Social Corporate Reporting

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The impact of governmentand foreign affiliate influenceon corporate social reporting

The case of Malaysia

Azlan AmranSchool of Management, University Science Malaysia, Penang, Malaysia, and

S. Susela DeviFaculty of Business and Accountancy, University of Malaya,

Kuala Lumpur, Malaysia

AbstractPurpose This paper seeks to investigate the influence of government and foreign affiliates,particularly; multinational companies on corporate social reporting (CSR) development in an economy,where CSR awareness is low coupled with weak pressure group activism.

Design/methodology/approach This is a cross sectional study that focuses on the informationcontained in the annual reports for year 2002/2003. This research uses content analysis as method tomeasure the extent CSR.

Findings Based on regression analysis, the study evidences on the impact of government influence.However, the impact of foreign affiliation variables is not evident. Institutionalisation of thegovernments aspirations and commitment to CSR is perhaps the most appropriate description forMalaysian CSR practice.

Research limitations/implications There are two main limitations of this study. Firstly, thisstudy examines the annual reports for one year. Secondly, this study is annual reports centric. It doesnot examine any other stand alone reports that the respondents might have produced on the subject ofsociety and the environment.

Practical implications This study provides justification for governments role in promoting CSRpractice. The impact is evidenced although there are no direct concerted efforts at that time by thegovernment in respect of CSR policy implementation. The significant role is attributed to the uniqueMalaysian socio economic structure.

Originality/value Thisstudycontributesto the CSR literature particularlyin thecontextof economieswhere governments play a significant role in promoting economic development. It provides empiricalevidence of theinfluence of government and foreignaffiliates. It also addsto the literatureby explainingthephenomenon from the Institutional perspective and its relevance to a developing economy.

Keywords Corporate social responsibility, Government, Influence, Malaysia

Paper type Research paper

IntroductionRecent surveys (KPMG, 2002; ACCA, 2002) conducted in relation to corporate socialreporting (CSR) practices of Malaysian companies indicate a rising trend in the numberof companies that choose to disclose non financial indicators in their annual reports. Oflate, this phenomenon is linked to the push for sustainable development. Despite thevarious reports on this trend (ACCA, 2002; Thompson and Zakaria, 2004), few studieshave dwelt on into the underlying factors of such a development, particularly the

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impact and role of the government and foreign affiliates[1] (Haniffa and Cooke, 2002;Thompson and Zakaria, 2004; Che Zuriana et al., 2001).

It is still unclear as to what really motivates Malaysian companies to disclose socialand environmental information, given the low public awareness of such issues and

demand for related information (Amran, 2006). Some studies pin the enhancedreporting to the need by Malaysian companies to keep abreast with the latest reportingpractices of multi national companies (MNCs) that operate in Malaysia (Zain, 1999;Amran and Susela, 2004) or the foreign affiliates. Studies of companies in moredeveloped countries suggest that corporate image enhancement is the main motivatingfactor for companies adoption of CSR (Neu et al., 1998; ODywer, 2002, 2003; Adams,2002). In all of these studies, however, scant regard is given to the significance ofgovernment actions and policies on CSR beyond the casual remarks on the extent of itscommitment (Thompson and Zakaria, 2004).

Hitherto, the theories used to explain the underpinning factors of Malaysian CSRoriginate mainly from the west where the awareness and demand for CSR is high.These theories may not be reflective of the Malaysian context where the awareness isstill in its infancy stage (Thompson, 2003). Recognizing this inadequacy, InstitutionalTheory is used as a means of explaining the Malaysian CSR experience. Although theimportance of this theory has increasingly gained recognition (Kolk, 2005; Rowe, 2005),only a limited number of publications has thus far focused on country specificinstitutional factors.

This paper specifically investigates the influence of the government and foreignaffiliates, particularly MNCs, on the development of CSR in Malaysia. It considers thebackground of the Malaysian environment in order to provide the justifications for therole of the government and foreign affiliates. It then explains the influence exerted bythese two variables from the perspective of institutional theory. It examines the twovariables using data from sampled Malaysian companies. This study demonstrates

that institutional theory is an appropriate framework to explain CSR in the context of adeveloping country.The discussion in this paper is organized as follows: the first section discusses the

background of Malaysia and the extant CSR literature, particularly that relating toMalaysia. The second section introduces the theoretical framework and developshypotheses for empirical investigation. The third section outlines the researchmethodology and the fourth section discusses the findings. The final section concludeswith the observation that in the context of developing countries, like Malaysia, thegovernments role in CSR cannot be discounted.

The Malaysian environmentMalaysia is a multi racial country where the main ethnic groups consist of the

Bumiputras[2] (65.8 per cent), Chinese (25.7 per cent) and Indians (7.5 per cent) (www.statistics.gov.my, as at 2006) (Department of Statistics, 2005). Malaysia is unique in thesense that it has successfully transformed itself into a country that capitalizes on itsmultiracial harmony (Norhashim and Aziz, 2005). Malaysias unique history is the result ofmore than 400 years of colonial rule since 1511, starting with the Portuguese and followedby others, including the Dutch, British and Japanese. Malaysia gained its independencefrom the British in 1957. British colonization is a significant contributory factorin shapingthe present Malaysian social, political and economic climate (Siwar and Hasan, 2002).

