CURRENT STATEOF

CORPORATE SOCIAL RESPONSIBILITYAMONG INDUDTRIAL COMPANIES

IN MALAYSIA

PREPARED BY:

TAMOI JANGGUCORINA JOSEPH

NERO MADI

SEPTEMBER 2006

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Faculty of AccountancyMARA University of Technology SarawakJalan Meranek94300 Kota SamarahanSarawak

Date: 8 September 2006Project File No: 600-IRDC/SSP.5/3/1 735

Professor Dr. AzniZain AhmedDeputy Vice-Chancellor (Research )Institute of Research, Development and Commercialisation (IRDC)MARA University of Technology (UiTM)40450 Shah Alam, Selangor Darul EhsanMalaysia

Dear Professor

FINAL RESEARCH REPORTS ON "CURRENT STATE OF CORPORATE SOCIALRESPONSIBILITIES AMONG INDUSTRIAL COMPAruIES INT MALAYSIA".

with reference to the above, enclosed are three copies of the final research entiiled,"Current sfafe of corporate Socra/ Responsrb itities Among tndustrial companies inMalaysia" by a group of researchers at riirrrrrs.r"*"'k:"'""'

Thank you.

Sincerely

LeaderResearch Project

TAMOI JANGGU

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RESEARCH TEAM

MTAMOI JANGGU

Project Leader

'w*CORINA JOSEPH

Team Member

*NERO MADITeam Member

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ACKNOWLEDGEMENTS

First and foremost, we would like to praise God almighty for giving us his blessingsto execute this project despite many challenging moments, which we faced especiallyduring the early stage of this undertaking.

We would like to thank the following people for their invaluable support, motivationand assistance in completing this project.

i. Professor Dr. Azni Zain Ahmed(Deputy Vice-Chancellor (Research) Institute of Research, Development andCommercialisation (IRDC), UiTM Shah Alam.

ii. Associate Professor Dr. Jamil Haji Hamali, the Campus Director of UiTMSarawak.

iii. Dr. Dayang Maryani Awang Hashim, the Coordinator of IRDC UiTMSarawak.

Last but not least, we would like to thank our family members and all the other peoplewho have been involved either directly or indirectly in this project. Without theircooperation and confident support, we would have not been able to carry out thisproject.

