Prior review Prior Review and Theoretical Framework

1684 literature documents the variation across firms in environmental disclosure activism. It has been shown to vary considerably across companies, industries, and time e.g. Brammer and Pavelin, 2006; Cormier et al., 2005; Solomon and Darby, 2005; Smith et al., 2005; Gao et al., 2005; Al-Tuwaaijri et al., 2004; Rahaman et al., 2004; Newson and Deegan, 2002; Gray et al., 2001; Gray et al., 1995a; Hackston and Milne, 1996; Adams et al., 1998; Patten, 1992. Some of the principal research questions that have been tackled regarding environmental and social disclosure practices are linked to attributes of economic performance or to factors including firm size, profitability, debt ratio, industry membership, visibility, ownership, environmental performance, and what motivates companies to make particular social and environmental disclosures. However, these results have not been consistent. First, the majority of studies have failed to distinguish between mandatory meaning that required by law or a condition of practice and voluntary disclosure. Second, it has become increasingly clear that environmental and social disclosure varies among various countries, and such results originate in differences among cultures and systems; and third, investigations into environmental and social disclosure lacking a theoretical basis have largely been disproven. Therefore, this study focuses on voluntary environmental disclosure and governance structure a proxy for cultural via the establishment of legitimacy theory. ----- Insert Table 1 ----- 2.2 Theoretical framework: organizational legitimacy Legitimacy theory is defined as ―a generalized perception or assumption that the actions of any entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and definitions ‖ Suchman, 1995. The corporate or governmental entity, through its top management, seeks congruency between organizational actions and the values of its general and relevant public Dowling and Pfeffer, 1975; Lindblom, 1994 or its stakeholders. Sethi 1979 argues that if an actual or potential disparity exists between organizational and social values, then organizational legitimacy will be jeopardized, thereby giving rise to a ‘legitimacy gap‘. In essence, seeking organizational legitimacy is deemed to be important in demonstrating social worthiness Oliver, 1991, as well as demonstrating that the firm is in tune with societal concerns Clarke and Gibson- Sweet, 1999 and values to help close any perceived legitimacy gaps. Actions by corporate management to convince the wider society that the organization is socially responsible are a part of the process of legitimation Gray et al, 1995a. Lindblom 1994 identified four broad legitimation strategies that firms may use to ensure organizational legitimacy: informing stakeholders about intended improvements in performance; seeking to change stakeholders ‘ perceptions of an event; distracting attention away from an issue; and changing external expectations regarding its performance. Such legitimation strategies include gaining, maintaining, or repairing legitimacy Suchman, 1995. Dowling and Pfeffer 1975 identified three modes of action that firms can undertake to enhance legitimacy: adapt output, goals, and methods of operation to conform to prevailing definitions of legitimacy; attempt via communication to alter the definition of social legitimacy to conform to present practices, output and values; and finally, attempt via communication to become identified with symbols, values or institutions which have a strong basis in social legitimacy. Gray et al. 1995a linked the strategies suggested by Lindblom 1994 and the actions proposed by Dowling and Pfeffer 1975 within the framework of legitimacy theory. The adoption of an appreciation strategy 1685 depends on how management feels it can most effectively close the legitimacy gap. When a legitimacy gap is discovered and recognized by senior management, the company must consider a response. One response is to ignore the gap, presumably on the basis that no adverse consequences will ensue. Alternatively, senior management responds by disclosing information that would be helpful in reducing the legitimacy gap. O ‘Dwyer 2002 suggests that the objective of companies in disclosing environmental and social information is to influence opinion: either in a defensive way to repair a perceived loss of legitimacy or in a proactive fashion, to be seen as having social conscience and enlightened self-interest. Legitimacy theory is also the basis for our analysis, because it is difficult to separate the notion of legitimacy from the idea of crisis. The financial crisis in Korea in 1997 raised questions of corporate legitimacy and its governance structures and of the relationship between the corporation and the social context governing the functioning of entities. After enduring the financial crisis, and attempting via communication to become identified with symbols and values, the improved governance structure enhanced the transparency of management and accounting disclousure. As a consequence, it is expected that the improved governance structure may affect the environmental information disclosure to stakeholders, thereby reducing the legitimacy gap for CSR corporate social responsibility.

3. Hypotheses Development

3.1 Research Framework

This study intended to verify the impact of corporate governance on the disclosure of environmental information, via legitimacy theory. This is important when discussing corporate environmental disclosure practices to consider the values, motives, and choices of those involved in policy formulation decision-making in the organization Maclagan,1999. Hence, the consideration of corporate governance, including ownership structure and the constituents of boards that exist in an organization, is important because it is top management who oversees information disclosure in annual reports Gibbins et al., 1990. The principal variables relevant to corporate governance are outside directors on board, management ownership, institutional ownership, and foreign ownership. The disclosure of environmental information is measured by environmental information disclosure EID, and particularly by the level of EID. The research framework of this study is as follows: Research Framework 1686

3.2 Korean context

3.2.1 Board composition

The Securities and Exchange Act, Article 2, defines an independent director as a non-executive director who is qualified and elected in accordance with Articles 54-5 or 191-16 of the Securities and Exchange Act Feb 1998, re-regulated on Nov 2000. The requirements for listed companies are as follows: a At least one independent director should be on the board, and the total number of independent directors should comprise at least one quarter of the board. b For companies with assets in excess of two trillion Korean won, at least three independent directors should serve on the board, and the total number of independent directors should comprise at least half of the board. The recommendations of the Korea Corporate Governance Service KCGS concerning boards of directors are as follows: a The board of directors shall make the corporation‘s key management policy decisions and shall supervise the activities of the directors and management. b The directors and the board shall perform their duties faithfully in the best interest of the corporation and its shareholders; they should also live up to their social responsibilities and consider the interests of various stakeholders. c The board shall observe the related statutes and the articles of incorporation when performing its duties, and shall ensure that all members of the corporation also observe them. One of the functions of the board is to oversee the process of information disclosure.

3.3 Hypothesis Development