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It is claimed that British short-sightedness and economic self-centeredness havegreatly defined Malaysias current economic structure. The British pre-independencesegregation policy in identifying the three main ethnic groups along economic sectorshas resulted in economic disparities between the Malay community (the natives) and the

Chinese. The climax ensuing from this policy were the racial riots in 1969, which led tothe formulation of the New Economic Policy (NEP). This policy was aimed at addressingand redressing Malay economic backwardness (Razali, 1999). A study conducted in 1977revealed that the ownership and control of Malaysian companies was primarily byindividuals or families of Chinese and European descent (Lim, 1981). The NEP becamethe fundamental basis of Malaysian economic and social development planning for morethan two decades until it was replaced by the New Development Policy (NDP) in 1990.This new policy was, in many ways, an extension of the NEP and was aimed at achievinga more united and just society through more balanced development. It also meantputting the Malays at the top of the agenda (Razali, 1999). The policies that were put inplace to achieve the NEP objectives had brought about diverse implications.

The NEP agenda in upgrading the Malay and Bumiputra economic status hadgranted them access to contracts, licenses, import permits and shares. They were alsogranted public funds from government backed agencies. TheBumiputras were involvedin start up projects to exploit state owned resources, with the government as thefinancial partner. Later in 1983, in an effort to reduce the heavy financial burden of thestate, government departments or projects were transformed into Malay dominatedgiant private companies. These companies, called government-linked companies(GLCs), are currently listed on the Malaysia exchange and have become large companiesin terms of market capitalization. However, they are highly dependent on thegovernment in terms of jobs, market protection and financial support. In some instances,the government holds significant shareholdings in these companies. The spill-over effectof the NEP is felt by the other ethnic groups in varying degrees. The Chinese possess

abundant financial resources and are skilful in entrepreneurship. They thus havebecome the unofficial and official business partners to the Malays.At the beginning of the NEP implementation, government officials were not clear as to

how to implement its objectives in achieving the Malay agenda. Access to economicopportunities was given rather indiscriminately at first and this resulted in businessventure failures. Later, the granting of licenses, permits and contracts was given toprominent and politically-heeled Malays, since the involvement of Malays in business hadbeen practically non-existent (Norhashim and Aziz, 2005). These Malays were perceivedas well educated and possessing strong leadership qualities. It was also assumed that thebenefits from these hand-outs would somehow trickle down to the Malay masses. Eventhough there is no strong evidence to suggest that political power was wielded freely in thesecuring of contracts or jobs, it would be nave to think that such a wielding of power could

not have happened (Norhashim and Aziz, 2005). After all, it was a norm to invite apolitician to officiate at a companys function or ceremony. Gaining a politicians trust andbeing a favorite was perceived as the key in ensuring a companys survival.

Economic developmentIn terms of economic development, Malaysia had been involved withinternational trade since the early days of her independence. Malaysia started outas a primary exporter of commodities, such as rubber and tin, and then moved on to

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industrialization by manufacturing light manufactured goods (Siddiquee, 2006). In theearly 1980 s, a major policy change occurred when the new government, headed byDr Mahathir Mohamed, opted for heavy industrialization. This was done throughpartnerships with foreign partners and the inflow of foreign direct investments (FDIs).

Henceforth, Malaysian economic development boomed to become one of the fastestgrowing economies in Southeast Asia. The involvement of foreign affiliates innurturing the Malaysian economy is significant. Malaysias success in attracting FDIlies in her ability to create a favorable business climate for foreign investors one withexcellent infrastructure and a hassle-free policy regime (Naik, 2002). Malaysia haseverything an investor could want: strong government policies that ensure politicaland economic stability; abundant skilled and semi skilled labor force to ensureproductivity; and sound infrastructure for business.

The above policy indicates a strong connection between Malaysia and foreigninstitutions. A high dependency on foreign economic networks requires Malaysiancompanies to follow global business trends, and CSR is one of them. Companies thathave foreign affiliates from more developed countries like Japan, the USA and the UKwould be institutionalized by the business practices of these affiliates.

The above discussion suggests that Malaysias economic dependency on foreignaffiliates as well as the active participation of the government in directing economicdevelopment may provide a plausible explanation of CSR development in the country.

CSR in MalaysiaOne of the earliest studies on the development of CSR in Malaysia was carried out byTeoh and Thong (1984). This study examined various aspects of corporate socialperformance, including social reporting. The authors surmised that companies weremainly involved in areas of human resource, product service, community work and thephysical environment. Human resource related activities topped the list of social

involvement by the companies surveyed.An interesting finding from the 1984 study was the mismatch between the level of

actual corporate social involvement and the reporting of such activities. In the case ofprivate companies, this mismatch was attributed to the limited circulation of theannual reports. For public companies, disclosures of their social involvement weremade in the form of passing references in the Chairmans statements, since annualreports were traditionally kept very brief. Based on these revelations, the researchersconcluded that Malaysian companies were, on the whole, rather conservative in theirattitudes towards CSR (Teoh and Thong, 1984). Later studies focused on the level ofreporting, the themes, and the type of news disclosed. As late as the closing years of thetwentieth century, CSR practices of Malaysian companies were still very low(Shireenjit and Zuani, 1998). The situation however, started to improve in early 2000

(Thompson and Zakaria, 2004; Zakaria, 2002).The early studies offered some plausible explanations for the low disclosure.