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TABLE OF CONTENTS

CONTENTS

Title page

Letter of submission

Research Team

Acknowledgements

Table of Contents

List of Tables

List of Figures

List of Appendices

Abbreviation

Abstract

INTRODUCTION

1.1 Background

1.2 Objectives ofthe Study

1.3 The Importance of the Study

1.4 Scope of the Project

1.5 Organization of the Study

LITERATURE REVIEW

2.1 Introduction

2.2 Corporate Social Responsibility - Definition

2.3 The Development of Corporate Social Responsibility

2.4 Influencing Variables

2.4.1 Size

2.4.2 Profrtability

2.4.3 Leverage

2.4.4 Audit Firm

2.4.5 Ownership

2.5 The Theoretical Foundations of Corporate Social Disclosure

2.5.1 Legitimacy Theory

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CONTENTS

2.5.2 Stakeholders Theory

2.5.3 Accountability Theory

2.5.4 Social Contract Theory

2.5.5 Agency Theory

2.5.6 Decision Usefulness Theory

2.6 Theoretical Framework for the Current Study

2.7 Prior Studies on CSR

METHODOLOGY

3.1 Introduction

3.2 Research Design

3.2.1 Sample Size

3.2.2 Data Source

3.2.3 Content Analysis

3.2.4 Number of Sentences

3.3 Development of Research Hypotheses

3.3.1 Size

3.3.2 Profttability

3.3.3 Financial Leverage

3.3.4 Audit Firm

3.3.5 Ownership

3.3.6 Chairmanship

3.4 Analysis of Data

ANALYSIS OF DATA AND DISCUSSION OF RESULTS

4.1 Introduction

4.2 DescriptiveAnalysis

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4.4

4.2.1 Demographic Profile

General Overview of CSR

CSR Disclosure Practices

4.4.1 Human Resource

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4.5

4.6

CONTENTS

4.4.2 Products

4.4.3 Environmental

4.4.4 Community

Six-Year Data Analysis of CSR

Relationship Between CSR and Company's Characteristics

4.6.1 CSR and Size

4.6.2 CSR and Profitability

4.6.3 CRS and Financial Leverage

4.6.4 CSR and Audit Firm

4.6.5 CSR and Ownership

4.6.6 CSR by Number of Directors and Percentage ofHoldings

4.6.7 CSR and Chairmanship

Discussion of Findings

4.7 .1 CSR in Malaysia from 1998 to 2003

4.7.2 CSR and Company's Characteristics

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5.0 CONCLUSION

5.1 Introduction

5.2 Summary of Findings and Concluding Remarks

5.3 The Contributions of the Current Study

5.4 Limitation of the Study

5.5 Future Research

REFERENCES

APPENDICES

1 CSR Rating Sheet

2 Yariable Definitions

3 List of Respondents

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Table 3.I

Table 3.2

Table 4.1

Table 4.2

Table 4.3

Table 4.4

Table 4.5

Table 4.6

Table 4.7

Table 4.8

Table 4.9

Table 4.10

Table 4.1 1

Table 4.12

Table 4.13

Table 4.14

Table 4.15

Table 4.16

Table 4.17

Table 4.18

Table 4.19

Table 4.20

Table 4.21

Table 4.22

Table 4.23

Table 4.24

Table 4.25

Table 4.26

LIST OF TABLES

Themes of Social Disclosure

Group of CSR Disclosure

Firms' Characteristics Based on Average

Statistics of Firms' Characteristics

Chairmanship and Audit Firm

Statistics of Firm's Percentage of Ownership

Incidence of Disclosure by Board

Incidence of Disclosure by General Themes

Amount and Percentage of CSR by General Themes

Statistics on Human Resource Disclosure

Amount and Incidence of Human Resource Disclosure

Statistics on Products Disclosure

Amount of Product Disclosure By Sub-category

Statistics on Environmental Disclosure

Amount of Environmental Disclosure By Sub-category

Statistics on Community Disclosure

Amount of Community Disclosure By Sub-category

Descriptive Statistics of Overall CSR

Descriptive Statistics of CSR by Themes

CSR by Firms' Size

CSR by Firms' Profitability

CSR by Firms' Leverage

Cross-Tabulation of CSR Disclosure and Size of Audit

Firm

Total Disclosure by Size of Audit Firm

Independent Sample t-test for CSR by Size of Audit

Firm

Yearly Disclosures by Top 5 Ownership

Total Disclosure by Top 5 Ownership

Statistics on Relationship Between CSR and Ownership

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Table 4.27

Table 4.28

Table 4.29

Table 4.30

LIST OF TABLES

CSR by Number of Directors and Percentage ofHoldings

Yearly Disclosure by Chairmanship

Total CSR by Chairmanship

Independent Samples t-test for Companies Chaired by

Malays and Chinese

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Figure 2.1

Figure 4.1

Figure 4.2

Figure 4.3

Figure 4.4

Figure 4.5

LIST OF FIGURES

Theoretical Framework of the Study

Firms' Characteristics

Breakdown of Total Amount of Disclosure

Trend ofCSR Level From 1998 to 2003

Trend of CSR by Different Themes - Human Resource

Trend of CSR by Different Themes - Environment,

Product and Communitv

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Appendix I :

Appendix 2 :

Appendix 3 :

