5
positve and negative correlation between profitability, leverage and size of board commissioners toward sustainability disclosure. Based on previous
research, researcher want to continue the research and focused the research into 3 independent variable that will influence to sustainability reporting disclosure.
The thesis title is :
“ The Impact of Profitability, Leverage and Size of Board of Commissioners toward Sustainability Reporting Disclosure Study of
Indonesian Companies that Participated Sustainability Reporting Award 2012 until 2015
B. Problem Formulation
In problem formulation, the gap between the present situation and desired situation is formed as structured description of problem formulation. The
purpose problem formulation is to explicit description statement of problem and provides a shared understanding of problem relevant aspect. The problem
formulation in this research is : 1. Does Profitability has impact to sustainability reporting disclosure ?
2. Does Leverage has impact to sustainability reporting disclosure ? 3. Does size of Board Commissioner has impact to sustainability reporting
disclosure ?
C. Purpose of Research
The purpose of this research is to investigate the impact of 3 independent variables to sustainability reporting and to investigate what extent printed
voluntary sustainability reports by companies that participated at sustainability
6
report award or exceed the requirements provided in GRI guideline. The purpose is as follows :
1. To analyze impact profitability to sustainability report 2. To analyze impact of leverage to sustainability report
3. To analyze impact of size board commissioner to sustainability report 4. To determine relationship between Profitability, Leverage, Size of Board
Commissioners with sustainability reporting.
D. Benefit of this Research
1. For companies : This research can be as reference to make decision making for managers about environment and social disclosure in order to attract
investor 2. For students : This research can contribute to new knowledge in financial
accounting, particularly about how the companies financial performance may affect the disclosure of sustainability reporting .
3.
For society : This research will be wider the knowledge of researchers on sustainability reporting on Companies in Indonesia
.
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CHAPTER II LITERATURE REVIEW
A. Theoritical Framework.
The purpose of this literature review is to understand the theories and to reveal the overview about sustainability and the term applied in this research.
There are selected literature from different journal and report like literature sustainability, sustainability report with GRI guideline and after that literature
review will describe about profitability, leverage and size of
commissioner
r as factor that followed by sustainability report.
1. Stakeholder Theory
According to R. Edward Freeman 1994 Stakeholder theory is theory of organizational management and business ethics that addresses
moral value in managing company or organization. According to Thomas Donaldson and Lee E.Preston 1995 describe stakeholder theory into
several means. First stakeholder theory is unarguably descriptive that present a model describing what the companies is and describe company as
a constellation of cooperative and competitive interest possessing intrinsic value. Second stakeholder theory is instrumental that establishes a
framework for examining between the management practice and company goal. Third stakeholder theory is managerial in broad sense of term.
Stakeholder theory recommends attitudes,
structures
and practice that combine together stakeholder management.
8
One of the strategy of to maintain the relationship stakeholder and
shareholder is to disclose sustainability reporting that give information about economic performance, social performance and environmental performance.
Sustainability reporting disclosure is expected to meet the needs of information that required and to manage managers to gain support from all
stakeholder and shareholder in order to make company do good performance for triple bottom line aspects and for the continuity life of company as well.
2. Agency Theory
Agency theory is concern about the relationship between the principle shareholder or investor and the agent managers, this theory
believe there is different interest and information asymmetry between the principal and the agent so it will make
conflicts
that called agency conflict Kathleen, 1989.
In the companies scope, companies tend to select the information to be disclosed, detracting the one that negatively affects their strategic and
financial positioning. Sustainability report will help to reduce the information
asymmetry
and to reduce risk and uncertainty perceived by principal
3. Legitimacy Theory
Legitimacy theory has become one of most used theory within social and environmental accounting area. James Guthrie et al 2006 found that In
this theory there is a social contract between company and society so company should act based on value and norm of society. Sustainability
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report help companies tell their performance to society, so society can accept companies. with the
acceptance
of society company can increase their profit and interact with the investor
These theories prove the line between company performance and sustainability. Company that have good performance especially company
that have good profitability should disclose their performance in proper sustainability report
4. Definition of Sustainability
The concept of sustainability was originally in forestry concept, where it‟s mean never harvesting more than what the forest yields in new
growth. This concept concern about preserving natural resources to the future Wiersum .,1995 in Tom Kuhlman and John Farrington, 2010.
