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3.3.1 The proportion of outside directors on a board
The exercise of the environmental information disclosure process should be viewed as a strategy targeted at the closure of a perceived legitimacy gap between management and stakeholders
government, banking institutions, shareholders, investors, suppliers, consumers, employees, community residents and environmental organizations via outside directors. Outside directors are
seen as a check-and-balance mechanism, not only ensuring that companies act in the best interests of owners, but also other stakeholders, and also advising on the public presentation of the company
‘s activities and performance; and providing
‗additional windows on the world‘ Tricker, 1984. The firms with a higher proportion of outside directors on the board are associated with higher levels of voluntary
disclosure Cheng and Courtenay, 2006. Furthermore, outside directors are likely to respond to concerns about honor and obligations, and would generally be more interested in satisfying the social
responsibilities of the firm Zahra and Stanton, 1998, as this may enhance their reputation and honor in society. They are likely to protect their reputation and to reduce the risk of litigation by providing
more societal disclosure. More recently, stakeholders have become interested in the environmental impacts of business activities and information on performance Jose and Lee, 2007; Cormier et al.,
2005; Burritt and Welch, 1997. Environmental information disclosure EID is one important method of communicating with stakeholders. Thus, outside directors can put pressure on companies to engage in
EID in ensuring congruence between organizational actions and societal values or organizational legitimacy. Therefore, boards dominated by outside directors are expected to have a greater influence
on EID, as they are responsible for representing the interests of other stakeholders. Therefore, we hypothesize the following:
H1: There is a positive association between the proportion of outside directors on corporate
boards and the disclosure of environmental information.
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3.3.2 The percentage of management ownership Preston et al. 1999 underlined the importance of this open communication between
management and its stakeholders. Management is not directly accountable to these stakeholders; a firm
‘s long-term existence is dependent upon its ability to legitimize its activities to the broader society. Corporate managers attempt to manage
stakeholders‘ impressions with regard to its environmental performance, exercising environmental information disclosure Neu et al., 1998. Hence, it can be
inferred that an implicit social contract exists between the organization and those who are affected by its operations Brown and Deegan, 1998. An organization that wishes to continue its operations must
ensure that it meets the terms of the social contract, even if these terms evolve over time. Failure by a firm to operate in a manner consistent with community, or public, expectations, may potentially lead to
the demise of the firm Deegan and Rankin, 1996. Relying on the organizational
– environmental nexus, environmental disclosure can then be viewed as an attempt by managers to legitimize a firm
‘s activities to its stakeholders Walden and Schwartz, 1997. In South Korea, amid growing public
concern for the environment, numerous stakeholders, including governments, banking sectors, shareholders, investors, suppliers, consumers, employees, community residents and environmental
organizations, are increasing the disclosure pressure of environmental activities in the name of social responsibility. Additionally, as the response to investor action, environmental information disclosure
affects corporate value Kim and Youn, 2000. Korean management will tend to increase the practices of EID
in order to improve the reputation and justify the firm‘s approaches to social responsibilities. Hence, we hypothesize as follows:
309
Environmental information includes choice of EIDenvironmental information disclosure and level of EID
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H2: There is a positive association between the proportion of management ownership and the
disclosure of environmental information.
3.3.3 The percentage of institutional ownership
The ownership structure of the company may expose legitimacy in corporate responsibility, communicating this to stakeholders. Institutional investors, in positions other than outside shareholders,
may find it more difficult to obtain environmental management information than other managers. These investors will, therefore, exert greater pressure for increased disclosure. Rahaman et al. 2004, in a
case study, reported that social and environmental disclosure efforts have provided explanations for corporate decisions to disclose information in annual reports at a Ghanaian public sector organization,
the Volta River Authority VRA. This study indicated that a major influence on environmental reporting is the constant pressure to comply with the requirements of funding agencies, such as the World Bank.
Solomon and Darby 2005 detected an association between institutional ownership and social and ethical environmental disclosure in the UK, using data from interviews. The results of these studies
showed that social and environmental disclosure was a response to the pressure of institutional investors. In the South Korean capital market, the 13 rate of institutional investors in 1997 has
increased over time. Institutional investors who have increased investment in corporations have exercised CSR corporate social responsibility, and they require more information to pursue this trend
of social and environmental management activities. Therefore, we expect that institutional investors will pressure management to exercise EID. Hence, we hypothesize the following:
H3: A positive association exists between the proportion of institutional investors and the
disclosure of environmental information.
