Corporate governance and corporate social responsibility disclosures

critical perspectives on international business Corporate governance and corporate social responsibility disclosures: The case of GCC countries Samy Garas, Suzanna ElMassah,

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Corporate governance and corporate social responsibility disclosures

Corporate social responsibility disclosures

The case of GCC countries Samy Garas College of Business, Zayed University, Dubai, UAE, and

Received 12 October 2016 Revised 25 September 2017 Accepted 24 October 2017


Suzanna ElMassah College of Business, Zayed University, Abu Dhabi, UAE

Abstract Purpose – The purpose of this study is to explore the impact of corporate governance (CG) on the corporate

social responsibility (CSR) disclosures. This is done in the context of firms operating in the Gulf Cooperation Council (GCC) countries and is largely based on the legitimacy theory, although other theories such as principal–agent theory and stakeholder theory are disucssed.

Design/methodology/approach – This study used the annual reports of 147 firms in the GCC countries, drawing on a legitimacy theory framework to determine the impact of CG characteristics, such as management ownership, ownership concentration, independence of board members, duality of CEO and chairman positions and the existence of an audit committee, on firms’ CSR disclosures to various stakeholders. Accordingly, the authors developed five hypotheses to examine the above variables and used a data set from Hawkamah – the Institute of Corporate Governance. This study covers a period of six years (2007-2012). The data set had been regressed in a multi-variate regression analysis.

Findings – The authors reported that greater managerial ownership and concentration of ownership have

positive impact on CSR disclosures. The findings of this study also show that internal CG mechanisms, such as the independence of board members, the separation of powers, between the CEO and chairman positions and the existence of an independent audit committee, also have a positive influence on CSR disclosures. In addition, the leverage ratio, return on assets, company’s size and age emerge as important determinants of CSR disclosures; nevertheless, the company’s size and age are statistically not significant. These significant findings corroborate the recent concern with CG in developing countries that brings greater attention to CSR disclousures, as both internal and external CG mechanisms are effective in influencing the CSR practices.

Practical implications – This study fills the gap in literature by providing empirical evidence on the impact of CG on CSR disclosures in a significant region in the emerging economies. Furthermore, it alerts regulators, policy-makers, practitioners and firms’ executives in the GCC region and other developing countries to pay more attention to CG reforms and enforcement as well as to increase institutional pressures regarding CSR adaptation. Originality/value – The study on how CG and CSR disclosures are connected has been limited. This study addresses this research gap and focuses on a region that has often been overlooked by accounting research.

Keywords Organizational culture, Corporate and social responsibility, Developing countries, Corporate governance Paper type Research paper

1. Introduction Corporate governance (CG) consists of procedures and processes by which an organization is directed and controlled to help building an environment of trust, transparency and

critical perspectives on international business © Emerald Publishing Limited 1742-2043 DOI 10.1108/cpoib-10-2016-0042


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accountability (OECD, 2015). Our study evaluates the impact of CG on the corporate social responsibility (CSR) disclosures. This is done in the context of firms operating in the Gulf Cooperation Council (GCC) countries. In 1930s, the notion of sound CG was originally grounded by the agency theory. At the time, the CG revolved around resolving problems that arise in agency relationships when the goals and interests between the principals and the agents are unaligned (Berle and Means, 1932). Later on, the definition of CG has evolved and scholars have investigated CG from different perspectives. For example, Shleifer and Vishny (1997) have examined the relationship between companies and their shareholders, while other scholars have expanded CG to include both internal and external stakeholders (Caramolis-Cötelli, 1995; Keasy and Wright, 1997; Roe, 2005; Pintea, 2015). Recently, the definition of CG has been further expanded to emphasize the positive influence of governance practices on environmental, social and economic development (Ahmed and Mohammad, 2005; Krechovská and Procházcová, 2014; Tophoff, 2007). Moreover, the recent growth of corporate scandals has raised the call for implementing more CG mechanisms in different parts of the world with a variant degree of success (Marsiglia and Falautano, 2005). The CSR concept has been defined by the World Business Council for Sustainable Development (WBCSD) as “the commitment of business to contribute to sustainable economic development, working with employees, their families and the local communities” (WBCSD, 2001). The key elements of CSR include investment in community outreach, improvement of employee relations, creation and maintenance of employment and environmental stewardship (Khoury et al., 1999). Thus, CSR transforms the corporation from a compliance mode to an engagement mode and from damage minimization to value adding (Novak, 1996; Luetkenhorst, 2004). Furthermore, the CSR concept attracts the world’s attention, especially with boosted business complexity and increased requirements of transparency and corporate citizenship (Jamali and Mirshak, 2007). This notion has been verified by Simms survey which revealed that 70 per cent of the global CEOs address CSR as a fundamental issue to their companies’ profitability (Simms, 2002). In this vein, corporations have expanded their performance assessment to include social, environmental and economic impacts and value added (Jamali et al., 2008). In academia, several studies have investigated CG and CSR independently (Bhimani and Soonawalla, 2005; Jamali et al., 2008). However, only scant attention has been paid at evaluating the relation between them. This was because they were considered one and the same thing. For instance, Bhimani and Soonawalla (2005) noted that “CG and CSR are two sides of the same coin”, while Jamali et al. (2008) observed that “CG and CSR are strongly and intricately connected”. Both CG and CSR concepts are well-articulated in legitimacy theory which defines the interaction between the firm and its internal and external sociopolitical environment (Van den Berghe and Louche, 2005)[1]. In fact, the legitimacy theory is widely used to explain environmental and social disclosures (Campbell et al., 2003), as it relies on the notion of “social contract” between the company and the society (Patten, 1991; Mathew, 1993; Deegan et al., 2000). Accordingly, the purpose of CG is to ensure that corporate power is wielded for the benefit of the society to gain public confidence (Stanfield and Carroll, 2004; Wilson, 2004). The extant research is limited in measuring the relation between CG and CSR disclosures based on legitimacy theory in the context of emerging economies in general and the GCC countries in particular. Hence, the modest attempt of our study is to explore the relation between CG and CSR by testing the impact of CG mechanisms on CSR disclosures during the period (2007-2013) in the context of GCC countries which are composed of Bahrain, Kuwait, Oman, Qatar, Kingdom of Saudi Arabia (KSA) and United Arab Emirates (UAE).