LIST OF APPENDICES

CSR Rating Sheet

Variable Definitions

List of Respondents

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ABBREVIATION

CSR Corporate Social Responsibility

ID Incidence of Disclosure

IND Independent Non-Executive Directors

CEO Chief Executive Officer

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ABSTRACT

The main aim of this study is to find out the level of the current state and trend

of CSR of industrial companies in Malaysia. Content analysis method is used to

analyse the data from the corporate annual reports of the companies from 1998 to

2003. Spearman rank coefficient is applied to investigate whether or not there is

relationship between CSR and companies' characteristics. It can be concluded that the

CSR level of industrial companies in Malaysia is increasing both in terms of amount

of the disclosure and the number of participating companies. The most popular theme

of disclosure is human resource then followed by environmental information and

disclosure on product. An involvement with community ranked last. This implies that

companies do appreciate their employees and concern about environmental issues.

The statistical analysis, among others, indicates there is positive relationship between

CSR and companies' size (as measured by turnover) but no apparent relationship is

noticed with companies' capital. Positive relationship between CSR and companies'

profitability as measured by net profit after tax is also found to be weak. The

relationship between CSR and leverage is negative in nature. Other finding with

regard to audit firm pointed out that there is no significant difference in mean

disclosure by companies audited by Big Four and Non-Big Four. More disclosure by

local companies as compared to their foreign counterparts is another noteworthy

findins.

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CHAPTER ONE

INTRODUCTION

l.t Background

Corporate Social Responsibility (CSR) has been defined by our Deputy Prime

Minister, Dato' Sri Najib Tun Abdul Razak in a CSR conference held in June 2003 at

PWTC, KL as "a concept whereby corporation integrate social and environmental

concerns in their business operations and their interactions with stakeholders on a

voluntary basis". Similarly, Gray, Owen and Maunders (1987) regard CSR as the

process of providing information which does not have purely financial implications

designed to discharge social accountability. This accountability issue has become the

spotlight of various groups such as academia and accounting profession especially in

the wake of corporate scandals. Since then, there has been call for more transparency,

integrity and accountability among the corporation. Corporation should recognize

their corporate responsibilities not only to their shareholders but also to the society

they operate in. This sustainability concept calls for a corporation to operate in a

responsible manner that takes full account of their business impact on the

environment, people and the community. The growth of public awareness about CSR

has put pressure on corporations, profession and governments to increase the amount

of social information in corporate reports (Tilt and Symes, 1994).

The call for more transparency and accountability of the corporation to the

stakeholders and society at large is the main motivational factor of this study. The

corporate scandals indeed have become the 'wake up' calls for the entire corporation

to be more responsible for their deeds to the society at large. The companies should

recognize that society too have the powers to 'terminate' their license to operate.

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Therefore, promotional CSR is seemed to be the right place and regarded as one of the

important element towards realising the aspirations and goals of national

development. Luan (2005a), cited the Malaysian govemment's stand on CSR issues,

that all organisations in the country should take account of the economic, social and

environmental impact of their activities, and should be encouraged to act and address

the key challenges which arise from these impacts on their core competencies.

Moreover, the government is taking stand that the existing legal framework and

regulations are sufficient to improve corporate behaviour.

1.2 Objective of the Study

Despite recognizing the importance of CSR and yet disclosure is still

voluntary in the annual report, therefore it would be interesting to find out the reaction

of corporations in Malaysia on this CSR issue. The main aim of this study is

therefore to find out what types of social information (if any) and how much (in

number of sentences) disclosed by Malaysian industrial companies.

Next, the researchers try to find out the trend of CSR disclosures before and

after the wake of corporate scandals. That is done by carrying out longitudinal

analysis of CSR from 1998 to 2003. Mathews (1997) admits that there is a continuing

empirical need to document and analyse what is disclosed in the areas of social and

environmental accounting. It seems apparent that there is a need for such analysis in

order to document and establish the state of the art in the field of social responsibility.

