Jurus - 32 06 Lock

Jurnal Pengurusan 32(2011) 55 - 71
Corporate Governance Practices and Environmental Reporting of Companies

in Malaysia: Finding Possibilities of Double Thumbs Up
(Amalan Tadbir Urus Korporat dan Pelaporan Alam Sekitar Syarikat di Malaysia:
Mengkaji Kemungkinan Hubungan Baik antara Kedua-dua Faktor)
Sharifah Buniamin
Bakhtiar Alrazi
Nor Hasimah Johari
Noor Raida Abd Rahman
ABSTRACT
Demonstrating good corporate governance and maintaining sound environmental performance are among the key
challenges facing the organisation to ensure its sustainability. In an attempt to investigate the linkage between these
two essential aspects, this study scrutinises the annual reports of 243 companies listed on the Main Board of Bursa
Malaysia. There are six selected corporate governance attributes namely, board independence, CEO duality, management
ownership, board size, financial expert and meeting frequency. Overall, it was found that the existence of environmental
reporting is low. Only 28% of the companies disclosed environmental information. Furthermore, on average, each
company reported 4.7 sentences, while the quality, as measured by the disclosure index shows an average of 3.24. The
most significant corporate governance attributes in influencing the extent of environmental reporting are board size
and management ownership. The finding provide limited evidence to support that, companies which comply with
corporate governance practices have the tendencies to be more environmentally responsible.
ABSTRAK
Amalan tadbir urus korporat yang baik dan mengekalkan prestasi alam sekitar merupakan antara cabaran utama
yang dihadapi oleh organisasi dalam memastikan kelangsungan pembangunan. Kajian ini meneliti 243 laporan
tahunan syarikat tersenarai di Papan Utama Bursa Malaysia bagi mengkaji perkaitan antara kedua-dua aspek
penting tersebut. Sebanyak enam ciri tadbir urus yang dipilih iaitu kebebasan lembaga pengarah, dwi-jawatan ketua
pegawai eksekutif, pemilikan saham, saiz lembaga pengarah, kecekapan kewangan dan kekerapan mesyuarat. Secara
keseluruhan, laporan alam sekitar adalah rendah. Hanya 28% syarikat melaporkan maklumat alam sekitar. Di samping
itu, secara purata, setiap syarikat melaporkan 4.7 ayat. Manakala bagi kualiti yang diukur dengan indeks pelaporan
menunjukkan purata sebanyak 3.24. Ciri tadbir urus yang paling mempengaruhi laporan alam sekitar ialah saiz
lembaga pengarah dan pemilikan saham. Keputusan ini tidak dapat menyokong sepenuhnya bahawa syarikat yang
memenuhi amalan tadbir urus mempunyai kecenderungan untuk lebih bertanggungjawab terhadap alam sekitar.
INTRODUCTION information. Among the factors found in prior study were

companies size (Cormier & Magnan 2003; Frost &
The impact of business on the environment has become a Wilmhurst 2000; Jaffar, Mohamad Iskandar & Muhamad
grave concern not only among environmental activist and 2002), corporate image enhancement (Adams 2002; Jaffar
legislators, but also local communities, supplier, & Buniamin 2004) and incidents that directly affected the
government, customers as well as the internal party such environment (Deegan, Rankin & Voughts 2000).
as employees and managers. As a result, companies face This study specifically investigates the influence of
increasing pressure to engage in environmental activities. the corporate governance attributes on the environmental
Thus, the commitment towards environmental activities performance proxied to the environmental reporting.
are evidenced by reporting in various media such as stand- Following the scandals of high profile companies such as
alone environmental reports, triple bottom line reports, Enron, Worldcom, Tyco and some other companies in the
sustainability report and annual report. The environmental US, the public started to question the integrity and
reporting acts as a tool for providing environmental effectiveness of monitoring mechanism in organisation
information designed to meet the accountability and to (Raphaelson & Wahlen 2004). Therefore, it was claimed
indicate companies concern on environmental issues that greater emphasis should be made in internal context,
(Shearer 2002). which include boards, particularly to increase shareholder
Since environmental reporting is done on a voluntary insight and influence on corporate behaviour in
basis, there are various literature focused on identifying organisations (Kolk 2006). In essence, they are apparently
factors that influence companies to disclose environmental accountable for any decisions (particularly the decision
56 Jurnal Pengurusan 32
to responsible and disclose the environmental information) development. The research methodology is justified next
made by the management to serve for the best interest of and finally the findings and discussions are presented.
the shareholders. Finally, the paper concluded with the discussion of the
Apart from the traditional approach of accountability result as well as the limitation and contribution of this
in the context of corporate governance, sustainability study.
