Board Size, Company Size, Profitability and Leverage on Corporate Social Responsibility Reporting in the Annual Report (Empirical Evidence of Mining Companies Listed in Indonesia Stock Exchange Period 2009-2011)

BOARD SIZE, COMPANY SIZE, PROFITABILITY AND LEVERAGE ON CORPORATE SOCIAL RESPONSIBILITY REPORTING

IN THE ANNUAL REPORT

(Empirical Evidence of Mining Companies listed in Indonesia Stock Exchange Period 2009 - 2011)

By:

Oktavian Surya Pramono 107082103317

DEPARTMENT OF ACCOUNTING INTERNATIONAL CLASS PROGRAM FACULTY OF ECONOMICS AND BUSINESS

SYARIF HIDAYATULLAH STATE ISLAMIC UNIVERSITY JAKARTA

ENDORSEMENT SHEET COMPREHENSIVES EXAMS

Today is Wednesday, January23, 2013 A Comprehensive Examination has been conducted on student:

1. Name : Oktavian Surya Pramono 2. Student Number : 107082103317

3. Department : International Accounting

4. Thesis Title : Board Size, Company Size, Profitability and Leverage on Corporate Social Responsibility Reporting in the Annual Report (Empirical Evidence of Mining Companies Listed in Indonesia Stock ExchangePeriod 2009 - 2011)

After careful observation and attention to appearance and capabilities relevant for the comprehensive exam process, it was decided that the above student passed and given the opportunity to continue to thesis as one of the requirements to obtain a Bachelor of Economics in the Faculty of Economics and Business SyarifHidayatullah State Islamic University Jakarta.

Jakarta, January23, 2013

Prof. Dr. Ahmad Rodoni (______________________)

ID. 19690203 200112 1 003 Chairman

Rahmawati, SE, MM (______________________)

ID. 19770814 200604 2 003 Secretary

Prof. Dr. Azzam Jassin, MBA (_____________________) Examiner Expert

CURRICULUM VITAE

Personal Data

Name : Oktavian Surya Pramono Place & Date of Birth : Jakarta, 22ndOctober1989

Address : Pamulang Indah (M.A) Jl. Edelweiss Blok B 7 No. 7 Religion : Islam

Nationality : Indonesia

Sex : Male

Hobby : Football and Travelling Mobile Phone : 085697155110

Email : oktaviansuryapramono@gmail.com Formal education

1. 1994-1995 TK Ananda U.T 2. 1995-2001 SD Dharma Karya U.T 3. 2001-2004 SMPN 1 Pamulang 4. 2004-2007 SMAN 1 Pamulang

5. 2007-2013 State Islamic University SyarifHidayatullah (UIN), Jakarta

Faculty of Economics and Business, Major of International Accounting

Non Formal Education & Training

ABSTRACT

The objective of this study is to identify the influence of board size, company size, profitability and leverage to corporate social responsibility reporting in the annual report of mining companies listed in Indonesia Stock Exchange year 2009 - 2011. The dependent variable in this research is corporate social responsibility reporting, which is measured by ratio scale and then the independent variables consist of 4 variables namely board size, company size, profitability and leverage are measured by ratio scale. The data in this research include 16 mining companies which were selected by using purposive judgment sampling in the period 2009 – 2011 where the total of samples are 48. The methods used in this research are normality test, classical assumption test and hypotheses test by using multiple regression analysis.

Keywords: Corporate Social Responsibility Reporting, Board Size, Company Size, Profitability, Leverage.

ABSTRAK

Tujuan penelitian ini adalah untuk mengidentifikasi pengaruh ukuran dewan, ukuran perusahaan, profitabilitas dan leverage terhadap pengungkapan tanggungjawab sosial perusahaan di laporan tahunan perusahaan pertambangan yang terdaftar di Bursa Efek Indonesia tahun 2009 - 2011. Variabel dependen di penelitian ini adalah pengungkapan tanggungjawab sosial perusahaan, yang diukur dengan skala rasio dan variabel independennya terdiri dari 4 variabel yaitu ukuran dewan, ukuran perusahaan, profitabilitas dan leverage yang diukur dengan skala rasio. Data dalam penelitian ini meliputi 16 perusahaan pertambangan yang terpilih dengan menggunakan purposive judgment sampling untuk periode 2009 – 2011 dimana total keseluruhan data sample adalah 48. Metode yang digunakan dalam penelitian ini adalah uji normalitas, uji asumsi klasik dan uji hipotesis dengan menggunakan analisis regresi berganda.

Kata kunci: Pengungkapan Tanggung Jawab Sosial Perusahaan, Ukuran Dewan, Ukuran Perusahaan, Profitabilitas, Leverage.

ACKNOWLEDGEMENTS

Alhamdulillah, praise and gratitude be Allah SWT, God of universe, who already gives a gift, a bless, as well as affection to me and also regard to Prophet Muhammad SAW as our life-guide, so that I am able to finish my thesis in fulfilling one of the requirements to obtain my Bachelor Degree in Economics at the State Islamic University (UIN) Syarif Hidayatullah, Jakarta.

The writer realizes that this thesis is too far from the perfection, realizing that the limitation of the knowledge as well as experiences that the writer has, but because of many parties support, finally the writer could finish this thesis by hoping that it could be worthwhile for the readers.

