Research Framework Hypotheses Development

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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

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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. 309 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