Corporate governance and corporate social responsibility (CSR ...

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Qual Quant DOI 10.1007/s11135-013-9903-8

Corporate governance and corporate social responsibility (CSR) reporting: an empirical evidence from commercial banks (CB) of Pakistan Mehmoona Sharif · Kashif Rashid

© Springer Science+Business Media Dordrecht 2013

Abstract The aim of this paper is to explore Pakistani listed commercial banks corporate social responsibility (CSR) reporting information along with the probable effects of different corporate governance (CG) elements on CSR disclosures. Furthermore, the relevance of different theories in explaining the results of this study is also provided. For analyzing the banks’ CSR reporting practice, which was done using content analysis, the annual reports for the years 2005–2010, of all the commercial banks were examined. Non-executive directors and foreign directors which are elements of CG were considered and multiple regression analyses were carried out to check the impact of CG elements on banks’ CSR reporting initiatives. The results of the study reveal that even though reporting of CSR is voluntary in Pakistan, the participation of Pakistani commercial banks in different CSR activities is not low. Furthermore, the level of CSR activities performed by the banks is impressive. The results displayed that non-executive directors have a positive impact on the CSR reporting supporting stewardship theory in CB of Pakistan. The major limitation of this study is that the data is only based on annual reports of commercial banks of Pakistan. It is therefore, not easier to generalize the findings of this research to other corporate sectors. Secondly the annual reports of commercial banks for the years 2005–2010, a time period of just 6 years were analyzed as access to data before and after the specified years was not readily available. This paper relates CSR disclosure with possible impact of CG in the particular perspective of a transitional economy’s banks such as Pakistan. By providing empirical facts of the effect of CG structure on the CSR activities practices in developing countries’ banking sector setting, this paper provides novel contribution to the current CSR literature. Keywords Corporate governance · Corporate social responsibility · Commercial banks · Pakistan · Financial reporting and disclosure

M. Sharif · K. Rashid (B) COMSATS Institute of Information Technology, Tobe Camp University Road, Abbottabad 22060, Pakistan e-mail: [email protected] M. Sharif e-mail: [email protected]

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1 Introduction Corporate social responsibility (CSR) reporting is one of the main topics of interest for researchers for the last so many years (Mathews 1997). According to a survey conducted by Price Water House Cooper’s International in 2002, more than 70 % of the international executives considered CSR as an essential requirement for companies’ survival and growth (Simms 2002). A prosperous, healthy and educated community is a sign of success and therefore an important segment. This is only possible when there is a powerful and mutually beneficial relationship between the communities and the corporate entities. Now-a-days organizations strongly believe that the success of an entity is directly connected with the well being of the society in which it operates, as business could not exist or prosper in isolation and it gives something back to the society in recognition of the benefits and advantages drawn from it. CSR reporting has become an integral part of corporate governance (CG) concern for the social responsibilities. A number of earlier researchers have worked on the same topic quite extensively to find out the relationship between CSR activities and the main economic indicators such as firms’ market position, size, industry relationship, risk management, market response, micro and macro environmental impacts, and companies’ goodwill (Roberts 1992; Herremans et al. 1993; Tilt 1994; Newson and Deegan 2002). According to Guthrie and Parker (1989), Patten (1992), Roberts (1992), Donaldson and Preston (1995), Deegan and Gordon (1996), Deegan and Rankin (1997), Adams et al. (1998) and Neu et al. (1998), corporate managers were quite motivated to practice CSR programs. Most of the earlier studies were related to the firms’ specific characteristics. Very limited number of the firms considered the CG attributes to know the positive relationship with CSR activities. The research on CSR practices is mostly limited to the non financial sector in the developed countries. Particularly, the banking sector is ignored (Deegan et al. 2002). Moreover, there is a limited number of CSR related research particularly in the developing countries. Pakistan is no exception to it. To address this issue, this study has been performed to explore the effect of corporate governance on reporting of corporate social responsibility by the listed commercial banks in Pakistan. This study is exclusively based on the CSR practices and reporting it accordingly. The study has further reviewed the literature related to legitimacy theory (LT) to confirm the validity of CSR activities and reporting practices by the companies. This research work explores the potential and actual practices carried out by the commercial banks in Pakistan compared with the global social responsibility reporting indicators, in accordance with the GovernmentRelated Entities (GRE) framework for rating of financial institutions’ performance. Finally, the research has studied the CSR reporting activities of the banks reporting five major areas of social responsibilities namely environmental concerns, labor management practices and work environment, production of quality products, human rights and social responsibility in accordance with GRE G3 guidelines for performance indicators. The current study aims at studying the CSR reporting system of commercial banks in Pakistan for identification and evaluation of CSR related information variables on annual reports. Secondly, to explore the variability of CSR reporting system for corporate governance practices and lastly, to find out whether agency or stewardship theory prevails in this sector or not. After the introduction, the rest of this paper is pre-arranged as follows. Section 2 contains a short analysis of literature on organizational legitimacy theory (LT) for the validation of CSR reporting practice for firms. Section 3 discusses the impact of CG on CSR reporting. Section 4 discusses the literature review and explains the development of hypotheses. Similarly, Sect. 5 discusses in detail the research method applied in the study. Section 6 explains the results

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of the model for this study. Finally, Sect. 7 reviews the findings of the study along with the implications and limitations of this study.