In finishing this thesis, the writer was not alone since I was supported and taught by many parties. In this opportunity, the writer would like to say my huge thankful to:

1. My lovely parents, Suparmin, SE, MM & Sri Fachrida Ach for their effort to have their children to be the best we can be. I realize that I am nothing and impossible to be like now without their role model.

2. My lovely siblings who so beautiful and so kind, Andhianty Nur Pratiwi, Muhammad Fadhil Aldaffa, Siti Alfiani Fauziah for their essential role to support each other. Eventually it is my turn to have my degree in Economics after having completed my education in university. I wish we are able to accomplish our dreams. So we will be a successful people together and make our parents happy and proud of us.

3. All of my family that I can’t tell one by one.

4. Someone special in my life now, Andrea Ardilla Mandry, SE. Thank you for coloring my life with your special and your contributions as my third supervisor for finishing this thesis. I don’t even know to draw you words

5. Prof. Dr. Abdul Hamid as a Dean of Faculty of Economics and Business, State Islamic University (UIN) Syarif Hidayatullah, Jakarta, who responsible for the teaching and learning processes at the faculty.

6. Dr. Amilin, SE, Ak, M.Si and Wilda Farah, SE, Ak, M.Si as my first and second thesis supervisor. Thanks for spending some times to guide, motivate and support accompanied by the knowledge in contributing for this thesis compliance so that the thesis can finish properly.

7. My expert comprehensive test examiner Prof. Dr. Ahmad Rodoni,Rahmawati, SE, MM and Prof. Dr. Azzam Jassin, MBA who had given me the contribution of knowledge and good mark in comprehensive test.

8. Lecturers and Staffs in UIN Jakarta, especially at international program secretariat FEB, Arief Mufraini Lc., M.Si (Head), Dr. Ahmad Dumyathi Bashori, MA (Secretary), and also Sugih Waluyo Romdlon, SE. Wish Allah SWT rewards back your nice contributions.

9. All of my friends in campus, especially at international program (Accounting & Management Department) where we have a great time in the last 4 years. Hopefully we will always keep in touch, guys.

10. All that I cannot mention one by one. I am very grateful for all the support and pray for me to make this process run properly. Hope you all will get the success in the future.

At the end, the writer opens for any critics as well as suggestions that could improve the content of this thesis. Hopefully this thesis could be worthwhile for all of us. Amin. Thank you.

Assalamualaikum Warahmatullahi Wabarakatuh.

