A dissertation submitted in fulfilment of the requirement for the degree of Master of Science in Accounting

CORPORATE SOCIAL RESPONSIBILITY DISCLOSURE IN MALAYSIAN GOVERNMENT

LINKED COMPANIES

BY

ELINDA BINTI ESA

A dissertation submitted in fulfilment of the requirement for the degree of Master of Science in Accounting

Kulliyah of Economics and Management Sciences International Islamic University

Malaysia

MAY 2011

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ABSTRACT

This study mainly investigates corporate social responsibility (CSR) disclosure in the annual reports of Malaysian government – linked companies (GLCs). Although a number of studies have looked into CSR in Malaysian companies, very little or limited research has been done on GLCs. CSR can be defined as a subject that covers from business ethics, good governance and legal practices to social obligation and sustainable environment. Being a business where the government has a major ownership and control, GLCs can be expected to lead others in good governance practices including CSR practice. That is because the objective of GLCs’ formation is not purely profit driven but includes social aspects to ensure a more equitable society.

This study examines the CSR items most disclosed, the extent of CSR disclosure and to examine whether corporate characteristics and corporate governance characteristics are good explanatory variables in determining CSR disclosure among 27 GLCs for the years 2005 and 2007. The two years were chosen to see if the introduction of the Silver Book in 2006 has an impact on CSR disclosure. A CSR disclosure checklist was used to score the items in the annual reports. The t test and non-parametric Mann- Whitney test showed that the extent of disclosure was higher in 2007 and the difference was statistically significant at the 5% level. This result appears to suggest that the introduction of the Silver Book in 2006 has had positive impact on CSR in Malaysian GLCs. The results further revealed that board size was a significant variable influencing CSR disclosure in 2005. It would appear that larger board size would stimulate healthier discussions on CSR and hence involvement and disclosure of those activities in corporate annual reports.