The last objective would be to find out whether there is any relationship

between amounts of social information disclosure and the size of company's external

auditor as well as company's characteristics such as size, profitability, leverage and

ownership (individual or corporate and local or foreign) and the directorship (number

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of directors and who is the chairman of the board). The study is motivated by the fact

that, to our knowledge, there is no prior academic research in Malaysia studying both

social and environmental disclosure particularly on industrial companies.

The issue of corporate social responsibility emerges from the general rise in

the interest and concern of the environment, product or services, employees'welfare

and health and safety among the community. It is generally perceived that companies

make profit to survive as profits affect the wealth of shareholders through its impact

on share price and dividends. Then the question arises whether companies should

reduce or contribute part of their profit to the community. Wartick and Wood, (1998)

point out that business carries out the economic functions at the expense of society.

Therefore, business has some form of responsibility to society. On the basis of this

assumption, the researchers of the current study are motivated to investigate what

areas companies contribute back to society and to what is the extent of their

contribution.

The importance of the study

This research considers that corporate social disclosures are desirable and

beneficial to both community and the company. As reported by Mathews (1993,

p.65), there is a worldwide interest in social disclosures. This research may contribute

significantly to the CSR pool of literature in the following ways:

a. There is no prior academic research in Malaysia studying CSR particularly on

industrial companies. Besides, that there is no study on trend analysis despite the

claims by number of researchers that CSR is important and projecting an

increasing trend. Therefore this study will enrich the pool of CSR literature.

1.3

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b. Despite the fact that CSR is voluntary in the global and Malaysian annual

report, most companies, regulators and also general public appreciate the

importance of CSR. This study may provide useful information to the relevant

regulators/authorit ies concerned.

c. This research project may promote the culture of CSR among big corporations

if findings are communicated to them via relevant regulators/authorities.

1.4 Scope of the Project

This study will be confined to corporate social and environmental information

disclosed in the published corporate annual report of industrial companies in Malaysia

from 1998 to 2003 and focus on the following areas:

i. the analysis of the trend of the corporate social and environmental disclosures

of industrial companies from 1998 to 2003, and

ii. the relationship between the amount of disclosures and the cornpany's

characteristics.

It is not the intention of this study:

i. to find out why the companies disclosed the corporate social and

environmental information

ii. to evaluate the quality or effect of social disclosures to companies

performance.

1.5 Organisation of the Study

The reporl of this study is organized into five chapters. Chapter one is on

general introduction, objectives, importance and organization of the study. This

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chapter also provides current state of social reporting in Malaysia. Chapter two

discusses the relevant literature and current practices, which provides a background

from which to develop theory, methodology and research tools. The purpose of this

chapter is to define the corporate social reporting and to explain the development of

corporate social reporting particularly in Malaysia. It will then proceed to describe the

influencing variables of social disclosure fromprevious studies. Finally, it will discuss

the theoretical foundations of corporate social reporting based on previous studies.

Chapter three outlines the methodological assumptions, sample utilized and

research instrument used in the study. Content analysis is used to describe the current

corporate social disclosure in Malaysia. This is later followed by some statistical

analysis using SPSS. The development of research hypotheses also will be included in

this chapter.

Chapter four contains the analysis of data and interpretation of initial results.

This chapter is divided into three sub-sections. Section one attempts to find out

whether a company had reported any aspect of its social performance in the annual

report and if so, how much is disclosed. The majorthemes of disclosure and its sub-

categories as well as the different company characteristics that affect disclosure are

also identified in this section. The second section will look at the relationship between

the amount of disclosure with company characteristics, such as size, profit, leverage

and ownership. Finally this chapter will look at the amount of disclosure using trend

analysis and discuss of research findings.

Finally, chapter five will present the research conclusion and

recommendations. Limitation of the study and opportunities for future research will

also be included in this final chapter.

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CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

Doing business today is not like doing it in the past ten or twenty years ago.