3.3.4 The percentage of foreign ownership
Different shareholders may demand different disclosures and this demand is greater when the shareholders are foreigners, owing to the geographical separation between management and owners
Craswell and Taylor, 1992. If a large proportion of a firm ‘s shareholders are foreign, it may prove
more difficult for them to obtain information about the firm from alternative sources. These investors will, therefore, impose greater pressure on the corporation to disclose more. Most recently, social
responsibility has been concerned with management activities, and environmental information disclosure became important in capital market. Along with it, foreign ownership will impose greater
pressure to disclose more environmental information. However, Cormier et al. 2005 found a negative association between foreign ownership and environmental disclosure quality in large German
companies. Unexpectedly, these results implied differences in ownership structures among countries. In the South Korean capital market, recently, foreign investors have occupied an important position.
They tend to be more interested in the environmental impacts of business activities than are local investors, and require a substantial amount of information on environmental performance in order to
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consider long-term investment. Therefore, we expect that foreign ownership will pressure management to exercise EID. We hypothesize the following:
H4: A positive association exists between the proportion of foreign ownership and the disclosure
of environmental information.
4. Methods
4.1 Data and sample selection
Panel A of table 2 presents that the final sample for the analysis includes 656 firm-year observations from the KIS-VALUE database. The sample for this study was obtained from firms listed
on the Korean Stock Exchange KSE from 2003 to 2006. We collected the environmental information data from the footnoted items of audit reports of the Retrieval and Transfer System DART, which has
archived electronic annual and quarterly reports of all the public companies in Korea since fiscal year 1998. Financial data and equity ownership were hand-collected from the KIS-VALUE database,
provided by the Korea Listed Companies Association. The proportion of outside directors on corporate boards was hand-collected from the annual reports of the Retrieval and Transfer System DART.
Exclusion criteria for the sample were firms in the banking and finance industry, with missing information on board composition, with no ownership data for the period 2003 to 2006, and with
missing, outlier, or insufficient financial data. Our sample ultimately included a total of 1,977 firm-year observations. The reason that financial industry corporations were excluded is that they are not
typically involved in environmental problems; this was verified through prior studies and sampling surveys.
Panel B of table 2 shows the industryyear distribution of sample firms. Panel B of table 2 shows the industryyear distribution of sample firms across different industries, using two-digit Korean SIC
codes. The number of disclosure firms differed among industries, but there were no differences in the numbers of disclosure firms in terms of year distribution.
----- Insert Table 2----- 4.2 Model Setting Procedure
This study was conducted in two stages. First, the authors identified those corporations that disclosed their environmental information in financial statements audit reports and assessed the
impact of corporate governance using form 1. Second, the impact of corporate governance on the level of EID was evaluated for corporations that disclosed environmental information in financial statements
audit reports using regression analysis form 2. The level of disclosure was assessed via a disclosure index that was developed for this study. The use of a disclosure index to assess the association
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between corporate governance and the level of disclosure is considered to be an important approach for evaluating the transparency and disclosure quality of corporate information. Chang et al. 2002
previously contended that the transparency of financial information is sustained when corporations provide relevant, timely, and accurate accounting information in an objective and easy-to-understand
manner. Thus, the level of disclosure can be used as an indicator of the transparency of corporate information.
DENINDI
it
= α + β1OUTDIR
it
+
β2CON
it
+ β3 INS
it
+
β4 FOR
it
+ β5 LEV
it
+ β6 ROA
it
+
β7IND
it
+
β8SIZE
it
+
it
--------------------------------------1 DISLEVEL,it
= α + β1OUTDIR
it
+
β2CON
it
+
β3 INS
it
+
β4 FOR
it
+ β5 LEV
it
+ β6 ROA
it
+
β7IND
it
+
β8SIZE
it
+
it
------------------------------------- 2 Where:
Dependent Variables Disclosure
= degree of various disclosure practices as below DENINDI choice of EID = a dummy variable with a value of 1 when a firm has EID practices in
the foot notes of audit reports in Korea and a value of 0 otherwise DISLEVEL level of EID = score of disclosure on the five categories required for EID score of
disclosure index Independent Variables
OUTDIR = the proportion of outside directors on corporate boards CON = the percentage of equity ownership by control
INS = the percentage of equity ownership by institutional investors FOR = the percentage of equity ownership by foreign investors
LEV = firm leverage measures as the ratio of total liabilities to total assets ROA =
return on assets as a measure of firms‘ performance IND = a dummy variable with a value of 1 when a firm belong to environmental expropriation
industries and a value of 0 otherwise SIZE = the natural logarithm of total assets
In both forms, the independent variables are all the same, but in this current study, the dependent variables differ from each other. The primary variables of interest are OUTDIR the
proportion of outside directors on corporate boards, CON the percentage of equity ownership by control, INS the percentage of equity ownership by institutional investors, and FOR the percentage
of equity ownership by foreign investors. The control variables are variables that were used in previous studies: LEVChoi,1998; Brammer and Pavelin, 2006; Cormier et al., 2005, ROACowen et
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