2 Legitimacy theory (LT) and banks’ CSR activities For the clarification of social reporting practices, LT theory is most frequently used by the organizations (Patten 1992; Deegan and Gordon 1996; Milne and Pattern 2002; O’Donovan 2002; O’Dwyer 2002; Moerman and Laan 2005; Murthy and Abeysekera 2008). LT theory stresses upon the need for positive response to social expectations by the corporate management (Patten 1992; Campbell 2000; Deegan et al. 2002). In spite of the fact that banking sector offers productive and beneficial products to the society, yet it needs to seek the legal authority regarding the social worth in the eyes of the society (Oliver 1991). Similarly, people of Pakistan also consider the banking sector liable to report the information related to their social activities to resolve the multidimensional social problems in the country. All such kinds of activities have been formalized and are duly reported on annual reports of the banks. Some of the main areas of social work include poverty alleviation, fighting against illiteracy, provision of employment, health and hygiene, protection of human rights, especially those of children and women (Lindblom 1993). The concept of organizational legitimacy motivates the organizations for regularly reporting these CSR activities on voluntarily basis. Guthrie and Parker (1989) argue that the factor of the legitimacy motivates corporate governance for practicing and reporting social activities. According to Branco and Rodrigues (2008) there is a positive relationship between re-usability of organizations in the society and reporting on CSR information. In this regard LT theory is exceptionally useful for bridging the gap between rationale disclosure and organizational legitimacy. For instance, happening of exceptional incidents like organizational disasters that highlight the concerned organizations compel them to change their CSR reporting activities (Patten 1992; Deegan et al. 2000). At the same time, some of the researchers are of the view that the legitimacy of a number of companies regarding their corporate social responsibility is doubtful for society (Deegan et al. 2000, 2002; Barako and Alistair 2008). This may be due to the poor communication between companies and society. According to Buhr (1998) the companies can inquire the required legitimacy by practicing the right things and avoiding the wrong things. According to Branco and Rodrigues (2008), LT emphasizes on the need for using CSR reporting as one of the options available for communication with the stakeholders. In case of banking industry, customers are the major stakeholders having a huge and diversified market segment. It means that the banks have depositors, regulators, shareholders, and managers as the main stakeholders in the bank performance. Moreover, these stakeholders have the Mitchell et al. (1997) power, urgency and legitimacy as described (Yamak and Suër 2005; Griffiths 2007).

3 CG impact on CSR reporting It is very difficult to differentiate between corporate governance and corporate social responsibility in the international economic perspective. Basically, corporate governance is based on the ethical norms and accountability. Whereas, CSR takes into account the current business practices taking care of socially responsible issues. In this way, corporate governance and corporate social responsibility have a positive correlation between them. Initially, corporate governance was related to conservative corporate decision-making, while corporate social

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responsibility was mainly concerned with the strategies having people as their focal point (O’Dwyer 2002). The mix of corporate governance and corporate social responsibility has given a new touch to the understanding and analysis of corporate law and policy. This combination has given rise to complex business norms. There are multiple sources of business laws and regulations like securities, anti-trust regulation, labor and employment laws, taxation laws, consumer protection laws, and other commercial laws. There is a combination of hard and soft laws that is federal and state laws and codes and standards. As a result, rising the private sector authority and decline in the state authority was observed. The combination of corporate governance and CSR has given a rise to new constitution of firms. The demarcation between corporate law related to investor manager relationship and non-corporate legal areas dealing with other corporate matters no longer exists (Murthy and Abeysekera 2008). CSR reporting shows a strong corporate commitment to the society. Traditionally CSR reporting is practiced by the developed countries (Belal 2000), but now-a-days, it is gaining significant importance and popularity in the developing countries as well. CSR reporting is only confined to the non financial institutions in daughter countries. Especially, the banking sector is ignored quite surprisingly. There is no particular study exclusively limited to the commercial banking sector in Pakistan. An attempt has been made to address this issue in the form of this study. This study has tried to investigate the CSR reporting practices and the impact of corporate comments on CSR elements particularly with respect to commercial banking sector of Pakistan. Across the world, the customers of banks are becoming more aware about their rights and claims regarding the corporate social responsibilities and have achieved considerable power to influence the corporate performance (Patten 1992; Sharma and Talwar 2005; Belal and Owen 2007; Khan et al. 2009). This has led to increasing the CSR activities carried out by the banks across the world (Douglas et al. 2004). According to Halabi et al. (2006) all the reports on leading Australian banks show that some of the banks disclosed their CSR activities regarding human rights, labor management, and environmental concerns. According to another study by Branco and Rodrigues (2008) banks do practice CSR reporting activities in Kenya but at a very low level. The banks consider that building a good reputation is must for gaining legitimacy with respect to CSR activities and social values. A number of other studies (Macey and O’Hara 2001; Halabi et al. 2006) have revealed that the companies having high public profile are more concerned for building good social reputation with the help of involving the community in CSR activities. Currently, the banking sector is more cautious about the important CSR activities as part of corporate governance. A number of recent scandals in some of the well known firms like Enron, WorldCom, Ahold and Parmalat, highlighted the ethical issues regarding managerial boards, team of auditors, risk and controlling devices, wages and compensation, management, and corporate culture. Competitively banking sector is under more stress than other organizations to prove their transparency regarding the disclosure of relevant CSR reporting information to strategic decision-makers and other stakeholders (Lindblom 1993).