reporting concerning the societal and environmental
implication has also emerged even it is mostly on voluntary
(Kolk 2006). The proper report of environmental LITERATURE REVIEW
performance is now gaining significant interest in the
business community and being debated within the ENVIRONMENTAL ISSUES IN MALAYSIA
accounting profession and authoritative bodies (Rezaee,
Szendi & Aggarwal 1995). As the number of potential The rapid development in economic growth and
readers which include the internal and external globalisation has caused serious environmental challenges
stakeholders, has increase, the transparency of the reports in Malaysia. The vital environmental issues are air and
should be assured and reliable. The issues on the nature water pollution, solid waste, water and wastewater
of accountability and the extent to which sustainability management. Al-Amin, Siwar, Jaafar and Mazumder (2007)
reporting can improve the accountability have been raised found that, in 2020, the emission of industry and
and debated (Livesey & Kearins 2002) proving its manufacturing sector will increase which indicate an
importance. With this development, it seems that alarming rate to unseating for sustainable economy. This
sustainability, specifically the environmental concern and situation is resulted from the economic growth and high
corporate governance need to be converged for better degree of openness which indicate that the economy is
reporting. In essence, good corporate governance requires very sensitive to the globalisation process. Perry and
consideration of the impact a corporation has on the wider Sanjeev Singh (2001) revealed that among the
community and the environment (Andrew 2003). environmental issues in Malaysia include over-logging of
The key motivation of this study is to examine whether primary forest, air and water pollution, and the dumping of
the good corporate governance practices is significant in hazardous waste.
explaining the environmental responsibility of companies Malaysian Government is also concerns and focuses
in Malaysia. Fulfilling the best practice of corporate on environmental aspects in 9th Malaysia Plan (2006-2010).
governance and voluntarily reporting on the environment The Government has a responsibility to ensure there is a
are manifestation of these two distinct but interrelated balance between development and environmental
spheres of performance. In fact, the concept of sustainable sustainability. Therefore, the government will step up
development introduced by the Brundtland Report in 1987 enforcement and increase preventive measures (Ahmad
demands the companies not only to be financially sound, Badawi 2005). Furthermore, in the 2006 budget, a sum of
but also socially and environmentally accountable to RM1.9 billion is allocated for the implementation of
assure that the rights of future generations are not environmental preservation projects. Out of this, RM40
compromised (Huizing & Dekker 1992). Additionally, to million is provided to prevent erosion of coastal areas,
the best of our knowledge, there is no other study yet has while RM370 million is allocated for drainage and flood
tried to link corporate governance and environmental mitigation nationwide, RM114 million for improvement of
performance. It is expected that companies which comply rivers and river estuaries, RM991 million for repairing the
with corporate governance practices will have higher existing sewerage plants and construction of new plant.
tendencies to be more environmentally responsible. In fact, While, RM 363 million is allocated for solid waste
previous studies especially on the voluntary reporting management program (Ahmad Badawi 2006).
practices provided evidence that companies with certain The management of the company needs to realise the
characteristics of good corporate governance disclose importance of social responsibility, specifically issues with
more voluntary information than their counterparts (Eng regards to environmental concern. The board members
& Mak 2003; Mohd Nasir & Abdullah 2004). and executives regarded themselves as having a great
Therefore, this study attempts to achieve the following influence on the environmental performance of the
objectives: company (Cahill & Engelman 1993). Previous study found
that, environmental information is useful and influenced
(1) To examine the existence, quantity and quality of users in their decision making (Deegan & Rankin 1999).
environmental reporting among the Malaysian This will lead to environmental reporting as an instrument
companies, and to respond and act as written evidence on the issue.
(2) To identify any associations between corporate
governance characteristics and the existence, ROLE OF ENVIRONMENTAL REPORTING TO
quantity and quality of environmental reporting ENSURE THE SUSTAINABILITY
The remainder of this paper is organised as follows. The publishing of environmental reports has become an
The subsequent section will provides a literature review important way for companies to communicate relevant
followed by theoretical framework and hypothesis environmental issue to various stakeholders and one way
Corporate Governance Practices and Environmental Reporting of Companies in Malaysia 57
which the company can demonstrate their responsibilities The Finance Committee on Corporate Governance
(O’Donovon 2002; Parker 1986). The use of environmental (FCCG) of the Securities Commission introduced the MCCG
reporting also signals the organisation’s environmental in 2000. Paragraph XVII of this part suggests that the board
commitment to customers, shareholders and the public. of directors seeks and assesses information that goes
Therefore, it will allow the society to understand better beyond financial performance of the company, including
the full implications of corporate activity. In addition, environmental performance. Additionally, Paragraph 10 of
environmental reporting provides additional information FRS 101 – Presentation of Financial Statements
to potential investors in order to make investment decision encourages business entities to prepare environmental
(Hood & Nicholl 2002). reports to supplement the financial statements. Meanwhile,
Environmental reporting also acts as an internal agent FRS 137 –Provisions, Contingent Liabilities and
of of change. It helps companies to illuminate weaknesses, Contingent Assets which was issued in 2001 provides
opportunities and set new goals. Additionally, it allowed explicit examples on environmental contingent liabilities
comprehensive assessment of all corporate resources and in the Appendix 4 of such standard.
impacts (Parker 1986). Therefore, it can be used to measure Moreover, the ACCA with the collaboration of the
effectiveness of corporate environmental programmes and Malaysian Department of Environment (DOE) published
highlight areas of the business that are not managing the the “Environmental Reporting Guidelines for Malaysian
environmental impact well (Hood & Nicholl 2002). Companies” in March, 2003. This explains what
In addition, environmental reporting acts as an environmental reporting is and provides an overview of
important tool in involving and educating the employees its evolution over the last 12 years. It also contains
on environmental issues (Hood & Nicholl 2002). Perhaps guidance on what environmental reports might contain,
more important, environmental disclosure is a source of drawing from best practice guidelines and using selected
documented evidence that can be used by external parties examples from published environmental reports of a number
to evaluate company performance. The ability of the of large companies from around the world.