With the rapid advances in information and technology, globalization and

liberalization, businesses are faced with stiff challenges to survive and maintain a

competitive edge. This is what some of the literature referred to as sustainability

concept. Tay Kay Luan (2006) for example, explained in his article that company

should operate in a more responsible manner that should take full account of their

business impact on environment, people and community. Due to the rising concern

over the adverse impacts of business operations on the natural environment and the

call for more transparency on the corporation side to the public at large, therefore the

research on this area is also increasins.

Wartick and Wood (1998) further stresses that due to the fact that business

carries out the economic functions of society and therefore has some forms of

responsibility to society. The 'wider public' for example the employees, trade unions,

government agencies and the general public are also affected by the actions of the

corporations. Regardless whether or not an individual or an entity has an economic

relationship with the enterprise, it is clear that the enterprise's existence and the

externalities it produces have an effect on all society (Gray et a1., 1996; Hines, 1988;

Mohamed Zain, 1999). Educated society therefore should be provided with the

information necessary for evaluating each enterprise's net contribution to social

welfare (Mohamed Zain. 1999).

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This chapter highlights some of the previous global studies on corporate social

disclosure particularly in Malaysia. The chapter will begin with the theoretical

foundation of corporate social disclosure and see how it relates to the Malavsian

environment particularly for industrial companies and its current state. It will then

proceed into the influential variable that may affect the amount of disclosure of

corporate social disclosure in the companies' corporate annual reports.

2.2 Corporate Social Responsibility - Definition

There are different interpretations and definitions among local corporate

leaders on what constitutes CSR. Some refer CSR as corporate responsibility,

corporate citizenship, corporate philanthropy, community development and some

relate it to the triple bottom-line; economic, environment and social performance. In a

simple term, the researchers refers CSR as about the way in which companies

fulfilling its social obligation both to the employees and to a wider community such as

donations, contribution to charity events or complying with regulations and social

requirements.

Gray et.al (1987) define social reporting as:

"......the process of communicating the social and environmental effects oforganisations' economic actions to particular interest groups within societyond to society at large. As such, it involves extending the accountability o/organizations (particularly companies), beyond the traditional role ofproviding a .financial account to the owners of capital, in particular,shareholders. Such an extension is predicted upon the assumption thatcompanies do have wider responsibilities than simply to make money for theirshareholders "

Boyce G. (2000) refers CSR as social accounting which involves the

communication of information concerning the impact of an entity and its activities on

society, and environmental accounting is accounting that is concemed with the

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communication of information on the impact of an entity and its activities on the

environment. Both social and environmental accounting could involve not only the

measurement or calculation of costs and benefits (social and environmental) but could

also include accounting for impacts not quantifiable in monetary terms.

Social and environmental accounting is seen as an approach that relates the

company's responsibility and obligations towards society (as a social contract) and

can be seen as a movement towards sustainability. For example, Mathews (1997)

states that at the very least, social accounting can be seen as an extension of

"traditional accounting" towards disclosure into non-traditional areas such as

information about employees, products, community services and the prevention or

reduction of pollution.

The Head of The ACCA Malaysia, Luan,T.K (2005) refers CSR into four

alTears:

i. Commitment to obey the law and basic ethical standards

ii. Improving community well-being

iii. Being responsible for the consequences of its actions and

iv. Contribution and sustaining business as a corporate citizen

2.3 The Development of Corporate Social Responsibility

Corporate social disclosure has seen substantial advancement in developed

countries such as US, UK Europe, Australia and New Zealand, in recent years. This

may be seen as a reflection of the increased public awareness and concern with the

negative impacts that businesses inflict on the natural environment (Shaari,A.L.,Nik

Ahmad, N. N and Sulaiman, M.,2004) and other stakeholders such as suppliers of raw

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materials and other resources, customers, employees, local community, society and

the government.