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ﺚﺤﺒﻟا ﺔﺻﻼﺧ

ﺔﻴﻟوﺆﺴﻤﻟا ﻦﻋ ﻒﺸﻜﻟا تﺎآﺮﺸﻟا ﻲﺴﻴﺋر ﻞﻜﺸﺑ ﺔﺳارﺪﻟا ﻩﺬه لوﺎﻨﺘﺗ ) – ﺔﻳﺰﻴﻟﺎﻤﻟا ﺔﻣﻮﻜﺤﻟا ﻦﻋ ةردﺎﺼﻟا ﺔﻳﻮﻨﺴﻟا ﺮﻳرﺎﻘﺘﻟا ﻲﻓ ﺔﻴﻋﺎﻤﺘﺟﻻا ﻲﻓ تﺎﺳارﺪﻟا ﻦﻣ دﺪﻋ ﺮﻈﻧ ﻦﻣ ﻢﻏﺮﻟا ﻰﻠﻋو ( ﺔﻣﻮﻜﺤﻟﺎﺑ ﺔﻄﺒﺗﺮﻤﻟا تﺎآﺮﺸﻟا وأ اﺪﺟ ﻞﻴﻠﻘﻟا ىﻮﺳ، ﺔﻳﺰﻴﻟﺎﻤﻟا تﺎآﺮﺸﻟا ﻲﻓ تﺎآﺮﺸﻠﻟ ﺔﻴﻋﺎﻤﺘﺟﻻا ﺔﻴﻟوﺆﺴﻤﻟا ﻦﻜﻤﻳو (ﺔﻣﻮﻜﺤﻟﺎﺑ ﺔﻄﺒﺗﺮﻤﻟا تﺎآﺮﺸﻟا)ﻰﻠﻋ ﻪﺑ مﺎﻴﻘﻟا ﻢﺗ ﺚﺤﺑ ةدوﺪﺤﻣ ﻦﻣ ﻲﻄﻐﻳ يﺬﻟا عﻮﺿﻮﻤآ تﺎآﺮﺸﻠﻟ ﺔﻴﻋﺎﻤﺘﺟﻻا ﺔﻴﻟوﺆﺴﻤﻟا ﻒﻳﺮﻌﺗ ماﺰﺘﻟﻼﻟ ﺔﻴﻧﻮﻧﺎﻘﻟا تﺎﺳرﺎﻤﻤﻟاو ﺪﻴﺷﺮﻟا ﻢﻜﺤﻟاو ، ﺔﻳرﺎﺠﺘﻟا لﺎﻤﻋﻷا تﺎﻴﻗﻼﺧأ ﺔﻴﻜﻠﻣ ﺎﻬﻳﺪﻟ ﺔﻣﻮﻜﺤﻟا نا ﺚﻴﺣ ﻞﻤﻌﻟا يﺮﺠﻳو .ﺔﻣاﺪﺘﺴﻤﻟا ﺔﺌﻴﺒﻟاو ﺔﻴﻋﺎﻤﺘﺟﻻاو ةدﺎﻴﻘﻟ ( ﺔﻣﻮﻜﺤﻟﺎﺑ ﺔﻄﺒﺗﺮﻤﻟا تﺎآﺮﺸﻟا ) ﻊﻗاﻮﺗ ﻦﻜﻤﻳ ، ﺔﻴﺴﻴﺋﺮﻟا ةﺮﻄﻴﺴﻟاو ﺔﻴﻟوﺆﺴﻤﻟا ﺔﺳرﺎﻤﻣ ﻚﻟذ ﻲﻓ ﺎﻤﺑ ﺪﻴﺷﺮﻟا ﻢﻜﺤﻟا تﺎﺳرﺎﻤﻣ ﻲﻓ ﻦﻳﺮﺧﻵا ﺐﻧاﻮﺠﻟا ﻞﻤﺸﻳ ﻞﻴﻜﺸﺘﻟا ﻦﻣ فﺪﻬﻟا نﻷ ﻚﻟذو .تﺎآﺮﺸﻠﻟ ﺔﻴﻋﺎﻤﺘﺟﻻا اﺬه ﻲﻓ ﺔﺳارﺪﻟا ﻩﺬه ﺚﺤﺒﺗ..ﺎﻓﺎﺼﻧإ ﺮﺜآأ ﻊﻤﺘﺠﻣ دﻮﺟو نﺎﻤﻀﻟ ﺔﻴﻋﺎﻤﺘﺟﻻا ﻒﺸﻜﻟا ىﺪﻣ ﻦﻋ ﻒﺸﻜﻳ ﺮﺜآﻷا تﺎآﺮﺸﻠﻟ ﺔﻴﻋﺎﻤﺘﺟﻻا ﺔﻴﻟوﺆﺴﻤﻟا ﻦﻣ ﺪﻨﺒﻟا ﺺﺋﺎﺼﺨﻟا ﺖﻧﺎآ اذإ ﺎﻣ ﺔﺳاردو ، تﺎآﺮﺸﻠﻟ ﺔﻴﻋﺎﻤﺘﺟﻻا ﺔﻴﻟوﺆﺴﻤﻟا ﻦﻋ ﻲﻓ ةﺪﻴﺟ ﺔﻳﺮﻴﺴﻔﺗ تاﺮﻴﻐﺘﻣ ﻲه تﺎآﺮﺸﻟا ﺔﻤآﻮﺣ تﺎآﺮﺸﻟا ﺺﺋﺎﺼﺧو تﺎآﺮﺸﻟا

ﻦﻴﺑ ﺎﻬﻨﻋ ﻒﺸﻜﻟا تﺎآﺮﺸﻠﻟ ﺔﻴﻋﺎﻤﺘﺟﻻا ﺔﻴﻟوﺆﺴﻤﻟا ﺪﻳﺪﺤﺗ ﻢﺘﻳ نأ ﻒﺸﻜﻳو ، ﺔﻴﺋﺎﺼﺣﻹا ﺞﺋﺎﺘﻨﻟا ﻰﻠﻋ لﻮﺼﺤﻠﻟ .

و

تاﻮﻨﺴﻠﻟ ﺔﻴﻟوﺆﺴﻤﻟا ﻦﻋ ﻒﺸﻜﻟا ﻲﻓ اﺮﻴﺒآ نﻮﻜﻳ نأ ﺲﻠﺠﻤﻟا ﻢﺠﺣ ﻰﻠﻋ رﻮﺜﻌﻟا ﻦﻜﻟو ﻦﻳﺮﺧﻵا ﻰﻠﻋ رﻮﺜﻌﻟا ﻢﺗ .