Among others, the absence of legislation on the matter (Teoh and Thong, 1984,Nik Ahmad and Sulaiman, 2004) and the low level of awareness of the businesscommunity of their companies potential environmental impact (Perry and Teng, 1998)were mentioned. Subsequent studies found Malaysian CSR as being mostlydeclarative, narrative in nature and mere references to general commitments (NikAhmad and Sulaiman, 2004; Thompson and Zakaria, 2004). In terms of the themes,


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human resources topped the list of disclosed items that include social, environmental,and product responsibility. Some studies further investigated CSR in relation to firmcharacteristics, and found that such characteristics as size, industry and profitability(Andrew et al., 1989; Thompson and Zakaria, 2004) were significant.

Although the literature points to an increasing CSR trend, the motivations behind suchdisclosures are seldomclear. Studies in the developed countries indicate that an increase inCSR over time can be attributed to legislation, demands of ethical investors and pressuregroups, specific events, awards, economic activities, media interest, societal awarenessand politics (Deegan, 2002). In the Malaysian context, the drivers of CSR are increasinglybeing investigated (Zain, 1999; ACCA, 2002; Haniffa and Cooke, 2002; Amran and Susela,2004). Zains (1999) study was based on interviews with local managers. The studyhighlighted the motivation for their disclosures as being linked to government influence, adesire to follow latest trends and also a commitment to Vision 2020[3].

Haniffa and Cooke (2002) explored the influence of culture and corporategovernance structure on CSR. On corporate governance structure, the study found thatcompanies with more family members on the board disclosed less. In addition,companies with independent non-executive directors tend to disclose less as comparedto companies with executive directors as chairpersons. As far as the cultural dimensionis concerned, the study did not establish any significant relationships, but found someevidence of foreign influence through foreign shareholding. In a more recent study bySumiani et al. (2007), it was found that companies with ISO 14000 certification tend tomake some form of disclosure.

It is evident from the above published research studies that the impact of thegovernment and foreign affiliations on CSR have been largely ignored. This studyextends the Malaysian CSR literature to examine the influence of government andforeign affiliations, given the unique socio-economic and political nature of theMalaysian environment.

Theoretical framework: institutional theoryMany of the early studies employed social and political theory, particularly legitimacytheory in explaining CSR. It is not easy to find the most appropriate theory (Tilling,2001) to explain a phenomenon and the literature on CSR reveals a lack of consensus onwhat constitutes an appropriate theory to explain it. Adams (2002) concluded that priorstudies had either provided support for or rejected one or more of the theories and thatno one theory was consistently supported or refuted.

In this study, institutional theory is used as the explanatory theory. It provides arelatively similar explanation to legitimacy theory albeit from a different perspective.Suchman (1995) and Milne and Patten (2002) suggested that the process of legitimationis not only strategic but also institutional in nature. Proponents of Institutionalism

depict legitimacy as the result of congruency between the organization and its culturalenvironment but they tend to focus more on the cognitive rather than the evaluativeside. The institutionalists assume legitimacy not as an operational resource but a set ofconstitutive beliefs (Suchman, 1995). It is the external institutions that construct andinterpenetrate the organization in every respect (Suchman, 1995). It is the strength ofinstitutional theory that provides the reasoning for the phenomenon of the alarminghomogeneity of organizational forms and practices in one particular environment(Dimaggio and Powell, 1983).

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In order to understand how the environment could force one unit of the populationwhich shares the same environment with another to resemble each other, the process ofisomorphism is described. According to DiMaggio and Powel (1983) there are twotypes of isomorphism: competitive and institutional. Competitive isomorphism

emphasizes market competition, niche changes and fitness measurements. This view isrelevant to an open and competitive field. In the highly competitive market,organizations make decisions by taking into account other responses. The second typeof isomorphism is useful in understanding the politics and ceremony that influencemodern organizational life. Organizations compete not just because of resources orcustomers but also for political power and institutional legitimacy, and for social aswell as economic purposes (Dimaggio and Powell, 1983).

Isomorphism can be achieved through three distinct mechanisms. The firstmechanism, called coercive isomorphism, basically originates from political influence,regulation, law and the public at large. It is a result of both formal and informalpressures exerted by other organizations which the particular organization isdependent on. The pressures may be in the form of forces, persuasions or invitations to

join the collusion. The second, mimetic isomorphism, results from uncertainty withinthe environment. When the environment creates an uncertain situation where there isno proper reference or guideline, an organization will model itself on other successfulorganizations (Dimaggio and Powell, 1983). In this case, the modeled organization maynot be fully aware of the impact of its own actions on other organizations. It serves as aconvenient source of practice that followers may use. The third and last source oforganizational isomorphism is normative pressure. Dimaggio and Powell (1983) statedthat normative pressure stems from professionalisation. It is observed thatprofessionalisation has two important factors that lead to isomorphism. These areeducation and professional networks. Universities and training centers are animportant place for the development of the normative pressure. Additionally,

professional associations play an important role in providing continuous knowledgeand creating some form of normative pressure on the professionals. The whole conceptof Institutional theory was utilized in developing the hypotheses.