4 Literature review and development of hypotheses Corporate governance tries to create a balance among different economic, social, individual, and community goals. It therefore, requires the effective and efficient use of resources to become accountable to the concerned stakeholders as per their demand. According to Dahya et al. (1996), corporate governance is “the manner in which companies are controlled and in

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which those responsible for the direction of the company are accountable to the stakeholders of the company”. Due to a number of scandals at international level regarding issues related to leadership and organizational management, corporate governance has become the focal point for the stakeholders. Corporate governance needs an efficient utility of resources by the corporate managers in a way that is beneficial for all the stakeholders. As the ownership of operations is shared by a number of entities including individuals, management, and society as a whole; it is therefore, a multi-fold task for the corporate managers to take care of all the stakeholders’ interest and create equilibrium between the rights and obligations of them. Corporate governance relates to the development of long-lasting relationship with external and internal customers, particularly with managers in the form of compensation related to monetary and non monetary benefits. Furthermore, it is related to the transactional relationship between management and investors based on the authority and disclosure. No matter what are the limitations of a corporation, the investors are only concerned with their own interests that are the security of their investment and the maximization of their profit. It is a natural phenomenon that investors cannot blindly trust the corporate management unless and until there is a proper mechanism for neat, clean and transparent transactions of corporate business. To address this problem the corporate management needs to develop CSR reporting system, which is not only acceptable to the investors, and management of the corporation, but also to the society on the whole. Mostly, it is observed that there is a legitimate gap between shareholders and corporate management. This gap cannot be filled by anybody else but the non-executive directors who serve as a neutral body between the corporate management and shareholders. Stewardship theory, having its roots from sociology and psychology is defined by Davis et al. (1997) as steward are those individuals who maximize and protect the shareholders wealth through firm performance, hence maximizing the steward’s utility functions. From this perspective, the company’s managers and executives those are working for the shareholders are stewards, who protect and generate profits for the shareholders. On the other hand, agency theory which was initiated by Alchian and Demsetz (1972) and was further developed by Jensen and Meckling (1976) has its roots in economic theory. Agency theory is defined as the relationship amid the principals (shareholders) and agents (company executives and managers). According to this theory, agents are hired to carry out the work by the principals or owners of the company who are the shareholders. According to Clark (2004) principals hand over the operation of the business to the managers or directors, who are shareholder’s agents. Agents are expected to act and take on decisions in the interest of the principal’s. According to the agency theory, the agents might not always make decisions which are beneficial to the principals (Padilla 2002). On the contrary, stewardship theory focuses upon top management role as being stewards who integrate their own goals as being a part of the organization. The stewardship perception suggests that stewards are pretty satisfied along with being motivated to attain organizational success. According to Tricker (1984) CSR reporting can greatly help in bridging the legitimacy gap between shareholders and corporate management by the means of non-executive directors. The non-executive directors serve as a check and balance mechanism to ensure the best care of owners and other stakeholders. They serve as an advisory body for presenting the companies’ performance especially the CSR activities. As the non-executive directors are not directly involved in the activities of the corporations, it is therefore, obvious that they can produce good results in ensuring a balance between shareholders, stakeholders and general society interests related to the corporate governance and their CSR reporting activities.

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According to Zahra and Stanton (1988), the companies are more concerned about their prestige and social responsibilities. One of the major threats to their corporate prestige on social status is due to the difference of opinion, priorities and preferences between owners, corporate management and other stakeholders. According to Fama and Jensen (1983) nonexecutive directors also serve as mediators between owners and managers for resolving the conflicts, if any. The presence of non-executive directors is a positive element regarding the satisfactory settlement of different disputes amongst these parties. Without the presence of non-executive directors in the corporate management, these little disputes may become bigger threats for the corporate existence. In the light of the above discussion, it becomes clear that non-executive directors have a pivotal role in leading the banking sector towards CSR activities. Furthermore, they can create a balance between companies’ activities, their legitimacy and social values. The presentation of non-executive directors on the board of directors has more influence on companies for practicing the CSR reporting activities. While, keeping the above discussion in mind, the first hypothesis of this study is: H1 There is a positive relationship between the percentage of non-executive directors on the board and CSR reporting information by the banks. In Pakistani banking sector, board diversity has tend to become an essential element of CG structure in the recent year. This is because of the fact that foreign representation on the board is being practiced these days (Haque et al. 2007). According to Fields and Keys (2003) a company’s performance is indeed affected by the heterogeneity of innovations, experiences and ideas that people transmit to a company. Financial performance of a business also rises with ethnic representation on the board. According to Ayuso and Argandona (2007) the typical role of foreign directors is to support the CSR reporting by the organization particularly banking companies. Haniffa and Cooke (2005) have given an empirical proof of a positive relationship between the percentage of foreign directors on the board and the level of intentional disclosure of CSR. Another study conducted by Branco and Rodrigues (2008) in Kenya disclosed that there was no relationship between the percentage of foreign directors on the board of management and CSR reporting activities. Foreign non-executive directors are quite actively involved in the CG restructuring in the Pakistani banks. Keeping in view the above discussion, it is considered by this study that non-Pakistani nationals working as non-executive directors on the board of directors of banks’ operating in Pakistan have strong influence on the CSR reporting system. Thus, according to the above discussed literature, it is implicit that foreign national on the board of directors may influence banks CSR reporting. Hence, the following hypothesis is examined: H2 Higher the percentage of foreign nationals on the board, greater is the CSR reporting information by the banks. A strong relationship is also known to be found between the size of the firm (STA) and CSR reporting information by the banks. According to Macey and O’Hara (2001), the size of the bank has a direct relationship with the size of the investment, revenues and profit generated by the banks. Larger the size of investment, revenues, and profit means larger the amount of contribution in the corporate social responsible activities by the banks. Similarly rich corporate cultured banks practicing all the ethical and moral norms and values are supposed to be having greater concern for the social responsibility. According to Trotman and Bradley (1981), due to their small scale of operations, lower visibility along with the constraints of resource access, small firms are less likely to take part in CSR initiatives. Larger firms on the other hand take on more activities and have a greater effect

