Managerial Auditing Journal

Emerald Article: The impact of government and foreign affiliate influence on corporate social reporting: The case of Malaysia Azlan Amran, S. Susela Devi

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To cite this document: Azlan Amran, S. Susela Devi, (2008),"The impact of government and foreign affiliate influence on corporate social reporting: The case of Malaysia", Managerial Auditing Journal, Vol. 23 Iss: 4 pp. 386 - 404 Permanent link to this document: http://dx.doi.org/10.1108/02686900810864327 Downloaded on: 11-02-2013 References: This document contains references to 66 other documents Citations: This document has been cited by 8 other documents To copy this document: permissions@emeraldinsight.com This document has been downloaded 4256 times since 2008. *

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Azlan Amran, S. Susela Devi, (2008),"The impact of government and foreign affiliate influence on corporate social reporting: The case of Malaysia", Managerial Auditing Journal, Vol. 23 Iss: 4 pp. 386 - 404 http://dx.doi.org/10.1108/02686900810864327 Azlan Amran, S. Susela Devi, (2008),"The impact of government and foreign affiliate influence on corporate social reporting: The case of Malaysia", Managerial Auditing Journal, Vol. 23 Iss: 4 pp. 386 - 404 http://dx.doi.org/10.1108/02686900810864327 Azlan Amran, S. Susela Devi, (2008),"The impact of government and foreign affiliate influence on corporate social reporting: The case of Malaysia", Managerial Auditing Journal, Vol. 23 Iss: 4 pp. 386 - 404 http://dx.doi.org/10.1108/02686900810864327

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MAJ 23,4

The impact of government and foreign afliate inuence on corporate social reporting
The case of Malaysia
Azlan Amran
School of Management, University Science Malaysia, Penang, Malaysia, and

386

S. Susela Devi
Faculty of Business and Accountancy, University of Malaya, Kuala Lumpur, Malaysia
Abstract
Purpose This paper seeks to investigate the inuence of government and foreign afliates, particularly; multinational companies on corporate social reporting (CSR) development in an economy, where CSR awareness is low coupled with weak pressure group activism. Design/methodology/approach This is a cross sectional study that focuses on the information contained in the annual reports for year 2002/2003. This research uses content analysis as method to measure the extent CSR. Findings Based on regression analysis, the study evidences on the impact of government inuence. However, the impact of foreign afliation variables is not evident. Institutionalisation of the governments aspirations and commitment to CSR is perhaps the most appropriate description for Malaysian CSR practice. Research limitations/implications There are two main limitations of this study. Firstly, this study examines the annual reports for one year. Secondly, this study is annual reports centric. It does not examine any other stand alone reports that the respondents might have produced on the subject of society and the environment. Practical implications This study provides justication for governments role in promoting CSR practice. The impact is evidenced although there are no direct concerted efforts at that time by the government in respect of CSR policy implementation. The signicant role is attributed to the unique Malaysian socio economic structure. Originality/value This study contributes to the CSR literature particularly in the context of economies where governments play a signicant role in promoting economic development. It provides empirical evidence of the inuence of government and foreign afliates. It also adds to the literature by explaining the phenomenon from the Institutional perspective and its relevance to a developing economy. Keywords Corporate social responsibility, Government, Inuence, Malaysia Paper type Research paper

Managerial Auditing Journal Vol. 23 No. 4, 2008 pp. 386-404 q Emerald Group Publishing Limited 0268-6902 DOI 10.1108/02686900810864327

Introduction Recent surveys (KPMG, 2002; ACCA, 2002) conducted in relation to corporate social reporting (CSR) practices of Malaysian companies indicate a rising trend in the number of companies that choose to disclose non nancial indicators in their annual reports. Of late, this phenomenon is linked to the push for sustainable development. Despite the various reports on this trend (ACCA, 2002; Thompson and Zakaria, 2004), few studies have dwelt on into the underlying factors of such a development, particularly the