Jakarta, July 25th 2013

(Oktavian Surya Pramono) Author

TABLE OF CONTENTS

SHEET STATEMENT AUTHENTICITY SCIENTIFIC WORKS ... i

SUPERVISOR APPROVAL SHEET ... ii

ENDORSEMENT SHEET COMPREHENSIVES EXAMS ... iii

CERTIFICATION OF THESIS EXAM SHEET ... iv

CURRICULUM VITAE ... v

ABSTRACT ... vi

ABSTRAK ... vii

ACKNOWLEDGEMENTS ... viii

TABLE OF CONTENTS ... x

LIST OF TABLES ... xiii

LIST OF FIGURES ... xiv

LIST OF ATTACHMENTS ... xv

CHAPTER I INTRODUCTION A. Background ... 1

B. Problem Identification ... 7

C. Objective and Benefit of Research ... 7

1. Objective of Research ... 7

2. Benefit of Research ... 7

CHAPTER II LITERATURE REVIEW A. Theory Basis ... 10

b. Benefit of CSR ... 12

c. CSR in Indonesia ... 12

2. Corporate Social Responsibility Reporting ... 15

a. Definition of CSR Reporting ... 15

b. Motivation and Reason for Doing CSR Reporting ... 17

c. Categories of CSR Reporting ... 19

d. CSR Reporting in Annual Report ... 21

1) Annual Report... 21

2) CSR Reporting in Annual Report... 22

3. Company Characteristics ... 23

a. Board Size ... 24

1) Definition of Board Size ... 24

2) Board Size and CSR Reporting ... 25

b. Company Size ... 26

1) Definition of Company Size ... 26

2) Company Size and CSR Reporting ... 26

c. Profitability ... 28

1) Definition of Profitability ... 28

2) Profitability and CSR Reporting ... 30

d. Leverage ... 32

1) Definition of Leverage ... 32

2) Leverage and CSR Reporting ... 32

B. Previous Research ... 42

C. Logical Framework ... 50

D. Hypothesis ... 51

CHAPTER III RESEARCH METHODOLOGY A. Scope of Research ... 54

B. Sampling Method ... 54

D. Data Analysis Method ... 57

1. Descriptive Statistics ... 57

2. Normality Test ... 57

3. Classical Assumption Test ... 59

4. Multiple Regression Analysis ... 61

5. Hypothesis Test ... 62

E. Operationalization Variable ... 63

CHAPTER IV ANALYSIS AND DISCUSSION A. Overview of Research Object ... 71

1. Description of Research Object ... 71

2. Description of Selected Companies’ Sample ... 72

B. Analysis and Discussion ... 74

1. Descriptive Statistics Analysis ... 74

2. Normality Test ... 77

3. Classical Assumption Test ... 79

a. Multicolinearity Test ... 79

b. Heteroskedastisity Test ... 80

c. Autocorrelation Test... 81

4. Hypothesis Test ... 81

a. Multiple Regression Analysis ... 81

b. Hypothesis Test ... 83

1) Determination Coefficient Test ... 83

2) Simultaneous Regression Analysis ... 84

3) Partial Regression Analysis ... 85

CHAPTER V CONCLUSION AND IMPLICATION A. Conclusion ... 93

B. Research Finding Implication ... 94

C. Limitation and Suggestion ... 96

LIST OF TABLES

No Details Page

1.1 Sample Cases of Environmental and Social Issues ... 2

2.1 Review of Previous Research... 42

3.1 Sample Selection ... 55

3.2 Durbin Watson ... 60

3.3 Operational Variable ... 69

4.1 Sample Selection ... 72

4.2 List of Companies’ Sample...73

4.3 Distribution of Sample According to Sub Sector ... 74

4.4 Descriptive Statistics ... 75

4.5 Kolmogorov-Smirnov Test ... 78

4.6 Multicolinearity Test Result ... 79

4.7 Autocorrelation Test Result... 81

4.8 Result of Multiple Regression Analysis ... 82

4.9 Result of Determination Coefficient Test ... 83

4.10 Result of F Test ... 84

4.11 Result of T Test ... 85

LIST OF FIGURES

No Details Page

2.1 Conceptual Framework of Study ... 50 4.1 Normality Test Result... 77 4.2 Heteroskedastisity Test Result ... 80

LIST OF ATTACHMENTS

No Details Page

1. Dimensions and Classification CSR Disclosure ... 102 2. Research Data ... 105 3. Outputs SPSS ... 108

CHAPTER I INTRODUCTION A. Background

Business and academic researchers have shown increasing levels of interest in corporate social responsibility (CSR) during recent years. The theme of environmental and social responsibility appears in a number of political and legal documents and is gaining ever-greater importance at the international level and national level. Survey of PriceWaterhouseCoopers (Pwc) of 750 Chief Executive Officers showed that increasing pressure to implement CSR was second ranking of the other business challenges in 2000 (Suharto, 2008:1).

Under the pressure of various stakeholders and the public, many companies have begun to deal with social and environmental issues firmly, which is evidenced by increase in the communication of social and environmental issues (Gao and Joshi, 2009:27). This happens because over time, society increasingly aware of social and environmental impacts posed by the company in running its activities to achieve the maximum profits that the longer the bigger and more difficult to control (Lubis, 2010:466).

There are some real cases in the field both at national and international scale about the negative impact of company activities that significantly affect the problem of social environment and physical environment, which can cause long-term social cost and borne by society (Nor Hadi, 2011), such as:

Table 1.1

Sample Cases of Environmental and Social Issues

No. Cases Environmental and Social Issues

1. PT. Freeport Indonesia

1. Mass labor strike because the labors demanding improved wages and welfare. 2. Communities around the company

demanding to be given job opportunities. 3. Get protests from local communities and

public and international concern regarding problems with the waste of industry and environmental pollution.

2. PT. Lapindo Lapindo mudflow in Sidoarjo in the middle of overcrowding caused by human error. Many people left homeless and lost sources of income.

3. Nike Had ignored business ethics, such as extortion to workers in developing countries (employment of underage children).

6. In the World Global Warming can also be triggered by the release of (product) of carbon from industrialization. It can cause a gradation of environment due to waste pollution in rivers and air pollution from factory emissions of gases that are not controlled.

Source: Bachtiar and Siregar (2010) and Nor Hadi (2011)

The occurrence of the various cases as described above is a reflection of the lack of a sense of corporate responsibility towards the environment in the vicinity. So in the midst of society gave birth to a critique of the corporate existence of the company's activities should be expected to have the feedback, both socially and economically (Nor Hadi, 2011:20).

This has increasingly lead to the development of corporate social responsibility (CSR) in both the international and national scale which emphasizes that every management efforts undertaken by the business entity

to achieve sustainable development based on the balance of the pillars of economic, social and environmental, to minimize and compensate for negative impacts and maximize the positive impact on each pillar (Elkington (1987) cited in Nor Hadi (2011:55).

Concern with corporate social responsibility (CSR) in Indonesia has been increasing and continues to grow since the government (Indonesia’s House of Representatives) issued Limited Liability Company Law No. 40 year 2007. In article 74 notes that a company having its business activities in the field of and/or related to natural resources shall be obliged to perform its social and environmental responsibility (Bachtiar and Siregar, 2010:242).

As an integral part of the company, accounting aims to accommodate the changing trend by establishing a sub-discipline of social accounting. There was an essential change by the accounting discipline through this issue, that is, the change in paradigm of responsibility. During times, accounting products were purposed as a management responsibility to stockowners. Nowadays, that paradigm was extended as a responsibility to all stakeholders. This extended paradigm of responsibility is a large contribution by the accounting discipline for the community. There is an acknowledgment that the users of financial reports are not only stockowners, future investors, creditors, and government, but have extended to other stakeholders (Mirfazli, 2008:389).

Therefore, the increasing concern with CSR has impacted also on growing attention to its reporting in companies’ annual reports (Bachtiar and

Siregar, 2010:242) and has encouraged researchers across the globe to study various aspects in CSR (P and W, 2011:46).