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on the society. They tend to disclose more CSR information so as to legitimize their actions and to hence reduce governmental intervention in their business actions (Cowen et al. 1987). Thus, the third hypothesis of the study is formulated as follows: H3 The larger the size of the firm, greater is the CSR reporting information by the banks. According to the literature review, another strong and positive relationship has been found between the variables of this study i.e., the profitability (ROE) and CSR reporting information by the banks (Cerf 1961; Singhvi and Desai 1971; Belkaoui and Kahl 1981; Wallace and Naser 1995; Hossain 2001). This is due to the fact that greater the level of profitability of an organization, larger is the amount spared for social work and charity which consequently leads to greater CSR and ultimately their reporting. According to Haniffa and Cooke (2005) organizations generating profit consistently are keen to report the CSR to highlight their performance in the eyes of the society (Malone et al. 1993; Wallace et al. 1994; Udayasankar 2008; Siregar and Bachtiar 2010). According to Singhvi and Desai (1971) higher profitability persuades management to provide more information to demonstrate its ability to maximize the shareholders’ value and to enhance its managerial compensation. Likewise, management of a profitable firm feels proud of its accomplishment and discloses further information to the public in order to promote positive impression of its performance. The same is true for the selected banks in Pakistan. Banks are involved in the kind of business where they expect returns. The profit earning system depends on how the lending and borrowing activities of the banks are conducted effectively. Thus, the fourth hypothesis of the study is presented as follows: H4 There is a positive relationship between profitability and CSR reporting information by the banks. In the hypothesis stated above, it is further assumed that there is a positive relationship between the profitability of corporations and the reporting of CSR activities in their financial statements. The performance of corporate social responsibility is directly related to the amount of profit earned by the corporations. The corporate social responsibilities require considerable amount of money and cannot be performed without generating reasonable profits. Only marginal portion of the gross profit of corporations can be utilized to address the social responsibilities. At the same time, only those corporations will be able to report their social responsible activities in their financial statements that have reasonably invested in different social activities and their contributions for social work is worth-mentioning and reporting in the financial statements. On the other hand, the reporting of social responsible activities serves as an indicator of corporations’ ability to generate reasonable profits and then appropriately distribute it amongst different stakeholders especially the society on the whole by investing in social activities. The literature review has further revealed that the financial strength of an organization is indicated by the level of their gearing ratio i.e., debt to equity (DTE) ratio. It is obvious that the size and apparent financial position of an organization is not the true mirror of its actual status (Zeghal and Ahmed 1990; Deegan and Rankin 1996; Deegan and Gordon 1996). An organization having billions of investment and periodic financial transactions never means that it is having a very sound financial position unless and until its debt to equity ratio is within limits and according to the acceptable standards. Basically, debt to equity ratio shows the proportion of owners’ equity and the liabilities upon an organization. If DTE ratio is positive, that means the organization has a sound financial position due to limited liabilities in terms of debts on the organization. This also shows that comparatively a stronger equity is available which leads towards the overall sound financial position and better prospects for future growth.

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Fig. 1 Conceptual framework

It is further assumed that there is a positive relationship between gearing ratio i.e., debt to equity (DTE) ratio of a company and their ability to perform and report corporate social responsibility. The positive debt to equity (DTE) ratio serve as a clear indicator, that is, the concerned company is in this well off state and has a fair relationship between her ability to negotiate with the liabilities quite easily. Only those companies can spare some amount of resources that has least liabilities to meet both in recent and remote future. Thus the fifth hypothesis of the study is formulated as: H5 There is a positive relationship between the gearing ratio (DTE) and CSR reporting information by the banks. The literature review is summarized in the conceptual diagram (Fig. 1). The conceptual framework shows that the CG elements, structure related and performance related variables can affect the CSR reporting of the banks. This study considers non-executive directors and foreign national directors as elements of corporate governance along with firm’s size and gearing level as structure-related variables. According to Wallace et al. (1994), these variables are considered to be quite steady and constant over time. On the other hand, return on equity is taken to be the performance related variable which is time specific and it tends to represent information that is of importance to accounting information users. The combination of non-executive directors and foreign national directors on the board of the banks can have a significant impact on the CSR reporting in CB of Pakistan. Finally, firm size, profitability and an optimal gearing ratio can also improve the CSR reporting in CB of Pakistan. 5 Methodology The source of data for this study was the annual reports of 22 commercial banks listed on KSE 100 index. The annual reports for year 2005–2010 were downloaded from the websites of the respective banks and examined accordingly. Previous studies carried out by Guthrie and Parker (1990), Adams et al. (1995) and Gray et al. (1995a) were the source of inspiration for selecting annual reports for the collection of data. Moreover, the annual reports are the most readily available source for the required data. It is also the matter of fact that companies do not publish any information regarding reporting their CSR separately.

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5.1 Variables relevant for the study 5.1.1 Dependent variable—CSR reporting The data related to the variables of this study was collected, codified and analyzed by using a commonly used technique for the analysis of data extracted from the annual reports i.e., the content analysis technique. The technique involves coding the content of data into various categories on the basis of selected criteria (Weber 1988). Content analysis consists of categories having classification of content units (Ali et al. 2008). For this purpose, the data was collected from the previous research in the relevant field (e.g., Ernst and Ernst 1976; Cowen et al. 1987; Guthrie and Parker 1989, 1990; Gray et al. 1995a,b) and was applied to Pakistani business environment (Ali et al. 2008; Khan et al. 2009). The research instrument of this study contains seven major categories of CSR reporting namely contribution to health sector, contribution to education sector, activities for natural disaster, other donations, and activities for employees, environmental issues, and product and services. The study tried to confirm the clarity and uniqueness, relevant to Pakistani banking sector environment, and mutual exclusiveness of the items of this research. Only those items were included that were related to the banking industry of Pakistan. Finally, 60 CSR reporting items were included in this study. 5.1.2 CSR reporting index (CSRRI) The numbers “1” and “0” were used to code an item in this research. 1 means that a CSR item is disclosed and 0 means that a CSR item is not disclosed. Each item scores were added for final score for a bank. The CSR reporting disclosure model calculates the total disclosure (TD) score for a particular bank additive as follows.  CSRRI = d60 (1) i /nj where, di is 1, if the item di is disclosed and 0 if the item di is not disclosed, nj is the maximum number of items for jth firms nj ≤ 60. To calculate a particular bank score, each item scores added are totally divided by the maximum likely score, and then is multiplied by hundred to get the percentage scores. For this study, 60 items represent the maximum possible disclosure score as the numbers of disclosure items combining all the broad themes form a total of 60. The average score is calculated by dividing the number of banks disclosing a particular item by the total number of items. 5.1.3 Independent variables Following Table 1 describes the independent and control variables, and the methodology used for their construction.