company to demonstrate good environmental management Another recent development relates to the
via environmental reporting would promote reputational introduction of two environmental reporting awards,
advantages (Hood & Nicholl 2002; O’Donovon 2002). namely the National Annual Corporate Report Awards
The most important, environmental reporting can be (NACRA) which includes a category on environmental
used as a tool to legitimize companies’ existence in the reporting in 2000, and the Malaysian Environmental
society (Jaffar & Buniamin 2004; Nik Ahmad & Sulaiman Reporting Awards (MERA) by ACCA in 2002. In 2004, MERA
2004). This is consistent with legitimacy theory; imply was replaced by the Malaysian Social and Environmental
that companies need to appear to have a goal, which are Reporting Awards (MESRA), with the inclusion of social
congruent with those of the society at large (O’Donovon disclosure in the award.
2002; Nik Ahmad & Sulaiman 2004). In Malaysia, legitimacy Meanwhile, the proper report of environmental cost
theory suggests that firms will take steps to ensure that and obligation is now gaining significant interest in the
their activities and performance are acceptable to society business community as it has been debated within the
(Nik Ahmad & Sulaiman 2004). Furthermore, most accounting profession and authoritative bodies (Rezaee
companies in Malaysia used environmental disclosure not et al. 1995). Environmental cost and obligation will continue
only to portray an environmental and social responsibility to grow in line with the consciousness of society,
(Thompson & Zakaria 2004) but used it to enhance the government regulation and corporation towards the
image and reputation of the companies (Hood & Nicholl environmental concerns (Rezaee et al. 1995).
2002; Jaffar & Buniamin 2004; Nik Ahmad & Sulaiman 2004; In Malaysia, currently, there is no statutory
O’Donovon 2002). As a result, environmental disclosure requirement in Malaysia that require public listed
can offer a financial benefit to the business (Yusoff, Yatim companies to disclose environmental information to public
& Mohd Nasir 2004). (Jaffar & Buniamin 2004). This situation explains the small
percentage of Malaysian public listed companies that
DEVELOPMENT OF ENVIRONMENTAL REPORTING provide environmental reporting in their annual reports
AND CORPORATE GOVERNANCE (Jaffar et al. 2002; Thompson 2002). Therefore the
disclosure of environmental information is on voluntary
Environmental reporting is a voluntary initiative in base.
Malaysia and has only emerged in the last decade or so. Corporate governance issue has become an important
However, there are several reporting recommendations and topic following the 1997 Asian financial crisis (Abdullah
guidelines, with direct and indirect reference to 2001). Issues concerning the role and function of regulators
environmental information have been issued. These and the need for improved disclosure and good corporate
include the financial reporting standards (FRSs) by the governance are among the most issues that generate
Malaysian Accounting Standards Board (MASB), the analysis and debates by public. This occurred since the
Malaysian Code on Corporate Governance (MCCG), and crisis brought to the foreground the weak corporate
the Association of Chartered Certified Accountant’s governance practices which include lack of transparency,
(ACCA) Environmental Reporting Guidelines. disclosure and accountability (Khoo 2003).
To overcome some of these problems, in 1997, the called agent, to perform some services on their behalf,
Financial Reporting Act was introduced and the Malaysian where some power of decision making are delegated to
Accounting Standards established as the sole authority the agent (Jensen & Meckling 1976). In corporate world,
to issue accounting standards. All companies must comply principal is the shareholders who are the owners of the
with the mandatory standards. Then, in March 1998, in company, whereas the management of the company
order to enhance the standards of corporate governance, represents the agent.
the Malaysian Government announced the foundation of Kelton and Yang (2008) stated that agency problem
High Existence Finance Committee that would look into arise due to the conflicts of interest between shareholders
establishing a framework for corporate governance and and managers. This can occur when the agent fails to act
setting best practices for business. Another step in in the best interest of principal and the effect may be
creating good corporate governance was created in the reflected in the company’s share price (Brennan, 1995). As
same month when the Registrar of Companies (ROC) the parties within the internal organisation, management
together with few professional bodies formed an entity has the upper hand over the shareholders pertaining to
known as Malaysian Institute of Corporate Governance access to information. Therefore, agency theory suggests
(MICG). The functions of this entity are to promote and voluntary disclosure as a mean to mitigate the divergent
encourage corporate governance development, provide interests between shareholders and the corporate
education and training for the benefits of its members and managers, while at the same time make an attempt to
other interested institutions in Malaysia Apart from that, discipline poor management. In addition, to safeguard the
the ROC had also introduced a Corporate Governance interests of the shareholders, board of directors is
Award in conjunction with its 100 years celebration (Abdul appointed through an election during the annual general
Shukor 2001). meeting. Thus, the role of the board of directors is
In November 1998, Malaysia partnered with the World imperative to counter ‘managerial opportunistic’ behaviour,
Bank and the Asian Development bank in coordinating which include taking action for their own personal interests
the Asia-Pacific Economic (APEC) forum to find ways to at the expense of the shareholders interests (Donaldson
improve corporate governance. Then in March 1999, High & Davis 1991). In this scenario, the corporate governance
Existence Finance Committee published a report on framework in which board of directors serves as an effective
Corporate Governance that laid the groundwork for tool in meeting the expectations and needs of the
drafting the Malaysian Code of Corporate Governance. shareholders that is defined as the “accountability to the
The Committee has made some recommendations in order shareholders” is vital.