According to United Nation World Commission on Environment and Development that more
famous
as Brundlatnd Report in 1987 defined sustainability is concerned with which action taken in present has upon the
options available in the future Tom Kuhlman and John Farrington,2010. World Commission on Environment and Development 1987
defined sustainable development as concept that has meaning “development
that meets the needs of the present without compromising the ability of future generations to meet their own needs
”. The are 2 main concepts of sustainable development first is the needs of world poor that overriding
priority should be given, second is the idea to have limitation of technology and social organization by the state to meet present and future needs.
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Sustainability has become a wide-ranging term that can be applied to almost every facet of life on earth from local to global scale. The term of
sustainability in management literature refer as continuity, Sustainability is how companies
demonstrate
their activities to continue and still exist into the future Aras Crowther, 2008. Aras Crowther prefer to not use
sustainability term and use durability term. Aras Crowther 2009 focus durability in 4 key aspects that will distribute sustainability.
Table 2.1 The Facets of Sustainability
Manageble Strategic
Measurable Financial
Equitable Distributional
Effecient Technological
Source: Güler Aras and David Crowther, 2009 The Durability Term can describe just like the 4 key aspects above :
1. Efficiency is concerned with the best use of scarce resources. This requires a redefinition of inputs to the transformational process and a focus upon
environmental resources as the scarce resource 2. Efficiency is concerned with optimizing the use of the scarce resources ie
environmental resources rather than with cost reduction 3. Value is added through technology and innovation rather than through
expropriation
4. Outputs are redefined to include distributional effects to all stakeholders
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5. Understanding Sustainability Reporting
The goal of United Nations decade of education sustainable development that started in 2005 is to integrate the principles, values and
practice of sustainable development. This education enables business leader and business practice to improve mindset of all aspects like customers,
vendors
, suppliers etc. Business leader and business practice need to disclose their activity business in sustainability reporting.
Sustainability reporting is becoming a mainstream business practice in the globalization era. Sustainability reporting is the critical first step in
implementing a strategy that can help an organization understand the impact on its stakeholders, and a ways in which it might mitigate a negative impact
on the economy, society and the environment EY and GRI, 2014 The practice to measure the performance of company in economic,
social and environment is known as sustainability reporting. Sustainability reporting is use to report the result of performance to
the stakeholder‟s and to show the company contribution to sustainable development.
Sustainability reporting is report that not only give the information about company financial performance but also non financial performance
which consist of social and environmental and show the continuity growth of company Elkington 1997. Non-financial information can be both
quantitative, such as tons of greenhouse gas, or qualitative, such as governance processes, the reputation of an organization or the organization‟s
impact on the state of biodiversity Ittosai WGEA, 2013
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According to United Nations Environment
program
sustainability reporting is the practice of measuring and disclosing sustainability
information alongside, or integrated with companies existing reporting practices. Sustainability information can be understood as any information
having to do with how companies use and affect financial, natural and human resources, and how company corporate governance is conducted
.
Sustainability reporting is a two- way practice, first it‟s supports
understanding of the impact of business on the wider societal and environmental stage and second it
‟s enables companies to appreciate the impact of society and the environment on business EY and GRI ,2014.
Many company realized the importance of disclose the sustainability reporting, according to sustainable Investment Research Analyst 2008
more than half of the United States 100 largest traded companies reported on their sustainability efforts. One of the drivers behind the increase in
sustainability reporting has been the acknowledgment that to be meaningful, a sustainability strategy must be based on reliable, concrete data. This can
only be the case once the mechanisms and systems for reporting the facts are put in report
EY and GRI, 2014. The proponents of sustainability reporting support its potential to
make company more accountable and transparent about their social and environmental impacts. Sustainability reporting is a voluntary report but
some countries like Germany, Russia, Japan, Finland and many more has been made form of
mandatory
environmental reporting .
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a. Sustainability Reporting Guideline
The last two decades there were increasing pressure on company to take into account their social and environment impact. Company need
a standard to make sustainability report, those standard can basically defined as voluntary, commonly used and has specific set of rules.