مﺎﻋ ﻲﻓ تﺎآﺮﺸﻠﻟ ﺔﻴﻋﺎﻤﺘﺟﻻا ﻦﻋ ﻒﺸﻜﻟا ﻲﻓ ةﺮﻴﺒآ ﻻ تﺎآﺮﺸﻟا ةرادإ ﺺﺋﺎﺼﺧﻮﺗﺎآﺮﺸﻟا ﺺﺋﺎﺼﺧ ﺔﻨﻴﻌﻟا ﻢﺠﺣ ﺮﻐﺼﻟ ﺔﺠﻴﺘﻧ نﻮﻜﻳ ﺪﻗو .تﺎآﺮﺸﻠﻟ ﺔﻴﻋﺎﻤﺘﺟﻻا ﺔﻴﻟوﺆﺴﻤﻟا وأﺔﻳﺎﻐﻟﺮﺴﻔﺘﻨﻨﻜﻤﻳ ﻲﺘﻟا ﻞﻣاﻮﻌﻟا ﻦﻣ ﺎهﺮﻴﻏو ﻦﻋ ﻒﺸﻜﻟا ﻰﻠﻋ ﺮﻴﺛﺄﺘﻟا

تﺎآﺮﺸﻟ ﺔﻴﻋﺎﻤﺘﺟﻻا ﺔﻴﻟو ﺆﺴﻤﻟا

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APPROVAL PAGE

I certify that I have supervised and read this study and that in my opinion, it conforms to acceptable standards of scholarly presentation and is fully adequate, in scope and quality, as a dissertation for the degree of Master of Science in Accounting.

……….

Nazli Anum Mohd Ghazali Supervisor

I certify that I have read this study and that in my opinion, it conforms to acceptable standards of scholarly presentation and is fully adequate, in scope and quality, as a dissertation for the degree of Master of Science in Accounting.

……….

Noraini Mohd Ariffin Examiner

This dissertation was submitted to the Department of Accounting and is accepted as a fulfilment of the requirement for the degree of Master of Science in Accounting.

……….

Hafiz Majdi Ab. Rashid Head, Department of

Accounting

This dissertation was submitted to the Kulliyyah of Economics and Management Sciences and accepted as a fulfilment of the requirement for the degree of Master of Science in Accounting.

……….

Khaliq Ahmad

Dean, Kulliyah of Economic

and Management

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DECLARATION

I hereby declare that this dissertation is the result of my own investigations, except where otherwise stated. I also declare that is has not been previously or concurrently submitted as a whole for any other degrees at IIUM or other institutions.

Elinda Esa

Signature ……… Date ………...

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INTERNATIONAL ISLAMIC UNIVERSITY MALAYSIA

DECLARATION OF COPYRIGHT AND AFFIRMATION OF FAIR USE OF UNPUBLISHED RESEARCH

Copyrights © 2011 by Elinda Binti Esa. All rights reserved.

CORPORATE SOCIAL RESPONSIBILITY DISCLOSURE IN MALAYSIAN GOVERNMENT – LINKED COMPANIES

No part of this unpublished research may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without permission of the copyright holder except as provided below.

1. Any material contained in or derived from this unpublished research may only be used by others in their writing with due acknowledgment.

2. IIUM or its library will have the rights to make and transmit copies (print or electronic) for institutional and academic purposes.

3. The IIUM library will have the right to make, store in a retrieval system and supply copies of this unpublished research if requested by other universities and research libraries.

Affirmed by Elinda Binti Esa

………. ………

Signature Date

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ACKNOWLEDGEMENTS

All praise is for Allah’s, May He grant peace and blessings everlasting to the Seal of His Prophets, to his family, and to his companions. First of all, I would like to say Alhamdulillah, for giving me the strength and health to do this dissertation until it done. Then, my sincerest appreciation goes to my beloved supervisor Assoc. Prof. Dr.

Nazli Anum Mohd Ghazali for the valuable guidance, advice, patience and attention.

In addition, I would like to thank to Dr Noraini Mohd Ariffin for her rigorous comments on my dissertation. Furthermore, thanks to my loving and supportive husband, Abdul Rahman Zahari and my wonderful children’s, Damia Ardini, Khalish Aqlan and Faqiihah ‘Adawiyyah, who provide unending inspiration and support.

Finally, I thank to my parents and family for their prayers, love and support.