impact and role of the government and foreign afliates[1] (Haniffa and Cooke, 2002; Thompson and Zakaria, 2004; Che Zuriana et al., 2001). It is still unclear as to what really motivates Malaysian companies to disclose social and environmental information, given the low public awareness of such issues and demand for related information (Amran, 2006). Some studies pin the enhanced reporting to the need by Malaysian companies to keep abreast with the latest reporting practices of multi national companies (MNCs) that operate in Malaysia (Zain, 1999; Amran and Susela, 2004) or the foreign afliates. Studies of companies in more developed countries suggest that corporate image enhancement is the main motivating factor for companies adoption of CSR (Neu et al., 1998; ODywer, 2002, 2003; Adams, 2002). In all of these studies, however, scant regard is given to the signicance of government actions and policies on CSR beyond the casual remarks on the extent of its commitment (Thompson and Zakaria, 2004). Hitherto, the theories used to explain the underpinning factors of Malaysian CSR originate mainly from the west where the awareness and demand for CSR is high. These theories may not be reective of the Malaysian context where the awareness is still in its infancy stage (Thompson, 2003). Recognizing this inadequacy, Institutional Theory is used as a means of explaining the Malaysian CSR experience. Although the importance of this theory has increasingly gained recognition (Kolk, 2005; Rowe, 2005), only a limited number of publications has thus far focused on country specic institutional factors. This paper specically investigates the inuence of the government and foreign afliates, particularly MNCs, on the development of CSR in Malaysia. It considers the background of the Malaysian environment in order to provide the justications for the role of the government and foreign afliates. It then explains the inuence exerted by these two variables from the perspective of institutional theory. It examines the two variables using data from sampled Malaysian companies. This study demonstrates that institutional theory is an appropriate framework to explain CSR in the context of a developing country. The discussion in this paper is organized as follows: the rst section discusses the background of Malaysia and the extant CSR literature, particularly that relating to Malaysia. The second section introduces the theoretical framework and develops hypotheses for empirical investigation. The third section outlines the research methodology and the fourth section discusses the ndings. The nal section concludes with the observation that in the context of developing countries, like Malaysia, the governments role in CSR cannot be discounted. The Malaysian environment Malaysia is a multi racial country where the main ethnic groups consist of the Bumiputras [2] (65.8 per cent), Chinese (25.7 per cent) and Indians (7.5 per cent) (www. statistics.gov.my, as at 2006) (Department of Statistics, 2005). Malaysia is unique in the sense that it has successfully transformed itself into a country that capitalizes on its multiracial harmony (Norhashim and Aziz, 2005). Malaysias unique history is the result of more than 400 years of colonial rule since 1511, starting with the Portuguese and followed by others, including the Dutch, British and Japanese. Malaysia gained its independence from the British in 1957. British colonization is a signicant contributory factor in shaping the present Malaysian social, political and economic climate (Siwar and Hasan, 2002).

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It is claimed that British short-sightedness and economic self-centeredness have greatly dened Malaysias current economic structure. The British pre-independence segregation policy in identifying the three main ethnic groups along economic sectors has resulted in economic disparities between the Malay community (the natives) and the Chinese. The climax ensuing from this policy were the racial riots in 1969, which led to the formulation of the New Economic Policy (NEP). This policy was aimed at addressing and redressing Malay economic backwardness (Razali, 1999). A study conducted in 1977 revealed that the ownership and control of Malaysian companies was primarily by individuals or families of Chinese and European descent (Lim, 1981). The NEP became the fundamental basis of Malaysian economic and social development planning for more than two decades until it was replaced by the New Development Policy (NDP) in 1990. This new policy was, in many ways, an extension of the NEP and was aimed at achieving a more united and just society through more balanced development. It also meant putting the Malays at the top of the agenda (Razali, 1999). The policies that were put in place to achieve the NEP objectives had brought about diverse implications. The NEP agenda in upgrading the Malay and Bumiputra economic status had granted them access to contracts, licenses, import permits and shares. They were also granted public funds from government backed agencies. The Bumiputras were involved in start up projects to exploit state owned resources, with the government as the nancial partner. Later in 1983, in an effort to reduce the heavy nancial burden of the state, government departments or projects were transformed into Malay dominated giant private companies. These companies, called government-linked companies (GLCs), are currently listed on the Malaysia exchange and have become large companies in terms of market capitalization. However, they are highly dependent on the government in terms of jobs, market protection and nancial support. In some instances, the government holds signicant shareholdings in these companies. The spill-over effect of the NEP is felt by the other ethnic groups in varying degrees. The Chinese possess abundant nancial resources and are skilful in entrepreneurship. They thus have become the unofcial and ofcial business partners to the Malays. At the beginning of the NEP implementation, government ofcials were not clear as to how to implement its objectives in achieving the Malay agenda. Access to economic opportunities was given rather indiscriminately at rst and this resulted in business venture failures. Later, the granting of licenses, permits and contracts was given to prominent and politically-heeled Malays, since the involvement of Malays in business had been practically non-existent (Norhashim and Aziz, 2005). These Malays were perceived as well educated and possessing strong leadership qualities. It was also assumed that the benets from these hand-outs would somehow trickle down to the Malay masses. Even though there is no strong evidence to suggest that political power was wielded freely in the ve to think that such a wielding of power could securing of contracts or jobs, it would be na not have happened (Norhashim and Aziz, 2005). After all, it was a norm to invite a politician to ofciate at a companys function or ceremony. Gaining a politicians trust and being a favorite was perceived as the key in ensuring a companys survival. Economic development In terms of economic development, Malaysia had been involved with international trade since the early days of her independence. Malaysia started out as a primary exporter of commodities, such as rubber and tin, and then moved on to