This is also in line with the precent outlet scope, nature and mission of Critical Perspectives on International Business (CPoIB) journal where not only our work is fundamentally related to the broad field of intertnational business but also our results have direct bearing on the relationship between “multinational firms and civil society” (CPoIB, 2017). As globalization has once again brought to the forefront issues of corporate responsibility, the results also speak to “issues of globalization and corporate social responsibility”, which is also in line with current journal’s scope and vision (CPoIB, 2017). Furthermore, our analysis of CG and CSR studies them as separate though related entities, breaking away from orthodox thinking on the subject matter in previous research (Bhimani and Soonawalla, 2005; Jamali et al., 2008). Our work corroborates other articles published at this research outlet, where our research on emerging economies, albeit the GCC ones and focus on interaction between multifaceted stakeholders, jells well together with the general theme of the journal and even the latest issue articles of CPoIB (Becker-Ritterspach et al., 2017; Ramya and Abhoy, 2017). The remainder of the paper is structured as follows: Section 2 reviews the literature and analyzes the connection channels between CG and CSR incorporating the legitimacy theory. Section 3 discusses the extant literature to develop our hypothesis. Section 4 describes the research design and methodology used in data collection. Section 5 presents and discusses the empirical findings and the final section offers some concluding remarks. 2. Literature review Over time, the definition of CG has undergone a lot of changes, starting from the narrow conception of CG which considers CG as a system created to ensure the firm is running in the interest of shareholders and with a minimal focus on the socio-environmental obligations of the firm (Jamali et al., 2008). This narrow view was challenged by the broad view which considers CG as a system concerned with ensuring that firms are running in a way that societal resources are used efficiently and effectively (Jamali et al., 2008). To address these two views, corporations create both internal and external mechanisms. The internal CG mechanism accentuates honesty and transparency in disclosing information on a timely mannar to management, shareholders and other stakeholders (Jamali et al., 2008). The external CG mechanism is concerned with the legal system which provides protection for stakeholders’ rights (Jamali et al., 2008). In our study, we adapt the broad view of CG within the internal mechanism. CSR was initially defined by Bowen (1953) as: [. . .] The obligations of businessmen to pursue those policies, to make those decisions or to follow those lines of action which are desirable in terms of objectives and values of our society.

This definition has been expanded by WBCSD to include the corporate responsibilities in providing sustainable economic development to employees and communities (WBCSD, 2001). This is in addition to the economic and legal obligations (McGuire, 1963). A responsible enterprise should consider not only its employees, vendors and clients, but also its local communities and nation to become a good corporate citizen (Carroll, 1991; Johnson, 1971). CSR transforms the corporation from a compliance mode to an engagement mode and from damage minimization to value adding (Novak, 1996; Luetkenhorst, 2004). Furthermore, CSR is considered as a voluntary effort to act responsibly toward all stakeholders (Cetindamar and Husoy, 2007) and influences corporate policies and practices (Khanifar et al., 2012). The literature has used a variety of methodologies in studying CSR based on the adopted definition of CSR. The narrow definition of CSR is linked with the classical perception where it focuses on firms as legal constructs with two responsibilities: profit



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maximization for shareholders and compliance with rules and regulations (Greenfield, 2004). Meanwhile, the broader definition of CSR includes a wider range of economic, legal, ethical, moral and philanthropic responsibilities by considering the corporation like any good citizen, who discharges all his obligations to the whole society (Hancock, 2005; Goodpaster and Matthews, 2003; Pettit, 2005). The interrelation between CG an CSR have been investigated in a number of studies, albeit, from three different perspectives. First, CG can be viewed as a pre-requisite for sustainable CSR which is the responsibility of the corporate boards (Elkington, 2006) or one of the building blocks of CSR accompanied by human capital, stakeholder capital and the environment (Hancock, 2005). Second, CSR can be viewed as a one dimension of CG (Kendall, 1999; Ho, 2005). This relation is manifested in the company’s responsibility towards its employees (internally) and the society (externally), which is reflected on CG designs and performance (Jamali et al., 2008). Third, CG and CSR are considered as complementary elements of the same firm accountability continuum (Bhimani and Soonawalla, 2005). Jamali et al. (2008) looked at the two concepts as two sides of the same coin. Our model suggests that while CG is increasingly compliance driven (binding), CSR falls on the other hand in the realm of voluntary social performance as per Bhimani and Soonawalla (2005). Therefore, our study synthesizes CG and CSR in a novel framework in the context of legitimacy theory and focuses on the GCC’s emerging economies where CSR has been largely overlooked and firms are operating under minimal regulations with limited public and government scrutiny (Platonova et al., 2016). To this end, the interrelation between CG and CSR can be articulated in a number of channels as presented in Table I. First, both concepts are concerned with the company’s moral responsibility towards its stakeholders. In this regard, both concepts develop their cores from same cradles, namely

Channels

CG

The Concept

The company has a moral responsibility towards its stakeholders Narrow definition: ensures the Internal approach: the firm is responsible to firm’s accountability, internal stakeholders (e.g. workplace safety, compliance and transparency working conditions, human rights, equal Broad definition: The firm is opportunity and labor rights) liable to all stakeholders Stakeholder approach: the firm is the center for the stakeholders and has a responsibility to different stakeholders

Legitimacy Theory

Both CG and CSR define the relation between the firm and its internal and external sociopolitical environment The appropriate role of Relies on the notion of “social contract” corporations in the society

Regulating Operations

The company increases the use of mechanisms to regulate its operations being held accountable for . . . taking account of . . .

