higher a company’s financial performance in the subsequent year.
Haslinda Yusoff et al. / Procedia Economics and Finance 7 (2013) 213 – 220
Balabanis et al., 1998, found that a combination of high CSR performance and high disclosure could lead to a positive effect on firms’ overall profitability. The research findings indicate a company’s preference to extend their disclosures, by covering a wide range of stakeholder-related themes, as well as offering up a positive corporate image. This study put forward the idea that, if CSR is viewed as a management strategy focused on improving financial performance, more companies will then be able to expand the scope of their social and environmental responsibilities over a broad set of stakeholders and related issues (disclosure breadth), and thereby enhancing their financial performance. Thus, this study hypothesized that: H 2:
The larger the breadth of CSRD, the higher a company’s financial performance in the subsequent year.
In line with the stakeholder theory, companies should be able to consider the interest of all legitimate stakeholders equally because of their intrinsic value (Donaldson and Preston, 1995) in order to be seen as responsible. Nevertheless, in reality, companies may incline to prioritize some stakeholder claims at the expense of others. For instance, Mitchell et al., 1997, suggest that management should account for stakeholder ‘salience’ or focus on certain stakeholders groups for the survival of the company. Similarly, in this study, concentration was used to mirror such a disproportionate weight of attention to the stakeholders. Pfarrer et al., 2008, indicate that disproportionate attention to more definitive stakeholder groups could help the company to gain legitimacy thus gaining better financial performance. Therefore, it is hypothesized that: H 3:
The more concentration in the dissemination of CSRD to definitive stakeholders, the higher the company’s performance in the subsequent year.
3. Methodology This study focused on a sample of the leading 30 companies listed on Bursa Malaysia based on their market capitalization as at 31 December 2009. Company data obtained for the two years (2009 and 2010), yielded a final sample size of 60 company-year observations. All data were gathered from the respective corporate annual reports. Corporate financial performance was used as a dependent variable for this study to reflect the monetary benefits a company could potentially gain as a result of their CSRD practices (also Aras et al., 2010; Fauzi et al., 2007). The proxy used to represent corporate financial performance encompasses the sum of relevant accounting-based measures i.e. return on assets (ROA), return on equity (ROE) and return on sales (ROS) (also Orlitzky et al., 2003; Teoh et al., 1998). The data had been gathered from DataStream online for the period 2010 – 2011. The one year lapse between the dependent and independent variables was designed to assess the impact of the company’s CSRD structure on the subsequent year’s financial performance. The related measurement approach and formulas for the study variables are as elaborated in Table 1.
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Table 1: Measurement approach for study variables Definition Measurement Return on assets (ROA), return on Dependent variable: equity (ROE), return on sales Corporate financial performance (ROS). Independent variables: Sentence count as a unit of 1. CSRD depth analysis and converted into weighted index. (volume of CSRD presented by company i at time t)
Formula DV= ROA + ROE + ROS
Disclosure depth index
¦
m i 1
stk jit
¦ stk ¦ ¦ stk n i 1
m j 1
jit
n i
, jit
where stkji
= number of sentences disclosed by company i for stakeholder j at time t m = the number of stakeholders included in the analysis (i.e. the eight stakeholder groups) n = the number of companies under review
2.
CSRD breadth (diversity of stakeholder-related themes covered by company i at time t to represent the quality of CSRD from stakeholders’ perspectives)
3.
CSRD concentration (measuring emphasis of disclosure to a selected group of influential stakeholders)
The existence and non-existence of specific stakeholder-related themes
e.g. if company i satisfied seven themes for human resources, four out of seven themes for shareholders, and six themes fulfilled for customers, the disclosure breadth score is equal to: (7/14 + 4/7 + 6/7)
Gini coefficient was applied in which data relating to disclosure depth in all stakeholders level was used.