Brunsson., 2012 in Vigneau J et al 2015 Global Reporting Initiative GRI is the best-known framework
for voluntary reporting of environmental and social performance by business and other organizations worldwide. GRI provides a framework
for sustainability reporting that is globally applicable. The Framework creates four key areas of sustainability which enables all organizations to
measure and report their economic, environmental, social and governance performance. GRI framework consists of sustainability
reporting guidelines Halina Szejnwled Brown et al 2009 GRI is an international independent organization that develops
and publishes report guidelines for reporting on economic, environmental and social performance. The mission of GRI sustainability
reporting is to provide a trusted credible framework for sustainability reporting that can be used by organizations of any size, sector, or
location. GRI report standard try to helps businesses, governments and
other organizations understand and communicate the impact of business on critical sustainability issues such as climate change, human rights,
14
corruption and many others. GRI give the world‟s most widely used
standards on sustainability reporting and disclosure. According to GRI sustainability reporting is a report published by
a company or organization about the economic, environmental and social impacts caused by its everyday activities. sustainability report also
presents the organ izations values and governance model it‟s a key
platform for communicating sustainability performance and impacts whether positive or negative. Until now GRI has released four
sustainability reporting guidelines , the latest version of guidelines is G4. G4
guidelines
are an update and evolution of the third generation of GRIs sustainability reporting guidelines G3.1, G4 released in May
2013. What makes G3 and G4 different is G4 introduces 7 new disclosures, a new structure for the guidance documents and two levels
for reporting „in accordance‟ with the Guidelines. In G4 guidlines there are two kind standards disclosure. First standard is general standard
disclosure that has 7 types of disclosure. In this disclosure companies will describe the organizations and provide overall context for the
report. The second standard is specific disclosure that divided into two areas : first area is management approach that provide overview of
companies approach in sustainability issues. Second area is indicator that provide comparable information of company triple bottom line
performance. G4 Sustainability Reporting Guideline,2015.
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Another best voluntary organization to make social responsibility framework is ISO 2600. ISO is one of the largest developer of voluntary
international standard. ISO standards are developed through a consensus process by groups of experts from all over the world, who are aware of
the standards that are needed in their respective sectors. ISO standards contribute to all three dimensions of sustainable
development economic, environmental and social. ISO draw on international consensus from the broadest possible base of stakeholder
groups and develop the standard from the input stakeholder group ISO 26000:2010
The ISO 26000 guidance standard emphasizes the principle of transparency and the value of public reporting on social responsibility
performance to internal and external stakeholders while GRI guideline of Reporting Principles are fundamental to achieving transparency in
sustainability. The GRI Guidelines and ISO 26000 both aim at improving organizations social responsibility and sustainability performance.
GRI and ISO 26000 have signed the memorandum of understanding to increase cooperation in sustainable development on 5
September 2011. ISO 26000 make guidance of social responsibility and sustainability standard reporting provided by GRI. GRI G4 Guidelines
and ISO 26000:2010, 2014
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6. Corporate Social Responsibility
In the last decades, corporate social responsibility CSR and corporate sustainability have become some of the major developments for
global corporations Stanny and Ely 2008, in Petra F 2010, this two concepts has become interlinked.
Corporate social responsibility CSR concerns a corporate‟s strategy, operations, and governance structure that create environmental and
social values in addition to maximizing enterprise value for the benefits of its shareholders by monitoring and ensuring compliance with the spirit of
the law, ethical standards, and international norms Eli Bartov and Yan Li
,2015.
According to the UN Global Compact survey 2010 93 percent of the 766 participant CEOs from all over the world declared CSR as an
important factor for their organizations future success and that‟s why many companies disclose their CSR report.
According to the legitimacy theory, CSR disclosure may be analyzed in the view of how the company is going to justify social and public
expectations. CSR reporting standards are evolving to take into account a whole range of stakeholders and their actions to address the requirements of
interested parties while financial reporting standards simply address the needs of the powerful therefore it can lobby for their own interest most
effectively Aras Crowther, 2008.