industrialization by manufacturing light manufactured goods (Siddiquee, 2006). In the early 1980 s, a major policy change occurred when the new government, headed by Dr Mahathir Mohamed, opted for heavy industrialization. This was done through partnerships with foreign partners and the inow of foreign direct investments (FDIs). Henceforth, Malaysian economic development boomed to become one of the fastest growing economies in Southeast Asia. The involvement of foreign afliates in nurturing the Malaysian economy is signicant. Malaysias success in attracting FDI lies in her ability to create a favorable business climate for foreign investors one with excellent infrastructure and a hassle-free policy regime (Naik, 2002). Malaysia has everything an investor could want: strong government policies that ensure political and economic stability; abundant skilled and semi skilled labor force to ensure productivity; and sound infrastructure for business. The above policy indicates a strong connection between Malaysia and foreign institutions. A high dependency on foreign economic networks requires Malaysian companies to follow global business trends, and CSR is one of them. Companies that have foreign afliates from more developed countries like Japan, the USA and the UK would be institutionalized by the business practices of these afliates. The above discussion suggests that Malaysias economic dependency on foreign afliates as well as the active participation of the government in directing economic development may provide a plausible explanation of CSR development in the country. CSR in Malaysia One of the earliest studies on the development of CSR in Malaysia was carried out by Teoh and Thong (1984). This study examined various aspects of corporate social performance, including social reporting. The authors surmised that companies were mainly involved in areas of human resource, product service, community work and the physical environment. Human resource related activities topped the list of social involvement by the companies surveyed. An interesting nding from the 1984 study was the mismatch between the level of actual corporate social involvement and the reporting of such activities. In the case of private companies, this mismatch was attributed to the limited circulation of the annual reports. For public companies, disclosures of their social involvement were made in the form of passing references in the Chairmans statements, since annual reports were traditionally kept very brief. Based on these revelations, the researchers concluded that Malaysian companies were, on the whole, rather conservative in their attitudes towards CSR (Teoh and Thong, 1984). Later studies focused on the level of reporting, the themes, and the type of news disclosed. As late as the closing years of the twentieth century, CSR practices of Malaysian companies were still very low (Shireenjit and Zuani, 1998). The situation however, started to improve in early 2000 (Thompson and Zakaria, 2004; Zakaria, 2002). The early studies offered some plausible explanations for the low disclosure. Among others, the absence of legislation on the matter (Teoh and Thong, 1984, Nik Ahmad and Sulaiman, 2004) and the low level of awareness of the business community of their companies potential environmental impact (Perry and Teng, 1998) were mentioned. Subsequent studies found Malaysian CSR as being mostly declarative, narrative in nature and mere references to general commitments (Nik Ahmad and Sulaiman, 2004; Thompson and Zakaria, 2004). In terms of the themes,

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human resources topped the list of disclosed items that include social, environmental, and product responsibility. Some studies further investigated CSR in relation to rm characteristics, and found that such characteristics as size, industry and protability (Andrew et al., 1989; Thompson and Zakaria, 2004) were signicant. Although the literature points to an increasing CSR trend, the motivations behind such disclosures are seldom clear. Studies in the developed countries indicate that an increase in CSR over time can be attributed to legislation, demands of ethical investors and pressure groups, specic events, awards, economic activities, media interest, societal awareness and politics (Deegan, 2002). In the Malaysian context, the drivers of CSR are increasingly being investigated (Zain, 1999; ACCA, 2002; Haniffa and Cooke, 2002; Amran and Susela, 2004). Zains (1999) study was based on interviews with local managers. The study highlighted the motivation for their disclosures as being linked to government inuence, a desire to follow latest trends and also a commitment to Vision 2020[3]. Haniffa and Cooke (2002) explored the inuence of culture and corporate governance structure on CSR. On corporate governance structure, the study found that companies with more family members on the board disclosed less. In addition, companies with independent non-executive directors tend to disclose less as compared to companies with executive directors as chairpersons. As far as the cultural dimension is concerned, the study did not establish any signicant relationships, but found some evidence of foreign inuence through foreign shareholding. In a more recent study by Sumiani et al. (2007), it was found that companies with ISO 14000 certication tend to make some form of disclosure. It is evident from the above published research studies that the impact of the government and foreign afliations on CSR have been largely ignored. This study extends the Malaysian CSR literature to examine the inuence of government and foreign afliations, given the unique socio-economic and political nature of the Malaysian environment. Theoretical framework: institutional theory Many of the early studies employed social and political theory, particularly legitimacy theory in explaining CSR. It is not easy to nd the most appropriate theory (Tilling, 2001) to explain a phenomenon and the literature on CSR reveals a lack of consensus on what constitutes an appropriate theory to explain it. Adams (2002) concluded that prior studies had either provided support for or rejected one or more of the theories and that no one theory was consistently supported or refuted. In this study, institutional theory is used as the explanatory theory. It provides a relatively similar explanation to legitimacy theory albeit from a different perspective. Suchman (1995) and Milne and Patten (2002) suggested that the process of legitimation is not only strategic but also institutional in nature. Proponents of Institutionalism depict legitimacy as the result of congruency between the organization and its cultural environment but they tend to focus more on the cognitive rather than the evaluative side. The institutionalists assume legitimacy not as an operational resource but a set of constitutive beliefs (Suchman, 1995). It is the external institutions that construct and interpenetrate the organization in every respect (Suchman, 1995). It is the strength of institutional theory that provides the reasoning for the phenomenon of the alarming homogeneity of organizational forms and practices in one particular environment (Dimaggio and Powell, 1983).