Hypotheses developmentThe government of Malaysia may be viewed as being sensitized to the needs of CSR(Amran, 2006). The initiative taken by Malaysia in response to Agenda 21[4] in its owndevelopment planning and monitoring systems, namely the five yearly Malaysiadevelopments plans and the longer term outline perspective plans, is evident (Hasanand Adnan, 2002). The Vision 2020targets see Malaysia as a fully developed countrywith emphasis on environmental sustainability (Mahyuddin and Rao, 2003).

GLCs are companies that used to be part of government departments, which were

later made private under the privatization policy. Most of these companies deal withstrategic interests such as energy and telecommunications and have governmentappointed directors represented on the boards. With the change in status, thesecompanies have increasingly focused on profits as their primary objective at the expenseof social and community concerns. With the advent of social and environmentalawareness and the ensuing pressure brought to bear by many groups globally, includingforeign investors, the government of Malaysia, which depends heavily on FDIs for thedevelopment of many of its economic programs, has reiterated its willingness to comply


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to certain social and environmental expectations. These expectations are then relayeddown to the government owned companies as well.

The appointed directors of these companies, being custodians for the government,need to align the decisions of the companies with the aspirations of the government.

Being in sync with the government is important for their survival. Through theiractions, the dynamics of field coercion come into play. These same companies, byvirtue of government connection, are also politically visible. This means that they areexposed to scrutiny not only by the government but also by other interested parties.Thus, based on the above argument, the following alternative forms of hypotheses aredeveloped:

H1. Ceteris paribus, there is a positive association between a company that has ahigh proportion of government shareholding and CSR.

Some companies have excelled over the years as a result of the NEP policy a policydrawn to reduce income disparities between the various races. The growth of thesecompanies, particularly in the early stages of operations, was aided by the government.Even though such direct patronage has since reduced, these companies are still verymuch dependent on government contracts and projects for their survival.

Companies that depend on the government for contracts and projects may beinstitutionalized by the governments aspirations and beliefs (Dimaggio and Powell,1983). In order to ensure their long-term survival, it may well be argued that thesecompanies engage in CSR in order to make them appear legitimate and appealing to thegovernment. Dependence here, however, does not imply a complete and permanentdependence but rather it shows the importance of the government as a major purchaseror client of the company. This is to ensure the long-term viability of the company:

H2. Ceteris paribus, there is a positive association between a company that isdependent on government contracts and CSR.

The growth of the Malaysian economy is highly dependent on FDI, and this createspressure on the Malaysian companies to consider CSR. Most of the top investors comefrom developed countries such as the USA and the UK which place a high priority onsustainable development. These MNCs are pressured by the market to comply withCSR standards in the countries that they operate (Utting, 2002). As a consequence,many Malaysian companies end up emulating the culture adopted by the MNCs intheir operations.

The global emphasis on sustainable development has put Malaysia as a place toconsider for investment by global business partners. In order to ensure a consistentflow of FDIs, Malaysia needs to seriously consider this matter. For Malaysiancompanies to operate abroad, they have to follow this trend. High dependency on wide

and foreign economic networks requires corporations to follow trends, strategize theirbusiness plans and policies, and ensure such information is communicated to thestakeholders. With social and environmental issues being one of the most urgent globalissues, Malaysia will not be able to avoid them. In fact, responding adequately to thetrend may even assist Malaysia to penetrate cross border markets.

From the institutional theory perspective, foreign associates or business partners(referred collectively in this paper as affiliates) are critical. In order to ensure thatthe local companies draw more investments as well as to make the investors stay,

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the companies tend to meet the expectations of foreign investors, specifically, theinvestors perception of environmental and social issues. This is to ensure their longrun survival prospects (Dimaggio and Powell, 1983). Malaysian companiescommunicate to their investors on how they feel about environmental and social

issues and the extent of their involvement in order to legitimize their existence in theeyes of the investors. Even though the information in the annual reports is seldomcurrent, it nevertheless informs the investors of the history of the companys activitiesfor one accounting period. This annual communication of information may beperceived as a means to attract foreign investors as well as to please current investors:

H3. Ceteris paribus, there is a positive association between a company that has ahigh proportion of foreign shareholders and CSR.

In the case of companies with business associates from overseas, such as the USA andJapan, where the awareness of CSR is high, it is expected that they will beinstitutionalized by their associates culture. This could happen as the businesspartners are powerful actors. Thompson (2003) explained the disproportionately largernumber of Malaysian companies with ISO 14001[5] as indicative of how foreignbusiness associates influence local companies. Thompson (2003) clarified that thehigher numbers are due to a pre-requirement of foreign multi-corporations for doingbusiness with them. The Malaysian companies are generally dependent on theseforeign multi-corporations in terms of product market and technological assistance.Obviously there is some sort of coercive pressure, if not mimetic, for local companies toseriously embark on CSR. Thus, mutual understanding in all aspects of businessoperation with the foreign counterparts would be a wise strategy. This includes thepractice of CSR:

H4. Ceteris paribus, there is a positive association between a company that hasforeign business associates (affiliates) and CSR.

