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1 Pattern of Self Managing CSR practice is performed by the company to assign employees or
through foundations and social organizations that formed the command of the company through corporate secretarypublic affair
manager public relations firm and the like. 2 Pattern of Outsourcing
This is an implementation of CSR strategies are handed by third parties, either partnered with professional parties such as NGOs,
Red Cross PMI, universities, mass media and others.
2. Corporate Social Responsibility Reporting CSR Reporting
According to Douglas et al. 2004 cited in P and W 2011:46 and Zadek et al. 1997 cited in Hassan and Harahap 2010:205 that CSR
reporting is variously called CSR disclosure, social accounting, corporate social reporting, social auditing, social and environmental reporting, social
review, or sustainability reporting.
a. Definition of CSR Reporting
According to Finch 2005 cited in Sutantoputra 2009: 37 that companies used CSR reporting as means to communicate to their
stakeholders over their management performance. The external communication of CSR activities can help a firm to build a positive
image among its stakeholders Fombrun and Shanley, 1990; Lafferty et al., 2002.
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Thus, according to Gray et al. 1987 cited in Sutantoputra 2009:37 defined CSR reporting as the process of providing
information designed to discharge social accountability and the medium may cover annual report, special publications or reports or
even socially orientated advertising. CSR is executed through triple bottom line reporting which declares not only financial results but also
social and environmental impact of a business Elkington, 1999. While, according to GRI Sustainability Reporting Guidelines
2002 cited in Sutantoputra 2009:38 that GRI used the term
sustainability reporting for CSR reporting and mentioned that:
Sustainability reporting is the practice of measuring, disclosing, and being accountable to internal and external stakeholders for
organizational performance towards the goal of sustainable development”. The report can provide important information
that is not included in financial reports but is crucial for business decision making. Companies can use sustainability
reporting to measure their sustainability performance i.e. economic, social and environmental performances over time
and use them as basis to improve their internal business practices and external communication.
After that, according to Gray et al 1987 cited in Bachtiar and Siregar 2010:242, CSR disclosure CSR Reporting is:
The process of communicating the social and environmental effects of organization
s’ economic actions to particular interest groups within society and to society at large. As such, the
traditional role of providing a financial account to the owners of capital, in particular, shareholder. Such an extension is
predicted upon the assumption that companies do have wider responsibilities than simply to make money for their
shareholders.
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In addition, according to Hackston and Milne 1996 cited in Rahman 2008:26 stated that corporate social responsibility disclosure
CSR Reporting is communication process of social effect and environment from organization economics activity toward public
society as a whole.
b. Motivation and Reason for Doing CSR Reporting
Within research of Mirfazli 2008:396 stated that some motivation is possible to push the environmental and social
performance information disclosure, namely:
1 To maintain the legitimacy of company operation Legitimacy Theory. According to Legitimacy Theory, company conduct
certain activity, included in matter of information disclosure, in order to obtain the legitimacy from society where the company
operates and also as a strategy to keep the good relation between
the company with the outside party especially stakeholders.
2 To manage or influence certain group stakeholders who have a strong influence
. In stakeholders’ theory, a company considers the existence of expectation, which differ from each group of
stakeholders that have an affect on operation and policy of
information disclosure.
3 To increase properties of all stockholders and managers. Positive Accounting Theory has the assumption that everyone does the
activity because
they are
pushed by
private interest
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accomplishment. If everybody has an activity to fulfill its private interest, it can be that managers set their mind to disclosure of the
environmental and social information because they expect to get the make-up of properties from the disclosure activity. Make-up of
properties is possible from profit improvement or assessing the
company.
4 Manager confidence that companies have the accountabilities or duty to provide certain information. Disclosure of social and
environmental responsibility performance information can be pushed because a manager believes that various group stakeholders
are entitled to know the operate implication for the company to
environmental and social quality.