CSR disclosure has been a research subject of many academicians for over two decades. Two major issues of those studies are factors that determine the level of CSR reporting and whether CSR reporting affects a firm’s future performance (Haniffa and Cooke (2005) cited in Bacthiar and Siregar (2010:242)).

In this study concern with factors that determine the level of CSR reporting (CSR disclosure). As we know that many empirical studies about factors that determine the level of CSR reporting had been done by previous researchers both nationally and internationally such as Al-Haj et al. (2011), Bachtiar and Siregar (2010), Darwis (2009), Gao and Joshi (2009), Janggu et al. (2007), Rahman (2008), Reverte (2009), Siregar and Sitepu (2009) and others.

Their study have found that various factors which determine the extent of CSR disclosure such as company size, profitability, leverage, board size (board of commissioner and board of director), company age, company profile, auditor size, foreign ownership and others. In addition, their study also has found different result of their empirical study.

In this study, researcher only focused of four variables namely board size, company size, profitability and leverage. Where the result of previous research conducted by Bachtiar and Siregar (2010) and Siregar and Sitepu

(2009) indicated that board size positively affects corporate social responsibility reporting. Even though, a very large board could limit the communication and coordination among board members and consequently will hamper monitoring process.

Then, research result of Al-Haj et al. (2011), Bachtiar and Siregar (2010), Darwis (2009), Gao and Joshi (2009), Janggu et al. (2007) and Reverte (2009) indicated that company size positively affects corporate social responsibility reporting. Whereas, study of Rahman (2008) Siregar and Sitepu (2009) indicated that company size negatively affects corporate social responsibility reporting.

Afterward, variable of profitability also indicated different results where the study of Gao and Joshi (2009), Janggu et al. (2007), Mohamed Zain & Janggu (2006) cited in Al-Haj et al. (2011) and Siregar and Sitepu (2009) indicated that profitability positively affects corporate social responsibility reporting. While, study of Al-Haj et al. (2011), Bachtiar and Siregar (2010), Darwis (2009), Rahman (2008) and Reverte (2009) indicated that profitability negatively affects corporate social responsibility reporting.

Likewise with variable of leverage, where within study of Al-Haj et al. (2011), Bachtiar and Siregar (2010), Darwis (2009), Janggu et al. (2007), Rahman (2008), Reverte (2009), Siregar and Sitepu (2009) indicated that leverage negatively affects corporate social responsibility reporting. While, based on agency theory argue that more highly leveraged firms disclose

voluntary information in order to reduce their agency costs and, as a result, their cost of capital.

In previous research has been inconsistent between the theory and result of empirical study. Reconciliation of inconsistent research results requires further research to determine whether the company characteristics consist of board size, company size, profitability and leverage influential toward corporate social responsibility reporting.

Based on the description above, the researcher is motivated to conduct this research because researcher want to know the practice of corporate social responsibility reporting (CSR disclosure) of companies in Indonesia as a manifestation of social responsibility that made the company, especially mining companies because it is a sector that has the most extensive range of stakeholders including employees, communities, investors, creditors, government, customers, suppliers and also related to natural resources (planet) where the its implementation and disclosure is also influenced by several factors owned by the company like company size, profitability, leverage, board size and others. Therefore, researcher is interesting to take the title of thesis “Board Size, Company Size, Profitability and Leverage on Corporate Social Responsibility Reporting in The Annual Report ((Empirical Evidence of Mining Companies listed in Indonesia Stock Exchange Period 2009 - 2011)”.

B. Problem Identification

1. Is the corporate social responsibility reporting influenced by board size? 2. Is the corporate social responsibility reporting influenced by company

size?

3. Is the corporate social responsibility reporting influenced byprofitability? 4. Is the corporate social responsibility reporting influenced by leverage? C. Objective and Benefit of Research

1. Objective of Research

a. To get empirical evidence related to effect of board size toward corporate social responsibility reporting.

b. To get empirical evidence related to effect of company size toward corporate social responsibility reporting.

c. To get empirical evidence related to effect of profitability toward corporate social responsibility reporting.

d. To get empirical evidence related to effect of leverage toward corporate social responsibility reporting.

2. Benefit of Research

The expected benefits in this research are: a. Theoretical Contribution

1) For Next Researcher

This research is expected to be a reference for next researcher that wants to develop this topic.

2) For Teaching Material

This study is expected to provide input to the learning program because the issue of CSR has been increasing during recent years both in international and national level. Where learning program that not only provides knowledge about the financial records solely, because now the company is no longer only concerned with financial records (single bottom line), but has been covering the financial, social, and environmental aspects of the so-called Triple Bottom Line. This is a synergy of three key elements of the concept of sustainable development.

b. Practical Contribution 1) For Company

For consideration in formulating policies related to the implementation of CSR in the company's operations and disclosure in corporate reports.

2) For Government

Provide relevant information about how big the contribution of Indonesia mining companies in implementing CSR activities as well as disclosure in corporate annual reports.

3) For Stakeholders a) For Society

Provide relevant information about what factors are pushing companies to implement and disclose social responsibility

activities and also give information about practice of CSR activities that disclosed in mining companies annual report. b) For Investor

This research can provide an overview for investors who has been or will be invested in the capital market about how the influence of company characteristics on corporate social responsibility reporting. So that, in the future investors can consider the criteria of CSR reporting into investing strategy.