to restore the confidence of investors and overseas markets Apart from more attention is focused on the
in the Malaysian capital markets. Then, in order to achieve environmental problems being paid by the government
better corporate governance, substantial reforms have also and mass media, board of directors may be interested in
been introduced, particularly the amendments to the the “accountability to the environment” through
Securities Industries Act, the Securities Commission and environmental preservation activities. Thus they chose
the listing rules of the Bursa Malaysia. to report such information due to several reasons. Firstly,
The role of corporate governance is to provide as highlighted in the literature review, the best practice of
guidance for the boards of listed companies by clarifying corporate governance as laid down in MCCG urges the
their responsibilities and providing prescriptions of control board of directors to monitor environmental performance
exercised by boards over their companies. The Finance of the company ( FCCG 2000). By observing a mere
Committee has agreed on the need to adopt international voluntary recommendation, it may shed some lights on
standards of best practice in developing the Code. The the public about the company’s determination to practice
Malaysian Code is modelled based on the good corporate governance and boost the shareholders
recommendations of UK Hampel Committee. The Code confidence in their investment security.
outlines a definition of corporate governance and set out Secondly, not only good environmental record may
four forms of recommendations and the compliance hinder companies from unnecessary non-compliance
responsibilities for the recommendations. costs, but also it may lead to a better longer term financial
and economic performance (Clarkson et al. 2006; Earnhart
& Lizal 2007) and thus this is consistent with the
THEORETICAL FRAMEWORK AND shareholders’ wealth maximisation goal. In contrast,
HYPOTHESES DEVELOPMENT management may have different opinion as environmental
activities requires sizeable amount of investment. This may
AGENCY THEORY be seen as an unattractive in the short run as profit may
slump (Connely & Limpaphayom 2004) and so does the
The study is founded on the proposition of agency theory, management compensation. Therefore, to ensure the board
the theoretical framework most often used by researchers of directors’ function effectively, several essential
to understand the relationship between the board attributes are proposed by the corporate governance
characteristics and firm value (Carter et al. 2003). It involves scholars and some of them are summarised in Figure 1.
a contract under which the principal engages another party,
CORPORATE GOVERNANCE
Board independence
CEO Duality ENVIRONMENTAL

REPORTING
Management Ownership
• Existence
Board size • Quantity
• Quality
Financial expertise
Frequency of board meeting
FIGURE 1. Essential attributes of corporate governance that lead to environmental reporting
Figure 1 lists board independence, CEO duality, board members, two of them are required to be
management ownership, board size, financial expert and independent (Bursa Malaysia 2006). In a recent research,
frequency of board meeting as the essential attributes of Haniffa and Cooke (2005) found that the composition of
corporate governance. The conceptual framework of the non-executive directors (i.e. independent) is significantly
study is completed with environmental reporting as the and positively related to corporate social disclosure.
dependent variable. Environmental reporting is determined Meanwhile, other research on voluntary disclosures
by a particular company disclosing some form of found mixed results. Those who found significant
environmental information in its annual report. To achieve positive association include Cheng and Courtenay (2004),
this, the study uses the checklist and decision rules Fama and Jensen (1983), Ho and Wong (2001), and Mohd
developed and used by Hackston and Milne (1996), Nasir and Abdullah (2004). On the other hand, Barako,
Williams and Ho (1999) and Deegan et al. (2002). In Hancock and Izan (2006), Eng and Mak (2003) as well as
particular, we expect that certain corporate governance Gul and Leung (2004) have found negative association.
attributes may lead companies to report on the Thus, our hypotheses, on the basis of agency theory are
environment. The following paragraphs discuss the stated as follows:
hypotheses development.
H1A: There is a significant association between board
independence and the existence of environmental
BOARD INDEPENDENCE
reporting.
According to Weir and Laing (2001), the board of directors H1B: There is a significant association between board
is responsible for the day-to-day management of the independence and the quantity of environmental
company and has a direct responsibility to formulate and reporting.
implement corporate strategy. The board, which comprises H1C: There is a significant association between board
of a number of independent directors, has a greater independence and the quality of environmental
monitoring and controlling ability over management (Fama reporting.