In order to understand how the environment could force one unit of the population which shares the same environment with another to resemble each other, the process of isomorphism is described. According to DiMaggio and Powel (1983) there are two types of isomorphism: competitive and institutional. Competitive isomorphism emphasizes market competition, niche changes and tness measurements. This view is relevant to an open and competitive eld. In the highly competitive market, organizations make decisions by taking into account other responses. The second type of isomorphism is useful in understanding the politics and ceremony that inuence modern organizational life. Organizations compete not just because of resources or customers but also for political power and institutional legitimacy, and for social as well as economic purposes (Dimaggio and Powell, 1983). Isomorphism can be achieved through three distinct mechanisms. The rst mechanism, called coercive isomorphism, basically originates from political inuence, regulation, law and the public at large. It is a result of both formal and informal pressures exerted by other organizations which the particular organization is dependent on. The pressures may be in the form of forces, persuasions or invitations to join the collusion. The second, mimetic isomorphism, results from uncertainty within the environment. When the environment creates an uncertain situation where there is no proper reference or guideline, an organization will model itself on other successful organizations (Dimaggio and Powell, 1983). In this case, the modeled organization may not be fully aware of the impact of its own actions on other organizations. It serves as a convenient source of practice that followers may use. The third and last source of organizational isomorphism is normative pressure. Dimaggio and Powell (1983) stated that normative pressure stems from professionalisation. It is observed that professionalisation has two important factors that lead to isomorphism. These are education and professional networks. Universities and training centers are an important place for the development of the normative pressure. Additionally, professional associations play an important role in providing continuous knowledge and creating some form of normative pressure on the professionals. The whole concept of Institutional theory was utilized in developing the hypotheses. Hypotheses development The government of Malaysia may be viewed as being sensitized to the needs of CSR (Amran, 2006). The initiative taken by Malaysia in response to Agenda 21[4] in its own development planning and monitoring systems, namely the ve yearly Malaysia developments plans and the longer term outline perspective plans, is evident (Hasan and Adnan, 2002). The Vision 2020 targets see Malaysia as a fully developed country with emphasis on environmental sustainability (Mahyuddin and Rao, 2003). GLCs are companies that used to be part of government departments, which were later made private under the privatization policy. Most of these companies deal with strategic interests such as energy and telecommunications and have government appointed directors represented on the boards. With the change in status, these companies have increasingly focused on prots as their primary objective at the expense of social and community concerns. With the advent of social and environmental awareness and the ensuing pressure brought to bear by many groups globally, including foreign investors, the government of Malaysia, which depends heavily on FDIs for the development of many of its economic programs, has reiterated its willingness to comply

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to certain social and environmental expectations. These expectations are then relayed down to the government owned companies as well. The appointed directors of these companies, being custodians for the government, need to align the decisions of the companies with the aspirations of the government. Being in sync with the government is important for their survival. Through their actions, the dynamics of eld coercion come into play. These same companies, by virtue of government connection, are also politically visible. This means that they are exposed to scrutiny not only by the government but also by other interested parties. Thus, based on the above argument, the following alternative forms of hypotheses are developed: H1. Ceteris paribus, there is a positive association between a company that has a high proportion of government shareholding and CSR. Some companies have excelled over the years as a result of the NEP policy a policy drawn to reduce income disparities between the various races. The growth of these companies, particularly in the early stages of operations, was aided by the government. Even though such direct patronage has since reduced, these companies are still very much dependent on government contracts and projects for their survival. Companies that depend on the government for contracts and projects may be institutionalized by the governments aspirations and beliefs (Dimaggio and Powell, 1983). In order to ensure their long-term survival, it may well be argued that these companies engage in CSR in order to make them appear legitimate and appealing to the government. Dependence here, however, does not imply a complete and permanent dependence but rather it shows the importance of the government as a major purchaser or client of the company. This is to ensure the long-term viability of the company: H2. Ceteris paribus, there is a positive association between a company that is dependent on government contracts and CSR. The growth of the Malaysian economy is highly dependent on FDI, and this creates pressure on the Malaysian companies to consider CSR. Most of the top investors come from developed countries such as the USA and the UK which place a high priority on sustainable development. These MNCs are pressured by the market to comply with CSR standards in the countries that they operate (Utting, 2002). As a consequence, many Malaysian companies end up emulating the culture adopted by the MNCs in their operations. The global emphasis on sustainable development has put Malaysia as a place to consider for investment by global business partners. In order to ensure a consistent ow of FDIs, Malaysia needs to seriously consider this matter. For Malaysian companies to operate abroad, they have to follow this trend. High dependency on wide and foreign economic networks requires corporations to follow trends, strategize their business plans and policies, and ensure such information is communicated to the stakeholders. With social and environmental issues being one of the most urgent global issues, Malaysia will not be able to avoid them. In fact, responding adequately to the trend may even assist Malaysia to penetrate cross border markets. From the institutional theory perspective, foreign associates or business partners (referred collectively in this paper as afliates) are critical. In order to ensure that the local companies draw more investments as well as to make the investors stay,