5 To hinder or preceding the effort recognitionmaking of disclosure regulation that more weighing. Managers do the environmental
and social performance information disclosure in order to hinder governments and depress the pertinent industry. It is very possible
to disturb this when too much reporting occurs.
Thereafter, according to Nor Hadi 2011:159 noted that there are two paradigm approaches in doing social performance
improvement and disclosure, which is based on: 1 Motive Approach,
means the practice of social responsibility and disclosure based on certain motive, either social motive or
economic motive. Motive approach foster social responsibility
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practices to be volunteer accordance with the requirements and corporate interests such as the existence of direct linkage and
positive between financial performances with social disclosure and there is linkage between social performances with social
disclosure. Research has proven this paradigm is Belkaoui and Karpik 1989, Bowman and Haire 1975, Ulmann 1985, Strand
1983 and others. 2 System Approach, means that company hold social spending,
including disclosure because of the demands and conditioning an existing system. This system may be rules and policies that must be
complied such as determination of management which is the translational code of conduct, vision and mission as well as
company strategy and regulations arising from the government Law of the Republic of Indonesia Number 40 Year 2007 regarding
Limited Liability Company, Standard, Regulation of Capital Markets, social customs or conventions. Thus, a violation of the
implementation of social performance and disclosure will have implications on the company.
c. Categories of CSR Reporting
Douglas et al. 2004 cited in P and W 2011:46 noted that reporting of the CSR behavior is different in different countries, which
is attributed to the government policies, cultural differences, and stage of economic development. Further, they also state that the volume of
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disclosure does not necessarily reflect the quality of corporate social reporting.
Until now, there are still differences of opinion about the contents of the disclosure of CSR itself. . The study is conducted by P
and W 2011:48 noted that types and categories of disclosures both mandatory and voluntary which are disclosed by the companies in
annual reports among others:
1 Environment 2 Fair business
3 Equal opportunity 4 Personnel or human resources
5 Community involvement 6 Product quality or safetyconsumer
7 Political 8 Energy
Meantime, cases in Indonesia, many companies do social responsibility, although each company has the interpretation and
availability differently. Implications of social responsibility practices are carried out voluntarily and without a commensurate standard so
that content and implementation strategies to be different Nor hadi, 2011:133.
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The study result of Nor Hadi 2009 cited in Nor Hadi 2011:134 find that social responsibility that has been done by
company includes six dimensions, namely: 1 Environmental
2 Community 3 Energy
4 Employee 5 Product
6 Others
d. CSR Reporting in Annual Report
1 Annual Report
According to Mirfazli 2008:398 definition of an annual report
is at the top every analyst’s list of financial reports used by analysts is the annual report to shareholders. It is the major
reporting document and every other financial report is in some respect subsidiary or to it.
Annual Reports are obliged to be submitted by companies enlisting in Stock Exchange as activity reporting during one
previous year to interested parties stakeholders. Overall, content from the annual report is not arrange by a professional authority in
charge like Indonesia Accounting Association IAI, but is arranged by the regulator of Stock Exchange that is Bapepam.
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The objectives of annual report involve: a Useful to users of the annual report in making investments,
credits, and other decisions. b Providing comprehensive reports about the company prospect
in future of operation activity, finance, and other relevant information
c Providing information about the claims of company resources and also its charge.
2 CSR Reporting in Annual Report
According to Sutantoputra 2009 cited in P and W 2011: 46 that generally, the main medium of disclosing CSR activities is
the annual report. However, if they are not disclosed in the annual report, and are published separately, then they are known as social
and environmental report, CSR report or sustainability report. Nevertheless, the most common form of disclosing CSR is
disclosure in annual report. Adam et al. 1998 cited in Bacthiar and Siregar 2010:243 found that firms in Germany, France,
Switzerland, UK, and Dutch firms, generally disclose their CSR activities through annual reports. In Indonesia, CSR reporting is
also revealed in the annual report. Based on those studies, our study focuses on the annual report also as the source of CSR. Kent
and Chan 2003 provided a number of reasons why it is justified
to use the annual report:
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a Annual report is the principal source of corporate communications to investors and it is widely used by firms to
disclose their social activities.
b The presentation of financial and social information within one document which is the annual report is one way of reducing
costs of disclosure.
c Annual report is also the type of information most actively
sought by pressure groups.
d Disclosures through other media, such as the popular press, are subject to the risk of journalistic interpretations and distortions,
whereas disclosures through annual report are completely
editorially controlled by management. 3.