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TABLE OF CONTENTS

Abstract ………. ii

Abstract in Arabic………... iii

Approval Page ………... iv

Declaration Page ………... v

Copyright Page………... vi

Acknowledgements……… vii

List of Tables ……… xi

List of Figures ………... xii

List of Abbreviations ……… xiii

CHAPTER 1: INTRODUCTION………... 1

1.0 Introduction ……….. 1.1 CSR Initiatives in Malaysia ………. 1.1.1 Overview of Malaysian CSR initiatives ………... 1.1.2 Government-Linked Companies (GLCs) ………. 1.1.3 Silver Book Program ………. 1.2 Problem Statement ………... 1.3 Objective of the Study...……… 1.4 Motivation of the Study ………... 1.5 Contribution of the Study ………. 1.6 Organisation of the Study ……… 1 4 4 5 7 7 8 9 10 11 CHAPTER 2: LITERATURE REVIEW………... 12

2.0 Introduction ……….. 2.1 Corporate Social Responsibility ……….. 2.2 The Development of CSR disclosure in Malaysia ………... 2.2.1 Corporate Characteristics in CSR ……… 2.2.2 Corporate Governance Characteristics in CSR disclosure… 2.2.3 Theme and Type of CSR disclosure ……… 2.3 Conclusion ………... 12 12 14 15 16 16 17 CHAPTER 3: GOVERNMENT-LINKED COMPANIES AND THE ‘SILVER BOOK’………. 19

3.0 Introduction ………...

3.1 Government-Linked Companies (GLCs)

3.1.1 Definition of Government-Linked Companies (GLCs)….

3.1.2 Background of Malaysian GLCs ………..

3.2 Overview of the GLC Transformation Program ………..

3.3 The Silver Book in Malaysian GLCs ………...

3.4 CSR and Malaysian GLCs ………...

3.5 Corporate Governance in Malaysian GLCs ……….

3.6 Conclusion ………...

19 19 22 24 26 29 30 31

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CHAPTER 4: THEORETICAL FRAMEWORK AND HYPOTHESES... 33 4.0 Introduction ………...

4.1 Theoretical Framework

4.1.1 Legitimacy Theory ………

4.2 Hypothesis Development ……….

4.2.1 Silver Book ………...

4.2.2 Company Size ………...

4.2.3 Leverage ………

4.2.4 Profitability………

4.2.5 Corporate Governance ………..

4.2.5.1 Independent Non-Executive Director …………

4.2.5.2 Board Size ………..

4.3 Conclusion ………...

33 33 36 37 38 40 41 42 42 44 45

CHAPTER 5: RESEARCH METHOD………. 46 5.0 Introduction ………...

5.1 Sample selection ………..

5.2 Data Collection Methods ……….

5.2.1 Research Instrument………..

5.2.2 Scoring Method ……….

5.3 Methods of Data Analysis ………

5.3.1 Statistical Test ………...

5.3.2 Independent and Dependent Variables ……….

5.4 Regression Models ………...

5.5 Conclusion ………...

46 46 50 52 52 53 54 56 56

CHAPTER 6: FINDINGS AND ANALYSIS OF RESULT………. 58 6.1 Introduction ………...

6.2 Finding Analysis and Discussion ………..

6.2.1.1 Corporate Social Responsibilities Items

Disclosure………...

6.2.1.2 Descriptive Statistics ………

6.2.1.3 Findings and Discussion of CSR

Items Disclosure ………

6.2.2 Extent of Corporate Social Responsibility Disclosure …..

6.2.2.1 Descriptive Statistics ……….

6.2.2.2 Mean Comparison (T-Test)………

6.2.2.3 Findings and Discussion of Extent of CSR Disclosure………...

6.2.3 Association of Corporate Social Responsibility Disclosure and Firm Specific Characteristics and

Corporate Governance………...

6.2.3.1 Descriptive Statistic ………..

6.2.3.2 Normality Test ………..

6.2.3.3 Pearson Correlation Coefficients ………..

6.2.3.4 Multiple Regression Test ………..

6.2.3.5 Findings and Discussion of the Association of

58 58 58 58 62 65 65 71 73

76 76 77 81 82

x

CSR Disclosure and Firm Specific Characteristics and Corporate Governance ………

6.3 Additional Test ………..

6.4 Conclusion……….

85 87 88

CHAPTER 7: CONCLUSION……… 89 7.0 Introduction ………..

7.1 Summary of Findings ………...

7.2 Contribution of the Study ……….

7.3 Limitation of the Study ………

7.4 Suggestions of Future Research ………...

89 89 94 95 96

BIBLIOGRAPHY ………... 97

APPENDIX 1: CSR Disclosure Checklist……….

APPENDIX 2: Definition and Decision Rules for Each Item Listed in the CSR Disclosure Checklist………

104 105

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LIST OF TABLES

Table No. Page No.