Sustainability

Both CG and CSR work on firm’s sustainability Satisfies all stakeholders goals Escalates firm’s credibility and relations with all and develops competitiveness stakeholders that leads to firm’s sustainability that leads to firm’s in the long run sustainability in the long run

Table I. The channels of interrelation between CG and CSR Source: Developed by the authors

CSR


transparency, accountability and honesty to gain stakeholders’ trust (Van den Berghe and Louche, 2005). On one side, the narrow definition of CG focuses on accountability, compliance and transparency (Keasy and Wright, 1997; Letza et al., 2004; MacMillan et al., 2004) which concurs with the internal dimension of CSR that addresses firms’ commitment to their internal stakeholders with respect to skills, education, workplace safety, human rights and labor rights (Grosser and Moon, 2005; Jones et al., 2005). On the other side, the broad view of CG ensures firms are liable to key stakeholders (Dunlop, 1998; Kendall, 1999; Jamali et al., 2008), which accords stakeholder approach of the CSR that views the corporation as a complex web of stakeholders’ relationships to which the corporation is obligated (Freeman, 1984). Sacconi (2004) emphasized that CSR is a type of extended CG, whereby those who run the firms must discharge their fiduciary duties towards all stakeholders. Second, to fully engage with the theoretical literature and bring some novelty to our analysis, we apply the legitimacy theory framework. This strand of theoretical literature argues that both CG and CSR as related concepts. They further define the interaction between the firm and its sociopolitical environment (Van den Berghe and Louche, 2005). On the one hand, the business legitimacy is derived from the perceived legitimacy of CG practices, which aims to ensure that corporate power is wielded for the benefit of the society to gain public confidence (Stanfield and Carroll, 2004; Wilson, 2004). On the other hand, legitimacy theory is used to explain environmental and social disclosures (Campbell et al., 2003), as it relies on the notion of “social contract” between the company and the society (Patten, 1991; Mathew, 1993; Deegan et al., 2000). This perspective highlights the appropriate role of corporations in the society (Palazzo and Scherer, 2006) and the alternation from firm–individuals relationship to firm–society integration (Groenewegen, 2004). This conclusion goes in line with Aguilera and Jackson (2003) argument that multiple institutions interact to influence the perceived legitimacy of CG practices within a nation. Third, both CG and CSR call for regulating the company’s operating environment to ensure better control and minimization of risks (Beltratti, 2005; Marsiglia and Falautano, 2005). Fourth, both CG and CSR initiatives require short-term costs; they are seen complementary prerequisites for organization’s sustainable growth within the global business environment (Marsiglia and Falautano, 2005; Van den Berghe and Louche, 2005). The sound governance not only satisfies the interests of owners, managers and stakeholders, but also enhances firm’s competitiveness (Gompers et al., 2003; Ho, 2005). Similarly, CSR practices improve company’s image, decrease transactional and environmental costs, enhance innovation and increase employees’ satisfaction (Hancock, 2005; Aguilera et al., 2007; Barnett, 2007). The current state of the literature on CSR has been mainly conducted on different firms in various industries in the developed countries (Belal, 2001; Abreu et al., 2005; Jamali and Mirshak, 2007) because of the level of economic development and socio-cultural environment which proved to affect CSR understanding and practices (Jones, 1999). Nevertheless, some research has been conducted on the developing countries such as Khan et al. (2009), who found out that CSR reporting provides the companies in Bangaladesh with a variety of benefits, namely, better recruitment and retention of employees, improved internal decisionmaking and cost savings, enriched corporate image and relations with stakeholders and higher financial returns. Furthermore, Jamali et al. (2008) concluded that CG is a pillar of CSR among Lebanese firms which corroborated Hancock (2005). Thus, we find it interesting to extend this line of research by examining the CSR practices in the GCC countries because this region has unique characteristics compared to



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other emerging countries. The GCC countries share a distinct but common Islamic, Arabicspeaking culture (Kantor et al., 1995). They follow incoherent common civil law, which cultivated low investor protection, weak capital markets and high levels of insider shareholding (Al-Malkawi et al., 2014). Nonetheless, during the past four decades, the GCC countries experienced a high level of economic growth because of exploitation of oil and natural gas, which significantly increased their cash flow and created new investment opportunities (Mostafa, 2007). Simultaneously, there has been an urgent call for organizations to access international capital markets for their growth funding and globalization of businesses. To satisfy these necessities, organizations were obligated to comply with CG best practices (Hussain and Mallin, 2002; Islam and Hussain, 2003; Joshi and Wakil, 2004; Garas, 2008). Also, regulators began to issue CG codes that were heavily influenced by European and American codes. The issuance of these codes was a sign of progress; however, CG among the GCC countries is still in an infantile state (Saidi, 2011). A few studies have evaluated the efficacy of CG mechanisms among the financial institutions in the GCC countries. Arouri et al. (2011) conducted a study on the CG mechanisms of 27 banks in the GCC countries excluding Kuwait and concluded that board size and CEO duality did not have significant impact on performance. Al-Musalli and Ismail (2012) conducted another study on 74 listed banks in the GCC countries and concluded that board size and presence of independent directors were negatively related to banks’ intellectual capital performance. They also emphasized that bank performance was not affected by bank size. Naushad and Malik (2015) have examined the effect of CG on the performance of 24 banks in the GCC region and concluded that smaller board size, CEO duality and ownership concentration tended to have a positive effect on banks’ performance. Simultaneously, a few studies in Bangladesh, Lebanon and GCC region have postulated that CSR disclosures in the Middle East are lagging behind best practices (Al-Khater and Naser, 2003; Mezher et al., 2010). In Bangladesh, Belal (1997) examined 50 companies and discovered that only 6 per cent have environmental disclosures. Imam (1999) examined 40 public companies and concluded the majority do not disclose any information about environment, human resources and community. Moreover, all of them provided information that is poor and qualitative in nature. Khan et al. (2009), on the other hand, have investigated the CSR disclosures practices in 20 commercial banks and concluded that disclosures were mainly focused on human resource disclosure, with inadequate reporting on social activities. These findings corroborated prior research on the banking sector (Gray et al., 1995). In Lebanon, Jamali and Mirshak (2007) examined the CSR disclosures among eight companies and concluded that CSR concept is still at the infantile stage because CSR is considered a voluntary action of a philanthropic nature, motivated by legitimacy and managerial principles. Profitability is not the driving force for CSR practices because neither tax deductions nor fiscal incentive are provided for CSR activities. Furthermore, the weak regulatory capacity restricts CSR activities to the internal domain without any external systematic disclosures (Jamali et al., 2007). In Qatar, Al-Khater and Naser (2003) explored the perception of CSR in the financial sector and concluded that CSR disclosures would serve the society at large by showing corporate contribution to the welfare of the society. Nevertheless, the study did not indicate the level of CSR disclosures in Qatar. In UAE, Rettab et al. (2008) investigated the perception of CSR among different companies in Dubai and concluded that CSR has positive impact on financial performance, employee performance and corporate reputation. In Abu Dhabi, Mezher et al. (2010) looked at CSR in the renewable energy sector by investigating Masdar initiative. The study successfully described CSR perspectives on long-term sustainability in terms of environmental and social issues. Nonetheless, the study failed to address the