Gini coefficient
1§ 2 · ¨ ¸ y1 2 y 2 .... mym m ¨© m 2 y ¸¹ where y1 … ym
= a sequence of disclosure levels for the stakeholders covered by company i in decreasing order of size ȳ = the mean disclosure level for each stakeholder in firm i m = the number of stakeholder groups included in the analysis
Control variable: Size of company
Market capitalization
4. Analysis and results 4.1 Descriptive statistics Table 2 displays the descriptive statistics of the variables. This study found that the greater the CSRD depth, the more pronounced the quantity of CSR information disclosed (mean score of 244.49). With respect of CSRD breadth, the results suggest that companies in Malaysia were able to expand their CSRD,
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encompassing 59.13 per cent of the stakeholder-related themes and attaining a mean score of 4.73/8.0. The CSRD concentration score, meanwhile, suggests that companies in Malaysia tend to practice a concentrated structure of CSRD, as reflected by the mean score of 0.77. According to the Gini coefficient, CSRD concentration will only range from zero to 1; whereby a zero score corresponds with perfect equality, meaning that a company has distributed an equal number of CSRD to every stakeholder and a score of 1 corresponds with perfect inequality, signifying a disclosure of a large volume of CSRD to a lesser number of stakeholder groups (concentrated structure). Table 2. Descriptive statistics Variables Corporate financial performance CSRD depth CSRD breadth CSRD concentration Size of company (millions)
Mean 0.44 244.49 4.73 0.77 18.93
Minimum -0.01 76.24 2.64 0.63 1.54
Maximum 3.17 559.21 7.38 0.84 68.30
Std. Deviation 0.52 133.18 1.00 0.04 17.60
Prior to conducting the multiple regression analysis, it was vital to ensure that all initial assumptions were complies with. At first, there exists a violation of normality for the variable relating to corporate financial performance as the skewness and kurtosis values were not within the acceptable range i.e. +/- 1.96 for skewness and +/- 2 for kurtosis (see Abdul Rahman and Mohamad Ali, 2006). Corrective measures were subsequently adopted in which the outliers were removed, resulting in only 57 cases studied. Additionally, relevant tests were then carried out to examine the probable existence of multicollinearity. As a result of the above, the degree of multicollinearity of the study variables was found to be acceptable †; with all tolerance values shown to be higher than 0.194, whereas the VIF values were lower than 5.154 (refer to Table 3). Table 3. Multicollinearity test: Tolerance and Variance Inflation Factor (VIF) Variable Market capitalization CSR Disclosure depth CSR Disclosure breadth CSR Disclosure concentration
Tolerance
VIF
0.472 0.194 0.198 0.276
2.119 5.154 5.038 3.617
N = 60
4.2 The influence of CSRD structure on companies’ financial performance A multiple regression analysis was then performed to investigate the relationship between CSRD structures and corporate financial performance in Malaysia. The regression model used is as follows: CFP = β0 + β1(CSRD_depth) + β2(CSRD_breadth) + β3(CSRD_concentration) + β4 (SIZE) + εt where: CFP CSRD_depth CSRD_breadth
†
= corporate financial performance, = CSRD depth index, = CSRD breadth,
According to Field, 2009, multicollinearity is expected to exist when tolerance is less than 0.1 and VIF is greater than 10.
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CSRD_concentration SIZE εt
= CSRD concentration, = size of company = error
The results achieved in Table 4 indicate significant positive relationship between CSRD breadth and subsequent CFP. Such a finding is in line with the stakeholder theory which suggests that when a company is perceived to be proficient in managing their stakeholders’ related issues, the level of loyalty among the stakeholders will facilitate the growth in sales, thus leading to higher profitability. Similarly, the significant positive relationship between CSRD concentration and subsequent corporate financial performance indicate that, an increased concentration on definitive‡ stakeholders will lead to greater financial performance in the subsequent year. The results also imply that an increase in the sentence relating to CSR information may lead to a decrease in company’s profitability. Company size was found to yield a positive and significant influence on a company’s subsequent year’s financial performance. Table 4. Multiple regression results Dependent variable: Corporate financial performance (CFP) R Square = 0.197, Adjusted R² = 0.135, F = 3.189, Sig. = 0.02 Variables
Coefficient (Beta)
t-statistics
P-value
(Constant) 0.340 0.000 CSRD depth -0.875 -3.101 0.003*** CSRD breadth 0.621 2.228 0.030** CSRD concentration 0.701 2.965 0.005*** SIZE 0.361 1.995 0.051* Notes: ***Significant at 0.01 level, ** Significant at 0.05 level, *Significant at 0.1 level
VIF
Tolerance
0.194 0.198 0.276 0.472
5.154 5.038 3.617 2.119
4.3 The strength of CSRD structure in influencing corporate financial performance This study then further extended its objective to investigate the strength of each CSRD structure in influencing corporate financial performance. In this regard, analysis on partial correlation was counted on to provide evidence to support or disprove the three predicted hypotheses. Accordingly, the said analysis was undertaken and the results are as shown in Table 5.