5.1 List of GLCs for year 2007 47

5.2 List of GLCs for year 2005 48

5.3 Sample selection for year 2005 and 2007 50 5.4 Summary of the operationalisation of independent variables 55 6.1 Descriptive statistics for CSRD items for year 2005 60 6.2 Descriptive statistics for CSRD items for year 2007 61 6.3 Descriptive statistics for the extent of CSRD in Malaysian GLCs

for year 2005 and 2007 67

6.4 Descriptive statistics on min, max and mean of the extent of CSRD

in Malaysian GLCs for year 2005 and 2007 68 6.5 Paired sample t-test for the extent of CSRD in Malaysian GLCs for

the year 2005 and 2007 71

6.6 Wilcoxon Test for the extent of CSRD in Malaysian GLCs for year

2005 and 2007 72

6.7 Summary of descriptive statistics 77

6.8 Normality test for year 2005 79

6.9 Normality test for year 2007 80

6.10 Pearson Correlation among continuous variables for year 2005 81 6.11 Pearson Correlation among continuous variables for year 2007 81 6.12 Summary of the multiple regression analysis results 83 6.13 Summary of the multiple regression analysis results for additional

test

87

7.1 Summary of hypotheses 93

xii  

LIST OF FIGURES

Figures No. Page No.

3.1 Ownership Structure of GLCs Malaysia 23 3.2 Benefits of GLCs Transformation Programme 26 6.1 Top five GLCs in CSRD in year before the introduction of the

Silver Book (2005)

69

6.2 Top five GLCs in CSRD in year after the introduction of the Silver Book (2007)

70

xiii  

LIST OF ABBREVIATIONS

CG Corporate governance CSD Corporate social disclosure CSR Corporate social responsibility

CSRD Corporate social responsibility disclosure EPF Employee Pension Fund

GLC Government Linked Company GLCs Government Linked Companies

GLICs Government Linked Investment Companies KLCI Kuala Lumpur Composite Index

Khazanah Khazanah Nasional Berhad KWAP Kumpulan Wang Amanah Pencen LTAT Lembaga Tabung Angkatan Tentera LTH Lembaga Tabung Haji

MoF Ministry of Finance Incorporated

PCG Putrajaya Committee for GLC High Performance PLCs Public Limited Companies

PNB Permodalan Nasional Berhad SOEs State Owned Enterprises  

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CHAPTER ONE INTRODUCTION

1.0 INTRODUCTION

The topic of corporate social responsibility (CSR) has triggered work and debate from a wide variety of researchers and practitioners since 25 years ago (Mathews, 1997).

However, most of the empirical studies in CSR literature have been conducted in developed countries such as UK, USA, Europe and Australia (Gray et al., 1987). In recent years, there have been numerous studies in Malaysia that examined CSR disclosure for example, Teoh and Thong (1984); Andrew et al. (1989); Mohd Jamil et al. (2003); Nik Ahmad et al. (2003); Ramasamy and Hung (2004); Abdul Hamid (2004); Thompson and Zakaria (2004); Mohamed Zain et al. (2006) and Mohd Ghazali (2007). However, very little or limited research has been done specifically on CSR disclosure in Malaysian GLCs (e.g. Saat et al., 2009)

CSR is a process of communicating the social and environmental effects of organizational economic actions to specific interest groups within a society and to society at large (Mohd Jamil et al., 2003). Godfrey et al. (2006) describe CSR disclosure as voluntary reporting of social and environmental information regarding to an organization’s interaction with community, shareholders, physical and social environment to outsiders through corporate annual reports. Furthermore, CSR is an obligation by the business to use their resources in a good manner to benefit not only for themselves but also to society at large. The role each business plays in the society will cultivate a productive and interesting outcome to CSR. CSR is found as a tool that drives the behavior of the company (Tay, 2005). The information about corporate

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social responsibility is a concern not only for the direct stakeholders who always demand information about financial performance, but for the public at large.

Today, a business is not only focused on maximizing profit but also incorporates, environmental and social performance in evaluating business performance. CSR has become a critical factor in business and a key differentiator in competing for the scarce commodities of human and financial capital (Tay, 2005).

Socially responsible manner is increasingly seen as essential to the long- term survival of companies. According to the Simms (2002), the international survey conducted by PricewaterhouseCoopers in early 2002 found that 70 percent of the global chief executives believed that addressing CSR was vital to their companies’ profitability (as cited in Adams & Zutshi, 2006).