6 Results and discussion As stated earlier, 60 CSR reporting items were considered for the study, the detail results of which are shown in Table 2. The results show that even though reporting of CSR is voluntary in Pakistan, the participation of commercial banks of Pakistan in different CSR activities is not as low as expected in relation to the total list of items and the extent of CSR activities

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M. Sharif, K. Rashid Table 1 Constructs of the independent variables Independent variables

Measurement

Non-executive directors (COMPNED)

Composition of non-executive directors to total directors on the board

Foreign directors (FOROWN)

Composition of non-Pakistani directors to total directors on the board

Size (STA)

Size based on total assets = fixed assets + current assets

Profitability (ROE)

Return on equity = net profit after tax/total equity

Gearing (DTE)

Debt to equity ratio = total long-term debt./total equity

Table 2 Overall extent of CSR reporting from the years 2005 to 2010 Sr. no.

No. of banks reported this item

%

Frequency

A: Contribution to health sector 1

Medical support for AIDS patients

8

36.36

8

2

HIV/AIDS assistance program

9

40.90

10

3

Health assistance to underprivileged and disable children Support to acid and burns victims

17

77.27

70

3

13.64

3

8

36.36

8

9

40.90

19

9

40.90

17

12

54.55

20

8

36.36

13

9

40.90

11

10

45.45

17

4 5 6 7 8 9 10

11 12 13

14 15 16 17 18

Donation to Leprosy centers for treatment of leprosy patients Organizing transplantation of organs and plastic surgery operation Donation of costly medical equipments in different medical hospitals Donation of cash money for setting up / running cancer hospital Donation of cash money for operation theater for kidney hospital Donation to rotary club to purchase equipment to help the disadvantaged children with hearing impairment Donation of cash money to women and child hospitals to bear their operational cost Donation to different eyes hospital Financial support for performing opthtamological operation of born blind children B: Contribution to education sector Donation to different organizations working for improving female education Scholarships to the research students of different universities Scholarship to meritorious and poor students Granted fund for blind education and rehabilitation Scholarships for physical disable students

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8

36.36

11

4

18.18

9

20

90.90

46

12

54.55

34

16

72.73

80

7

31.82

11

9

40.90

23

Corporate governance and corporate social responsibility Table 2 continued Sr. no.

19 20 21 22 23

No. of banks reported this item Donation of books and other equipments to different colleges and universities Organizing different local and international students competitions Donation for the students of art and architecture Internship facility for universities students with/without cash allowance Part time job facilities for the students

%

Frequency

10

45.45

23

8

36.36

11

4

18.18

4

1

4.55

1

0

0.00

0

22

100.00

65

22

100.00

28

13

59.09

19

21

95.45

46

C: Activities for natural disaster 24 25 26 27 28 29

30 31 32

33 34 35 36 37

Donation for the flood and earthquake affected people Donation by the employees for affected people Donation for rehabilitations of homeless people due to river erosions Distribution of worm cloths among the cold-affected people Donations for internally displaced people (IDP’s)

16

72.72

24

11

50.00

18

Establishment of health care center for rural people for free medical services Donation to the families victim of terrorist attacks

14

63.64

21

1

4.55

1

Donation to hospitals for purchasing equipments for reducing sufferings of poor Thalassemia patients Donation for improvement of street children’s condition Financial support to the natural affected victims of neighboring countries Sponsoring to different national and international games and events Donation to different sports organizations

5

22.73

7

9

40.90

17

1

4.55

1

12

54.55

21

Donation to Prime Minister/Chief Minister relief fund for flood victims people D: Other donations

Assistance to different Trusts who works for destitute people of the society E: Activities for employees

15

68.18

25

14

63.64

27

38

Staff engagement programs

21

95.45

26

39

Employees trainings cost

15

68.18

18

22

100.00

40

9

40.90

11

40

Number of employees

41

Career development

42

Employee benefits

22

100.00

61

43

Compensation plan for employees

20

90.90

32

44

Facilities to employee’s children

45

Number of employees trained

46

Amount of budget allocation on employees training Employees categories by function

47

9

40.90

9

12

54.55

15

8

36.36

10

16

72.72

24

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M. Sharif, K. Rashid Table 2 continued Sr. no.

No. of banks reported this item

48

Frequency

9

40.90

11

49

Information about support for day-care, maternity and paternity leave F: Environmental issues

0

0.00

0

50

Awards for environmental protection

2

9.09

2

51

Planting of trees to make the country green

7

31.82

11

2

9.09

2

0

0.00

0

5

22.73

5

52 53 54

Cost of employees safety measures

%

Support for public/private actions designed to protect the environment Past and current operating costs of environmental friendly equipment and facilities Promoting environmental awareness to the community through promotional tools G: Product/services/statements

55

Explanation of major kinds of product/services

16

72.72

102

56

Improvement of product/service quality

21

95.45

87

57

Improvement of customer service

21

95.45

63

58

Receipt of awards (local/international) for CSR activities Value added statement

8

36.36

13

22

100.00

75

0

0.00

0

59 60

Providing information for conducting safety research on the company’s products Total

