Board composition and corporate social responsibility in an emerging market

• Pages: 35-53
• Published date: 01 February 2016
• DOI: https://doi.org/10.1108/CG-05-2015-0059
• Date: 01 February 2016
• Author: Sheela Devi D. Sundarasen,Tan Je-Yen,Nakiran Rajangam
• Subject Matter: Strategy,Corporate governance

Board composition and corporate social

responsibility in an emerging market

Sheela Devi D. Sundarasen, Tan Je-Yen and Nakiran Rajangam

Sheela Devi D. Sundarasen

and Tan Je-Yen are both

based at the Graduate

School of Management,

Multimedia University,

Cyberjaya, Malaysia.

Nakiran Rajangam is

based at Taylor’s

Business School, Taylor’s

University, Subang Jaya,

Malaysia.

Abstract

Purpose –The purpose of this paper is to examine the effect of board composition on corporate social

responsibility (CSR) for selected Malaysian companies in Bursa Malaysia.

Design/methodology/approach –The paper analyses board composition and CSR of Malaysian

(family and non-family) firms using linear regression analysis.

Findings –The empirical findings indicate that non-executive directors (NEDs) and independent

non-executive directors (INEDs) designate a negative relationship, while women on board indicate a

positive relationship. The only variable that positively affects the level of CSR initiatives is the presence

of women directors. As for family and non-family business, the main findings are: a positive relationship

between NEDs and CSR initiatives in non-family business and a negative relationship between INEDs

and CSR for family-controlled business.

Research limitations/implications –This paper is limited only to selected companies on Bursa

Malaysia over a period of two years. The paper suggests that board composition in an emerging market

is relatively ineffective in improving CSR initiatives, with the exception of women on board. This is more

prevalent in family business, as they do not seem to contribute toward humanizing or cultivating CSR in

their companies.

Practical implications –This paper can be used as a reference by regulatory bodies to further

investigate on the means as to how board composition can further contribute toward CSR initiatives, as

these board members have inherent authorities and decision-making power. Composition and role of

women directors in board needs to be further deliberated.

Originality/value –This paper contributes to the existing literature in terms of the roles of board

composition on CSR initiatives. It further highlights the difference in the aforementioned relationship

between family and non-family business.

Keywords Board composition, Corporate social responsibility, Emerging market,

Family and non-family business

Paper type Research paper

1. Background of the study

Corporate governance (CG)[1] and corporate social responsibility (CSR)[2] are concepts

intended to help organizations achieve a balance between profitable operation and ethical

practice. By achieving this, organizations not only meet the expectation of the investors and

other stakeholders, but also demonstrate a commitment to social and environmental

responsibility. Thus, CG and CSR cannot be standalone, but are a part of the business

system that an organization follows and uses to deliver results. In the Malaysian context,

CG and its association to CSR is more relevant, as 72 per cent of the listed companies in

Bursa Malaysia are family controlled (Himmelberg et al., 2004), whereby the head of the

families control these companies, as they are the major shareholders of the company.

Himmelberg et al. (2004) concur that the most crucial element with regard to governance

and CSR is the fact that whether the presence of family controls in the board will, in turn,

affect CSR initiatives and the disclosure of relevant information. CSR-centric companies will

proactively promote the public interest or welfare by developing community progress and

growth, and are likely to voluntarily eliminate practices that are harmful to the society,

Received 11 May 2015

Revised 16 October 2015

21 October 2015

Accepted 26 October 2015

DOI 10.1108/CG-05-2015-0059 VOL. 16 NO. 1 2016, pp. 35-53, © Emerald Group Publishing Limited, ISSN 1472-0701 CORPORATE GOVERNANCE PAGE 35

regardless of legality. This is deemed to be a deliberate act when companies make

decisions or create strategies that affect their business operations. As a result, public will

view this as a core value or principle of the business and honor the triple bottom line,

namely, people, planet and profit (Pimple, 2012).

Studies indicate that the number of Malaysian companies adopting the CSR reporting as

still low (Said et al., 2009;Mohamed Zain and Janggu, 2006;Manasseh, 2004;Nik Ahmad

and Sulaiman, 2004;Shaw Warn, 2004;Ramasamy and Ting, 2004;Foo and Tan, 1988).

The current trend of the uprising public awareness toward company’s social responsibility

(Thompson and Zakaria, 2004) has added another angle toward the responsibility of board

members/composition on CSR initiatives. In view of that, the main motivation of this study

is to first examine the association between CG characteristics in terms of board

composition and CSR. Thereafter, the differences in the association between board

composition and CSR between family and non-family business will be examined, as

concentrated ownership structures are prevalent in East Asia, including Malaysia (World

Bank, 2005;Claessens and Fan, 2002;Zhuang et al., 2000). A large portion of share

ownerships by few large shareholders (also known as blockholder) is prevalent in family

business. Families (which are either single person or multiple family members) are

reportedly (up to 67.2 per cent) the substantial shareholders in most public listed

companies in Malaysia (Haslindar and Fazilah, 2009). At least 25 per cent of the shares in

each listed company are held by the public (Bursa Malaysia, 2006), while family founder of

the companies or other connected parties would be the major shareholders, and would

control the decision-making process, as they could hold at least three quarter of shares

(Pascoe and Rachagan, 2005). This indicates that families are often the controlling

shareholders in Malaysia. A family-controlled company tends to have “top-down” approach

in managing a business, where owners tend to make major decisions (Thillainathan, 1999).

The head of the family is usually the founder, and he or she would have the final say during

the decision-making process (Nam, 2001). Therefore, agency problem could happen in a

concentrated ownership, where potential abuse of power by major shareholders may

happen due to unfettered power in a company.

To achieve the objectives of examining the association between CG characteristics in

terms of board composition and CSR and the differences in the association between family

and non-family business, this study uses companies listed in Bursa Malaysia. A stratified

sampling technique is used to determine the sample of 450 companies. Data are collected

through analyzing the annual reports of the chosen companies for two years, that is, 2011

and 2012. A multivariate regression analysis is undertaken to test the hypotheses

developed for this study. CSRLEV is used to determine the CSR disclosure, and has a total

of 28 items. The independent variables are: role duality, non-executive directors (NEDs)

and woman in the board variable, while the control variables are: return on equity (ROE),

auditors’ credibility and firm size.

The findings of this study highlight the roles of board composition on CSR initiatives and the

differences in this relationship between family and non-family business. In general, role

duality, NEDs and independent non-executive directors (INEDs) designate a negative

relationship, while women on board indicate a positive relationship. As for family and

non-family business, the main findings are: a positive relationship between NEDs and CSR

initiatives in non-family business and a negative relationship between INEDs and CSR for

family-controlled business. The only variable that positively affects the level of CSR

initiatives is the presence of women directors. This may signal that board composition in an

emerging market is relatively ineffective in improving CSR initiatives, with the exception of

women on board. This is more prevalent in a family business, as they do not seem to

contribute to humanize or cultivate CSR in their companies.

Nevertheless, it is envisioned that the outcome from this study can be used as a reference

by regulatory bodies to further investigate on the means as to how board composition can

further contribute toward CSR initiatives, as these board members have inherent authorities

PAGE 36 CORPORATE GOVERNANCE VOL. 16 NO. 1 2016