CHAPTER II LITERATURE REVIEW A. Basis Theory

1. Corporate Social Responsibility (CSR) a. Definition of CSR

As a concept, although CSR has become a trend that much discussed both international and national scale, CSR doesn’t have a commensurate limitation. Many experts, practitioners and researchers do not yet have similarities in providing definitions. Although in many cases have the same essence (Nor Hadi, 2009:46).

The concept of CSR is still in the early stages in developing countries, there appears to be a growing recognition within the business community of the importance key stakeholders attach to the social, environmental, and ethical behavior of companies (Zadek et al. (1997) cited in Hassan and Harahap (2010:205)).

In this paper will introduce to CSR-definitions from:

1) The World Business Council for Sustainable Development (WBCSD)

Continuing commitment by business to behave ethically and contributed to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large (Al-Haj et al., 2011:182).

2) Commission of the European Communities

A concept by which “companies decide voluntarily to contribute to a better society and a cleaner environment”. It states that behaving in a socially responsible way amounts to “going beyond compliance and investing „more’ into human capital, the environment and the relations with stakeholders”. (P and W, 2011:45).

3) CSR Ghana

CSR is about capacity building for sustainable likelihoods. It respects cultural differences and finds the business opportunities in building the skills of employees, the community and the government (Nor Hadi, 2011:46).

4) CSR Asia

The company's commitment to operate in a sustainable based on the principle of economic, social and environment, while balancing the diverse interests of its stakeholders (Suharto, 2008:5).

5) CSR Indonesia

CSR can be defined based on the Law of the Republic of Indonesia Number 40 Year 2007 regarding Limited Liability Company that CSR is company's commitment to participate in sustainable economic development in order to improve the quality of life and environment that are useful, both for the company itself, the local community, and society in general.

b. Benefit of CSR

According to Wibisono (2007) cited in Irawan (2008:4) that company gets several benefits because implement its social responsibility such as:

1) Maintaining and improving the company’s reputation and brand Image.

2) Social License to Operate.

3) Reducing the risk of company’s business.

4) Expands the access to resources for business operations. 5) Expands the opportunities market.

6) Reducing costs, such as costs associated with the impact of waste disposal.

7) Improving relationship with stakeholders. 8) Improving relationship with regulators.

9) Raising the employees’ spirit and productivity. c. CSR in Indonesia

The issue of corporate social responsibility (CSR) in Indonesia has grown steadily since the government (Indonesia’s House of Representatives) issued Limited Liability Company Law about the company's obligation to implement Corporate Social Responsibility (CSR) which proper with the Article 74 in the Limited Liability Company Law No. 40 year 2007 forces all companies in the field of and/or in relation to natural resources to put CSR into practice.

According to Harahap (2002) cited in Irawan (2008:5), social involvement is done by the company based on the situation in the Indonesia country, namely:

1) Environment, among others: surveillance of the effects of pollution, improvement of natural destruction, conservation of nature, the beauty of the environment, reducing the noise pollution, land use, waste management and wastewater, research and development of environment; cooperation with energy, among other things: conservation and energy savings are made by companies in their activities.

2) Human resources and education, among other: safety and health of employees, employee education, family needs and recreation employees, increase and broaden employees' rights, efforts to encourage participation, pension improvements, scholarships, assistance to schools, the establishment of schools, help the higher education, research and development, requirement of employees from poor, and enhancement of employee career.

3) Honest business practices, among others: pay attention to the rights of female employees, honesty in advertising, credit, service, products, and warranties. Thus, control of product quality, government, universities, and the building of recreational place. 4) Aid the environment community, among others: use the expert of

not intervene in the structure of society, building the health clinics, schools, worship houses, improvement of village or city, contribution to social activities, improvement of rural housing, financial assistance, improvement the market transport vehicle. 5) The activities of art and culture, among others: helping arts and

cultural institutions, arts and cultural sponsored, using arts and culture in advertising, recruiting talented people in arts and sports. 6) Relation with shareholders, among others: openness of directors to

all limited liability company, rising of disclosure in financial statements, disclosure of company involvement in social activities. 7) Relation with the government, among other: obey of government

regulations, limiting the lobbying activities, control the company’s political activities, helping government agencies in accordance with enterprise capabilities, helping as general of enhancement of social welfare society, help the project and government policies, improve the productivity of the informal sector, development and innovation of management.

According to Nor Hadi (2011:170) noted that typology of social responsibility seen from the direct and indirect involvement of companies in practice, there are two implementation strategies, namely:

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 secretary/public 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).

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 organizations’ 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.

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

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 recognition/making 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

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

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 safety/consumer 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).

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 reportis 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.

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:

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

(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 countrieslisted 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.

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.

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 company's 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

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)).

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

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).

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 company's financial success. Conversely, when low rate of profitability, company hopes to the users of report will read good news of company's 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 company's 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

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.

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 company's 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

=

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 pressure 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.

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 company's financial viability and risk.

Formula for calculating leverage (DER) is as follows:

B. Previous Research

1. Factors Affecting Social Disclosure in Annual Report on Manufacturing Companies Listed in the Jakarta Stock Exchange (Andre Christian Sitepu and Hasan Sakti Siregar, 2009)

The purpose of this research is to examine the effect of corporate characteristics, consist of size of board of commisioner, leverage, company size and profitability to corporate social responsibility disclosure. This research can explain the decision making about the corporate social responsibility disclosure done by manufacturing companies listed in JSX for the year 2007. The data used are in form of annual reports from 33 companies used as sample for the year 2007.

