The Relationship between Corporate Governance and Corporate Social Responsibility Disclosure for Chinese Manufacturing Listed Companies
Chapter 1; 1,786 words
Chapter 2; 5,171 words
1. CHAPTER ONE; INTRODUCTION
1.1 Research Background
The last three decades have seen China emerge as a significant global economic and manufacturing powerhouse. However, the rapid growth has not been without its shortcomings. The growth has spurred some ecological and societal problems among them being environmental degradation, unsustainable utilization of resources, product safety and quality issues, labor issues and sustained prevalence of poverty among others (Wang, Song,and Yao, 2013).Accordingly, there is an increasing need for companies around the world to have genuine interests and be more responsive to their obligations to society and hence the concept of corporate social responsibility disclosure(Harun, 2016).
Prior to narrowing down to corporate social responsibility disclosure which forms the focus of this research, it is worth noting that CSR has gained widespread recognition as a notion focusing on the social impact of a company’s activities. According to Kilic, Kuzey,and Uyar (2015), CSR seeks to have companies extend their interests beyond profit maximization to include sustainability efforts for the sake of other stakeholders. Dam and Scholtens (2012) argue that while the primary rationale for business existence is profit making, business should not pursue profits at the expense of societies’ interests. It follows that firms should build value for their shareholders while simultaneously behaving in a socially acceptable and responsible way. The operations of a company impact on a broad audience which includes its customers, suppliers, public, investors, and government hence the need for accountability (Abu Sufian and Zahan, 2013). This necessitates the obligation to disclose CSR (in this case corporate social responsibility disclosure) to its stakeholders. This may include the shareholders, environmental activists, government and society in general. Through such disclosure which is mainly voluntarily, an organization is improved which is likely to indirectly impact on better financial performance (Kilic, Kuzey, and Uyar, 2015).
In an attempt to draw the relationship between Corporate Governance (CG) and CSR disclosure, it is imperative to define and consider the role of CG in a company. CG embodies a system of rules, practices, and processes upon which the direction and control of a company are hinged on (Aifur, Bardul,and Javed, 2013). The CG philosophy seeks to support the management efficiently conduct its affairs while simultaneously meeting other stakeholders needs. Farook, Hassan,and Lanis(2011) emphasize that an efficient and effective CG underlines transparency, answerability, responsibility, and integrity. It can thus be argued that CSR and CSR disclosure is subject to the influence of the preferences, motives, and values of those charged with the responsibility of formulating and making decisions at the company. Corporate governance can be broken down into two broad components being ownership structure and board structure. According to Majeed, Aziz and Saleem (2015), Lone, Ali, and Khan (2016) and Razak and Mustaph (2013), the dimensions of board structure are; board size, board independence, boarder gender, and CEO duality. The scholars argue that the board composition, independence, diversity and role duality impact on the extent of CSR disclosure of companies. The assumption in many studies is a positive relationship between board independence, board size, and CSR disclosure, a negative correlation between CEO role duality and CSR disclosure. The researchers also enumerate foreign ownership, institutional ownership and ownership concentration as the primary dimensions for ownership structure. Their studies seek to find the correlation between the dimensions and CSR disclosure. However, the assumption in the studies is a positive correlation between foreign ownership, institutional ownership, ownership correlation and CSR disclosure (Majeed, Aziz and Saleem (2015); Lone, Ali, and Khan (2016) and Razak and Mustaph (2013).
On the other hand, it paramount to note that there are four main categories of CSR disclosure categories as explicated by Yusoff, Dalila, Jamal and Darus (2016), being community, workplace, marketplace and environment activities. In their study, Hoje and Maretno (2011) established a positive relationship between CSR disclosure and internal and external governance system in companies. Consistent with Hoje and Maretno (2011) findings, Mohammad Issam et al., (2015) also argued that CG and CSR disclosure go hand in hand and that CG motivates companies to conduct their operations while focusing on benefiting the society. Abu Sufian and Zahan (2013) further adduced that CSR disclosure, with a focus on CSR initiatives, can act as a substitute for evaluating a company’s performance. Wang, Song,and Yao(2013) support this notion by asserting that CG is a crucial element in fostering quality in CSR disclosure and recommends that companies evaluate their CG capacity towards CSR disclosure.