broader issues beyond the scope of Abu Dhabi government. In effect, the study neglected the persistent challenges of cultural difference, low consumer interest and other challenges common in developing countries. The aforementioned studies indicate the scarcity of the literature on CSR disclosures in the GCC countries and highlight the importance of our study in this region. The following part reviews prior literature to develop our research hypotheses. 3. Hypotheses development 3.1 Managerial ownership Recent research has argued that managerial ownership is negatively related to CSR disclosures (Akrout and Othman, 2013; Chau and Gray, 2010; Haniffa and Cooke, 2002; Khan et al., 2013; Oh et al., 2011). However, the ownership structure in the GCC countries is one of family concentration where companies are characterized by increasing privatization in financial and non-financial sectors (Albassam, 2014; Omran, 2007). The dominance of family members in management leads to low organizational involvement in social activities because management tends to see the costs of investing in CSR activities are outweighing the benefits (Arouri et al., 2014). In KSA, Gavin (2010) reported that only two family-owned companies had encountered financial difficulties, which reflects the culture characterized by excessive secrecy and low level of transparency and disclosure. In addition, the Union of Arab Banks (2007) studied the governance practices among public companies in Kuwait, KSA, UAE, Jordan and Lebanon and concluded that ownership concentration and control of companies in substantial family corporate holdings result in a general lack of transparency and disclosure. Accordingly, we assume a negative relationship between managerial ownership and CSR disclosures in the following hypothesis: H1. Ceteris paribus, there will be a negative correlation between managerial ownership and the level of corporate social responsibility disclosures. 3.2 Ownership concentration Our next hypothesis is based on theoretical expositions by various authors such as Das et al. (2015), who have emphasized the positive relationship between ownership concentration and CSR disclosures regardless of shareholders’ type whether they are public, governmental or foreign shareholders (Das et al., 2015). This type of positive relation has been supported by other studies (Haniffa and Cooke, 2005; Khan, 2010; Oh et al., 2011; Soliman and Ragab, 2012). Similarly, agency theory suggests that institutional investors have extra incentives to closely monitor disclosure policies because they have experience and resources that enable them to effectively monitor management decisions, including disclosure-related decisions (Elzahar and Hussainey, 2012; Jensen and Meckling, 1976; Ntim and Soobaroyen, 2013). Zeitun (2014) examined the ownership concentration of 203 companies in the GCC region and concluded that ownership concentration has a positive and significant impact on firm’s performance which corroborate the findings of Shleifer and Vishny (1997). This finding confirms that ownership concentration is an important determinant for corporate performance in GCC countries. Hence, the following hypothesis is proposed: H2. Ceteris paribus, there will be a positive correlation between ownership concentration and the level of corporate social responsibility disclosures.



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3.3 Board independence The board of directors plays an indispensable role in monitoring and directing managers to satisfy shareholders’ interests (Jensen and Meckling, 1976); nevertheless, the effectiveness of the board’s monitoring is determined by its composition. Independent members are more likely to pressure management for a higher level of qualitative disclosure (Forker, 1992). Independent board members can exert a great influence on the level of CSR disclosures not only by establishing and maintaining balance in the board’s make-up, but also by increasing the board’s level of effectiveness (Jo and Harjoto, 2011). Similarly, positive correlation between ownership concentration and the level of CSR disclosures is backed by theoretical work by Reverte (2009), who argued that amalgam of legitimacy, stakeholder and agency theories all interact to explain the theoretical (positive) association between ownership concentration and CSR disclosures. A number of studies have reported that CSR disclosures are positively correlated with board independence (Das et al., 2015; Khan, 2010; Khan et al., 2013; Soliman and Ragab, 2012). In line with this, a greater number of independent board members should improve transparency and encourage CSR disclosures (Bukair and Rahman, 2015). Moreover, nonexecutive directors on the board are more likely to encourage managers to engage in more social activities and provide high-quality CSR disclosures. Congruent with prior research, therefore, the following hypothesis is proposed: H3. Ceteris paribus, there will be a positive correlation between board independence and the level of corporate social responsibility disclosures. 3.4 CEO duality Duality occurs when the CEO holds the chairman position which, in turn, increases his power and negatively influences the firm’s performance efficiency. The combination of the two positions reduces the board’s effectiveness in monitoring management (Fama and Jensen, 1983), firm performance (Kang and Zardkoohi, 2005), firm value (Yermack, 1996) and involvement in social activities (Elzahar and Hussainey, 2012). In contrast, Forker (1992) argued that the separation of those two roles carries qualitative monitoring and enhances the internal control system (Sanda et al., 2003). Moreover, it effectively reduces any advantage that may result from withholding information. An independent chairman provides more power to the board, which is reflected in qualitative disclosure (Al-Janadi et al., 2013). This view has been supported by prior research, which has emphasized that keeping the two positions separated optimizes CSR disclosures (Forker, 1992; Haniffa and Cooke, 2002; Said et al., 2009). In the GCC countries, the governance structure of listed companies prevents the duality role, except in Kuwait where some companies allow duality because the code of governance does not require segregation (Al-Saidi and Al-Shammari, 2013). This best practice is inapplicable in closely held companies because of the overwhelming family dominance. Based on the above discussion, the following hypothesis is proposed: H4. Ceteris paribus, there will be a positive correlation between the separation of the CEO and chairman roles and the level of corporate social responsibility disclosures. 3.5 Audit committee independence An audit committee is usually formed to ensure the integrity of financial reporting through monitoring and control (Abdel-Fattah, 2008; Fama and Jensen, 1983). This is in line with principal–agent theory where the principals’ (shareholders) and the agents’ (management)