The statistical methods use in this research is multiple regressions. The result of this research shows that size of board of commisioner and

Debt to Equity Ratio (DER)

=

and types of corporate social disclosure in the annual report to be directly related to management’s perceptions about the concerns of the community. Lindblom (1994) in his legitimacy theory identified four reasons why companies disclosed social information. Firstly, is to inform the “relevant public” the organization’s performance and activities in response to any environmental changes. Secondly, is to change the perception of relevant public. Thirdly, is to deflect attention from issues concerned. The last reason is to change the outside expectation of their performance when they feel its “relevant public” have unrealistic expectation of its social and environmental performance. Social disclosures are made to please the readers or users of the financial statements. Pattern (1992), asserts that disclosing of information can be used to maintain its freedom, status and reputation (Hogner, 1982) and projecting an image to society that the corporations are socially responsible (Abbot and Monson, 1979; Pattern, 1992).

Another theory, stakeholder theory (Watts and Zimmerman, 1978) assume that disclosure on social and environmental information by an organisation is as a result of the pressure from stakeholders such as communities, customers, employees, environment, shareholders and suppliers. This theory concludes that CSR is a way to show a good image to these stakeholders to boost long-term profits because it would help to retain existing customers and attract new ones. Therefore, under this theory the larger company tend to disclose more social and environmental information in the annual reports.

Accountability theory in addition, implies that corporate social and environmental disclosure is as a result of corporation’s obligation to provide the information needed by the users. The company should furnish information when and only needed and should not go beyond the scope of the requirement in order to avoid crossing the boundary of legitimacy theory (Mohamed Zain, 1999).

Next, is social contract theory, which is developed based on concept that there exists contract between business and wider society, whereby business (is deemed to) agrees to perform various society desired actions in return for approval of its objectives, other rewards and its ultimate survival (Guthrie and Parker, 1989).

The other theory, the agency theory assumes the voluntary social and environmental disclosure by corporations as a means for the reduction of agency costs that could arise in the form of legislation and regulation. Social and environmental disclosure is seen as an important element in the corporation’s maintenance of its freedom, status and reputation with influential “publics” or “stakeholders (Hogner, 1982).

Methodology

This study focused on all (169) industrial companies listed on the Malaysian Stock Exchange (MSE) for the period from 1st January 1998 to 31st December 2003.The study applied simple random method to select sample from the population and later checked against the availability of the annual report at Sarawak own state library and MSE library. Companies that do not have all complete set of the corporate annual report from 1998 to 2003 will be excluded from our sample thus leaving only 45 companies for our sample. The non-availability of the annual report could be due to the fact that these companies may be listed during that period or it may change its principal activities during the period covered or any other reasons.

The amount of disclosure (dependent variable) will be grouped into four different categories (thereafter referred to as theme of disclosure) namely human resource, community involvement, product and environment. This is consistent with previous studies by Gray et al. (1995); Hackston and Milnes (1996) and Mohamed Zain (1999). These four dependent variables are further divided into 17 sub-categories of variables as shown in Table 1.

Table 1: Themes of Social Disclosure

Human Resource Products

Appreciation General statement

Training & Development Product quality /safety

No. of employees Research & design

Employees welfares

Staff cost Environmental

Employees Option Scheme (ESOS) Pollution

Waste management

Community Landscaping

Sports and culture General – Policies

Health & safety - Management performance

Number of Sentences

In this study, he amount of social and environment disclosure is measured by using content analysis that is by counting the number of sentences. This is based on an assumption that each sentence of disclosure is a grammatically self-contained speech unit expressing an idea, claim or assertion. It seems logical that a number of ideas, claims or assertion would be more significant than the number of lines (Mohamed Zain, 1999). The use of the number of sentences and page length is justified on the basis that more accuracy can be attributed to the counting of sentences than words (Hackston and Milne, 1996) The number of sentences is counted for each 17 sub-category items wherever possible. In the event that one sentence includes more than one sub-category, hen the number of sentences would be allocated to only major categories of disclosure such as human resource, community, products or environment. The sub-categories such as acknowledgement, training and development, employee welfares and others are then identified as “yes”, if these are mentioned and “no”, if they are not.

There are other ways that amount of disclosure can be investigated such as by counting the words or number of pages. Determining the number of pages is the easiest technique to employ, but it could cause loss of information and also difficult to interpret (Mohamed Zain, 1999). Counting the number of words is not only tedious but it is also difficult to assign the words to a category (Mohamed Zain, 1999).

Research Hypotheses

CSR have been tested against company’s size, profitability, financial leverage and size of audit firm engaged. But prior researchers mostly used one year sample and different variables measurements of content analysis. The results are mixed therefore not useful. This research is no exceptional but will extend further to find out the nature of the relationship (if any) between CSR and ownership as well as directorship, which have never been statistically tested before. Based on prior research findings, four testable hypotheses are formulated to reconcile and confirm statistically the previous findings.