& Jensen 1983). The state of “independence” is met when
a director inter alia is neither holding significant ownership CEO DUALITY
nor holding any executive position in the company (Bursa
Nelson (1998) and Zairi (2000) stressed the importance of
Malaysia 2006). It is expected that since these independent
leadership in ensuring the success of social responsibility
directors are supposed to represent the interests of other
endeavours. According to them, companies that are
stakeholders, they will have more influence on
successful in integrating the CSR into their management
environmental reporting (Haniffa & Cooke 2005).
systems shared four characteristics, namely, value-based
Furthermore, since the involvement in social activities may
transformational leadership, cross-boundary learning,
enhance one’s prestige and honour in society, they will be
stakeholder linkages and performance levers. Similarly,
more interested to do so in order to satisfy the social
Adams (2002) incorporated the ‘internal context’ as one of
responsibility of the firm (Zahra & Stanton 1988).
the factors that influence corporate social and ethical
In Malaysia, the MCCG proposes that the composition
reporting, which includes inter alia the identity of the
of the board of directors comprises one-third independent
chair. Hence, the role of the CEO in guiding the organisation
members (FCCG 2000). In fact, it became a requirement
towards achieving social and environmental objectives is
that must be met by Malaysian companies that are listed
extremely significant.
on Bursa Malaysia. However, if a company has only three
In corporate governance literature, a separation of ownership has a positive and significant association with
CEO roles from the roles of the chairman is needed to ensure voluntary disclosure. A similar association was also found
the independence of the board of directors (Chaganti, if the percentage of shares held by the largest shareholders
Mahajan & Sharma 1985). It is believed that if the CEO is considered (Haniffa & Cooke 2002). In contrast, there
holds the chairman position, a state called “CEO duality” are also studies that found either insignificant (Halme &
will occur and his/her influence may reduce the Huse 1997; Leung & Horwitz 2004; Nagar et al. 2003) or
effectiveness of the board of directors in monitoring the negative associations (Hossain, Tan & Adams 1994; Leung
management (Agrawal & Chadha 2003). In fact, this is one & Horwitz 2004). Therefore, based on the agency theory,
of the problems described by Haniffa and Cooke (2002) as it is reasonable to come up with the following hypotheses:
‘dominant personality phenomenon,’ which is increasingly
H3A: There is a significant association between
receiving considerable concern.
management ownership and the existence of
Haniffa and Cooke (2002) further classified the issue
environmental reporting
in two views. The first view supports the separation of the
H3B: There is a significant association between
two roles to provide checks and balances for the
management ownership and the quantity of
performance of management. While the second view
argues that the separation is not crucial since many
H3C: There is a significant association between
companies are well run even with the roles combined and
management ownership and the quality of
have a strong and capable board for monitoring.
Additionally, the combination of the roles of chairman and
CEO is permitted under MCCG (FCCG 2000). Nevertheless,
BOARD SIZE
the respective companies must make public the reasons
underlying the combination of roles. There is no requirement pertaining to the number of
Previous studies by Forker (1992) found that CEO directors to make up the board but the MCCG asserts that
duality is associated with lower voluntary disclosures and the number of directors is an important factor in the board
it shows that the monitoring function of an individual who of directors’ effectiveness (FCCG 2000). A larger board size
occupies the positions of both the CEO and chairman could may bring a greater number of directors with experience
be compromised. Consistent with the result, Gul and Leung (Xie, Davidson & DaDalt 2001) that may represent a
(2004) found a significant and negative relationship multitude of values (Halme & Huse 1997) on the board. On
between duality and voluntary disclosure. However, on the contrary, Chaganti et al. (1985) claimed that smaller
the other hand, other research such as Barako et al. (2006), boards are manageable and more often play a role as a
Cheng and Courtenay (2004) and Ho and Wong (2001) controlling function whereas larger boards may not be
found insignificant association between duality and able to function effectively as the board leaves the
voluntary disclosure. To be consistent with agency theory, management relatively free.
our hypotheses are as follows: Published studies that linked board size and voluntary
H2A: There is a significant association between role disclosure (including environmental information) are rather
duality and the existence of environmental reporting. lacking. Besides Halme and Huse (1997), which found no
H2B: There is a significant association between the role significant association between the number of board
duality and the quantity of environmental reporting. members and the tendency for companies to report on the
H2C: There is a significant association between the role environment, as well as Cheng and Courtenay (2004),
duality and the quality of environmental reporting. which found a similar result for voluntary disclosure (in
which environmental information is a part of it), other
MANAGEMENT OWNERSHIP studies are almost untraceable. However, there are studies
linking corporate performance (financially) and board size
The MCCG does not specify the ideal level for management (Bonn 2004; Dwivedi & Jain 2005).
ownership. However, managers are more likely than The study by Bonn (2004) found no relationship
shareholders to emphasise corporate social performance between board size and firm performance. She further
and environmental performance because they are not argued that the board size only measures the factual
spending their own money (Graves & Waddock 1994) or number of directors without capturing their task. Hence,
pursuing non-profit goals to secure their position (Wang one could argue that it is the skills and knowledge board
& Coffey 1992). This in turn may improve their reputation brings to the firm is significant but not the number. In
and gain public prestige (Halme & Huse 1997). Therefore, contrast, Dwivedi and Jain (2005), found a positive
it is suggested that the lower the management ownership, relationship although the association was weak. They
the tendency that the company will report on the conclude that larger boards are in a position to improve
environment will be higher. the governance of the company. Fulfilling the proposition
Previous studies found mixed observations of agency theory, we hypothesize that:
concerning the association between ownership structure
H4A: There is a significant relationship between board
and reporting practices. Leung and Horwitz (2004) and
size and the existence of environmental reporting.