Control variablesSize. Several empirical studies provide evidence of the association between companysize and corporate social disclosures (Belkaoui, 1999; Cowen et al., 1987; Patten, 1991,1992; Hackston and Milne, 1996). However, some studies also fail to prove theassociation (Roberts, 1992). Studies in the Malaysian context, for example, Teoh andThong (1984) and Thompson and Zakaria (2004), found that there is an associationbetween size and CSR disclosure. Larger firms normally undertake more activities,have a greater impact on society, possess a larger number of shareholders, receivemore attention from the general public and therefore, are under greater pressure toexhibit social responsibility (Cowen et al., 1987):

H5. Ceteris paribus, there is a positive association between size and CSR.

Profitability. The institutionalists suggest that financially strong companies are morelikely to be institutionalized by external pressures (Oliver, 1991). In the Malaysiancontext, the results produced by Zakaria (2002) do not support this contention. Therationale that is normally used to support this contention is that a company that makesmore profit could afford to be more active in CSR (Amran, 2006). Therefore, thefollowing hypothesis is developed:


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H6. Ceteris paribus, there is a positive association between previous year profitand CSR.

Industry affiliation. Practice is seen to be diffused by the concept of modeling. The

institutionalists posit that organizations tend to model themselves after similarorganizations that they perceive to be more successful (Dimaggio and Powell, 1983).Prior literature has also shown that industry affiliation significantlyinfluences CSR(Patten,1991; Hackston and Milne, 1996). In the Malaysian context, there is significant relationshipbetween these two factors (Zakaria, 2002). Therefore,the following hypothesis is developed:

H7. Ceteris paribus, there is a positive association between industry membershipand CSR.

Research designUnit of analysisThe unit of analysis is the annual reports for the year 2002/2003 of companies listed on

Bursa Malaysia[6]. The prime source is the companys annual report itself. This isconsistent with prior CSR research (Hackston and Milne, 1996; Haron et al., 2006;Zakaria, 2002). Annual reports are regarded as the main form of companycommunication (Zeghal and Ahmed, 1990; Haron et al., 2006).

Sampling design and data collectionFor this study, stratified random sampling technique is used to obtain a sample of publiclisted companies on the Bursa Malaysia by sectors. Each sector represents a particularindustry as classified by the Bursa Malaysia and, wherever necessary, some sectors arecombined due to small observations (Zakaria, 2002). Consequently, a total of seven sectorsemerged and used, namely: consumer product, industrial product, construction/infrastructure project companies, trading and services/technology, finance, property/

hotel and plantation/mining. This sampling technique permits a better understanding ofthe companies practices within the various sectors in the Bursa Malaysia. The focus is noton the top companies as done by previous researchers (Hackston and Milne, 1996) butincludes small and medium companies as well. Based on preliminary observation, many ofthese companies are subjected to external institutional factors too, hence the mixed groupof samples. Furthermore, by segregating the companies by sectors, this will ensure that allindustries are included. A final list of sectors is as per Table I.

CSR as a dependent variableContent analysis is used to measure the corporate social responsibilitydisclosures. Content analysis is commonly used in assessing corporate socialresponsibility disclosures (Ernst and Ernst, 1976; Guthrie and Parker, 1990; Hackstonand Milne, 1996; Gray et al.,1995a; Haniffa and Cooke, 2002; Raar, 2002; Zakaria, 2002).In order to ensure replicability, the instrument developed by Hackston and Milne(1996)[7] is utilized. This instrument provides a reliable set of procedures to measurethe disclosure of CSR and also to allow comparability with other research studies.

Several reasons led to the decision to use the Hackston and Milne instrument.Firstly, the Hackston and Milne (1996) technique was developed based on establishedwork including Guthrie and Parker (1990) and Ernst and Ernst (1976). The instrumentwas specifically developed to assess CSR. Hence, this ensures comparability with

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previous studies. Krippendorf (1980) stated that one of the main principles of contentanalysis is that they should meet a test that suggests that they are objective,

systematic and reliable. The technique used by Hackston and Milne (1996) has gonethrough a rigorous reliability testing by Milne and Adler (1999) who concluded that theinstrument is suitable for novice and less experienced coders.

Gray et al. (1995b) raised a concern on the unit of analysis for the amount ofdisclosure. Milne and Adler (1999, p. 242) noted that in the social and environmentaldisclosure studies much of the discussion on the unit analysis confuses the issues ofwhat should form the basis for coding with what should form the basis for measuringor counting the amount of disclosure. It is clear that these two are not the same. Manyresearchers focus on how they count or measure and less on how the unit of analysisforms the basis for their coding decisions. Milne and Adler (1999) proposed the use ofsentence as a more reliable basis for coding than other units of analysis. Further,although most of the studies use sentences for coding, the use of word or area of page

(e.g. tenths or one hundredths) to measure the disclosure amount is common. Usingword or areas of page as a basis to measure social and environmental disclosures,however, complicates reliability. Milne and Adler (1999) noted that words bythemselves do not bring any meaning without referring to the sentence and its context.It is difficult to decide which words are considered social or environmental disclosure.

Likewise, using a plastic grid sheet over a body of text and trying to code thecontents of each square would also result in meaningless measures. This method mayhave the advantage of including charts or graphs into the analysis but it is alsoexposed to lots of noise introduced when unnecessary pictures or different fonts,columns or page sizes are used in the annual report. There is inconsistency in themethodology applied. Research that uses word and plastic grid, for example, mightfind the same difficulties in classification as encountered by research that only uses

plastic grid. It is only when references are made to sentences that the real meaning canbe derived for appropriate classification. Previously, Hackston and Milne (1996)attempted the use of all three measures and found that they produced results thatshowed significant correlation with the independent variables.