Company Characteristics
Empirical study has shown that disclosure activism and CSR disclosure activism varies across companies, industries, and time. For
disclosure activism, Fuad 2006:82 research the factors that influence disclosure of manufacturing companies where he explained that the level
of corporate disclosure is influenced by several factors contingency. Several factors are considered as a contingency independent variable for
the level of disclosure is a Debt to Total Assets, Return on Assets, Company Size, Auditor Size, and Disclosure Level one year before.
For CSR disclosure activism varies across companies, industries, and time Al-Haj et al. 2011, Bachtiar and Siregar 2010, Darwis
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2009, Gao and Joshi 2009, Janggu et al. 2007, Rahman 2008, Reverte 2009, Siregar and Sitepu 2009, and others, where they had
researched about CSR reporting that analyze whether company characteristics are potential determinants of CSR reporting practices by
various countries listed firms. Each company has special characteristic that different between one
entity to another Lang Landholm 1993 cited in Rahman 2008:28. According to Willance 1994 cited in Rahman 2008:28 divided
company characteristics into three, namely: a. There are structured related variables, like company size, leverage, and
type of stock ownership. b. Performance related variables like profitability, company type, and
company basis. c. Market related structured like industry type.
Company characteristics explain wider variation of CSR reporting in the annual report. Company characteristics in this research refer to
board size, company size, profitability and leverage.
a. Board Size
1 Definition of Board Size
Within research of Bacthiar and Siregar 2010:244, Indonesia Country adopts a two-tier board system, board size
relates to total of board of commissioners’ and board of directors’ size.
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Then, within research of Siregar and Sitepu 2009:4, board size is total of board of commissioner.
2 Board Size and CSR Reporting
Collier and Gregory 1999 cited in Bactiar and Siregar 2010 and Siregar and Sitepu 2009:4 argued that larger board of
commisioners’ size and directors’ size will make it easier to control the CEO and the monitoring process will be more effective. But, a
very large board could limit the communication and coordination among board members and consequently will hamper monitoring
process. So, larger board size will have positive influence on CSR, but a very large board size will have negative effect on it.
Result of research conducted by Bachtiar and Siregar 2010, Sembiring 2005, Siregar and Sitepu 2009 indicated that
board size positively affects corporate social responsibility reporting.
In this study, researcher only using board of commissioner as one of factors related to CSR reporting in the companies’ annual
reports. Eventhough, in Indonesia adopts a two-tier board system, board size relates to total of board of commissioners’ and board of
directors’ size.
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b. Company Size
1 Definition of Company Size
According to Abrams 1993:69 that company size can be measured with using total revenue, total units sold or volume and
total employment
.
Meantime, according to Indriani 2005 cited in Sudaryono 2007:109 explained that the companys size can be
measured using total assets, sales, or capital from company. Likewise, according to Gao and Joshi 2009:39 noted that
to measure the company size can be measured in a number of ways, such as total asset, capital employed, turnover, number
employees, company’s market value and equity.
2 Company Size and CSR Reporting
Company size is the independent variable which is usually used to explain disclosure variation in the company’s annual
report. In this study, researchers use total assets as company size. According to Al-Haj et al. 2011:194 that one of
benchmarks to indicate whether company is big or small with see its total asset. The company has big total assets shows that the
company has reached maturity stage, generally company has a positive cash flow and considered to have good prospects in a
relatively long period of time, moreover it also reflects that the company is relatively more stable and able to generate profits than
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companies has small amount of total assets Indriani 2005 cited in Sudaryono 2007:109.