47.07

performed by the banks is truly inspiring. Even though taking on of CSR activities by the banking sector are quite new measures in Pakistan, the results of the study reveal that there are quite a few banks which are involved in the CSR activities at a larger extent contributing in the different sectors. All the banks (100 %) reported CSR information on items such as donation for natural disaster affected people, donation by employees for affected people, reporting of value added statement, employee benefits, staff engagement programs and number of employees employed. In view of above statements, it is quite visible from our results that the commercial banks of Pakistan make most of their contribution towards the activities for natural disaster and they stand besides these affected people in accordance with their financial ability for satisfying their commitment to the society. Two of the sample bank even reported to have provided financial support to natural affected victims of neighboring country (earthquake victims of Peoples Republic of China and Bangladesh). The continuance of reporting such exhilarating events will make the bank and the country earn phenomenal respect and recognition, both locally and worldwide. Table 2 shows that on an average 17 banks (74.64 %) provide a helping hand in giving health assistance to underprivileged and disabled children, 12 banks (54.55 %) donate cash amounts for either setting up or running cancer hospitals, 10 banks (45.45 %) donate cash money to women and children hospitals to bear their operational cost. About more than one-third banks make their contributions to help set up HIV/AIDS assistance programs, to organize transplantation of organs and plastic surgery operations, to donate costly medical

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equipments in different medical hospitals and to rotary club for the purchase of equipments to help the disadvantaged children with hearing impairment. It is observed that Pakistani commercial banks report extensively about their human resource (SI no. 38–49). All the 22 banks (100 %) report about the number of employees employed and the benefits program of employees. Around 21 banks (95.45 %) report about their staff engagement programs. These organizations realize their responsibility towards the financial, emotional and physical well being of their employees and their families. The management believes in looking after its employees in terms of their physical, spiritual and emotional well being at all times. Following best global practices, the management of these organizations has set up a dedicated department to engage the employees in positive and fun-filled activities. The study reveals that the banks contribution towards the education sector is that almost 20 banks (90.90 %) make donations to different organizations working for improving female education, by establishing and operating schools in the underdeveloped regions of Pakistan. Around 16 banks provide scholarship to meritorious and poor students and 10 surveyed banks (45.45 %) donate books and other equipments to different colleges and universities. Furthermore, almost all the banks place a lot of emphasis on reporting information related to the products and services that they provide (SI no. 55–60), especially towards their approach for improving customer services and their products/services quality and reporting extra financial statement such as value added statement. Overall, it is quite evident from the reporting score of 47.07 % that in Pakistani commercial banks CSR reporting in the annual report is not as low as anticipated. Although, there are a few CSR items (Table 3) which have not at all been reported by any of the surveyed banks, the banks CSR participation towards various sector such as health, human resource and others are very motivating. There might be several reasons behind not reporting these items. For instance, banks might not be offering part time job facilities to the students due to their corporate culture or banks firm thoughts which are directed toward hiring more qualified personnel (Rashid 2005). Items relating to environmental issues (SI no. 53 and 60) need to be addressed along with the other issues as well. Banks dedications towards environmental issues are rather disappointing. This is the area where Pakistani banks need to improve as part of their upcoming CSR initiative. 6.1 Banks ranking based on reporting of CSR items According to the survey of the commercial banks of Pakistan, the overall ranking of these banks is presented in Table 4. This ranking was based on the CSR reporting scores for each of the banks, which presented insights about which of the banks reported more of environmental and social information in their annual reports than others.

Table 3 CSR reporting items not reported by any sample banks

SI no.

CSR reporting items

23

Part time job facilities for the students

49

Information about support for day-care, maternity and paternity leave

53

Past and current operating costs of environmental friendly equipment and facilities

60

Providing information for conducting safety research on the company’s products

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M. Sharif, K. Rashid Table 4 Ranking of the banks based on the reporting of CSR items Sr. no.

Name of the banking organizations

Number of items disclosed

%

Ranking

1

Allied Bank (ABL)

50

83.33

1

2

Habib Bank (HBL)

48

80.00

2

3

Bank Al Falah (BAFL)

45

75.00

3

4

Meezan Bank (MEBL)

43

71.67

4

5

National Bank (NBP)

42

70.00

5

6

Habib Metro Bank (HMB)

42

70.00

5

7

United Bank (UBL)

40

66.67

6

8

Muslim Commercial Bank (MCB)

37

61.67

7

9

Askari Bank (AKBL)

37

61.67

7

10

Standard Chartered Bank (SCBPL)

35

58.33

8

11

Faysal Bank (FABL)

34

56.67

9

12

Bank Al Habib (BAHL)

33

55.00

10

13

Soneri Bank (SNBL)

28

46.67

11

14

Bank of Khyber (BOK)

26

43.33

12

15

My Bank (MYBL)

22

36.67

13

16

Summit Bank (SMBL)

19

31.67

14

17

NIB Bank (NIB)

16

26.67

15

18

JS Bank (JSBL)

15

25.00

16

19

KASB Bank (KASBB)

15

25.00

16

20

Bank Islami Pakistan (BIPL)

13

21.67

17

21

Samba Bank (SBL)

12

20.00

18

22

Silk Bank (SILK)

12

20.00

18

Allied Bank Ltd (ABL) managed to gain the top position by disclosing 50 items (83.33 %) out of the 60 items. A thorough study of this bank’s CSR activities displayed it as a respectable corporate body who has been constantly involved in the implementation of different social and humanitarian programs. Allied Bank Ltd is socially committed to contribute towards bringing a positive change in the communities it conducts business in and they consider it as their moral and ethical responsibility to lend a helping hand to the members of the community in need. Their CSR philosophy has focused around some key areas over the years, such as education, healthcare, sports promotion, environment, promotion of art and artists, staff welfare and engaging the staff in healthy activities and their CSR objective is to re-enforce the bank’s image as ‘Not just for profit’. They firmly believe in behaving ethically by following best practices and contributing to the economic development of the country at large. Being one of the leading banks in Pakistan, they are committed to consider the interests of the society by taking responsibility for the impact of their activities on customers, employees, environment in all aspects of the bank’s operations. Moreover, regarding the rankings, Allied Bank Ltd is followed by Habib Bank Ltd, Bank Al Falah Ltd, Meezan Bank Ltd and so on. Due to the least display of CSR items, Samba Bank Ltd and Silk Bank Ltd obtained the lowest ranking.