Hence, based on the above argument, it appears that using sentences as a basis tocode and count the content of CSR could serve the purpose of this study. Further analysisby Milne and Adler (1999) had also suggested that using sentences for both codingand measurement seems likely to provide complete, reliable and meaningful data.

Main board Second board

Industry membershipTotal listedcompanies Sample Percentage

Total listedcompanies Sample Percentage

Industrial 130 27 20.77 128 32 25Consumer products 74 14 18.92 52 13 25Construction andinfrastructure 49 12 24.49 16 4 25Trading and technology 135 36 26.67 55 15 27.3Property and hotel 96 23 23.96 2 2 100Finance 58 11 18.96 0 0 0Plantation and mining 42 10 23.81 4 2 50Total 584 133 22.77 257 68 26.46

Table I.Demography of the

respondents


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Sentences also have natural unit of narratives that are separated by punctuation marks(Elijido-Ten, 2004). Thus, sentences overcome the weakness posed by words and pagemeasurement methods. However, using sentences as the unit of analysis also has itsweakness. It omits graphs, charts or figures which may be equally important as the

narrative. The number of sentences is also subjective in the sense that it is dependent onthe writers differing grammar or writing skills that produce different number ofsentences (Unerman, 2000). To overcome this, Hackston and Milne (1996) proposed theinclusion of decision rules to count tables, figures or charts which are on the checklist.They should be interpreted as one line equals to one sentence. Based on the abovediscussion and to provide comparability with other studies, in this study sentences areused as the coding and measurement method.

In order to ensure that the collection of data is consistent and free of biasness,previous research suggest the use of an inter-rater or inter-observer reliability index(Tilt, 1997; Deegan and Gordon, 1996). This index measures the correlation of ratingsgiven by different researchers to the same behavior. In this study, five annual reportswere scrutinized by two researchers for consistency. The differences between the

researchers scores were not significant.

Operationalization of variablesTable II summarizes the operationalization of the independent variables tested in thisstudy.

Data analysisMultiple regressions are used in assessing the variability in the extension of CSR. Thisstatistical method had been widely used in the previous research (Hackston and Milne,1998; Cooke, 1998; Haniffa and Cooke,2002). The majority of the variables in this study aremeasured using dummy variables as most of the variables are qualitative in nature.

Gujarati (2003) confirmed that dummy variables can be incorporated in the regressionmodels just as other quantitative variables. The following regression model is developed:

CSR B0 B1FSi B2GSi B3DGi B4DFi B7INDi B8CONi B9CONSTi

B10TTECHi B11FINi B12PLMINi B16SIZEi B17ROAi21 ei

Variables Operationalization Source of information

Foreign shareholders Ratio of foreign shareholding tototal number of shares issued.

Annual report

Government shareholding Ratio of government shareholdingto total number of shares issued.

Annual report

Dependence on government If a company receives majorgovernment project, tender,privatization project, or concession,coded as 1; otherwise 0

Company profile, annual report

Dependence on foreign partner If a company has a foreign partner,coded as 1; otherwise 0.

Company profile, annual report

Industry Industry type, dummy variable Company profileSize Number of employees Annual reportProfitability Prior years ROA Annual report

Table II.Summary of theoperationalization ofindependent variables

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where QLYCSR, total score for quality of CSR; QTYCSR, total quantity of CSR;B0, intercept; FS, percentage of foreign ownership; GS, percentage of governmentownership; DG, 1 if the company is dependent on government tender/project; 0 ifotherwise.; DF 1 if the company is dependent on foreign associate; 0 if otherwise;

IND 1 if the company is in industrial sector; 0 if other wise; CON 1 ifthecompany isin consumer sector; 0 if otherwise; CONST 1 if the company is in construction sector; 0if otherwise; TTECH 1 if the company is in trading and technology sector; 0 ifotherwise; FIN 1 if the company is in finance sector, 0 if otherwise; PLMIN 1 if thecompany is plantation/mining sector, 0 if otherwise; SIZE, total sales (proxy for size); ROA,return on asset (ROA), (proxy for profitability); ei, error terms.

In the process of testing the data, the correlation matrix was reviewed and thevariance inflation factors (VIF) computed in order to detect whether there wasmulticollinearity problem. Further analysis to see whether the multiple regressionsassumptions have been violated was also carried out. The normality, linearity andhomoscedasticity assumptions were determined based on the analysis of residuals,plots of the studentized residuals against predicted values and Q-Q plot.

Test on the untransformed data showed violations of the multiple regressionsassumptions of normality, linearity and homoscedasticity and none onmulticollinearity effects. In order to ensure the rigor of the regression tests, the datawas transformed into normal data. Issues on identifying the appropriate techniques indealing with the accounting disclosure have been discussed by Cooke (1998), Haniffaand Cooke (2002) and Tilling (2004). Cooke (1998) suggested that research on disclosureshould pay attention to the structure of data and to consider the appropriateness oftransformations where necessary.