the companies tend to meet the expectations of foreign investors, specically, the investors perception of environmental and social issues. This is to ensure their long run survival prospects (Dimaggio and Powell, 1983). Malaysian companies communicate to their investors on how they feel about environmental and social issues and the extent of their involvement in order to legitimize their existence in the eyes of the investors. Even though the information in the annual reports is seldom current, it nevertheless informs the investors of the history of the companys activities for one accounting period. This annual communication of information may be perceived as a means to attract foreign investors as well as to please current investors: H3. Ceteris paribus, there is a positive association between a company that has a high proportion of foreign shareholders and CSR. In the case of companies with business associates from overseas, such as the USA and Japan, where the awareness of CSR is high, it is expected that they will be institutionalized by their associates culture. This could happen as the business partners are powerful actors. Thompson (2003) explained the disproportionately larger number of Malaysian companies with ISO 14001[5] as indicative of how foreign business associates inuence local companies. Thompson (2003) claried that the higher numbers are due to a pre-requirement of foreign multi-corporations for doing business with them. The Malaysian companies are generally dependent on these foreign multi-corporations in terms of product market and technological assistance. Obviously there is some sort of coercive pressure, if not mimetic, for local companies to seriously embark on CSR. Thus, mutual understanding in all aspects of business operation with the foreign counterparts would be a wise strategy. This includes the practice of CSR: H4. Ceteris paribus, there is a positive association between a company that has foreign business associates (afliates) and CSR. Control variables Size. Several empirical studies provide evidence of the association between company size and corporate social disclosures (Belkaoui, 1999; Cowen et al., 1987; Patten, 1991, 1992; Hackston and Milne, 1996). However, some studies also fail to prove the association (Roberts, 1992). Studies in the Malaysian context, for example, Teoh and Thong (1984) and Thompson and Zakaria (2004), found that there is an association between size and CSR disclosure. Larger rms normally undertake more activities, have a greater impact on society, possess a larger number of shareholders, receive more attention from the general public and therefore, are under greater pressure to exhibit social responsibility (Cowen et al., 1987): H5. Ceteris paribus, there is a positive association between size and CSR. Protability. The institutionalists suggest that nancially strong companies are more likely to be institutionalized by external pressures (Oliver, 1991). In the Malaysian context, the results produced by Zakaria (2002) do not support this contention. The rationale that is normally used to support this contention is that a company that makes more prot could afford to be more active in CSR (Amran, 2006). Therefore, the following hypothesis is developed:

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H6. Ceteris paribus, there is a positive association between previous year prot and CSR. Industry afliation. Practice is seen to be diffused by the concept of modeling. The institutionalists posit that organizations tend to model themselves after similar organizations that they perceive to be more successful (Dimaggio and Powell, 1983). Prior literature has also shown that industry afliation signicantly inuences CSR (Patten, 1991; Hackston and Milne, 1996). In the Malaysian context, there is signicant relationship between these two factors (Zakaria, 2002). Therefore, the following hypothesis is developed: H7. Ceteris paribus, there is a positive association between industry membership and CSR. Research design Unit of analysis The unit of analysis is the annual reports for the year 2002/2003 of companies listed on Bursa Malaysia[6]. The prime source is the companys annual report itself. This is consistent with prior CSR research (Hackston and Milne, 1996; Haron et al., 2006; Zakaria, 2002). Annual reports are regarded as the main form of company communication (Zeghal and Ahmed, 1990; Haron et al., 2006). Sampling design and data collection For this study, stratied random sampling technique is used to obtain a sample of public listed companies on the Bursa Malaysia by sectors. Each sector represents a particular industry as classied by the Bursa Malaysia and, wherever necessary, some sectors are combined due to small observations (Zakaria, 2002). Consequently, a total of seven sectors emerged and used, namely: consumer product, industrial product, construction/ infrastructure project companies, trading and services/technology, nance, property/ hotel and plantation/mining. This sampling technique permits a better understanding of the companies practices within the various sectors in the Bursa Malaysia. The focus is not on the top companies as done by previous researchers (Hackston and Milne, 1996) but includes small and medium companies as well. Based on preliminary observation, many of these companies are subjected to external institutional factors too, hence the mixed group of samples. Furthermore, by segregating the companies by sectors, this will ensure that all industries are included. A nal list of sectors is as per Table I. CSR as a dependent variable Content analysis is used to measure the corporate social responsibility disclosures. Content analysis is commonly used in assessing corporate social responsibility disclosures (Ernst and Ernst, 1976; Guthrie and Parker, 1990; Hackston and Milne, 1996; Gray et al.,1995a; Haniffa and Cooke, 2002; Raar, 2002; Zakaria, 2002). In order to ensure replicability, the instrument developed by Hackston and Milne (1996)[7] is utilized. This instrument provides a reliable set of procedures to measure the disclosure of CSR and also to allow comparability with other research studies. Several reasons led to the decision to use the Hackston and Milne instrument. Firstly, the Hackston and Milne (1996) technique was developed based on established work including Guthrie and Parker (1990) and Ernst and Ernst (1976). The instrument was specically developed to assess CSR. Hence, this ensures comparability with

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Main board Industry membership Industrial Consumer products Construction and infrastructure Trading and technology Property and hotel Finance Plantation and mining Total Total listed companies 130 74 49 135 96 58 42 584 Sample 27 14 12 36 23 11 10 133 Percentage 20.77 18.92 24.49 26.67 23.96 18.96 23.81 22.77

Second board Total listed companies Sample Percentage 128 52 16 55 2 0 4 257 32 13 4 15 2 0 2 68 25 25 25 27.3 100 0 50 26.46