According to Belkaoi 2004 cited in Sudaryono 2007:109, the asset is one element of the financial statements
relating directly to the measurement of financial position balance sheet an economic entity. The larger size total assets of
company, the greater of information required to be disclosed than small firms. The statement was based on agency theory in which
large firms have greater agency costs than small firms. Generally, large firms have greater agency costs. To reduce
the agency costs, company tend to disclose more extensive information. Then, large company is
issuers of the most highlighted. The greater disclosure is reduction of political cost as
a form of corporate social responsibility Darwis, 2009:54. Theoretically, larger companies tend to receive more
attention from the public and are under greater public pressure to exhibit social responsibility Cowen et al. 1987 cited in Gao and
Joshi 2009:33. Larger companies can be expected to disclose more social and environmental information to prove their corporate
citizenship, thereby legitimizing their existence. That is because additional disclosure may influence society’s perception about the
company Neu et al. 1998 cited in Gao and Joshi 2009:33.
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In addition, signaling theory suggest that companies with superior performance or good companies use information to send
signals to the market Ross 1979 and Morris 1987 cited in Gao and Joshi 2009:33. Employing signaling theory, Inchausti 1997
cited in Gao and Joshi 2009:33 finds that management with “good news” disclose more information than that with “bad news”.
So, company size frequently been assumed as a factor determining CSR reporting. The study is done by Al-Haj et al.
2011, Darwis 2009, Gao and Joshi 2009, Bachtiar and Siregar 2010, Janggu et al. 2007 and Reverte 2009 indicated that
company size positively affects CSR reporting.
c. Profitability
1 Definition of Profitability
According to Jordan et al. 2010:61, profitability is intended to measure how efficiently a firm uses its assets and
manages its operation. The focus in this group is on the bottom line, net income.
According to Suharli 2006:294, the ratio of profitability is closely related to profits and the sources used to produce it. Ideally
companies generate as much as possible profit from a given source. Ratio needs to be calculated is the ROA, ROE, and EPS.
Whereas, according to Kieso 2010:803, profitability ratios measure the income or operating success of a company for given
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period of time. Income, or lack of it, affects the company’s ability to obtain debt and equity financing. It also affects the company’s
liquidity position and the company’s ability to grow. As a
consequence, both creditors and investors are interested in evaluating earning power
– profitability. Analysts frequently use profitability as the ultimate test of management’s operating
effectiveness. This ratio can be measured with profit margin, asset turnover, return on asset,
return on common stockholders’ equity, earning per share EPS, price-earning ratio and payout ratio.
Likewise, according to Sudaryono 2007:111 that level of profitability of a company is a measure of the ability to get profit
through all the existing capabilities and resources such as sales activities, cash, capital, the number of employees, and the number
of branches. Profitability becomes more important than profit problems
in the literal sense, because the high profit is not necessarily the size that the company has worked with efficiently. Thus,
companies should not only pay attention to how the effort to increase profit but more important is the effort to enhance its
profitability, because of high profitability is reflection efficiency is also high Sudaryono, 2007:111.
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2 Profitability and CSR Reporting
Theoretically, based on the legitimacy theory, one of the arguments in the relationship between profitability and level of
CSR disclosure is that when a company has a high rate of profitability, the company management considers not need to
report things that can disturb the information about the companys financial success. Conversely, when low rate of profitability,
company hopes to the users of report will read good news of companys performance, for example in the social sphere and thus
investors will still invest in the company and also other investors will be interested to investee in its company. Thus, it can be
concluded that profitability has a negative relationship of the level of CSR disclosure Donovan and Gibson 2000 cited in Darwis
2009:55. Nevertheless, according to Shinghvie Desai 2001 cited
in Sudaryono 2007:112 stated that firms with high profitability will encourage managers to provide more detailed information so
that it can convince investors and creditors of the companys profitability.
