Is corporate governance relevant to the quality of corporate social responsibility disclosure in large European companies?

• Date: 07 May 2019
• DOI: https://doi.org/10.1108/IJAIM-10-2017-0118
• Published date: 07 May 2019
• Pages: 301-332
• Author: Christine Adel,Mostaq M. Hussain,Ehab K.A. Mohamed,Mohamed A.K. Basuony

Is corporate governance relevant

to the quality of corporate social

responsibility disclosure in large

European companies?

Christine Adel

Department of Accounting and Finance, German University in Cairo,

Cairo, Egypt

Mostaq M. Hussain

University of New Brunswick-Saint John, Saint John,

New Brunswick, Canada

Ehab K.A. Mohamed

Faculty of Management Technology, German University in Cairo,

Cairo, Egypt, and

Mohamed A.K. Basuony

Department of Accounting, The American University in Cairo,

Cairo, Egypt

Abstract

Purpose –This paper aims to report on the quality of corporate social responsibility (CSR) disclosure in

S&P Europe 350companies. The paper also examines the impact of corporategovernance structure and other

f‌irm-specif‌iccharacteristics on the quality of CSR disclosurein European companies.

Design/methodology/approach –The paper uses a disclosure index adopted from Jizi et al. (2014).

Moreover, the paper contributes to the CSR disclosure literature by developing a new index that

includes all the aspects introduced by the Global Reporting Initiative version 4.The data of CSR

reporting are manually collected from the f‌irms’reports. The population and sample of this study are

related to 350 companies operating in 16 European countries. Tobit regression analysis is used to test

the hypotheses.

Findings –The results reveal that directors’ownership, the presence of a CSR committee and f‌irm size

positively affect the quality of CSR reporting.Further testing of the independent variables on each CSR sub-

category is made. The CSR sub-categories used are, namely, community involvement, employees,

environment, social product and service quality, supply chain sustainability and business ethics. The

presence of a sustainability committee inside the company is the only factor that shows a strong positive

effect on the disclosureof every CSR sub-category and the CSR inclusive index.

Research limitations/implications –The limitations of this research are that it focuses exclusively

on the effect of the internal corporate mechanisms on the quality of CSR reporting; disregarding the

economic, institutional, political and cultural factors that can play a role in inf‌luencing sustainability

reporting of the companies.

Practical implications –Better CSR disclosureleads to the f‌irm having a better image in the society; this,

in turn, has implicationson f‌irm performance, attracting funds, as well as recruitingand retaining high prof‌ile

employees. Stakeholders are placing cumulative signif‌icance to corporate transparency particularly in the

area of CSR. Managersshould exert more efforts into not only improving thedisclosure of the various facts of

CSR but also into using the variousmedia available for disclosure. Companies should take the initiative of

Corporate

social

responsibility

301

Received5 October 2017

Revised11 February 2018

Accepted11 March 2018

InternationalJournal of

Accounting& Information

Management

Vol.27 No. 2, 2019

pp. 301-332

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-10-2017-0118

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

www.emeraldinsight.com/1834-7649.htm

establishing a CSR committee to ensure effective formation and implementation of CSR policies and

disclosureof CSR activities.

Social implications –The CRS research itself bears the merit of social implications. Moreover, the

f‌indings of thisresearch pave the way for future researches to examine the effect of the adoption of globalCSR

initiativesand frameworks on the quality of CSRreporting.

Originality/value –This paper contributes to the CSR disclosure literature by developing a new index

that includes all the aspects of CSR and exploring the relation between the rarely explored “presence of

sustainability committee”andCSR disclosure, as well as testing a vast number of CSR sub-categories that is

not extensivelycovered in previous studies. Moreover, the papercovers a large sample of companies across 16

European countries, in termsof their stand-alone sustainability reports, dedicated chaptersof CSR in annual

reports, integratedreports, website CSR information and any attachments/linksprovided on the websites for

furtherCSR documents, brochures or data sheets.

Keywords Corporate governance, Disclosure, Europe, Corporate social responsibility (CSR)

Paper type Research paper

1. Introduction

For long, companies have been adopting thepath and view that their only responsibility is

to maximize their shareholders’prof‌its while keeping an eye on the customs and legal

framework of the place where they operate (Tang et al.,2015). However, ever more than the

previous decades, the various corporatestakeholders are imposing a wider social context as

a further responsibilityon the businesses and holding them accountablefor their operations’

impact on the environment, employment, resources’scarcity and the society as a whole

(Kolk, 2008;Al Farooqueand Ahulu, 2017).