CSR is always seen as a subject that covers business ethics, good governance practices, legal practices and also social obligation to sustain the environment. CSR is perhaps best defined as a concept whereby the companies integrate social and environmental concerns in their operation to satisfy the stakeholders and community needs. Furthermore, CSR is not only about donating money, but more on integrating social and ethical practices into the business strategy (Anwar, 2007).

Besides CSR, corporate governance (CG) also plays an important role in enhancing shareholder value. Hardjono and Van Marrewick (2001) asserted that organizations today are generally more inclined to diversify the basis of their performance evaluation from a short term financial focus to include long term social, environmental and economic impacts and value added (as cited in Jamali & Rabbath, 2007). This is where the concepts of CG and CSR come into the picture. Under CG, companies are encouraged to promote ethics, fairness, transparency and accountability in all dealings (Jamali & Rabbath, 2007).

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In Malaysia, a number of studies have been conducted and discussed CG and CSR independently as being unrelated accountability models (Bhimani & Soonawalla, 2005) whose guidelines, reporting standards, and oversight mechanism evolved separately (Bhimani & Soonawalla, 2005). As for CSR, most of the studies look into the nature and the extent of CSR disclosure among the public listed companies. Kin (1990) for instance, has conducted study on CSR disclosure in Malaysia by using 100 Annual Reports of Malaysian public listed companies and found that only 66 percent of the companies in the sample made social disclosure. From the total above, 64 companies disclosed information on product or service improvement or contribution, 31 companies disclosed on human resource, 22 companies on community involvement and only one company disclosed environmental information. Another study done by MACPA (1998) on corporate social disclosure (CSD) using Malaysian public listed companies revealed that the levels of disclosure among Malaysian companies were relatively very low. However, study concerning CSR disclosure on Government Link- Companies (GLCs) has been minimal (e.g. Saat et al. 2009) and there is still no research done on the extent of CSR disclosure before and after the introduction of the Silver Book, one of the initiatives for CSR included in the GLC Transformation Program.

Most of the studies relating to determinants of CSR disclosure focused on company characteristics such as profitability (e.g. Wallace and Naser, 1995; Abdul Hamid, 2004; Mohd Ghazali, 2007), the size of company (e.g. Wallace and Naser, 1995; Haniffa and Cooke, 2005; Abdul Hamid, 2004; Mohd Ghazali, 2007) and Leverage (e.g. Wallace and Naser, 1995; Haniffa and Cooke, 2005). However, no research has been done on the association between corporate governance characteristics such as board size and CSR disclosure among GLCs. As Bhimani and

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Soonwalla (2005) claimed that CG and CSR are two sides of the same coin.

Therefore, this study aims to investigate the extent of CSR disclosure among Malaysian GLCs before and after the introduction of the Silver Book. In addition, the study intends to determine whether corporate characteristics (company size, profitability and leverage) and corporate governance characteristics (board size and independent non executive director) have a relationship with CSR disclosure.

1.1 CSR INITIATIVES IN MALAYSIA 1.1.1 Overview of Malaysian CSR initiatives

In the Malaysian business environment, the CSR issue remains the new buzzword.

And yet for many companies, it is an acronym that remains remarkably unfamiliar.

Little is known that corporate social responsibility is not about public relations but more about protecting and investing in one’s future. For instance, a survey conducted by Bursa Malaysia among Public Listed Companies (PLCs) in Malaysia for 2006 revealed that most PLCs received low scores and lag far behind in understanding the CSR concepts as well as CSR issues relevant to their operations. From this survey, 11.5 percent of PLCs fall into the poor band, 28.5 percent of PLCs fall into the below average band, 27.5 percent of PLCs fall into the average band, 19 percent of PLCs fall into above average band, 9 percent of PLCs fall into the good band and only 4.5 percent of PLCs fall into the leading band. This survey covered four dimensions as defined in the CSR framework launched by Bursa Malaysia (BM) such as marketplace, workplace, environment and community (Bursa Malaysia report on CSR, 2006).

The Government for instance has been promoting CSR disclosure through the introduction of the Caring Society Policy, Vision 2020, the Ninth Malaysia Plan, and

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the publication of the GLC Transformation Program. Through the GLC Transformation Program, the Silver Book, which is also known as the fifth initiative in the Transformation Manual, was launched in September 2006. This Silver Book provides guidance on how GLCs can proactively contribute to society and at the same time creates value to their shareholders.