Then, according to Heinze 1976 and Hackston and Milne 1996 cited in Rahman 2008:29 stated that profitability is a
factor that makes the management free and flexible to disclose social responsibility to stakeholder. The higher company
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profitability rating so the bigger the social information disclosure Bowman and Haire, 1976; Preston, 1978; Hackston and Milne,
1996; cited in Rahman, 2008:29. In addition, according to Belkaoi and Karpik 1989 cited in
Rahman 2008:29, social care wants the company management to make the company profitable. Therefore, we may assume that
the profitability has a positive relation with company social responsibility.
Moreover, according to Mohamed Zain Janggu 2006 cited in Al-Haj et al. 2011:183 find the results provides strong
evidence that the corporate social disclosure is positively related to companies’ profitability. This indicates that, the bigger, in terms of
size a company is, the more the company discloses its social and environmental information.
The result of studies of Gao and Joshi 2009, Janggu et al. 2007, Zain Janggu 2006 cited in Al-Haj et al. 2011 and
Siregar and Sitepu 2009 indicated that CSR reporting is positively related to profitability.
In this study, researcher use return on assets ROE to measure the profitability variable. According to Ross, et al.
2006:65, ROE is measure of how the stockholders fared during the year, because benefiting shareholders is our goal, ROE is, in an
accounting sense, the true bottom-line measure of performance.
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Formula for calculating ROE is as follows:
d. Leverage
1 Definition of Leverage
Leverage ratio is usually also called solvency ratio. According to Ross et al. 2006:60, leverage is intended to address
the firm’s long-run ability to meet its obligations. Then, Solvency ratio or leverage ratio is ratio used to
measure the extent of corporate assets financed by debt. In a broad sense it is said that this ratio is used to measure a companys ability
to pay its liabilities, both short and long term Kasmir, 2012:151. Then, according to Kasmir 2012:155, kind of leverage
ratio consist of seven namely debt to equity ratio DER and debt to asset ratio debt ratio, long term debt to equity ratio, tangible
assets debt coverage, current liabilities to net worth, times interest earned and fixed charge coverage. In this study, researcher use debt
to equity ratio DER.
2 Leverage and CSR Reporting
Leverage is one of company characteristics that influence corporate social responsibility reporting practice Al Haj et al.,
2011:183. ROE
=
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There are only few studies conducted to find out the relationship between social responsibility and financial leverage of
the corporation. Within study of Darwis 2009:55, Janggu et al 2007:11 and Reverte 2008:387 explain that the context of the
agency theory, Jensen and Meckling 1976 argue that more highly leveraged firms disclose voluntary information in order to reduce
their agency costs and, as a result, their cost of capital. Empirical evidence of Trotman and Bradley 1981 cited in
Janggu et al. 2007:11 show that positive relationship has been found between financial leverage and the extent of social
disclosure. However, Brammer and Pavelin 2008 sustain that a low
degree of leverage ensures that creditor stakeholders will exert less press
ure to constrain managers’ discretion over CSR activities, which are only indirectly linked to the financial success of the firm
Reverte, 2008:387. Al-Haj et al. 2011, Bachtiar and Siregar 2010, Darwis
2009, Janggu et al. 2007, Rahman 2008, Reverte 2009, Siregar and Sitepu 2009 show that leverage negatively affects
CSR reporting, where management with high leverage will reduce its CSR to avoid creditor scrutiny.
Thus, we do not make any a priori assumption about the sign of the association between CSR disclosure and leverage.
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In this study, researcher use debt to equity ratio DER. According to Kasmir 2012:157, debt to equity ratio is a ratio used
to assess the debt to equity. This ratio is useful to know the amount of funds provided by creditors with the owner of the company and
also provides a general indication of the companys financial viability and risk.
Formula for calculating leverage DER is as follows:
B. Previous Research
1. Factors Affecting Social Disclosure in Annual Report on