interests are unaligned and both actors pursue their self-interests which are often incongruent with each other (Fama and Jensen, 1983). However, an audit committee can be amenable in this case and fix the market failure because of information asymmetry between the principal and agent. That is, the audit committee can provide monitoring services to the principal which reduces the incentive of the agent to shirk the corporate responsibility. Moreover, it acts as a liaison between the external auditor and management to ensure that users of financial statements can confidently rely on the financial statements for making optimal decisions (Razek, 2014). To accomplish such a goal, the board of directors establishes the audit committee with the right composition and characteristics. The extant research concluded that audit committee independence is positively and significantly correlated with CSR disclosures among banks in the GCC region (Al-Rashed, 2010) and firms from different industries in Malaysia (Said et al., 2009), Bangladesh (Khan et al., 2013), Hong Kong (Ho and Wong, 2001), Kenya (Dulacha et al., 2006) and the KSA (AlSaeed, 2006). In addition, Pomeroy and Thornton (2008) reported a positive relationship between the independence of an audit committee and the quality of financial reporting in emerging markets. Accordingly, the following hypothesis is proposed: H5. Ceteris paribus, there will be a positive correlation between the independence of the audit committee and the level of corporate social responsibility disclosures. Furthermore, the current literature almost exclusively focuses on developed countries, where issues of corporate responsibility and disclosures might be at a lower level to begin with. Our paper sheds the light on the emerging economies where we try to generalize the results of previous studies in the context of the GCC. Additionally, the focus of literature has also been focused on agency and stakeholder theories (Reverte, 2009); however, our study extends the current literature by applying the legitimacy theory in a more comprehensive manner albeit in the context of GCC. 4. Methodology We are testing the five proposed hypotheses through a quantitative model where we ascertain the impact of managerial ownership, ownership concentration, board independence, CEO duality and audit committee independence on CSR reporting to understand the nature of CG–CSR interconnection. The following part explains our model and the data collected to test this model. 4.1 Sample The sample consisted of panel data from 147 listed companies in the six GCC counties – Bahrain, Kuwait, Oman, Qatar, KSA and UAE – from 2007 to 2013; 744 data points were collected annually from the following sources: the S&P/Hawkamah Pan Arab Environmental, Social and Governance (ESG) Index developed by Hawkamah (2012), covering the period from 2007 to 2012; and annual financial reports and company websites to access other performance and control variables, namely, return on assets (ROA), age, size and leverage for the sampled companies. Data were limited by the company’s date of establishment and the availability of data as in Table II.


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4.2 Model specification We modified the regression analysis used by Khan et al. (2013) to test the relationship between the CG variables and CSR disclosures. The model was tested for multicollinearity through correlation matrix and variance inflation factor tests. The regression equation is as follows: CSRDI ¼ a þ b 1 MOWN þ b 2 INS þ b 3 BIND þ b 4 CEODU þ b 5 AUDCOM þ b 6 FSIZE þ b 7 FAGE þ b 8 LEV þ b 9 ROA þ «


where CSRDI represents the CSR disclosure index (represented by Hawkamah’s ESG index); MOWN represents the percentage of management ownership in the corporation; INS represents the ownershiop concentration among major shareholders; BIND represents the independence of the board members from executive management; CEODU is a dummy variable equals to 1 if the CEO holds the chairman position and 0 for the opposite; AUDCOM is a dummy variable equals to 1 if the firm had an independent audit committee and 0 for otherwise; FSIZE is a natural log of total assets; FAGE is a natural log of the number of years since the inception of the company; LEV is the ratio of book value of total debts to total assets; and ROA is the ratio of earnings before interest and taxes on total assets. 4.3 Measurement of variables 4.3.1 Dependent variable: CSR Disclosure Index (CSRDI). The dependent variable in the study is the companies’ level of CSR disclosures, as represented by the ESG Index. The ESG Index was created by Hawkamah (2012) in partnership with Standard and Poor’s and the International Finance Corporation. The Index draws data from a universe of the 150 largest and most liquid companies (subject to a liquidity screen) listed on the national stock exchanges in 11 markets: Bahrain, Egypt, Jordan, Lebanon, Kuwait, Morocco, Oman, Qatar, KSA, Tunisia and UAE. The purpose of the Index is to identify the companies that go the extra mile in ESG reporting and policy implementation. Each company is analyzed based on its performance with respect to nearly 200 ESG issues, including carbon emissions, water and energy consumption, employee health and safety, community investment, charitable giving, financial reporting, auditing, board independence and executive remuneration. The 50 best-performing companies are included in the Index. The data set collected by S&P/Hawkamah – in which each company’s score takes an aggregate score value between 1 and 61 – was used to measure the extent of CSR disclosures. The scoring process of the Index involves assessing the companies’ levels of

Table II. Sample composition

Country

No. of companies

No. of observations

Bahrain Kuwait Oman Qatar KSA UAE Total

5 22 7 22 66 25 147

18 113 28 135 342 110 744


transparency and disclosure in the ESG areas and then looking at their actual sustainability performance characteristics based on independent sources of information, news stories, websites and CSR reports. The existing Index incorporates 197 indicators/questions that cover ESG dimensions. The weighting of items differs by sector based on their relative impact. As a result of the scoring process, a composite ESG score is assigned and each company’s position in the Index is determined as a function of its ESG score. Companies that score highly on the ESG metrics are likely to be more sustainable and attractive to long-term investors. The Index, in other words, provides a tool for investors to identify better governed and environmentally and socially responsible Middle East and North Africa companies and thus facilitates investment in those companies. 4.3.2 Independent variables: CG variables. The independent variables are CG variables, namely, management ownership, shareholder identity, independence of directors, role duality and audit committee independence. The measurement of these variables was categorical, meaning that categories were assigned without arranging the variables in clear order, as shown in Table III. First, management ownership (X1) determined whether a company was owned publicly, by management alone or by management and the board of directors. Second, shareholder identity (X2) measured the degree of concentration of ownership or the absence of major shareholders in the company. Third, the independence of directors (X3) measured the degree of directors’ decision-making independence compared to that of executives. Fourth, role duality (X4) identified the combination of CEO and chairman positions. Fifth, the audit committee independence (X5) measured the number of independent board members in the audit committee. Some firm-specific characteristics and performance indicators were also included as control variables in the model, namely, company size (logarithm transformation total assets) (X6), company age (logarithm transformation) (X7), leverage (X8) and ROA (X9).