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Corporate governance and corporate social responsibility Table 5 Descriptive statistics for independent variables

Independent variables

Mean

SD

Minimum

Maximum

COMPNED

0.53

0.17

0.20

0.91

FOROWN

0.10

0.19

0.06

0.30

STA (Log)

5.03

0.58

3.17

6.02

ROE

0.05

0.27

0.02

0.50

DTE

0.44

0.25

0.03

0.96

6.2 Multivariate analysis The relationship between the dependent and different independent variables of the study was tested by using regression analysis along with the measures of the overall level of CSR reporting by the commercial banks of Pakistan. The model for the study is presented below. CSRRI = β0 + β1 COMPNED + β2 FOROWN + β3 STA + β4 ROE + β5 DTE + et (2) where, CSRRI is the corporate social responsibility reporting index. COMPNED is the percentage of independent directors to total directors on the board. FOROWN is the percentage of non-Pakistani directors to total directors on board. Furthermore, STA is the size of the firm on the basis of total assets. ROE is the profitability on the basis of return on equity, DTE is the gearing on the basis of debt to equity ratio. Finally, et is the disturbance term and β 1.... β5 are the beta coefficients. 6.3 Descriptive statistics and the correlation matrix Descriptive statistics of the independent variables is depicted in Table 5. It is very obvious with a mean of 53 % that the independent variable COMPNED which is measured by the proportion of non-executive directors to total number of directors show that majority of the banks have many non-executive directors on the board. The result undoubtedly depicted that financial institutions are generally dominated by non-executive directors. Meanwhile, the mean value of foreign national (FOROWN) representation on the board of directors is only 10 % with the maximum representation of around 30 %. This indicates that the banks’ board does not comprise of many foreign nationals. On the other hand, mean of size of the firm is 5.03 and profitability ratio and gearing ratio mean are 5 and 44 %, respectively. The correlation matrix for the dependent and independent variables is shown in the Table 6. The correlation between all the variables except for FOROWN is found to be highly significant at 0.01 levels. Parallel to the study’s hypothesis, CSR reporting is positively related with the proportion of non-executive directors on the board with correlation coefficient of 0.874 ( p < 0.001). Results of correlation coefficient of 0.096 ( p > 0.001) also depict a no significant correlation between foreign national representation on the board and disclosure of corporate social information. On the other hand, STA, ROE and DTE are also found to be positively correlated with CSR reporting with a correlation coefficient of 0.821, 0.764 and 0.494, respectively.

123

M. Sharif, K. Rashid Table 6 Pearson correlations CSRRI CSRRI COMPNED

COMPNED

FOROWN

STA

ROE

DTE

1 .874**

1

.000 FOROWN STA ROE DTE

.096

.091

.168

.172

1

.821**

.792**

.074

.000

.000

.153

1

.764**

.679**

.067

.616**

.000

.000

.051

.000

.494**

.424**

.057

.532**

.169

.000

.000

.132

.000

.053

1 1

** Correlation is significant at the 0.01 level (2-tailed)

Table 7 Multiple regression results using index (CSRRI) as the dependent variable Variables

Predicted sign

Intercept

Coefficient value

t Statistic

−0.2736

−2.7505

p Value

VIF

0.0069

COMPNED

+

0.5892

6.7288

0.0000**

FOROWN

+

0.3923

5.3441

0.4339

1.99

STA

+

0.0783

3.1034

0.0024**

3.29

ROE

+

0.2628

6.2730

0.0000**

2.06

DTE

+

0.1330

3.5534

0.0006**

1.50

R 2 (%)

85.81

Adjusted R 2 (%)

85.32

F-statistics

173.90 and p = 0.0000

Durbin–Watson

1.8610

3.23

** Correlation is significant at the 0.01 level (2-tailed)

6.4 Multiple regressions analysis Multiple regression results are shown in the Table 7. The results reveal a significant relationship between the dependent and independent variables. The regression model illustrates 85.32 % (F = 173.90; p = 0.000) of CSR reporting variance for the explanatory variables. The R 2 value of the model is approximately 86 %, indicating that 86 % change in our dependent variable is explained by the independent variables. A highly significant ( p < 0.05) relationship between COMPNED with the level of CSR reporting of surveyed banks is indicated by the regression model. It depicts that the level of social information reporting is higher in annual reports when the number of independent directors on the Pakistani board is high. This result supports the study’s H1 which is consistent with the results of previous disclosure research (Haniffa and Cooke 2002; Chen and Jaggi 2000). However, the results of the study do not support H2 as the composition of foreign national directors on the board is found to be insignificant ( p > 0.05).