Mohd Nasir and Abdullah (2004) found that management
H4B: There is a significant relationship between board size meetings to be held during a year. However, as a rule of
and the quantity of environmental reporting. thumb, the number shall coincide with “the audit cycle
H4C: There is a significant relationship between board size and the timing of the published financial statements” (p.
and the quality of environmental reporting. 40) which suggests a minimum of four times. Generally,
the number of board meeting is positively related with the
FINANCIAL EXPERTISE number of audit committee meeting (Raghunandan & Rama
2007), voluntary disclosure (Karamanou & Vafeas 2005),
Financial expertise is important in dealing with complexities earnings quality (Dey 2008; Vafeas 2000; Xie et al. 2001)
of financial reporting (Kalbers & Fogarty 1993). A director while negatively related with material internal control
with a corporate or financial background may be more weakness (Zhang et al. 2007) and forecast precision
familiar with the ways that earnings can be managed and (Karamanou & Vafeas 2005). Based on the claims of prior
may better understand the implications of earnings research, our hypotheses are:
management (Xie et al. 2001). Furthermore, Agrawal and
Chadha (2003) and Park and Shin (2004) asserted that the H6A: There is a significant relationship between frequency
ability to deter earnings management will be greater when of board meeting and the existence of environmental
independent members have accounting or finance reporting.
expertise. With the exception of the studies by Agrawal H6B: There is a significant relationship between frequency
and Chadha (2003), Park and Shin (2004) and Xie et al. of board meeting and the quantity of environmental
(2001), there is lack of research that focuses on board reporting.
expertise. Most of the studies focused on audit committee H6C: There is a significant relationship between frequency
expertise since it falls within the recommendation of of board meeting and the quality of environmental
corporate governance guidelines, in particular, Blue reporting.
Ribbon Committee.
Findings on the audit committee suggested that
financial expertise is less associated with material internal METHODOLOGY
control weakness (Krishnan 2005; Zhang, Zhou & Zhou
2007), occurrence and/or lower extent of earnings DATA
management (Abbot et al. 2004; Bedard, Chtourou &
The empirical test was based on a sample of Listed
Courteau 2004; Xie et al. 2001), financial statement fraud
Companies at Main Board for the year 2005. Data were
(Abbott et al. 2000). Also, audit committee members with
extracted from the annual reports of these companies
financial reporting and auditing knowledge are more likely
through the website provided by Bursa Malaysia
to understand auditor judgments and support the auditor
(www.bursamalaysia.com.). All financial firms are excluded
in auditor-management disputes, to address and detect
as these sectors are additionally governed by certain rules
material misstatements (DeZoort & Salterio 2001;
and procedures from regulatory bodies such as BNM and
Karamanou & Vafeas 2005), to conduct frequent meetings
Ministry of Finance. Furthermore, the operations of these
(Raghunandan & Rama 2007), to engage in voluntary
companies are deemed to have less impact to the
disclosure (Karamanou & Vafeas 2005; Kelton & Yang
environment (Frost & Wilmshurst 2000; Wilmshurst &
2008) and to have higher quality of disclosure (Felo,
Frost 2000) and as such increase the likelihood of non-
Krishnamurthy & Solieri 2003; Mangena & Pike 2005).
reporting incidence (ACCA 2002, 2004; Ahmad et al. 2003).
Thus, considering the possible impact of financial expertise
The final sample consists of 243 companies that were
on environmental reporting and by adopting the definition
randomly selected using the random number generator
of financial expertise as per Bursa Malaysia Listing
available in Excel. This sample represents 41 percent of
Requirements (Para 15.10), we hypothesize that:
the remaining population and it is consistent with the
H5A: There is a significant relationship between financial minimum sample size as suggested by either conventional
expertise and the existence of environmental sample size table proposed by Krejcie and Morgan (1970,
reporting. as cited in Sekaran 2003: 294) or modern online sample size
H5B: There is a significant relationship between financial calculator by Raosoft, Inc. Data is extracted using the
expertise and the quantity of environmental content analysis method from the annual reports of these
reporting. companies for the year 2005.
H5C: There is a significant relationship between financial
expertise and the quality of environmental reporting. CONTENT ANALYSIS
FREQUENCY OF BOARD MEETING The environmental reporting practices of the sample

companies were assessed based on a content analysis of
Frequent board meetings suggest a more active board the annual reports. Content analysis refers to “a research
(Raghunandan & Rama 2007) which is more effective in technique for making replicable and valid inferences from
monitoring the management. Malaysian Code on Corporate data to their context” (Krippendorf 1980). Annual report is
Governance (2000) let companies decide on the number of selected as the document to be analysed, among other
things, are due to its greater accessibility to the researchers Governance states that if the roles of the board chairman
(Gray, Kouhny & Lavers 1995; Unerman 2000; Wilmshurst and the CEO are combined, a strong independent element
& Frost 2000) and the fact that in Malaysia, there are not on the board must exist and the decision to combine these
many companies that produce a stand-alone environmental roles must be publicly explained. We assign CEO duality
report (ACCA 2002). to take the value of ‘1’ when the firm has a CEO who is also
serving as the chairman, and ‘0’ otherwise.