Furthermore, the regulatory bodies such as Bursa Malaysia have continuously taken proactive roles in driving the promotion of CSR in the Malaysian business environment. Bursa Malaysia, as part of its effort to guide the PLCs in adopting CSR into their business practices has introduced a CSR framework and guidelines. The Bursa Malaysia Framework which was launched in September 2006 focuses on four main important areas of CSR practice. These are the environment, the workplace, the community and the marketplace. The CSR Framework is basically a set of guidelines for Malaysian PLCs to help them in the practice of CSR. Thus, not only the government but also the regulatory bodies have taken several initiatives to promote CSR among the GLCs and PLCs.

1.1.2 Government-Linked Companies (GLCs)

Malaysia provides an attractive research channel because of its unique business environment where the government has a direct controlling stake in privatized entities (Mohd Ghazali, 2007). In other words, the Malaysian government takes a proactive entrepreneurial role in establishing “state enterprise” (also called government-linked companies or GLCs). GLCs have evolved into an important national institution, and many major companies have become well-recognized corporate names regionally (Ramirez & Tan, 2003). Mohd Ghazali (2007) also added that these types of companies are not purely profit driven but were set up to achieve social objectives to

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ensure a more equitable society. Being businesses where the government has major ownership and control, GLCs are expected to lead others in good corporate practices especially on CSR practices consistent with their social aspirations.

GLCs as defined by Putrajaya Committee for GLC High Performance (PCG) are companies that have a primarily commercial objective and in which there is major ownership and direct controlling stake by the Malaysian Government. The government also has the power to appoint the board members, senior managements and to make major decision for GLCs either directly or through government-linked investment companies (GLIC).

In addition, GLCs also can be classified as those firms controlled by the financial or legal exposure agencies such as Khazanah Nasional Bhd (Khazanah), Permodalan Nasional Berhad (PNB), Employee Pension Fund (EPF), Lembaga Tabung Angkatan Tentera (LTAT), Ministry of Finance Incorporated (MoF), Kumpulan Wang Amanah Pencen (KWAP) and Lembaga Tabung Haji (LTH), which are technically owned by the depositors, but capital and some income are partly guaranteed by the Government of Malaysia.

GLCs play a vital role in the Malaysian economy. They contribute significantly to Malaysian economic growth and make up nearly 39 percent and 50 percent respectively of the market capitalization of Bursa Malaysia and the benchmark of Kuala Lumpur Composite Index (KLCI). GLCs also contribute in developing the nation through generating the human capital, utilizing local resources as well as creating a balanced and prosperous society.

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“GLCs are the backbone of the country’s economy through the provision of mission-critical services such as transport, energy, telecommunication and financial service” and “….any improvement in terms of its efficiency and performance would eventually bring the benefits, not only to stock exchange but also to the income, consumption and wealth of the nation”

(Former Prime Minister, Datuk Seri Abdullah Ahmad Badawi, 2004).

1.1.3 Silver Book Program

A significant amount of effort has been put into promoting CSR among the GLCs. As one of the tentative steps towards promoting CSR disclosure, the government has taken a proactive role through the publication of the GLC Transformation Program.

Under the transformation program, CSR issues are being stressed through the Silver Book, one of the initiatives included in the GLC Transformation Manual. The Silver Book was launched in September 2006. The introduction of the Silver Book provides guidance for GLCs on how they can proactively contribute to society and at the same time still creates value to their shareholders. In addition, the Silver Book provides a strategic framework for GLCs to proactively contribute in a socially responsible manner and it also guides GLCs to establish an effective contribution program and minimize the cost of any social obligations or even transmute these obligations into positive social contributions.

1.2 PROBLEM STATEMENT

In Malaysia, currently there is no statutory requirement or accounting pronouncement for companies to disclose social and environmental information to the public (Ramasamy & Hung, 2004). Due to the absence of the mandatory requirements, reporting is essentially voluntary in nature and simply based on manager’s discretion.

This may lead companies to disclose additional information that only gives positive impact to their performance and hide any information that provides negative impact.

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The CSR framework and guidelines introduced by Bursa Malaysia, one of the regulatory bodies in Malaysia, is expected to guide and influence PLCs to implement good CSR activities. On the other hand, for the GLCs, the government has set up a set of guidelines on how GLCs could engage and invest in CSR activities in a good manner through the Silver Book.

Having recognized the importance of the GLCs role in the country’s economic growth and GLCs supposedly be a leading example in practicing a good corporate practice, the current study is therefore, expected to fill the gap where there is still no research conducted specifically on GLCs and CSR before and after the introduction of the Silver Book. The present study will also assess whether size, profitability, leverage and corporate governance characteristics are good explanatory variables in determining corporate social responsibility disclosure.