5. Empirical results 5.1 Descriptive statistics The data for CSRD, as represented by companies’ ESG scores, shows a mean of 19.18. Public shareholders owned 68.82 per cent of companies in the sample; the majority of companies (68.55 per cent) had a low level of ownership concentration (less than 25 per cent); and 63.31 per cent of the companies had limited board independence (less than 33 per cent). Most of the companies in our sample (82.66 per cent) had CEO duality, while

Variable Management ownership Shareholder identity Independence of directors CEO duality Audit committee independence Leverage ratio Return on assets Ln (Company size) Ln (Company age) Note: *Significant at 0.05 level

Combined ESG Score Spearman’s rho coefficient 0.31* 0.48* 0.52* 0.45* 0.43* 0.12* 0.15* 0.04 0.01

p-value 0.001 0.001 0.001 0.001 0.001 0.004 0.001 0.259 0.720

Table III. Spearman’s rho coefficients between combined ESG score and independent variables

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more than 80 per cent of the companies had less than 50 per cent audit committee independence.


5.2 Correlation analysis Table IV presents the correlation coefficients of the combined ESG scores along with other independent variables, calculated based on the Spearman’s rho coefficient. The CSRDI (combined ESG scores) was positively correlated with management ownership, shareholder identity, independence of directors, CEO non-duality, audit committee independence and leverage ratio. By contrast, ROA had a significant negative relationship with ESG. Ln (company size) and Ln (company age) had no correlation with the ESG scores. 5.3 Multiple linear regression analysis To develop a greater understanding of the relationship among the different variables, a multiple regression model was constructed. First, the data were validated to ensure they met the assumptions of Ordinary Least Squares (OLS). The Pearson correlation coefficients calculated indicating some significant relationships between the continuous variables. In such cases, it is important to be cautious about possible multicollinearity. To construct the initial model, all of the categorical variables were transformed into binary variables before they were compared according to their reference category. Table III summarizes the binary coding of the independent variables. Multiple linear regressions were applied using the traditional OLS, as follows: CSRDI ¼ a þ b 1_1 X1_1 þ b 1_2 X1_2 þ b 2_1 X2_1 þ b 2_2 X2_2 þ b 2_3X2_3 þ b 3_1 X3_1 þ b 3_2 X3_2 þ b 3_3 X3_3 þ b 4 X4_1 þ b 5_1 X5_1 þ b 5_2 X5_2 þ b 5_3 X5_3 þ b 6LN ðX7Þ þ b 7 LN ðX8Þ þ b 8 X8 þ b 9 X þ «

(1)

Tables V-VII show the outputs of the above model. Tables V and VI show the model’s significance, indicating that the variables had significant effects on the combined ESG scores. However, Table VII shows that the last condition number was greater than 15 and the last Eigenvalue was almost zero. Both results indicate a problem with multicollinearity and the potential that the above results may be unreliable. To deal with such a multicollinearity problem, a principal component regression was used as an alternative method for constructing the regression model. 5.4 Principle component analysis Principal component regression (PCR) is a regression analysis technique that is based on the principal component analysis. Typically, the technique involves regressing the outcome on a set of covariates based on a standard linear regression model. Then, the model uses principal component analysis to estimate the unknown regression coefficients in the model.


Independent variable

New transformed binary variable

Management Ownership (X1): MOWN

X1_1

New values and their labels

1 = ownership by management 0 = otherwise X1_2 1 = ownership by management & BoD 0 = otherwise If X1_1 = 0 and X1_2 = 0, then: X1 = 0 (reference category) = Management Ownership


H1: All else considered equal, there will be a negative association between managerial ownership and the level of CSR disclosures; thus, when management ownership increases, CSR disclosures decrease Shareholder identity (Concentration of X2_1 1 = > 25% ownership) (X2): INS 0 = otherwise X2_2 1 = > 50% 0 = otherwise X2_3 1 = > 75% 0 = otherwise If X2-1 = 0 and X2_2 = 0, X2_3 = 0 then: X2 < 25% (reference category), i.e. the company has no major shareholder, indicating no Concentration of Ownership H2: All else considered equal, there will be a positive correlation between concentration of ownership and the level of CSR disclosures; thus, when major shareholders increase, the CSR disclosures increase Independence of Directors (X3): BIND X3_1 1 = 1 > 33% 0 = otherwise X3_2 1 = 1 > 50% 0 = otherwise X3_3 1 = 1 > 67% 0 = otherwise If X3-1 = 0 and X3_2 = 0, X3_3 = 0 then: X3 < 33% (reference category), i.e. the company has an executive director (Directors’ independence does not exist) H3: All else considered equal, there will be a positive correlation between board independence and the level of CSR disclosures; thus, when the independence of board members increases, the CSR disclosures increase Duality of CEO and Chair Roles (X4): X4_1 1 = CEO and chair are not the same CEODU person (no duality) 0 = both CEO and chair are the same person (duality) H4: All else considered equal, there will be a positive correlation between the separation of the CEO and chairman roles and the level of CSR disclosures; thus, no CEO duality leads to an increase in CSR disclosures Audit Committee Independence (X5): X5_1 1 = 1 > 50% AUDCOM 0 = otherwise X5_2 1 = 1 > 66% 0 = otherwise X5_3 1 = 100% 0 = otherwise If X5-1 = 0 and X5_2 = 0, X5_3 = 0 then: X5 < 50% (reference category), i.e. audit committee independence does not exist (continued)

Table IV. Binary coding for independent variables

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Independent variable


Table IV.