An alternative technique to solve the above problem is normal scores transformation.The normal scores transformations is derived by dividing the distribution into thenumber of observations plus one region on the basis that each region has equalprobability. This technique is actually the extension of the rank method except that theranks are being substituted by scores on the normal distribution:

For example, if there are six observations the normal distribution would be divided into sevenequal probable parts so that the original values are replaced by normal scores (here 2 1.0676,2 0.5659, 2 0.1800, 0.1800, 0.5659, 1.0676) rather than the ranks 1,2,3, . . .) (Cooke, 1998, p. 214).

Cooke (1998, p. 214) advocated that the main advantage of replacing the ranks bynormal scores is that the resulting test would have exact statistical properties becausesignificance levels can now be determined; Fand T-test are meaningful; and the powerof the Fand T-test may be used. Cooke added that the normal score approach offers ameans whereby a non-normal dependent variable may be transformed into normal.In addition normal scores posses an advantage when there are problems ofmonotonicity and nonlinearity.

The transformed data were then checked to see whether the problems still persisted.The same techniques as above were used and it was noted that the problem had ceased.

Regression resultsResults from the regression analysis using normal scores data are presented inTable III. The regression produced an adjusted R2 of 0.367. This implies that theamount of variability in CSR disclosure, as explained by the variables, is about 36.7 percent, and this is quite large.


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Government shareholding is significant at the one per cent level. The result indicatesthat the higher the government shareholdings the better the CSR disclosure of thecompany. This is consistent with the hypotheses developed earlier, thus thehypotheses is accepted are proved.

Dependence on the government is shown to be significant at the one per cent level.The result strongly supports the hypothesis that a company which is dependent ongovernment tenders and contracts produce better reporting. The coefficient result is0.268, the second highest after size. This indicates that dependence on the governmentcontributes strongly in explaining CSR, when the variance explained by all othervariables in the model is controlled for. This implies that strong governmental pressureis exerted on companies that choose to be affiliated with the government.

Despite the strong belief that foreign affiliate influence will encourage CSR, none ofthe foreign influence variables are found to be significant. The coefficient result forforeign shareholding is 0.000, indicating no contribution to the explanation of CSR.This implies that companies which have foreign shareholdings, like for example, theMNC subsidiaries of BAT (Malaysia) Berhad and Ajinomoto (M) Berhad, do not haveextensive CSR in their annual reports. This revelation is beyond expectation, since it is

expected that the reporting culture of the MNCs would influence those of theirsubsidiaries or associates here in Malaysia. Perhaps, this is due in part to the use by theMNCs of other alternative media rather than the annual reports for CSR purposes.Preliminary observation of this conflict suggests that most of the MNC subsidiaries inMalaysia have separate CSR Reports. Ajinomoto (M) Berhad, for example, hadconsistently produced separate environmental reports each year. This report is aconsolidation for a whole group of companies and is prepared by the Head Office.Other observations show that companies such as BAT (M) Berhad, Shell Malaysia

CSRIndependent variables Coefficient Sig. t-stats VIF

Government share 0.159 0.017 * 2.404 1.385

Dependence on the government 0.268 0.000 * * 4.453 1.142Foreign share 0.000 0.995 20.006 1.380Dependence on a foreign partner 0.020 0.294 0.294 1.417Control variable.Size 0.315 0.000 * * 4.553 1.150Prior profitability (ROE) 0.084 0.176 1.359 1.219

Industry affiliationConsumer 0.056 0.389 0.864 1.331Trading and technology 0.051 0.434 0.786 1.339Finance 0.164 0.009 * * 2.621 1.241Plantation and mining 0.214 0.001 * * 3.527 1.161Property and hotel 20.034 0.585 20.546 1.196Std error 0.7235

F value 11.530Sig F 0.000

R2 0.402Adjusted R2 0.367

Notes: *Significant at 5 per cent level; * *significant at 1 per cent level

Table III.Regression results: CSR

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Refinery Berhad, Ford (M) Sendirian Berhad and Sony Technology (M) SendirianBerhad, publish separate independent reporting on CSR. Future studies should beextended to encompass alternative media, such as independent reports and web sites.

Of the three control variables, the impact of size and industry membership is found

to be significant. The size factor is significant at the one per cent level. This result isexpected and is reminiscent of other local and oversea studies, for example, Zakaria(2002) and Hackston and Milne (1996). It supports H5 which says that biggercompanies normally produce better CSR. The result by industry shows that onlycompanies in finance and plantation and mining sectors are significant at the 1 and5 per cent levels. The result for the plantation sector is expected since this sectoris dominated by big companies and is exposed to environmental issues. The companiesselected from the finance sector are mainly banks and the result shows that banksproduce good CSR after plantation companies. The fact that the finance sectoris heavily regulated and comes under the purview of the Central Bank, may partlyexplain the greater inclination to CSR.

Discussion and conclusionThe aim of this study is examine the impact of government and foreign affiliate influenceon CSR. The discussion of Malaysias social and economic environment demonstratesMalaysias unique situation where there three different main ethnic groups live inharmony. It is shown that the impact of colonisation has greatly shaped the Malaysiansocial, political and economic climate. One of the major impacts of the Britishcolonisation was the economic disparities between major ethnic groups, especiallyamong indigenous peoples that lead to ethnic tension. The government plays a leadingrole in the social engineering and the formulation and the implementation of NEP hasbeen a critical factor. The NEP in many ways influenced the government policy andpractice that favoured indigenous peoples. The rational was to balance up the disparities

between the ethnic groups. These instances had lead to indigenous domination in thepublic sector as well as in the government owned companies. The implementation of theNEP has also influenced the privatisation of government entities and the countrysdevelopment which had encouraged the involvement of indigenous people to participatewhere ample resources were granted to those who were selected. These companiesformed one group in these samples. These are the companies that are highly dependenton the government and are also mostly owned by the government agencies.