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Table I. Demography of the respondents

previous studies. Krippendorf (1980) stated that one of the main principles of content analysis is that they should meet a test that suggests that they are objective, systematic and reliable. The technique used by Hackston and Milne (1996) has gone through a rigorous reliability testing by Milne and Adler (1999) who concluded that the instrument is suitable for novice and less experienced coders. Gray et al. (1995b) raised a concern on the unit of analysis for the amount of disclosure. Milne and Adler (1999, p. 242) noted that in the social and environmental disclosure studies much of the discussion on the unit analysis confuses the issues of what should form the basis for coding with what should form the basis for measuring or counting the amount of disclosure. It is clear that these two are not the same. Many researchers focus on how they count or measure and less on how the unit of analysis forms the basis for their coding decisions. Milne and Adler (1999) proposed the use of sentence as a more reliable basis for coding than other units of analysis. Further, although most of the studies use sentences for coding, the use of word or area of page (e.g. tenths or one hundredths) to measure the disclosure amount is common. Using word or areas of page as a basis to measure social and environmental disclosures, however, complicates reliability. Milne and Adler (1999) noted that words by themselves do not bring any meaning without referring to the sentence and its context. It is difcult to decide which words are considered social or environmental disclosure. Likewise, using a plastic grid sheet over a body of text and trying to code the contents of each square would also result in meaningless measures. This method may have the advantage of including charts or graphs into the analysis but it is also exposed to lots of noise introduced when unnecessary pictures or different fonts, columns or page sizes are used in the annual report. There is inconsistency in the methodology applied. Research that uses word and plastic grid, for example, might nd the same difculties in classication as encountered by research that only uses plastic grid. It is only when references are made to sentences that the real meaning can be derived for appropriate classication. Previously, Hackston and Milne (1996) attempted the use of all three measures and found that they produced results that showed signicant correlation with the independent variables. Hence, based on the above argument, it appears that using sentences as a basis to code and count the content of CSR could serve the purpose of this study. Further analysis by Milne and Adler (1999) had also suggested that using sentences for both coding and measurement seems likely to provide complete, reliable and meaningful data.

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Sentences also have natural unit of narratives that are separated by punctuation marks (Elijido-Ten, 2004). Thus, sentences overcome the weakness posed by words and page measurement methods. However, using sentences as the unit of analysis also has its weakness. It omits graphs, charts or gures which may be equally important as the narrative. The number of sentences is also subjective in the sense that it is dependent on the writers differing grammar or writing skills that produce different number of sentences (Unerman, 2000). To overcome this, Hackston and Milne (1996) proposed the inclusion of decision rules to count tables, gures or charts which are on the checklist. They should be interpreted as one line equals to one sentence. Based on the above discussion and to provide comparability with other studies, in this study sentences are used as the coding and measurement method. In order to ensure that the collection of data is consistent and free of biasness, previous research suggest the use of an inter-rater or inter-observer reliability index (Tilt, 1997; Deegan and Gordon, 1996). This index measures the correlation of ratings given by different researchers to the same behavior. In this study, ve annual reports were scrutinized by two researchers for consistency. The differences between the researchers scores were not signicant. Operationalization of variables Table II summarizes the operationalization of the independent variables tested in this study. Data analysis Multiple regressions are used in assessing the variability in the extension of CSR. This statistical method had been widely used in the previous research (Hackston and Milne, 1998; Cooke, 1998; Haniffa and Cooke, 2002). The majority of the variables in this study are measured using dummy variables as most of the variables are qualitative in nature. Gujarati (2003) conrmed that dummy variables can be incorporated in the regression models just as other quantitative variables. The following regression model is developed: CSR B0 B1 FSi B2 GSi B3 DGi B4 DFi B7 INDi B8 CONi B9 CONSTi B10 TTECHi B11 FINi B12 PLMINi B16 SIZEi B17 ROAi21 ei
Variables Foreign shareholders Operationalization Source of information Annual report Annual report Company prole, annual report

Table II. Summary of the operationalization of independent variables

Ratio of foreign shareholding to total number of shares issued. Government shareholding Ratio of government shareholding to total number of shares issued. Dependence on government If a company receives major government project, tender, privatization project, or concession, coded as 1; otherwise 0 Dependence on foreign partner If a company has a foreign partner, coded as 1; otherwise 0. Industry Industry type, dummy variable Size Number of employees Protability Prior years ROA

Company prole, annual report Company prole Annual report Annual report

where QLYCSR, total score for quality of CSR; QTYCSR, total quantity of CSR; B0, intercept; FS, percentage of foreign ownership; GS, percentage of government ownership; DG, 1 if the company is dependent on government tender/project; 0 if otherwise.; DF 1 if the company is dependent on foreign associate; 0 if otherwise; IND 1 if the company is in industrial sector; 0 if other wise; CON 1 if the company is in consumer sector; 0 if otherwise; CONST 1 if the company is in construction sector; 0 if otherwise; TTECH 1 if the company is in trading and technology sector; 0 if otherwise; FIN 1 if the company is in nance sector, 0 if otherwise; PLMIN 1 if the company is plantation/mining sector, 0 if otherwise; SIZE, total sales (proxy for size); ROA, return on asset (ROA), (proxy for protability); ei, error terms. In the process of testing the data, the correlation matrix was reviewed and the variance ination factors (VIF) computed in order to detect whether there was multicollinearity problem. Further analysis to see whether the multiple regressions assumptions have been violated was also carried out. The normality, linearity and homoscedasticity assumptions were determined based on the analysis of residuals, plots of the studentized residuals against predicted values and Q-Q plot. Test on the untransformed data showed violations of the multiple regressions assumptions of normality, linearity and homoscedasticity and none on multicollinearity effects. In order to ensure the rigor of the regression tests, the data was transformed into normal data. Issues on identifying the appropriate techniques in dealing with the accounting disclosure have been discussed by Cooke (1998), Haniffa and Cooke (2002) and Tilling (2004). Cooke (1998) suggested that research on disclosure should pay attention to the structure of data and to consider the appropriateness of transformations where necessary. An alternative technique to solve the above problem is normal scores transformation. The normal scores transformations is derived by dividing the distribution into the number of observations plus one region on the basis that each region has equal probability. This technique is actually the extension of the rank method except that the ranks are being substituted by scores on the normal distribution:
For example, if there are six observations the normal distribution would be divided into seven equal probable parts so that the original values are replaced by normal scores (here 2 1.0676, 2 0.5659, 2 0.1800, 0.1800, 0.5659, 1.0676) rather than the ranks 1,2,3, . . .) (Cooke, 1998, p. 214).