Table 5. Partial correlation analysis CSRD depth
‡
CSRD breadth
CSRD concentration
Control variables: SIZE Corporate financial performance (CFP)
-.239
-.175
.216
Control variables: SIZE and others Corporate financial performance (CFP)
-.395**
.295*
.380**
Pfarrer et al., 2008, stated that definitive stakeholders are those who possessed the power, legitimacy and urgency claims against the company.
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Notes: Ns = not significant (p >.05), *p < .05, **p < .01, ***p < .001, (1-tailed)
The results outlined in Table 5 confirm that there is a low, negative and partial correlation between CSRD depth and CFP when SIZE, CSRD breadth, CSRD concentration are controlled. CSRD depth will highly influence CFP in a negative way if other variables do not exist. Hence, Hypothesis 1 is rejected. On the other hand, Hypothesis 2 is accepted, as evidenced by the minimal, positive and partial correlation between CSRD breadth and CFP, when the effects of SIZE, CSRD depth, CSRD concentration were controlled. In summary, disclosure breadth alone could strongly influence the financial performance in a positive direction without the presence of CSRD depth and CSRD concentration and SIZE. Finally, to top it all up, there is also a low, positive and partial correlation between disclosure concentration on definitive stakeholders and the company’s subsequent financial performance. Therefore, Hypothesis 3 cannot be rejected. 5. Discussion and conclusions The empirical evidence gathered in the course of undertaking this study, suggest the formation of the building blocks to further evaluate the link between CSRD structure and corporate financial performance. The results indicated that efficient financial performers were those who increased the breadth of their CSRD in which they enhanced the coverage of disclosure to multiple stakeholders as well as those who provided higher concentration to the definitive stakeholders. Greater concentration on the definitive stakeholder groups could expedite the revitalizing of a company’s legitimacy and consequently increasing its financial performance. By proficiently managing the interests of more stakeholders, a company would be seen as being more socially responsible. As a result, it would gain better support from stakeholders thereby deriving uplift in the company’s financial performance. The overall concept of the current study is consistent with the stakeholder theory which underpins its theoretical framework (CSRD–corporate financial performance) (see Fauzi et al., 2007; Waddock and Graves, 1997). The study findings also suggest that the stakeholder theory is a relevant premise in the attempt of understanding the relationship between CSRD structure and corporate financial performance (e.g. Aras et al., 2010; Ramasamy et al., 2007) in Malaysia. In light of the findings that have been discovered earlier, two significant implications can be observed. Firstly, this study offers a new methodological perspective relating to a finer-grained analysis on CSR disclosure structures and practices. Secondly, this study provides positive insights into an improved CSR related disclosure framework, in which related regulatory bodies such as Bursa Malaysia and other public/private sector organizations can benefit in developing future reporting policies. Acknowledgement The researchers would like to thank the Ministry of Higher Education Malaysia (MOHE) and Universiti Teknologi MARA for the research grant received. References Abdul Rahman, R., & Mohamed Ali, F. (2006). Board, audit committee, culture and earnings management: Malaysian evidence. Managerial Auditing Journal, 21(7), 783-804. Aras, G., Aybars, A., Kutlu, O., 2010. Managing Corporate Performance: Investigating the Relationship between Corporate Social Responsibility and Financial Performance in Emerging Markets. International Journal of Productivity and Performance Management, 59(3), p. 229-254. Balabanis, G., Phillips, H. C., Lyall, J., 1998. Corporate Social Responsibility and Economic Performance in the Top British Companies: Are They Linked?. European Business Review, 98(1), p. 25-44.
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