MEASUREMENT OF VARIABLES The main objective of corporate governance is to
separate ownership and control (Palenzuela, Lara &
The dependent variable (environmental disclosure) Hurtado 2003). It is believed that, director who holds a
comprises of three different stages in environmental sizeable ownership in the firms is more likely to question
reporting (i.e. existence, quantity and quality). The and challenge management’s proposals because his or
existence of reporting determines whether a particular her decision will impact his or her own wealth (Paton &
company is disclosing some forms of environmental Baker 1987). Naturally, a director in this position will less
information in its annual report. A company that reports likely to support actions that would reduce their wealth
the information is coded as ‘1’ and if non-disclosed it is .
(Chtorou, Bedard & Courteau 2001). For the purpose of
coded as ‘0’. the study, management ownership is measured as directors
Meanwhile, the quantity of reporting is based on the direct equities divided by total voting equity outstanding.
number of sentences since sentences can be used to In this study, the size of the board of directors is
convey meaning and thus, are likely to provide more reliable based on the number of members. The number of directors
measures (Hackston & Milne 1996) than other is an important factor in determining the effectiveness of
measurement units such as number of words and the board. According to Chaganti et al. (1985) board size
proportions of a page. has various implications on how the board functions. A
Finally, the quality of reporting is assessed from the smaller board is manageable and more often, it plays a role
Disclosure Scores (DS) derived from an index developed as controlling function. Whereas a larger board may not
by Alrazi (2005). This index developed based on a review be able to function effectively as the board leaving the
of various scoring systems including the adjudication management relatively free. Even though larger board is
criteria used in the Association of Chartered Certified difficult to manage, it may be valuable for the breadth of
Accountants’ Malaysian Environmental and Social services as it would add diversity of experience of the
Reporting Awards (ACCA’s MESRA) and the National boards (Xie et al. 2001). Apart from that, larger board
Annual Corporate Report Awards on Environmental provides better environmental links and more expertise
Reporting (NACRA-ER). (Chtorou et al. 2001). Thus board size is significant
The Malaysian Code of Corporate Governance has attribute that affect the board function and eventually the
emphasised that the key for the good corporate corporate performance.
governance is through well balanced of director’s Board of directors’ competency in term of accounting
composition. It is important as it will bring to more effective and financial knowledge has received widespread
of its monitoring function. A well balanced of composition attention from media and regulators (Agrawal & Chadha
refers to the composition that should not be controlled by 2003). The Cadbury report 1992 emphasizes that the non
a particular group of people that could compromise its executive directors’ competency is an important factor to
independence in its conduct (Abdullah 2001). ensure the effectiveness of board monitoring. Among
Independence according to Malaysian Codes of Corporate others, directors should have knowledge on managing
Governance means that the board should consist of company and corporate governance processes (Chtourou
members who are independence of both, the management et al. 2001). Directors with corporate and finance
and the significant shareholder. Therefore, the Codes background tend to have better understanding on financial
stressed that at least 1/3 of the board should be non- reporting as compared to those who do not have that
executive who are independent. Non executive directors knowledge (Xie et al. 2001). Members with no experience
are defined as directors who are not affiliated with the in accounting and finance are less likely to detect problems
management. Thus the extent of a board’s independence in financial reporting. This is consistent with Xie et al.
is measured by the number of non executive directors to (2001) who found that the relationship between
the number of directors on board. experienced board of director (directors with corporate
Duality refers to a position, where one person carries and finance background), with earnings management is
on the duties as a chairman and CEO simultaneously. The low. Similarly, Agrawal and Chadha (2003) indicate that
board is consider not effective and independent if the the probability of earnings manipulation is low for firms
board chairman is also the CEO of the company as conflict with board of directors who have knowledge in accounting
of interests will arise and it bring to domination of decision and finance. Therefore for effective monitoring, by the
making by a single person. Thus, there should be a clear end 2003, all major U.S stock markets required that at least
separation of roles between the board chairman who leads one member of the audit committee must have financial
the company and CEO who runs the company (Abdullah, expertise. Malaysian Code of corporate governance has
2001). However, the Malaysian Codes of Corporate also emphasised the same criteria where all members of
audit committee should be financially literate and at least FINDINGS AND DISCUSSION
one of them should be a member of an accounting
association or body. Thus, for the purpose of the study, Table 1 describes the industry representation based on
directors’ competency is measured by giving a score of ‘1’ Bursa Malaysia’s industrial classification. The companies
if the firm has at least one director who has professional in our sample are representatives of various sectors, with
qualification and 0 otherwise. considerable numbers are from industrial products sector
The frequency of meeting is measured from the total (30%), followed by trading/services sector (22%) and
of meetings that was held by the board of directors in the properties sector (19%). None of the companies is from
particular year. According to Xie et al. (2001), audit the mining sector and in fact, there is only one company
committees who are more active will lead to more effective from that sector was listed on the Board as of the cut-off
monitoring. Audit committee that meets more often is more date. Since the sample selection method is based on the
likely to detect problems and monitor the issues in financial random-sampling, such exclusion is considered as
reporting. A study by Chtourou et al. (2001) has found insignificant.
that independent directors do not seem to be sufficient to
ensure the effectiveness of its function. The results proved TABLE 1. Industry representation
that the members must also be active for better monitoring.
