CSR Disclosure, Corporate Governance and Firm Value: a study on GCC Islamic Banks

• Pages: 607-638
• DOI: https://doi.org/10.1108/IJAIM-08-2019-0103
• Date: 28 May 2020
• Published date: 28 May 2020
• Author: Mohd Shukor Harun,Khaled Hussainey,Khairul Ayuni Mohd Kharuddin,Omar Al Farooque
• Subject Matter: Accounting methods/systems,Accounting & Finance,Accounting/accountancy

CSR Disclosure, Corporate

Governance and Firm Value: a

study on GCC Islamic Banks

Mohd Shukor Harun

Faculty of Economics and Muamalat, Universiti Sains Islam Malaysia, Nilai,Malaysia

Khaled Hussainey

Portsmouth Business School, University of Portsmouth, Portsmouth, UK

Khairul Ayuni Mohd Kharuddin

School of Business and Economics, Loughborough University,

Loughborough, UK, and

Omar Al Farooque

UNE Business School, University of New England, Armidale, Australia

Abstract

Purpose –This study aims to explorethe corporate social responsibility disclosure (CSRD) practicesof the

Islamic banks in the Gulf CooperationCouncil (GCC) countries during the period 2010-2014 and examines the

determinantsof CSRD and its effects on f‌irm value.

Design/methodology/approach –Based on the Accounting and Auditing Organization for Islamic

Financial InstitutionsGovernance Standard No. 7 guidelinesand using content analysis, the paper develops a

comprehensive CSRD index for GCC Islamic banks. The study applies ordinary least squares regression

analysisfor hypothesis testing and for f‌inding determinants of respectivedependent variables.

Findings –The results show a very low level of CSRD among the sampleIslamic banks in GCC countries.

When using corporate governance characteristics toexamine the determinants of CSRD, this study provides

evidence of a signif‌icant positiveassociation between board size and CSRD practice in Islamic banks anda

signif‌icant negative relationshipof chief executive off‌icer (CEO) duality with CSRD, as per expectation. For

the economicconsequences of CSRD, the study documents an inverse performanceeffect of CSRD while board

size, board compositionand CEO duality indicate signif‌icant positive effectson f‌irm value.

Research limitations/implications –The relatively small sample size of GCC Islamic banks may limit the

application of the f‌indingsto other Islamic f‌inancial institutions such as Takaful and the Islamic unit trustcompany.

Practical implications –The f‌indings of this study initiate the global debate on the need for corporate

governance reform in Islamic banks by providing insights on the role played by corporate governance mechanisms

in encouraging and enhancing CSRD practices among Islamic banks. The f‌indings also have important

implications for investors, managers, regulatory bodies, policymakers and Islamic banks in the GCC countries.

Social implications –The results of the study do not support the idea that Islamicbanks operating on

Islamic principles can meet their social responsibilities through promoting corporate social responsibility

(CSR) activitiesand by differentiating themselves from non-Islamicbanks.

Originality/value –This is the f‌irst study to examine the determinants of CSRD in GCC Islamic banks

using comprehensive CSRD and corporate governance variables and, therefore, adds value to the existing

CSR literaturein banking.

Keywords Corporate social responsibility disclosure, Corporate governance, Islamic banks,

Gulf Cooperation Council, Firm value,

Accounting and Auditing Organization for Islamic Financial Institutions

Paper type Research paper

Study on GCC

Islamic banks

607

Received30 August 2019

Revised16 January 2020

16March 2020

Accepted17 March 2020

InternationalJournal of

Accounting& Information

Management

Vol.28 No. 4, 2020

pp. 607-638

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-08-2019-0103

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1834-7649.htm

1. Introduction

The recent development of corporate social responsibility (CSR) has had an enormous

impact on the role of business and resulted in a change to accounting practices (Aribi and

Gao, 2010). CSR disclosure (CSRD) plays a signif‌icant role in the business including

enhancing corporate transparency, developing corporate image and providing useful

information for investment decision-making (Gray et al.,1996;Friedman and Miles, 2001).

The rising importance of CSR has also been ref‌lected in academic research (Liu and Lee,

2019;Plumlee et al.,2015;Johansen and Nielsen, 2012). Nowadays, companies are seen as

organizations that operate within society and having the responsibility to ensure socio-

economic justice and, at the same time, extending benef‌its to the stakeholders consistent

with stakeholder theory perspectives (Mohammed, 2007). As the banks realize the

signif‌icance of the f‌inancial well-being of stakeholders, the role of CSRD has become more

important as a means of discharging accountability (Gray et al., 1996;Park and Ghauri,

2014).

The pressure on companies to be accountableto a wider audience of stakeholders comes

from several sources such asethical investors, consumer associations, a growing numberof

pressure groups and from the UN and European Community Directives (Gray et al.,1996).

When f‌irms disclose CSR activities, they dischargeaccountability to a broader spectrum of

stakeholders rather than just shareholders alone. Such disclosuresprovide insights beyond

those conveyed in f‌inancial disclosuresand can help diminish the information gap, enhance

the credibility of corporatereporting and improve the role of accounting informationin f‌irm

valuation. There is also an importantconnection between a company’s CSRD and business

sustainability as the various stakeholders can only support and reward the “good”

businesses when they are clearlyaware of the “good”practices by those companies, making

the decision on which CSR practices should be undertaken and how they should be

communicated an important concernfor a socially responsible corporation (Akisik and Gal,

2011). While Klein et al. (2005) have documented the consequences of disclosure on f‌irm

value, Pagano et al. (2002) contend that disclosure is a mechanism that allows investors to

increase their abilityto monitor the f‌irm and enhance f‌irm value.