Based on the above discussion, the research objectives and research questions are stated in the following section.

1.3 OBJECTIVES OF THE STUDY

The main objective of this study is to investigate the extent of CSR disclosure before and after the introduction of the Silver Book, to examine CSR items most disclosed in Malaysian GLCs before and after the introduction of the Silver Book and to determine whether size, profitability, leverage and corporate governance characteristics such as board size and independent non-executive director are good explanatory variables in determining CSR disclosure among Malaysian GLCs.

Having discussed briefly the concept of CSR, the leading role that GLCs play and their significant contribution towards nation development, the research questions addressed in the current study are:

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i) what is the extent of corporate social responsibility disclosure among Malaysian GLCs before and after the introduction of the Silver Book?

ii) which items of corporate social responsibility is most disclosed in Malaysian GLCs before and after the introduction of the Silver Book?

iii) is there any association between size, profitability, leverage and corporate governance characteristics, i.e., board size and independent non executive director with the level of CSR disclosure among GLCs?

1.4 MOTIVATION OF THE STUDY

The main reason for examining GLCs in this study is due to the fact that these organizations have a dominating presence in the Malaysian economy and stock market. GLCs constitute a vital part of the Malaysian economy and make up nearly 39 percent and 50 percent of the market capitalisation of Bursa Malaysia and the Kuala Lumpur Composite Index (KLCI) respectively (Wan Abdul Aziz, 2007). GLCs are the main service providers to the nation in key strategic utilities and services consisting of telecommunication, airlines, public transport, water and sewerage, banking and financial services, and electricity. It can be expected that GLCs will engage in more corporate social responsibility activities because the objective of their formation is not totally profit driven (Mohd Ghazali, 2007). Thus, the researcher is motivated to study the involvement of GLCs in CSR activities by examining the extent of CSR disclosure and the association with corporate attributes (company size, profitability and leverage) and corporate governance characteristics (board size and independent non executive director).

10 1.5 CONTRIBUTION OF THE STUDY

The study will contribute to the existing literature on CSR disclosure in at least two ways. First, it helps in further understanding the relationship between corporate governance characteristics and CSR disclosure specifically in Malaysian GLCs. The findings show that corporate governance has some influence on CSR. The regression analysis showed that board size was significantly associated with the extent of CSR disclosure in year 2005. The positive association in 2005 suggests that GLCs with more members tend to be associated with more social activities.

Secondly it attempts to examine how the Silver Book, one of the initiatives included in the GLC Transformation Manual has succeeded in improving CSR disclosure among GLCs. The finding showed that regulatory efforts have some positive impact on CSR disclosure. The result revealed that there was a significant increase in the extent of CSR disclosure in year 2007 compared to year 2005. This finding interpreted as an increasing awareness among Malaysian GLCs towards their social responsibility and hence disclosure in annual reports. It would appear that the introduction of the Silver Book has proved successful in guiding Malaysian GLCs towards more involvement in CSR activities.

In addition, the present study will provide information about the roles and responsibilities of the GLCs in developing the country and nation as whole. This is particularly important, since there has not been any previous study conducted pertaining to this area.

Since, GLCs have their own unique characteristics of government ownership as described earlier and not many countries in the world have such corporate structure among the listed corporations, it is hoped that the study will provide some information for future study pertaining to Malaysian GLCs.

11 1.6 ORGANISATION OF THE STUDY

This dissertation will be organized into seven chapters. Chapter One provides the introduction and background of the study, CSR initiatives in Malaysia, definition of GLCs and Silver Book, problem statement, research questions, objective and motivation of the study and also contributions of the study.

Chapter Two contains the relevant literature review, which includes the definition of corporate social responsibility and its development in Malaysia. In addition, it also discusses the theoretical framework of the study.

Chapter Three provides information on the Malaysian GLCs, the Silver Book and also information on Corporate Governance among Malaysian GLCs.

Chapter Four discusses the hypotheses development in this study.

Chapter Five describes the research methodology which includes the sample selection, research instrument, procedures of the data collection and statistical tests.

Chapter Six explains the data analysis, results of the study and the discussion of the results. This chapter contains the statistical data results, analysis of data and interpretation of the results.

Finally, Chapter Seven presents the conclusions and summary from the findings, limitations of the study, implications of the study, and the recommendations for future research.