The simultaneous disclosure of shareholder and stakeholder corporate governance practices and their antecedents

• Published date: 01 January 2019
• Author: Godfred Adjapong Afrifa,Ernest Gyapong
• Date: 01 January 2019
• DOI: http://doi.org/10.1002/ijfe.1661

RESEARCH ARTICLE

The simultaneous disclosure of shareholder and

stakeholder corporate governance practices and their

antecedents

Ernest Gyapong

1

| Godfred Adjapong Afrifa

2

1

School of Accountancy, Massey

University, Palmerston North, New

Zealand

2

Business School, University of Kent,

Canterbury, UK

Correspondence

Ernest Gyapong, School of Accountancy,

Massey University, Palmerston North,

New Zealand.

Email: e.gyapong@massey.ac.nz

Abstract

In making corporate governance (CG)‐related disclosure, firms may solely

focus on shareholders or may broaden their scope of disclosure to serve other

stakeholders as well. This study examines whether there are differences in

the disclosure of shareholder and stakeholder CG practices. Based on a hand‐

collected dataset of 1,110 firm years in South Africa and a disclosure index

using 72 CG provisions from the King III report of CG, we find that the disclo-

sure of stakeholder CG practices is higher than that of shareholder CG prac-

tices. Our evidence suggests that foreign ownership, institutional ownership,

racial diversity, and gender diversity increase total voluntary disclosure. In con-

trast, chief executive officer (CEO) age decreases total voluntary disclosure.

Also, although foreign ownership, institutional ownership, gender diversity,

and racial diversity increase both shareholder and stakeholder CG disclosures,

CEO age has a negative relationship with both shareholder and stakeholder

CG disclosures. Further, board size reduces shareholder disclosure but not

stakeholder disclosure. Our results further indicate that, ceteris paribus, the

extent of shareholder CG disclosure relative to stakeholder CG disclosure is

(a) lower with board size, gender diversity, and racial diversity and (b) higher

with the level of institutional ownership. Our findings are robust across a raft

of econometric techniques.

KEYWORDS

corporate governance, disclosure, shareholder, stakeholder, South Africa

1|INTRODUCTION

In making corporate governance (CG) related disclosure,

firms may solely focus on shareholders or may broaden

their scope of disclosure to serve other stakeholders as

well. Previous studies suggest that voluntary CG

disclosure decisions are influenced by several factors,

including ownership characteristics (Cox, Brammer, &

Millington, 2004; Dam & Scholtens, 2012; Harjoto &

Jo, 2011; Lim, Matolcsy, & Chow, 2007; Peasnell, Pope,

& Young, 2000) and board characteristics (Barako,

Hancock, & Izan, 2006; Post, Rahman, & Rubow, 2011;

Latridis, 2013;Lewis, Walls, & Dowell, 2014). Neverthe-

less, these studies mainly focus on total voluntary CG

disclosure. In this paper, we investigate the simulta-

neous disclosure of shareholder and stakeholder CG pro-

visions as well as the antecedents of the variations in

these disclosures. To address these issues, we exploit

the unique institutional setting in South Africa (SA)

where a history of apartheid has impacted CG practices.

Received: 16 April 2018 Revised: 8 September 2018 Accepted: 9 September 2018

DOI: 10.1002/ijfe.1661

260 © 2018 John Wiley & Sons, Ltd. Int J Fin Econ. 2019;24:260–287.wileyonlinelibrary.com/journal/ijfe

Apartheid resulted in corporate resources being held in

the hands of the minority White population in SA.

Therefore, in the post‐apartheid period, the SA govern-

ment instituted several affirmative action rules, which

has become part of CG. Consequently, CG codes in SA

require firms to voluntarily disclose CG information

relating to shareholders and other nonshareholding

stakeholders.