Companies are consequently moving from opposing or being irresponsive to demands

for corporate social responsibility (CSR) practices to understanding that it yields resources’

eff‌iciency, cuts costs and reapsreputation benef‌its on their businesses. Firms worldwide are

becoming more adoptive of the concept of being socially responsible entities and are

increasingly working on integrating the strategies and practices of responsibility into the

core of their practices. In addition to this, companies are being more alert to the impact of

their CSR practices and communication(Akisik and Gal, 2011;Klettner et al., 2014;Basuony

et al., 2014a). CSR communication and reporting is expected to reduce the information

asymmetry and improve the companies’relations with their stakeholders (Gul and Leung,

2004).

The reporting on corporate responsibility is assumed to be strengthened by an effective

board of directors that is fundamentally created to protect the interests of shareholders

(Jamali et al., 2008).This is because the board is the main responsible body for the creationof

responsible business practices and strategies, for surveying a sustainable use of the

business’assets and for deciding on the CSR policies. In addition to this, corporate

disclosures are also decisions that originate from the company’s board of directors

(Michelon and Parbonetti, 2012;Akisik and Gal, 2011). Furthermore, it is also shown by

several research studiesthat the structure of ownership of the company, its f‌irm size, level of

prof‌itability, auditor type and many other variables do affect the quality and degree of

corporate disclosures.

After recently gaining increased attention in the research, measuring the quality of CSR

reporting is not an area that is exploredenough in the literature. CSR used to be measured in

terms of the number of pages or number of words dedicated to its topic. However, a trend

toward content analysis of the reported information is on the rise. Also, the impact of

corporate governance and f‌irm specif‌ic characteristics on the quality of CSR disclosure has

not been explored in a large number of European countries.

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Hence, the objective of this study is to investigate the impact of corporate governance

and other f‌irm-specif‌ic variables on the quality of CSR disclosure in S&P Europe 350

companies. The motivation behind the choice of top European companies listed in S&P

Europe 350 is to provide evidence on a large region rather than focus on a single country.

Also, evidence on CSR reporting in certain parts of Europe is still ambiguous and not well

documented for. The EuropeanUnion (EU) has a long history of mandating better corporate

disclosure that increasingly demands more non-f‌inancial disclosure from large companies.

By issuing Directive2014/95/EU the EU mandates better CSR disclosure by companies.

This paper contributes to the CSR disclosure literature by going further than prior

studies that focus only on four elements of CSR, namely, community, environment,

employees and products and services by measuring the quality of disclosure of business

ethics and supply chain sustainability. The additional two aspects are added as per the

Global Reporting Initiative (GRI) version G4. This is in addition to exploring the relation

between the rarely explored “presence of sustainability committee”variable and CSR

reporting quality, as well as testing the previously mentioned vast number of CSR sub-

categories that are not fully includedin previous studies. Moreover, the paper covers a large

sample of companies across 16 European countries in terms of their stand-alone

sustainability reports, dedicated chapters of CSR in annual reports, integrated reports,

website CSR information and any attachments/links provided on the websites to further

documents, brochuresor data sheets on CSR. This comprehensive explorationof this variety

of CSR reporting vehicleshas not been covered in previous studies.

This paper extends the disclosure indices found in prior literature by measuring the

quality of disclosure of business ethics and supply chain sustainability. These additions

enhanced the index by making it more objective and comprehensive to effectively measure

the CSR quality.

The structure of this paper is as follows:Section 2 provides a literature background and

the hypotheses development. Section 3 presents the methodology, followed by the research

f‌indings in Section 4, and f‌inally, the research summary and conclusion are presented in

Section 5.

2. Literature review

2.1 Background

Corporate governance attracts increased attention due to the f‌inancially questionable

business practices and f‌inancial scandals reported in the corporate sector (Majumder et al.,

2017). Corporate governance is widely referred to as the system by which businesses are

controlled and directed(Dharmadasa et al.,2014;Mohamed et al., 2009). Jensenand Meckling

(1976) add that the presence of corporate governance is vital due to the separation of

ownership and managementof the company; with each side having differentand sometimes

conf‌licting interests. In general, corporate governance is about safeguarding stakeholders’

rights in the corporate world. The board of directorsis appointed as an internal governance

instrument that has two major roles, namely, controlling and advising the company’s

managers. This is why the board composition determines to a big extent the effectiveness

with which they carry their functions and impacts the voluntary corporate disclosure

decisions (Donnelly and Mulcahy, 2008;Jamali et al.,2008;Basuony et al., 2014b;Ji et al.,

2015;Al Farooque and Ahulu, 2017;Majumderet al.,2017).

Dharmadasa et al. (2014) state that it is acknowledged that the practices of corporate

governance differ across countries, industries and even across f‌irms because they usually

arise from differences in legal, institutional, social, regulatory and social contexts. Some

articles divide corporate governance into ownership structure and board structure

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