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a. The difference Sustainability Reporting and CSR Reporting
Sustainability reports are modern concepts of interdisciplinary reporting that indicate the simultaneous integration of economic,
environmental and social elements Reiner Quick, 2008 in Ratu Farah 2012. CSR are the concept of governance that has been long time made
before the sustainability concept made and the CSR concept had been used by the ancient Greece since the government set the rules for
merchant. Apparently CSR is one of the mechanisms for sustainability. CSR
is aimed at social aspect in general while Sustainability is a much broader term aimed at reduction of negative Social, Economic
Environmental effects while carrying out businesses. Therefore, with a broad scope, sustainability reporting is responsible by all of part not only
part of CSR within the company Committee CSR-LPT PT. Antam,Tbk, 2011 in Ratu Farah 2012.
So, the conclusion from the different approaches between sustainability reporting and CSR reporting, from the article and forum
discussion that researcher have read, sustainability reporting is the modern concept of communication to internal and external stakeholder to
show the performance of company in economic, social, environment and to contribute to sustainable developm
ent that‟s why CSR reporting is part of sustainability reporting.
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7. Sustainability Report Awards
Sustaianability Report Awards is an annual awards for companies or organizations that made and published their sustainability reports or their
CSR reports. The purpose of Indonesia Sustainability report is to appreciate Indonesian companies that disclose the triple bottom companies
performance. Article 66.C of the Limited Liability Company Law no. 40 Year
2007 is Indonesian regulation that require companies should disclose their environmental and social responsibilities through their annual report. From
that moment many company try to combine their social, environmental and financial performance in 1 line that refer to sustainability report.
Figure 2.1 Indonesian Companies that Participated Sustainability Reporting Award
Source : Cynthia Dewi and Putu Sudana, 2015. As we can see in figure 2.1 above that there is an increasing
participant to participated Indonesia sustainability report awards, it happen because many Indonesian company start to aware not only in the importance
to disclose their social and environmental aspects but also to have good and transparent communications between companies and stakeholders.
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8. Profitability
The purpose company do a business is to get a profit. Profit is the excess revenue that minus expense and Profit usually used to measure the
performance of company or to determine earning per share. The goal of financial management is to maximize the profit and to reach the wealth or
welfare of the company and society. In this modern era many company are required to have competitive
advantage and are able to maintain the success and continuity in improving profitability. According to Don Hofrand 2009 profitability is measured
with an income statement that listed income and expense during period time for the entire business. Don Hofrand defines profitability as accounting
profit or economic profit. It‟s a common in business life that financial ratio are the practical
financial and planning analysis tool that already used for several decades. Financial ratio appeared in the mid of nineteenth century and used by
accountants or managers to show company potential and to make economic decision including investing and evaluation of company financial
performance Majed Abdel et al, 2012 According to Majed Abdel et al 2012 defined financial ratio as
relationship between two individual quantitative financial information connected with each other in logical manner and it‟s consider as meaningful
financial indicator which can be used by internal and external stakeholder for
20
example a stockholder need financial ratio to indicate the progress and the rate return investment.
One of the classifications and most common used by companies in financial ratio is profitability ratio. Profitability ratios are an indicator for the
firms overall efficiency, Profitability ratios measures earning capacity of the firm, and it is considered as an indicator for its growth, success and
control. The long term profitability in company is very important in order to
survive, to sustain company life and to give benefit to shareholder. Profitability ratio gives important information to investor and creditor,
that‟s why many of Investor or creditor use profitability ratio in order to make judgment to invest or not to invest their money in companies. A
research conducted by Cynthia Dewi and Putu Sudana 2015 show that Profitability has significant effect to ROA so, high and good profitability
ratio of companies will lead companies to disclose more about their sustainability disclosure.
In this Research the profitability ratio used is : Return on Asset ROA
This ratio measure how well company use asset to generate Income. This ratio also show how company success in use asset to earn income for
investor Dyah Idraswari and Putra Astika,2015. �
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a. Profitability and Sustainability Reporting disclosure
Profitability is one the ability of companies to generate the profit so it can increase the value of share in companies. The increasing
profitability companies make companies can spend their profit to do social and environmental activities.