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Cooke (1998, p. 214) advocated that the main advantage of replacing the ranks by normal scores is that the resulting test would have exact statistical properties because signicance levels can now be determined; F and T-test are meaningful; and the power of the F and T-test may be used. Cooke added that the normal score approach offers a means whereby a non-normal dependent variable may be transformed into normal. In addition normal scores posses an advantage when there are problems of monotonicity and nonlinearity. The transformed data were then checked to see whether the problems still persisted. The same techniques as above were used and it was noted that the problem had ceased. Regression results Results from the regression analysis using normal scores data are presented in Table III. The regression produced an adjusted R 2 of 0.367. This implies that the amount of variability in CSR disclosure, as explained by the variables, is about 36.7 per cent, and this is quite large.

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CSR Independent variables Government share Dependence on the government Foreign share Dependence on a foreign partner Control variable. Size Prior protability (ROE) Industry afliation Consumer Trading and technology Finance Plantation and mining Property and hotel Std error F value Sig F R2 Adjusted R 2 Coefcient 0.159 0.268 0.000 0.020 0.315 0.084 0.056 0.051 0.164 0.214 2 0.034 0.7235 11.530 0.000 0.402 0.367 Sig. 0.017 * 0.000 * * 0.995 0.294 0.000 * * 0.176 0.389 0.434 0.009 * * 0.001 * * 0.585 t-stats 2.404 4.453 2 0.006 0.294 4.553 1.359 0.864 0.786 2.621 3.527 2 0.546 VIF 1.385 1.142 1.380 1.417 1.150 1.219 1.331 1.339 1.241 1.161 1.196

398

Table III. Regression results: CSR

Notes: *Signicant at 5 per cent level; * *signicant at 1 per cent level

Government shareholding is signicant at the one per cent level. The result indicates that the higher the government shareholdings the better the CSR disclosure of the company. This is consistent with the hypotheses developed earlier, thus the hypotheses is accepted are proved. Dependence on the government is shown to be signicant at the one per cent level. The result strongly supports the hypothesis that a company which is dependent on government tenders and contracts produce better reporting. The coefcient result is 0.268, the second highest after size. This indicates that dependence on the government contributes strongly in explaining CSR, when the variance explained by all other variables in the model is controlled for. This implies that strong governmental pressure is exerted on companies that choose to be afliated with the government. Despite the strong belief that foreign afliate inuence will encourage CSR, none of the foreign inuence variables are found to be signicant. The coefcient result for foreign shareholding is 0.000, indicating no contribution to the explanation of CSR. This implies that companies which have foreign shareholdings, like for example, the MNC subsidiaries of BAT (Malaysia) Berhad and Ajinomoto (M) Berhad, do not have extensive CSR in their annual reports. This revelation is beyond expectation, since it is expected that the reporting culture of the MNCs would inuence those of their subsidiaries or associates here in Malaysia. Perhaps, this is due in part to the use by the MNCs of other alternative media rather than the annual reports for CSR purposes. Preliminary observation of this conict suggests that most of the MNC subsidiaries in Malaysia have separate CSR Reports. Ajinomoto (M) Berhad, for example, had consistently produced separate environmental reports each year. This report is a consolidation for a whole group of companies and is prepared by the Head Ofce. Other observations show that companies such as BAT (M) Berhad, Shell Malaysia