The growth of the Islamic banking and f‌inancial system has been one of the hallmarks,

as its inception of Islamic bank in 1975 [1], and its market capitalization (MC) currently

stands at US$2.05tn (IFSB, 2018). Despite its growth, it is believed that Islamic banking

represents the absolute ethical codes of the Islamic religion because of the unique

characteristics of Islamic f‌inance –nointerest (riba), prevention of uncertainty (gharar) and

gambling (maysir) and the insistence of “real”transactions (El-Gamal, 2005). In fact,Islamic

codes impose strong social obligations on Muslim individuals and organizations (Maali

et al.,2006).

From the Islamic perspective, CSR represents accountability to God (Allah) and then

accountability toward society/stakeholders (El-Halaby and Hussainey, 2015). Therefore,

Islamic banks can be viewed as institutions, which promote social justice and social

responsibility. In the Islamic context, social responsibilities represent the concept of

brotherhood “ukhuwah”from one to another. As such, the social role is very important for

Islamic banks and they can be described as banks, which have a social responsibility

(Haniffa and Hudaib, 2007;Al-Mubarak and Osmani, 2010;Hasan, 2011). Consequently, as

Islamic banks operating with Islamic principles, they should be more active in promoting

CSR and be accountable toward stakeholders and society in general. Based on the

accountability principles,Islamic banks are required to disclose all information that ref‌lects

their identity (Bayoud et al.,2012). It is expected that Islamic banks disclose CSR

information in a succinct, truthful and comprehensible method to meet their stakeholders’

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needs (Haniffa and Hudaib, 2007), as well as enhance their transparency and improve their

ethical behavior (Al-Qadi, 2012). The Accounting and Auditing Organization for Islamic

Financial Institutions (AAOIFI) also reiterates that Islamic banks should disclose all

information necessary to inform the community about their operations affecting the

community’s well-being(AAOIFI, 2010).

The existing body of CSR literature on Islamicbanks focuses on either the level of CSRD

(Hassan and Harahap, 2010;Aribiand Gao, 2012) or the determinants of CSRD (Farook et al.,

2011;Amin et al.,2011;Rahman and Bukair, 2013). There is scant research examining this

relationship in Islamic f‌inancial institutions (Hassan et al.,2009;Arshad et al.,2012;Mallin

et al.,2014) andthere is no evidence from prior studies on the factors determining CSRD for

Islamic banks in the Gulf Cooperation Council (GCC) countries.However, numerous studies

that examined the factors affecting disclosure suggested that corporate governance is the

key driver for corporate disclosure levels either as a whole (Samahaet al.,2015;Gisbert and

Navallas, 2013;Farook et al.,2011;Bhatti and Bhatti, 2009) or for different types of

disclosure (Elshandidy et al.,2013;Abraham and Cox, 2007). Therefore, corporate

governance mechanismscan be considered as essential factors illustrative of the decisionsof

corporate disclosure related to CSR. Also, most previous studies were conducted before the

issuance of an updated AAOIFI (2010 edition) Governance Standard No. 7 (on CSR) and,

thus, did not represent a clear benchmark of CSRD practice in Islamic banks. The

motivation behind this study derivesfrom the dearth of research on CSRD in Islamic banks

in GCC countries after the issuance of AAOIFI’s Governance Standards No. 7 in 2010. In

fact, only a handful ofstudies adopted AAOIFI as best practice for CSR reporting forIslamic

Banks based on the latest AAOIFI Governance Standards (versions 2010) [2], which

provides variations of CSRD practices between banks and countries. It is noted, here, that

AAOIFI standards (2010 edition) contain 48 Shari’ah standards, 26 accounting standards

(FAS) and 5 auditing standards (AS), 7 governance standards and 2 codes of ethics for

Islamic banks, where the overall disclosure practices of banks including CSRD

predominantly depends on FAS and AS. The AAOIFI Governance Standards No. 7 relates

to corporate social responsibility conduct and disclosure for Islamic Financial Institutions

including Islamic banks. The primary objective for this standard is to ensure that CSR

activities and compliance of Islamic Financial Institutions are communicated in a truthful,

transparent and comprehensible manner to relevant stakeholders (AAOIFI, 2010). CSR for

Islamic Financial Institutions refers to all activities carried out by an Islamic Financial

Institution to fulf‌il its religious,economic, legal, ethical and discretionary responsibilities as

f‌inancial intermediaries for individuals and institutions (AAOIFI, 2010). The accountability

for disclosure under this standard is divided between mandatory societal disclosure (such

as, screening and dealing responsibly with clients, earnings and expenditure prohibited by

Shariah, employee welfare and zakat) and recommended disclosure (such as Qard Hasan,

charitable activitiesand Waqf)(AAOIFI, 2010).

Other streams of research also show thatdisclosure reporting plays an important role in

improving communication with stakeholders along with a positive impact on f‌irm value

(Uyar and Kiliç, 2012;Anam et al.,2011;Wang et al.,2008;Schwaiger, 2004;Hassan et al.,

2009;Servaes and Tamayo, 2013). Nonetheless, prior studies (Al-Qadi, 2012;Maali et al.,

2006) have not clearly examined how CSR reporting could inf‌luence a f‌irm’s valuefor GCC

Islamic banks. Even the f‌indings on the impact of disclosure on f‌irm value are generally

inconclusive (Vogel, 2005;Hassanet al.,2009;Al-Akra et al.,2010) and the issue remains as

an open empirical question particularly for Islamic banks in particular. To the best of our

knowledge, there is only one study by Platonova et al. (2018), which examined the

relationship between CSR and f‌inancial performance of Islamic banks in GCC. Using a

Study on GCC

Islamic banks

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