With reference to Chinese manufacturing listed companies, the study will focus on the extent to which CG affects CSR disclosure. This is considering limited and inconsistent studies in this context, notwithstanding the role played by Chinese manufacturing sector at the global scale.
1.2 Research Rationale (Motivation)
Several empirical studies have been conducted studying the relationship between corporate governance and CSR disclosure. However, the studies have yielded mixed results. In the context of China and specifically its manufacturing sector, the studies are limited.
Of paramount importance is to first establish the dimensions to which CG will be analyzed. To this regard, the study classified corporate governance into ownership and board structure. The components of board structure include board size, board independence, CEO duality and gender inclusivity. Ownership structure, on the other side, looks at ownership concentration, foreign ownership and institutional ownership. Prior studies have attempted to give an understanding on how the board structure and ownership structure of the governing bodies influence CSR disclosure. While several studies have established that there exists a relationship between CG and CSR disclosure, other researchers refute their findings hence conflicting results. For instance, Razak and Mustapha (2013) established a positive correlation between board size and CSR disclosure suggesting that bigger boards tend to influence CSR disclosure. These findings were seconded by Lone, Ali, and Khan (2016) in their study on the effects of CG and CSR disclosure determinants in Pakistan. Aslam et al., (2018) could not establish a correlation between board size and CSR disclosure. Contradicting findings can also be seen in the relationship between CEO duality and CSR disclosure. With these variables, Aslam et al., (2018), Jizi et al., (2014) and Diaz, Rodriguez and Craig (2017) established a positive correlation; Khan, Muttakin, and Siddiqui (2013) on the other hand could not establish an association between the variables while Kilic, Kuzey and Uyar (2015) concluded that CEO duality and CSR disclosure are negatively correlated. Regarding gender diversity, Lone, Ali, and Khan (2016) concluded that boards with women tend to have better a CSR reporting when compared to male dominated boards. Conversely, Kilic, Kuzey and Uyar (2015) and Majeed, Aziz and Saleem (2015) published contrasting findings arguing that the presence of women in boards did not reveal any significant tendency to influence CSR disclosure. With board independence, Khan, Muttakin and Siddiqui (2013) found that the presence of directors who are not affiliated to the company boosted oversight and hence increased CSR disclosure. Majeed, Aziz and Saleem (2015) refuted these findings by arguing that independent directors were more focused on financial performance of a company rather that their social responsibility disclosure and hence no relationship between the two variables. With ownership structure, the same differences in findings prevailed. For instance, Khan, Muttakin and Siddiqui (2013) maintained that there was no significant relationship between foreign ownership and CSR disclosure. These findings were refuted by Abu Sufian and Zahan (2013) in their study and concluded that there exists a positive significant relationship between the variables suggesting that the presence of foreigners in the boards resulted to more extensive and transparent CSR reporting activities. Similarly, Wang, Song and Yao (2013) and Felmania, Relasari, and Makhtaruddin (2014) findings contradicted on the relationship between institutional ownership and CSR disclosure. While Wang, Song and Yao (2013) established that institutional ownership led to more transparent and extensive CSR disclosure, Felmania, Relasari, and Makhtaruddin (2014) asserted that institutional owners tend to coerce the management into publishing biased reports and hence a negative correlation between the variables.
As evidenced in previous sections, there is need to conduct more research to yield consistent results. Studying the influence of CG on CSR disclosure will assist Chinese manufacturing firms align their governance bodies with their CSR disclosure policy. With the increasing pressure to disclose CSR initiatives both voluntarily and involuntarily, CSR disclosure is proving to be an important aspect of reporting that can even affect the value, reputation, position and influence of a firm. Hapsora and Fadhila (2017) argue that reporting non-financial information is quickly becoming a standard for measuring the value of a firm. Firms that engage in more CSR activities and disclose them stand a better chance of being successfu...