Table V. Model’s significance using ANOVA test

H5: All else considered equal, there will be a positive correlation between the independence of the audit committee and the level of CSR disclosures; thus, when audit committee independence increases, the CSR disclosures increase X6: FSIZE Firm size measured by natural logarithm of total assets X7: FAGE Age of company measured by the natural log of the number of years since the firm’s inception X8: Leverage Ratio Ratio of book value of total debt to total assets X9: ROA Return on Assets

Dependent variable

F-statistic

Degree of freedom

p-value

R2 adjusted

Combined ESG score

12.31

299

0.0001

0.43

Note: *Significant at 0.05 level

Model 1

Table VI. Regression coefficients and significance levels using ANOVA

New values and their labels

(Constant) X1_1 X1_2* X2_1* X2_2* X2_3* X3_1* X3_2* X3_3* X4* X5_1* X5_2* X5_3* LN X6 LN X7 X8 X9*

Unstandardized coefficients B

Standardized coefficients

t-statistics

Significant

3.10 1.32 5.23 3.88 9.14 10.72 4.74 2.58 8.12 5.59 6.09 5.01 7.06 0.24 0.45 0.00 0.07

0.04 0.19 0.11 0.30 0.26 0.16 0.08 0.22 0.20 0.08 0.13 0.18 0.05 0.04 0.03 0.05

1.33 1.56 6.52 4.20 11.55 9.88 5.43 2.71 7.08 7.54 3.15 4.82 5.88 1.92 1.64 1.12 2.06

0.185 0.119 0.000 0.000 0.000 0.000 0.000 0.007 0.000 0.000 0.002 0.000 0.000 0.055 0.101 0.265 0.039


Tables VIII and IX show the outputs of using PCR to regress the combined ESG score on the independent variables, after omitting one Eigen vector, using the NCSS package. Table IX reports the results of regressing the explanatory variables on the CSR disclosure score using PCR. Accordingly, the final estimated equation could be expressed as:


Dimension 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

Eigenvalue

Condition index

5.72 1.41 1.25 1.20 1.08 1.01 0.92 0.87 0.81 0.72 0.62 0.53 0.43 0.24 0.14 0.07 0.01

1.00 2.01 2.14 2.18 2.31 2.38 2.49 2.57 2.65 2.82 3.04 3.30 3.64 4.90 6.50 9.37 30.11

Dependent variable

F-statistic

Degree of freedom

p-value

R2 adjusted

Combined ESG score

60.0516

737

0.0001

0.57


Model Intercept X1_1 X1_2* X2_1* X2_2* X2_3* X3_1* X3_2* X3_3* X4_1* X5_1* X5_2* X5_3* lnx6* lnx7 X8 X9*

Unstandardized coefficients

Standardized coefficients

t-statistic

Significance

3.09 1.38 5.46 3.89 9.15 10.61 4.39 2.12 7.49 5.59 6.42 5.41 7.68 0.24 0.44 0.0001 0.07

0.04 0.20 0.11 0.30 0.26 0.14 0.07 0.21 0.20 0.08 0.14 0.20 0.05 0.04 0.03 0.05

1.64 7.42 4.21 11.56 9.87 6.16 3.07 10.53 7.54 3.42 6.21 9.34 1.97 1.60 1.12 2.02

0.10 0.00001 0.0001 0.000001 0.00001 0.00009 0.002 0.000001 0.00001 0.0006 0.00007 0.00001 0.049 0.11 0.26 0.045



Table VII. Eigenvalues and condition numbers corresponding to the matrix of predictors

Table VIII. Testing the significance of the model (1) using PCR

Table IX. Regression coefficients and significance levels using PCR

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CSRDI ¼ 3:09 þ 1:38 X1_1 þ 5:46 X1_2 þ 3:89 X2_1 þ 9:15 X2_2 þ 10:61 X2_3 þ 4:39 X3_1 þ 2:12 X3_2 þ 7:49 X3_3 þ 5:59 X4_1 þ 6:42 X5_1 þ 5:41 X5_2 þ 7:68 X5_3 þ 0:24LN ðX6Þ þ 0:44 LN ðX7Þ


þ 0:0001 X8 0:07 X9 5.5 Discussion of results The main objective of this study was to determine the effect of CG mechanisms on CSR disclosures in the GCC countries by testing five hypotheses. The results showed that there was a positive significant coefficient ( b 1-2 = þ 5.46) for managerial ownership variables (X1-2). This finding corroborates previous literature (Belal and Owen, 2007; Block and Wagner, 2014; Islam et al., 2008), implying that the greater the level of ownership by the management and board of directors, the higher the level of CSR disclosures. This can be explained by the dominance of family members in the management of many GCC companies. In fact, family firms may be more interested in CSR disclosures for building a strong social image and a good reputation and social position for their families. In addition, the managers of family enterprises operating in export-oriented industries may have a greater incentive to be involved in CSR activities to satisfy the expectations of international stakeholders (Belal and Owen, 2007; Islam and Deegan, 2008). As the majority of large firms in GCC countries are heavily involved in importing-exporting businesses (European Central Bank, 2008), they may be more interested in engaging in CSR activities. In light of this finding, H1 is not supported. Furthermore, this finding conflicts with the findings of prior research (Chau and Gray, 2010; Haniffa and Cooke, 2002; Khan et al., 2013), who found that managerial ownership had a significant negative impact on CSR disclosures because of the external pressure from different stakeholders for management to disclose more CSR information. The results showed positive significant coefficients ( b 2-1 = þ 3.89, b 2-2 = þ 9.15, b 2-3 = þ 10.61) for concentration of ownership variables (X2-1, X2-2 and X2-3). This finding implies that the greater concentration of ownership leads to more CSR disclosures. This may be because of a proactive attempt to secure legitimacy or the desire of institutional investors to see the firms they invest in comply with CSR policies. This finding supports H2 and aligns with a wide range of previous studies (Belal and Owen, 2007; Das et al., 2015; Haniffa and Cooke, 2005; Islam and Deegan, 2008; Khan, 2010; Oh et al., 2011; Soliman and Ragab, 2012). The results revealed positive significant coefficients ( b 3-1 = þ 4.39, b 3-2 = þ 2.12, b 3-3 = þ 7.49) for the directors’ independence variables (X3-1, X3-2 and X3-3). This finding suggests that the greater the independence of directors, the more CSR disclosures. This can be explained by the greater balance and effectiveness of the board when there are more independent directors. Furthermore, independent directors may be more willing to satisfy the demands of all stakeholders and to improve transparency and disclosure. As such, this finding supports H3 and confirms the findings of a number of previous studies (Das et al., 2015; Khan, 2010; Khan et al., 2013; Soliman and Ragab, 2012). The results show that the CEO duality had a significant impact on CSR disclosures in the GCC region. When the chairman and the CEO roles were separated, firms scored 5.59 higher on the combined ESG scores relative to those firms with a dual CEO and chairman role. This means that separation between the two positions leads to more disclosure. This finding supports H4 and corroborates the results of several studies