The Malaysia economy besides focusing on agriculture also encouraged FDI whichmostly focused on information technology and manufacturing industry. Many of theMNCs have realised that there are now being observed by the stakeholders and thecompanies need to comply with the international norms in regard to CSR practices(Weyzig, 2006). These norms also tend to pass through the MNCs vendors and as a

result this study expects that companies which are significantly owned by foreignersor had a partnership with foreign companies should produce better CSR.

The regression analysis provides evidence on the impact of government influence.Engaging with the government aspirations is seen as part of the companies strategy inorder to maintain trust and improve their image. The GLCs are strategic companieswhich control nation strategic resources and thus their responsibilities are not to justmaximise shareholder value but to cover all the necessary government functions inorder to maintain strong inner stability.


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Institutionalisation by the governments aspirations is perhaps the mostappropriate description for Malaysian CSR practice. The government plays asignificant role in the sense that companies that are dependent on government or havesignificant government shareholding are institutionalized by the governments

aspirations and vision regarding social and environmental issues. Governmentinvolvement in CSR can be seen in the Vision 2020, commitment of adopting Agenda21 which emphasises sustainable development, the introduction of the Prime MinistersHibiscus Award, the launching of two ethical funds or social responsibility investmentfunds in 2004 and the support for corporate social reporting.

Similar pressure can be seen in the company that is dependent on governmentcontracts. Through the coercive mechanism, companies that fail to join force with thegovernment in promoting better community involvement and environmentalprotection may face problems in securing future contracts (Dimaggio and Powell,1983). This study proves that the government influence is clearly evidence to the bigcompany which has link and dependent to government.

An alternative interpretation of these findings is that the government of Malaysia isvery serious in inculcating the CSR culture into the companies that cooperate closelywith the government[8]. This is because it reflects on the ruling party and itscommitment is something that can be proudly exhibited to either opposition membersor the NGOs. This may perhaps enhance the governments image and subsequentlybestow a position as a model to other developing countries. The status could thanpermit better access to the elite groups such as those in the USA, European countries or

Japan, in terms of getting economic resources or international support for developmentprogrammes. As such it is argued that the Malaysian government has beeninstitutionalised by the global trend.

The regression analysis however fails to support the significant role of foreignstakeholder contribution in relation to the company reporting, despite the strong

argument that foreign companies or MNCs may have some influence. A brief review ofMNC CSR indicates that most of the companies may have different media such asstand alone reporting in communicating their CSR. Companies like British AmericanTobacco (M), Ajinomoto (M) and Shell (M) usually have separate supplementalinformation which this study has not considered, as it focused solely on annual reports.

Notes

1. Foreign affiliates here refers to foreign associates or business partners or othermultinationals operating in Malaysia.

2. Bumiputra or Bumiputera means son of earth in Malay, translated literally it meansprinces of the earth and is an official definition widely used in Malaysia, embracing ethnic

Malays as well as other indigenous ethnics. This word is used interchangeably with Malayin this paper. The term bumiputera (son of the soil)is used to denote the Malays andthe native Muslims and non-Muslims of Sarawak and Sabah in a single category (Shamsul,2001, p. 364).

3. Vision 2020: in 1991, the Malaysian Government declared that it was the objective of thenation to become a developed nation in its own right by 2020. The key to the attainment of afully developed nation status was to address nine strategic challenges. Among these werethe establishment a fully moral, ethical and caring society and the ensuring of aneconomically just society (Zain, 1999).

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4. Agenda 21 is the principal global plan to confront and overcome the economic and ecologicalproblems of the late twentieth century (CAP, 2002). It is meant to propose actions that shouldbe taken into account by every individual, institution and state. Participants hope to see animprovement in the strengthening of environmental standards in the long-term period.

5. ISO 14001 is an environmental management system that helps an organization to identifyenvironmental risks and impacts that may occur as a result of its activities and ensure thatthese are routinely managed.

6. Formerly known as the Kuala Lumpur Stock Exchange.

7. Hackston and Milne (1996) constructed their own instrument based on Ernst and Ernst(1976), Guthrie and Parker (1990) and Gray et al. (1995b). Milne and Adler (1999) tested thereliability of this instrument and concluded that the instrument is suitable for novice andless experienced coders.

8. Recent government role in promoting CSR is evidence in newly announced 2008 Budgetproposal which require public listed companies to disclose their employment composition byrace and gender. As Malaysia in a multiracial country, this effort is expected to encouragediversity is work place.

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Che Zuriana, M.J., Kasumalinda, A. and Rapiah, M. (2002), Corporate social responsibilitydisclosure in the annual reports of Malaysian companies a longitudinal study, Social and

Environmental Accounting Journal, Vol. 22 No. 2, pp. 5-9.

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empirical evidence, Accounting, Auditing & Accountiability Journal, Vol. 7 No. 4, pp. 42-72.

Corresponding authorAzlan Amran can be contacted at: [email protected]

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