H1. The total CSR in the annual reports is positively related to firms’ size. H2. The total CSR in the annual reports is positively related to firms’ profitability. H3. The total CSR in the annual reports is negatively related to firms’ financial leverage. H4. There is no significant relationship between CSR disclosure and the size of audit firm. Results and Discussion

Overview of CSR in Malaysia from 1998 to 2003

The descriptive analysis of data from 1998 to 2003 revealed that the overall level of social responsibilities amongst industrial companies in Malaysia can be described as growing. The overall amount or level of disclosure shows an increasing trend both in total number of sentences and average disclosure per company during the period under examination (see Figure 2).

Figure 2 Trend of CSR Level from 1998 to 2003

The above finding is similar and consistent with the latest longitudinal analysis on construction companies in Malaysia by Mohamed Zain and Tamoi Janggu (2006). Prior research by Romlah et al. (2003) also reports similar finding that the amount of social and environmental disclosure by Malaysian companies is limited but growing. However, further analysis revealed that two of the companies in 2000 did not even express their appreciation to its staff for their contributions. This exclusion cannot be considered as an overlook as the researchers captured another two non-disclosure on appreciation; one for 2002 for the same company and another one in 2003 from a different company. This finding implies that it is deliberately done for reasons unknown and beyond the scope of this current research to explore.

The human resource theme reported the highest amount of disclosure for the entire six years in both number of sentences and participating companies which comprise 82% of total amount of disclosure (see Figure 3). The most popular sub-theme of disclosure is under the category of Employees Share Option Scheme (ESOS). The disclosure is merely passing a statement and almost the same for all the companies; that is to inform users what they offer to its employees,

conditions and the right to exercise it. Next most popular theme is appreciation and awards where the chairman of the board expresses gratitude to employees for their hard work and commitments. This is consistent with previous studies by Mohamed Zain and Tamoi Janggu (2006), Hasnah, Sofri, Sharon and Ishak (2006) and Mohamed Zain (1999).

Figure 3 Breakdown of Total Amount of Disclosure

The second most popular theme of disclosure is the disclosure on products which made up of 9 per cent of total disclosure (see Figure 3 above). The information on this merely stresses on the product development efforts and achievement, product quality and safety standards. Environmental information ranked third most important in terms of number of sentences of disclosure and participating company. Overall, it shows a slight improvement as compared to previous study on construction companies by Mohamed Zain and Tamoi Janggu (2006) which placed environmental disclosure as least important. Study by Hasnah (2006) found that environmental information placed second in terms of number of participating companies in 1998. This finding therefore implies that companies in Malaysia are reacting positively to effort made by the authorities to protect the environment.

The least important is community involvement information. This theme includes disclosure on company’s involvement in community projects such as giving donation to the poor or charity drive, involvement in sport and education. It falls short of our national aspiration to become a “caring society”.

CSR and Firms’ Characteristics

The second research objective is to find out the relationship between the CSR practices and firms’ characteristics such as size, profitability, leverage, size of audit firm employed and ownership.

The statistical results shown in Table 2 reveal that CSR is positively related to firm size as measured by firm’s turnover but quite weak in nature. This finding is consistent with previous research by Mohamed Zain and Tamoi Janggu (2006) which found that there is a positive relationship between CSR and company’s size. With regard to the relationship with size as measured by paid-up share capital, he finding is inconclusive. This is because the results for three years show a positive and weak relationship and another three years show a negative relationship. This result may be due to the fact that paid-up share capital does not fluctuate with the economic situation unlike turnover and fixed assets utilization. Moreover, it is unlikely to be affected by the decision of the board on CSR matters. There were no previous research studying the relationship of capital as a measurement of size and therefore no comparison can be made.

The relationship between CSR and profitability is quite noteworthy where the significant and positive relationship is found. This implies that profitable companies tend to disclose more social issues as compared to less profitable ones. This further confirms the previous findings on construction companies by Mohamed Zain and Tamoi Janggu (2006) and

Table 2: Summary of Statistical Results

Characteristics Coefficient Correlation

Years Turnover Capital Profit Leverage

1998 0.196 0.092 0.302* 0.019

1999 -0.072 -0.002 -0.036 -0.001

2000 -0.121 -0.045 -0.082 -0.176

2001 0.153 0.044 0.357** -0.174

2002 0.224 -0.095 0.470** -0.209

2003 0.446** 0.120 0.328* -0.023

contradicts findings by Hackston and Milne (1996); Mohamed Zain (1999) which test relationship by using one year data. This finding may best relate to what the chairman of Marks and Spencer PLC said; “Business only contributes fully to a society if it is efficient, profitable and socially responsible”. In addition, Inchausti (1997) argues that profitable companies would use external information to obtain personal advantages of their positions and compensation arrangements.

Previous studies on construction companies in Malaysia from 1998 to 2002 have concluded that the relationship between CSR and leverage is positive but weak (Mohamed Zain and Tamoi Janggu, 2006). Other studies found no relationship (Trotman and Bradley, 1981, Mohamed and Ahmad, 2001). However, the current study finds that there is negative relationship between CSR and leverage even though it is weak. This means that the higher the company’s debt, the lower will be their CSR level. High-leveraged companies might use the strategy of hiding information from maximum exposure from educated and inquisitive public.