(Forker, 1992; Haniffa and Cook, 2002; Said et al., 2009). However, these findings contradict those of Khan et al. (2013), who found that CEO/chair role duality had no impact on the extent of CSR disclosures. The results also uncover positive significant coefficients ( b 5-1 = þ 6.42, b 5-2 = þ 5.41, b 5-3 = þ 7.68) for the audit committee independence variables (X5-1, X5-2 and X5-3), suggesting that the greater independence of the audit committee, the more CSR disclosures. This result is logical, as independent audit committees are known for supplying reliable and credible information and ensuring the integrity of disclosure. This finding supports H5 and is in line with a number of previous studies (AlSaeed, 2006; Ho and Wong, 2001; Khan et al., 2013; Said et al., 2009). Finally, the results show that company size (X6)[2] have had a positive effect on CSR disclosures, while ROA (X9) had a negative effect. At the same time, leverage ratio and a company’s age had no significant effect on a firm’s CSR disclosures. Concentration of ownership of more than 50 per cent (X2_2) had the strongest effect on CSR disclosures and concentration of ownership of more than 75 per cent had the second strongest effect on CSR disclosures (X2_3); ROA (X9) and firm size LN(X6) had the least significant effects on CSR disclosures compared to other significant predictors. 6. Conclusion The objective of this paper was to examine the impact of CG mechanisms on CSR disclosures in the GCC countries by ascertaining the impact of CG characteristics, such as management ownership, ownership concentration, independence of directors, CEO duality and audit committee independence, on the firms’ response to various stakeholders. The results imply that managerial ownership is positively related to the extent of CSR disclosures. This, in turn, provides empirical support to the notion that a firm’s involvement in export-oriented industries may lead to a high level of CSR disclosures despite significant managerial ownership (Belal and Owen, 2007; Islam and Deegan, 2008). The GCC region is uniquely distinguished from other developing economies (e.g. Lebanon, Turkey, Jordan and India) in being heavily engaged in importing-exporting activities which require more CSR disclosures for international stakeholders even though most of the firms are family businesses. An alternative explanation could be that the presence of ethical management in some organisations influences its CSR disclosure practices. Prior studies, in fact, have documented the same conclusion (Fukukawa et al., 2007; Haniffa and Hudaib, 2007); which suggests a positive relationship between the ethical identity of a company and its corporate disclosures. The results also emphasize that ownership concentration enhances the CSR disclosures and maximizes the firms’ commitments towards the society. This might be one of the reasons that capital markets regulators and stock exchange in the GCC region do not put any restriction on ownership concentration as it adds value to community welfare. Furthermore, it is documented that internal CG mechanisms, such as board independence, audit committee independence and separation between CEO and chairman positions, have significant positive impact on the level of CSR disclosures. It seems that despite the traditional settings in the GCC region, CG mechanisms involving presence of outsiders have had a significant impact on the extent of disclosures made by GCC companies, possibly because of the legitimisation effects of such mechanisms. This is consistent with a number of prior studies (Das et al., 2015; Khan et al., 2013; Soliman and Ragab, 2012) that find the presence of rational CG mechanisms to have some mitigating impact on the influence of family ownership on voluntary disclosures. Perhaps, this also suggests that CG models in the GCC countries require further



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revisions about the separation between the CEO and the chairman position, especially if they both come from the same family. The findings may have significant policy implications in the current context of GCC region, as the regulators are attempting to carry out further reforms in the CG arena. The overall findings of our study provide empirical evidence which suggests that CG attributes are important determinants of extent of CSR disclosures in developing economies such as the GCC countries. Thus, CG, in particular the internal governance structure, is likely to play a vital role to reduce legitimacy gap through environmental and social disclosures. This study contributes to the accounting literature by extending the findings of previous studies to cover a significant region in the emerging economies which might be of an interest to academic scholars, regulators and policy-makers to adopt an appropriate balance of legislation, regulatory reform and their enforcement, to make improvements in the CG practices. We do this through providing empirical support where our sample consists of six GCC countries. We document that managerial motivation can have a significant positive impact on CSR disclosures. In this vein, it should be of interest to regulators and policy-makers in countries with similar corporate ownership and regulatory structures. Despite these contributions, the findings of this study are subject to several limitations. The study focused on CSR disclosures that were included in the annual reports, even though management might disclose CSR activities via other mass communication tools. Accordingly, this research could be extended to cover disclosures circulated in other media. Furthermore, a firm’s involvement in socially responsible activities may not necessarily translate into the disclosure of these activities, since many businesses and even individuals provide aid, donations and contributions to their societies without explicit declaration or disclosure; this practice is instead driven by the specific customs and traditions in this part of the world which can be an interesting avenue for future research. 'Finally, the research is in line with the scope of CPoIB because of several reasons. First, our topic empirically evaluates a critical issue propounded in the scope and mission statement of the present outlet. For instance, the present study is crucially related to the broad field of international business with the results having direct bearing on the relationship between “multinational firms and civil society” (CPoIB, 2017). Second, ever since recent pushback against globalization in the form of rise of populist movements across the world, our research on issues of corporate responsibility, one of the consequence of globalization, helps us further our understanding about the process of globalization. This is in line with “issues of globalization and corporate social responsibility” (CPoIB, 2017). Finally, our study is critically measuring the relationship between CG and CSR based on legitimacy theory while reassessing the orthodoxy that considers it “two sides of the same coin” (Bhimani and Soonawalla, 2005). Notes 1. This paper is considered as part of a broader project where we take into account legitimacy in general, as opposed to the narrow conception of legitimacy and its drivers in the legitimacy theory. Therefore, in addition to control variables guided by legitimacy theory, we also added other controls to reduce any bias in our multivariate regression framework. 2. Increasing the logarithm of company size by one unit led to an increase in the combined ESG score by 0.24 with all other predictors held constant. This relation can be expressed by applying


the exponential transformation to both predictor and combined ESG score and concluding that increasing the company’s size by one unit yields a 1.27 increase in the combined ESG score with all other predictors held constant.

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Corresponding author Samy Garas can be contacted at: [email protected]

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