A higher profitability of company will make a higher chance of companies to disclose about their social and environmental activities
that company done. Sustainability reporting disclosure is a voluntary report that can be done by company to show their social and
environmental performance. Company that has higher profitability than other company in the
same sector incline to disclose more information to public about their social, environmental and financial performance that has been done
by companies. Company also want to show to investor that the operational of company in a good condition. With the disclosure of
the Sustainability Report which is done by the company, it is expected to provide tangible evidence that the production process is
carried out by the company, not only for profit-oriented purpose but also for paying attention to social issues, and the environment.
A research conducted by Dyah Indraswari and Putra Astika show that there is relationship between profitability and CSR disclosure.
Their reveal that the higher profitability is the higher of intention to disclose CSR disclosure.
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9. Leverage
Companies need a financial capital to run out their operational, capital can come from the companies owner or come from debt. Leverage or
many people call it as borrowed capital is one of financial ratio. Leverage ratio show how much capital comes in form of loans and debt and to show
how much company can full fill their obligation. Leverage ratio help measures the financing that company use from
debt compare their capital and their ability pay the interest or return the investment. Leverage is the use of fixed cost on asset or expense in order to
get profit and increase the return. According to Katia D Hustler 2009 Leverage allows a financial institution to increase the potential gains or
losses on a position or investment beyond what would be possible through a direct investment of its own funds.
The higher debt of company the higher company takes the risk and it will be dangerous for company if the margin cannot cover the fixed cost. It
also applies to high interest expense and dividends,, it will lead company to bankrupt if the margin operational cannot cover the expense
In this research the leverage ratio used is : Debt Asset Ratio
This Ratio Measures percentage of company assets that provided by debts Dewi and Maswar, 2013
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a. Leverage and Sustanainability reporting Disclosure
The higher the debt ratio is show that company has a high risk to not meet their obligation of debt to investor or creditor. Companies
with high leverage incline to report a high income and decrease any cost also cost to disclose their social performance.
In line with agency theory that a high leverage ratio has agency cost so companies try to decrease any cost that related to social and
environmental performance. High debt ratio will bring bad image for company to public
low debt ratio will bring positive image of company to public. The low debt ratio show that company can pay the debt on time and
it increase the credibility of company that make stakeholder trust their money on the companies and try to support the operational of
companies One of the way to increase the credibility of company is to
disclose company activities that show companies care about environmental and social issues. Social and environmental disclosure
can be done by the companies through making the sustainability reporting disclosure.
A research conducted by Emmy Febrianti and Supartha Wisada 2015 reveal that leverage has positive impact toward sustainability
report disclosure. This research used Debt to Asset ratio to describe how much asset that companies get from the debt.
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10. Size of Board Commissioner
The Board of Commissioners is the highest internal control mechanism that is responsible for managing the company effectively. The
Board of Commissioners consists of inside and outside directors who will have access to specific information that is valuable and very helpful board of
commissioners as well as making it an effective tool in controlling decision Mulyadi,2002 in Evi et al,2011
The functions of board commissioner is to observe the managers work and to determine that managers full fill their obligation to develop and
running out the companies. The more of board of commissioner, the more effective and easier to control and to monitor CEO and managers.
Board of commissioner is one the part of good corporate governance in order to create efficiency and transparent market. The proportion of
independent board commissioners can make a strict control to managers so it will lead an increasing company credibility and prevent any agency
interest that lead company to destruction. In this Research the size of board commissioners ratio used is :
Board of commissioners ratio
This ratio is show how much board commissioner that 1 company have Evi, et al, 2011.
.
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a. Size of Board Commissioner and Sustainability reporting
disclosure
Size of Board Commissioners is total of board commissioners member in one company. The board commissioners meetings are one
communication media
and coordination
between board
commissioners to do their job in order to control the managers. Purpose of meeting of board commissioners is to discuss the
strategy of company , to evaluate the company performance, to see rule that have been made and done by managers and to solve any
special interest in company. The more board commissioner make a meeting its the better, because board commissioner can make
company to disclose social and environmental performance. The bigger size of board commissioners also has an impact to
make managers disclose the information about company social and environmental activities that has been done by company. This is in
line with research that have been done by Eyi, Zuraida and Devi 2011 reveal that size of board commissioners has an influence
toward CSR disclosure. With the control and monitor from board commissioners, directors can arrange a strategy to implement social
and environmental activities, so company will disclose more about their activities in sustainability report.
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B. Previous Research