An increasing public awareness of corporate social responsibility has

developed a criticism towards the use of profit as an all-inclusive measure for

corporate performance (Hackston and Milne, 1996). This in turn has led to a growing

attention by the accountancy bodies to consider CSR in accounting practices including

Malaysia. As mentioned above, social and environmental accounting is a growing

area of development and research. Europe has traditionally been a forerunner in the

area of social accounting. France and Germany, for example, have published the Bilan

Social and Socialberichtbilanz as early as in the 1970's and 1980's. Later

developments like environmental reporting, Eco-Management and Audit-Shemes;

EMAS, the okobilanz are parts of today's European landscape (Ramsay, 2003). A

report entitled "Management Barometer survey" by Pricewaterhouse Coopers in 2002

shows that in Westem Europe, two thirds (65%) of large corporations report

economic, social and environmental issues in addition to required financial

information; in the US, 4lyo provide such information. Companies are experimenting

with different types of indicators for measuring and reporting their performance in the

area of corporate social responsibility.

The legislative development concerning social and environment is at

somewhat different stages. Mandatory reporting has developed mainly on the

environmental side of the issue and many countries have regulations concerning the

companies' environmental impacts on society. The social accounting side is still in its

cradle but growing. There is no consistent standard or regulations concerning the

disclosure of social and environmental issues; each country has its own (if any)

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2.4

legislative regulations. Malaysia for example has its own Environmental Act but still

not a mandatory disclosure in annual reports.

Influencing Variables

Previous studies found that a number of companies' characteristics such as

size, profitability, leverage, size of audit firnr, industry in which the company is

identified and country of ownership influence corporate social disclosure practices.

Gray et. al (1995a) summarize the previous studies as:

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ii.

iii,

CSR does appear to be related to company size but results are not reliable.

There is some evidence to industry effects but studies are not clear.

CSR does not appear to be related to profitability in the same period but some

evidence suggests that it might be related to lag profit.

Country of ultimate ownership seems to have a significant effect.

The following section will highlight various concluded findings from previous

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studies on relationship between CSR and various companies' characteristics.

2.4.1 Size

Most of previous researchers investigated the effect of the company size as

indicated by firm's assets and paid-up share capital on CSR. Some studies suggested a

positive correlation between size and social disclosure. Spicer (1978) suggests firm

size as a factor influencing pollution control, as larger companies had a better record

in this regard than smaller firms. Watts andZimmerman (1978) argues that because

political costs reduce management wealth, companies attempt to reduce costs by such

devices as social disclosure campaigns. Cowen, Ferreri and Parker (1987) found out

that larger corporations tend to disclose more information because larger corporations

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are highly visible, make greater impact to the society, and have more shareholders

who might be concerned with social activities undertaken by corporations. Other

studies which found similar findings include: Trotman and Bradley (1931); Cowen

et.al.(l987); Belksoui and Karpik (1989); Patten (1992); Hackton and Milne (1996)

which concluded that size is an explanatory variable, insomuch as their findings

indicated that firms supplying information on social responsibility are of a larger size,

are more concemed with longer-term events, and have a positive systematic risk.

However, the findings of the above studies are contradicted by environmental

disclosure. Halme and Huse (1997) conducted a study on annual report for the year

1992 from Scandinavian countries (Sweden, Finland, Spain and Norway) and found

no significant relationship between environmental reporting and companies' size.

In the Malaysian context, the conclusions derived from previous studies are

mixed. Mohamad and Ahmad (2001) concluded that firm's size is not significant

while Abdul Rahman and Atan, (2002) and Ahmad. Z, Hassan. S. and Junaini

Mohamad (2003) concluded that there is no association between environment

disclosure and company's size.

In addition, studies by Mohamed zain (1999) and Romlah et.al. (2003)

revealed that company's size as measured by total assets provides an explanation on

the variability of environmental disclosure among Malaysian companies. This fuither

confirm by latest longitudinal study by Janggu, T (2006) on construction companies in

Malaysia which concluded that firm's size as measured by profitability and turnover

are positively related with CSR.

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