We focus on shareholder and stakeholder CG disclo-

sures in SA for the following reasons. First, chief execu-

tive officer (CEO), ownership, and board characteristics

may influence firms to be shareholder focused or con-

sider other nonshareholding stakeholders when making

CG disclosure decisions. For example, foreign investors

who are far from firms may demand higher levels of CG

disclosures that protect shareholder interests (Bokpin &

Isshaq, 2009; Haniffa & Cooke, 2002; Mangena &

Tauringana, 2008; Singhvi, 1968). On the other hand,

shareholder classes who invest for various strategic rea-

sons associated with the different roles and positions they

have in society may require firms to have a stakeholder

focus in terms of CG disclosure (Dam & Scholtens,

2012). Further, to facilitate a rent extraction objective

and to prevent board monitoring (Fracassi & Tate,

2012), long‐tenured CEOs may use their familiarity with

board members (Allgood & Farrell, 2000), to inhibit the

disclosure of monitoring‐intensive CG provisions that

protect shareholder interests. By studying the determi-

nants of shareholder versus stakeholder CG disclosure

practices, we can determine the likelihood that a firm

may solely focus on shareholder CG disclosures or

broaden their scope to serve other stakeholders as well.

Moreover, because the cost of disclosing CG information

can be significantly high (Friedman, 1970; Hermalin &

Weisbach, 2012), an understanding of the drivers of

shareholder versus stakeholder CG disclosures will be

important for firms as they make the crucial decision of

whether to focus on shareholder value creation or to

create social value in addition.

Second, a firm's decision to focus solely on share-

holders or broaden their scope of disclosure to include

other stakeholders may have differential consequences.

For example, a focus on shareholder‐related CG prac-

tices may help investors identify profitable investment

opportunities and avoid adverse selection decisions

(Bushman & Smith, 2001; Ntim, Opong, & Danbolt,

2012), minimize information asymmetry between man-

agers and shareholders (Jensen & Meckling, 1976;

Sheu, Chung, & Liu, 2010), and reduce bonding and

monitoring costs leading to a reduction in the costs

of capital (Beiner, Drobetz, Schmid, & Zimmermann,

2006). On the contrary, the consequences of disclosing

CG provisions that protect the interest of other

nonshareholding stakeholders may be explained by

two competing views: the conflict resolution hypothesis

(Cai, Jo, & Pan, 2011) and the managerial opportunism

hypothesis (Choi, Lee, & Park, 2013). Under the con-

flict resolution hypothesis, the disclosure of stakeholder

CG practices may help firms establish a reputation as

good corporate citizens (Barnea & Rubin, 2010), reduce

conflicts by bonding with powerful nonshareholding

stakeholders (Jensen, 2001; Calton and Payne, 2003),

and legitimize operations to reduce political costs

(Cheung, Rau, & Stouraitis, 2010; Freeman & Reed,

1983). Under the managerial opportunism hypothesis,

managers (including the CEO) promote the disclosure

of CG practices that protect nonshareholding stake-

holders for private benefits (Barnea & Rubin, 2010).

These private benefits may include improving insider's

reputation as good social citizens (Barnea & Rubin,

2010) and bonding with powerful stakeholders to facil-

itate entrenchment, prevent monitoring (Prior, Surroca,

& Tribo, 2008), and demand higher pay (Milbourn,

2003). An understanding of the determinants of these

disclosure practices may be necessary in dealing with

their adverse consequences if any. Although previous

studies have examined how various board and owner-

ship characteristics impact voluntary CG disclosures,

the SA setting with its hybrid CG disclosure regime

allows us to observe how various CEO, board, and

ownership attributes simultaneously impact both share-

holder and stakeholder CG disclosures.

Utilizing a unique hand‐collected dataset of 185 listed

SA firms and 72 CG provisions from 2008 to 2013, we

investigate the simultaneous disclosure of shareholder

and stakeholder CG disclosures and their antecedents.

We find that although the overall level of disclosure is

high, firms disclose more of the CG practices that relate

to stakeholders relative to those that relate to share-

holders. The results suggest that both shareholder and

stakeholder CG disclosures increase with institutional

ownership, foreign ownership, gender diversity, and

racial diversity but decrease with CEO age. In contrast,

board size decreases the level of shareholder CG disclo-

sures but not that of stakeholder CG disclosures. Our

analysis further suggests that, ceteris paribus, firms with

at least one female director, bigger boards, and at least

one “non‐White”director disclose less shareholder‐

related CG information relative to stakeholder‐related

CG information. Conversely, firms with higher levels of

institutional ownership disclose more shareholder‐related

CG information relative to stakeholder‐related CG

information. Our evidence suggests that there are both

differences and similarities between the shareholder‐

related and stakeholder‐related CG disclosures in terms

of their determinants.

GYAPONG AND AFRIFA 261