In relation to size of audit firm, current study concludes that size of audit firm does not matter. It was found that Big Four audit firms do not necessarily disclose more. It may be unjustified to expect audit firms to disclose more social information regarding the audited companies. Every user of the audited financial statements must be informed that it is the responsibility of the top management to prepare financial reports. Auditors, however, are in the position to advise top management of the companies on what to be included in the published reports apart from the standard requirements of the accounting standards in order to react to calls for good corporate governance by the authorities and at the same gain mileage by projecting good corporate image. Therefore, it is quite sad to note that four of the companies audited by Big4 audit firm did not even express their appreciation to employees for their hard work.

In addition to the above, he current study noted that there is a weak degree of positive relationship between CSR and firm owned by individuals and corporation. Corporate companies are found to be more socially responsible than individual-owned companies in terms of amount of disclosure. Comparing CSR by local and foreign companies, statistical data concluded that local firms are more socially responsible than its foreign counterparts because they disclosed more information than foreign firms.

Initial investigation on chairmanship of the companies revealed that Chinese-managed companies seem to disclose more social information as compared to Malays. Further analysis however reveals that there is no significant difference between CSR of companies managed by Chinese or Malays. This may be due to our sample that is mostly chaired by Malay directors.

Summary of Findings and Concluding Remarks

It can be concluded that the CSR level of industrial companies in Malaysia is improving both in terms of amount of disclosure and the number of participating companies. The most popular theme of disclosure is human resource then followed by environmental information and disclosure on product. This observation implies that companies do appreciate their employees and concern about environmental issues. The least popular theme of disclosure is information on companies’ involvement with community, which indicates that our corporate citizens are not doing enough to complement the government’s effort in making Malaysia a “caring society”.

The statistical results that confirm three of four testable hypotheses are supported by the findings of the current study. Only hypothesis (H4) is disconfirmed because there is no statistical evidence to reject it. The relationship between CSR and company’s size as measured by turnover is confirmed to be positive in nature. It is also concluded that profitability has a weak positive relationship with CSR while the relationship between CSR and leverage is found to be negative. Other findings with respect to the size of audit firm indicated that it does not have influence on CSR level. There is no significant difference in the mean disclosure level between companies audited by Big Four and Non-Big Four.

On ownership, it is concluded that local companies disclose more than their foreign counterparts and corporate ownership is more socially responsible than its individual ownership.

Overall, his current research has been, not only successful in achieving its objectives, but also to some extent has enriched the current pool of literature on CSR disclosure particularly in Malaysia.

The Contribution of the Current Study

The strengths of the current research, inter alia, are: (i) it is the only study thus far that covers a disclosure pattern of six years, spanning from 1998 through 2003; (ii) it focuses on industrial companies in Malaysia thereby widens the horizon of CSR research; (iii) it extends the previous research to cover new variables such as individual and corporate ownership, influence of the chairman’s race on the disclosure and exploring the disclosure pattern by paid-up share capital.

Specific finding with regard to the overall disclosure pattern for the six-year period can be confidently described as quite encouraging in that it steadily projects an increasing trend over the years. Statistical test results support hypothesis (H1) where the CSR disclosure is confirmed to be positively related to the firms’ size as measured by the firms’ turnover though weak in nature. Corporate Social Responsibility disclosure by paid-up share capital, on the other hand, dilutes the above finding in that it cannot be generalized because the result is not conclusive. In other words, bigger firms as measured by paid-up share capital might not disclose more social information in their published annual reports.

Another finding with respect to both individual and corporate ownership is that the relationship between CSR and the said variables are positive, but weak. More disclosure by local firms as compared to foreign counterparts based on the top five (5) highest shareholdings is also noted as useful finding. It can therefore be concluded that foreign firms might not necessarily be more aware of CSR disclosure issues that have attracted the concerns of the educated public than the local ones.

Finding regarding the racial influence of the company’s chairman disclosure attitude is quite interesting. Chinese-managed firms tend to disclose more social information as compared to Malay-chaired companies. The actual attitude of Chinese or Malay chairmen towards CSR issues is, however, not obvious because there is insufficient statistical evidence to prove it. Statistically, he means difference of the extent or amount of disclosure between the two groups of chairmen is not found to be significantly different.

Limitation of the Study

The present study is not without its limitations. First, he use of corporate annual reports may not give a complete picture of the disclosure practices as the company may use other medium to channel the information such as the media, separate environmental and social reporting and interim financial statements. ACCA (2002) for example acknowledges this in its study by extending the scope of its investigation to include standalone environmental reports and companies’ websites.

Secondly, even though the research design use of content analysis by counting the number of sentences of CSR disclosure is commonly used method and regarded as the most accurate (Hackston and Milne, 1996), his method is subject to human error as it involves the exercise of judgment as to what constitutes social information. Mohamed Zain (1999), pointed out that counting the number of sentences is not only tedious but it is also difficult to assign the words to a category.

Finally, his study focuses on industrial companies in Malaysia. Thus all conclusions derived cannot be generalized to other industries. In summary, his current study does not reveal a full picture on the CSR practices in Malaysia.

Nevertheless, his study adds substantially to the existing literature on CSR in Malaysia. It presents an up-to-date overview of CSR particularly in industrial sector which is the first empirical analysis time-series studies in Malaysia. Future Research

This research should be extended into other industries in order to paint a meaningful comparison about the whole picture of CSR practices in Malaysia. The future study should also consider other forms of communication such as standalone report and websites. Another useful topic for future research would be to compare the management or accountant’s perception on social and environmental disclosure and the actual CSR by their respective organization.

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