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Corporate governance and corporate social responsibility Table 8 Incremental regression results Independent variables

OLS 1

OLS 2

OLS 3

OLS 4

OLS 5

C

−0.2736

−0.4561

0.0160

−0.5372

−0.40701

COMPNED

0.5892*



0.7422*

0.8277*

0.6226*

STA

0.0783*

0.1739*



0.1133*

0.1134*

ROE

0.2628*

0.3851*

0.2915*



0.2234*

DTE

0.1330*

0.1600*

0.1784*

0.0708



R2

0.8581

0.8023

0.8463

0.8096

0.8426

Adjusted R 2

0.8532

0.7972

0.8423

0.8047

0.8385

* Shows that the variable is significant at the 0.05 level (2-tailed)

Foreign national representation on the board is not significantly associated with the degree of CSR reporting reported by the banks. This result is consistent with the earlier study conducted by Branco and Rodrigues (2008). The three additional variables of the study i.e., firm size, profitability and gearing ratio are also found to be statistically significant with the level of CSR reporting, hence leading to the acceptance of H3, H4 and H5. According to Cormier and Gordon (2001) and Roberts (1992), large organizations having a higher profitability and gearing ratio tend to do more of CSR reporting because of visibility and accountability. This indicates that Pakistani commercial banks utilize annual reports as a prospect to put across their image and legitimize their activities. The correlation matrix visual examination of the explanatory variables is considered as an important way to identify collinearity problem. Farrar and Glauber (1967) and Studenmund (1992) state that correlation coefficient is thought to be problematic if it exceeds 0.80. A more indicative and accurate technique mostly used is the variance inflation factor (VIF) for each of the independent variable (Kennedy 1992). If the VIF exceeds 10, collinearity is considered as a problem (Gujrati 2005). The VIF for this study vary from 1.50 to 3.29. Thus, according to the correlation matrix and VIF of the variables of the study, it is unlikely that multi-collinearity manipulates the regression results, since the maximum VIF of 3.29 is less than the threshold of 10. 6.5 Incremental regressions results The incremental regression analysis is performed to check the relative significance of the independent variables of the study on the value of the R 2 . The independent variables are excluded one by one from the study and an analysis of its effect on the value of the R 2 is observed. As it can be seen in the Table 8, OLS 1 represents the original regression results of the model. A considerable change in the value of the R 2 is noticed when the variable COMPNED is eliminated from the model (reduction from 85.82 to 80.23 % in OLS 2). This depicts that representation of non-executive directors on the board is the most important variable in affecting the degree of CSR reporting information by Pakistani commercial banks. All the results of this study show a prevalence of stewardship theory as the non-executive directors are acting as stewards. Board composition of non-executive directors is positively associated with firms’ financial performance because higher level of external environment through which the firm can gain more information, resource and legitimacy than others can improve the value of a firm. The majority of past research studied the linkages among board composition, leadership structure and corporate financial performance (CFP) leading to CSR,

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concentrating on a particular aspect of governance, such as size, compensation, anti-takeover provisions, shareholders’ activism, investors’ protection, and so on. Berle and Means (1932) found a relationship between ownership and management towards CFP, and argued that CFP is increased when management is separated from ownership. The reason for this phenomenon is that external directors are more professional and are in a better position to exert control over management. Therefore, according to the stewardship theory, effective boards will be comprised of external directors, since non-management directors are believed to provide superior performance benefits to the firm as a result of their independence from the firm’s management. This position is supported by some empirical results. For example, Ezzamel and Watson (1993) found that outside directors were positively associated with profitability among a sample of the U.K. firms, and in an examination of 266 U.S. corporations, Baysinger and Butler (1985) found that firms with more external board members realized higher returns on equity. Fama (1980) maintains that independent directors are better in managing and monitoring management self interest and opportunism. Similarly, several other researchers have also noted a positive relationship between external director representation and CFP (Schellenger et al. 1989; Rosenstein and Wyatt 1990).

7 Conclusion This study has examined the corporate social responsibility reporting level given in the annual reports of commercial banks in Pakistan. The study basically took into account the main elements that could have an impact on CSR reporting activities by the commercial banks in Pakistan namely; presence of non-executive directors on the boards of management, presence of non-Pakistani directors on the board, firm size, profitability ratios and the gearing ability of the banks. The results of the study revealed that although CSR reporting by the Pakistani banks was quite moderate; yet good enough to include them in the list of socially responsible corporations. A reasonable variety of CSR reporting was observed. The main categories of CSR reporting included health, education, natural disaster, activities for employees, environmental issues, product/services/statements and other donations. On the basis of the findings of this study, it is concluded that commercial banks operating in Pakistan are among the corporations that are keeping up their corporate social responsibilities. All the categories of social work mentioned above are getting reasonable share from the commercial banks. Unfortunately, Pakistan is amongst the lists of the countries that are struck by poverty, poor health, illiteracy and natural disasters. There is no doubt in the fact that country like Pakistan fully deserves to have the corporations’ involvement in the eradication of social problems. The findings of the research exposed the facts that commercial banks of Pakistan are reasonably contributing to CSR activities related to a number of sectors mentioned above. Five hypotheses were set for this study and four of them were significantly accepted. The conceptual framework of the study supported the results of the hypotheses i.e., a positive relationship was found between the percentage of non-executive directors on the board who act as stewards and CSR reporting information (H1), firm size and CSR reporting (H3), profitability and CSR reporting information (H4), and between gearing ratio and CSR reporting information by the banks (H5). On the basis of the findings, this study has made a number of implications for the CSR literature. Firstly, has tried to give an insight into the CSR reporting activities of commercial banks in Pakistan and has enhanced the currently available literature on the topic. It has also

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paved the way for further research and comparative studies on the CSR topic in the rest of developing countries. Secondly, an example has been set regarding the research on the topic of CSR exclusively in banking sector. Thirdly, the findings of this study have recorded that a number of commercial banks in Pakistan are considerably contributing in CSR activities related to health, education, and disaster management. Fourthly, the study has highlighted the importance of non-executive directors and their valuable contribution in influencing the banking sector for CSR activities. The limitation of the study suggests that data set for wider time period and under boom and recession in the economy can lead to the different nature of the relationship among the variables of the study and alternate policy implications.

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