Renery Berhad, Ford (M) Sendirian Berhad and Sony Technology (M) Sendirian Berhad, publish separate independent reporting on CSR. Future studies should be extended to encompass alternative media, such as independent reports and web sites. Of the three control variables, the impact of size and industry membership is found to be signicant. The size factor is signicant at the one per cent level. This result is expected and is reminiscent of other local and oversea studies, for example, Zakaria (2002) and Hackston and Milne (1996). It supports H5 which says that bigger companies normally produce better CSR. The result by industry shows that only companies in nance and plantation and mining sectors are signicant at the 1 and 5 per cent levels. The result for the plantation sector is expected since this sector is dominated by big companies and is exposed to environmental issues. The companies selected from the nance sector are mainly banks and the result shows that banks produce good CSR after plantation companies. The fact that the nance sector is heavily regulated and comes under the purview of the Central Bank, may partly explain the greater inclination to CSR. Discussion and conclusion The aim of this study is examine the impact of government and foreign afliate inuence on CSR. The discussion of Malaysias social and economic environment demonstrates Malaysias unique situation where there three different main ethnic groups live in harmony. It is shown that the impact of colonisation has greatly shaped the Malaysian social, political and economic climate. One of the major impacts of the British colonisation was the economic disparities between major ethnic groups, especially among indigenous peoples that lead to ethnic tension. The government plays a leading role in the social engineering and the formulation and the implementation of NEP has been a critical factor. The NEP in many ways inuenced the government policy and practice that favoured indigenous peoples. The rational was to balance up the disparities between the ethnic groups. These instances had lead to indigenous domination in the public sector as well as in the government owned companies. The implementation of the NEP has also inuenced the privatisation of government entities and the countrys development which had encouraged the involvement of indigenous people to participate where ample resources were granted to those who were selected. These companies formed one group in these samples. These are the companies that are highly dependent on the government and are also mostly owned by the government agencies. The Malaysia economy besides focusing on agriculture also encouraged FDI which mostly focused on information technology and manufacturing industry. Many of the MNCs have realised that there are now being observed by the stakeholders and the companies need to comply with the international norms in regard to CSR practices (Weyzig, 2006). These norms also tend to pass through the MNCs vendors and as a result this study expects that companies which are signicantly owned by foreigners or had a partnership with foreign companies should produce better CSR. The regression analysis provides evidence on the impact of government inuence. Engaging with the government aspirations is seen as part of the companies strategy in order to maintain trust and improve their image. The GLCs are strategic companies which control nation strategic resources and thus their responsibilities are not to just maximise shareholder value but to cover all the necessary government functions in order to maintain strong inner stability.

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Institutionalisation by the governments aspirations is perhaps the most appropriate description for Malaysian CSR practice. The government plays a signicant role in the sense that companies that are dependent on government or have signicant government shareholding are institutionalized by the governments aspirations and vision regarding social and environmental issues. Government involvement in CSR can be seen in the Vision 2020, commitment of adopting Agenda 21 which emphasises sustainable development, the introduction of the Prime Ministers Hibiscus Award, the launching of two ethical funds or social responsibility investment funds in 2004 and the support for corporate social reporting. Similar pressure can be seen in the company that is dependent on government contracts. Through the coercive mechanism, companies that fail to join force with the government in promoting better community involvement and environmental protection may face problems in securing future contracts (Dimaggio and Powell, 1983). This study proves that the government inuence is clearly evidence to the big company which has link and dependent to government. An alternative interpretation of these ndings is that the government of Malaysia is very serious in inculcating the CSR culture into the companies that cooperate closely with the government[8]. This is because it reects on the ruling party and its commitment is something that can be proudly exhibited to either opposition members or the NGOs. This may perhaps enhance the governments image and subsequently bestow a position as a model to other developing countries. The status could than permit better access to the elite groups such as those in the USA, European countries or Japan, in terms of getting economic resources or international support for development programmes. As such it is argued that the Malaysian government has been institutionalised by the global trend. The regression analysis however fails to support the signicant role of foreign stakeholder contribution in relation to the company reporting, despite the strong argument that foreign companies or MNCs may have some inuence. A brief review of MNC CSR indicates that most of the companies may have different media such as stand alone reporting in communicating their CSR. Companies like British American Tobacco (M), Ajinomoto (M) and Shell (M) usually have separate supplemental information which this study has not considered, as it focused solely on annual reports.
Notes 1. Foreign afliates here refers to foreign associates or business partners or other multinationals operating in Malaysia. 2. Bumiputra or Bumiputera means son of earth in Malay, translated literally it means princes of the earth and is an ofcial denition widely used in Malaysia, embracing ethnic Malays as well as other indigenous ethnics. This word is used interchangeably with Malay in this paper. The term bumiputera (son of the soil)is used to denote the Malays and the native Muslims and non-Muslims of Sarawak and Sabah in a single category (Shamsul, 2001, p. 364). 3. Vision 2020: in 1991, the Malaysian Government declared that it was the objective of the nation to become a developed nation in its own right by 2020. The key to the attainment of a fully developed nation status was to address nine strategic challenges. Among these were the establishment a fully moral, ethical and caring society and the ensuring of an economically just society (Zain, 1999).

4. Agenda 21 is the principal global plan to confront and overcome the economic and ecological problems of the late twentieth century (CAP, 2002). It is meant to propose actions that should be taken into account by every individual, institution and state. Participants hope to see an improvement in the strengthening of environmental standards in the long-term period. 5. ISO 14001 is an environmental management system that helps an organization to identify environmental risks and impacts that may occur as a result of its activities and ensure that these are routinely managed. 6. Formerly known as the Kuala Lumpur Stock Exchange. 7. Hackston and Milne (1996) constructed their own instrument based on Ernst and Ernst (1976), Guthrie and Parker (1990) and Gray et al. (1995b). Milne and Adler (1999) tested the reliability of this instrument and concluded that the instrument is suitable for novice and less experienced coders. 8. Recent government role in promoting CSR is evidence in newly announced 2008 Budget proposal which require public listed companies to disclose their employment composition by race and gender. As Malaysia in a multiracial country, this effort is expected to encourage diversity is work place.

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