Meanwhile, the control variables are the company No Industry Number %
size and industry. These two variables are consistently 1 Industrial Products 73 30
found to be related to the level and extent of disclosure 2 Trading/Services 53 22
(Wilmshurst & Frost 2000; Cormier & Magnan 2003; 3 Properties 47 19
Campbell 2004). Company size is measured by total assets. 4 Consumer Products 28 12
Previous studies that used total assets as a proxy for size 5 Construction 17 7
include Ahmad, Hassan and Mohammad (2003), Cormier 6 Plantation 14 6
and Magnan (2003), and Jaffar et al. (2002). As for industry, 7 Technology 7 3
8 Infrastructure Project Companies 2 1
the companies are divided into two: high environmentally
9 Hotel 1 0
sensitive and low environmentally sensitive. This involves
10 Trusts 1 0
reviewing the works of previous researchers (see for
Total 243 100
example, Wilmshurst & Frost 2000) and also a report issued
by the Department of Environment, Malaysia (DOE 2002).
Thus, companies regarded as highly environmentally DESCRIPTIVE ANALYSIS OF THE
sensitive are involved in the following operations – mining, ENVIRONMENTAL REPORTING
chemicals, transportation, oil and gas, wood and timber,
utilities, agriculture, construction and properties, and Table 2 reports the findings on the number of reporting
manufacturing. For diversified companies, they are companies according to the industrial classification. An
classified as highly environmentally sensitive if 51 percent analysis of the sample annual reports revealed that 68 out
of their revenue is derived from these nine operations of 243 reports contained some form of environmental
(Lemon & Cahan 1997). information. It is evident that there is an improvement in
TABLE 2. Distribution of reporting companies
Frequency Environmental Section

No Industry Number Per Reporting Number Per Reporting
Co. (%) Co. (%)
1 Industrial Products 19 28 4 21.05
2 Trading/Services 19 26 3 15.79
3 Properties 10 15 2 20
4 Consumer Products 6 8 0 0
5 Construction 4 7 1 25
6 Plantation 8 13 4 50
7 Technology 1 1 0 0
8 Infrastructure Project Companies 1 1 1 100
9 Hotel 0 0 0 0
10 Trusts 0 0 0 0
Total 68 28* 15 6.2**
* Number of reporting companies divided by total reporting companies (i.e. 68/243).
* * Number of reporting companies that provide environmental section divided by sample (i.e. 15/243).
number of reporting companies from 13% in 1999 as Table 3 provides a summary of the findings on the
reported by Ahmad et al. (2003) to 28% in 2005. Data “quantity” and “quality” of the environmental information
presented in Table 3 demonstrates that among the ten reported by the sample companies according to the
sectors, industrial products comprise has the highest industry. In total, these 68 companies provided 1,142
percentage among the companies (28%) that voluntarily sentences with an average 4.70 sentences. The highest
report environmental information followed by trading/ number of sentences disclosed in plantation industry was
services (26%), properties (15%) and plantation (13%). Of 362, and the lowest number of sentences disclosed is 1. It
these 10 sectors, the companies in hotel and trust sectors was also observed that the highest disclosure score is
did not provide any environmental information in their reported by the industrial product industry with 233 score
annual reports. In exploring further, only 15 out of 243 and the average for each company is 3.24%. Based on the
companies (6.2%) reported the environmental information results, it was suggested that the environmental reporting
in a separate environmental section in the annual report. in Malaysia is still at its infancy stage.
TABLE 3. Quantity and quality of environmental information
Quantity (Sentences) Quality (Disclosure Score)

No Industry Total Average/ Total Average/
industry industry
1 Industrial Products 306 4.19 232.96 3.19
2 Trading/Services 176 3.32 184.26 3.48
3 Properties 110 2.34 107.43 2.29
4 Consumer Products 33 1.18 30.85 1.10
5 Construction 43 2.53 45.75 2.69
6 Plantation 362 25.86 141.46 10.10
7 Technology 1 0.14 6.38 0.91
8 Infrastructure Project Companies 111 55.50 37.23 18.62
9 Hotel 0 0.00 0 0.00
10 Trusts 0 0.00 0 0.00
Total 1142 4.70* 786.32 3.24**
* Total sentences divided by sample.
** Total disclosure score divided by sample.
The analyses on number of sentences based on meeting.” It is also observed that 59 companies (24%) are
industry show that three industries, namely, infrastructure classified as high environmentally sensitive. On average,
project companies, plantation and industrial products the sample companies have eight members in their board
reported the highest average environmental sentences of directors. Forty percent of them are independent from
(55.5, 25.86 and 4.19 sentences respectively). It is the management and have significant ownership. A further
significant to note that the highest scoring for quality is analysis shows that there are 40 companies (16%) which
consistent with the result for “quantity” with the exception do not meet the requirements of the Bursa Malaysia listing
of the third highest scoring industry that is trading/ requirement that is to have at least two or one-third
services. Nevertheless, this should be interpreted with (whichever is higher) of the board members to be
caution since the infrastructure project companies industry independent. In fact, one of these companies does not
is represented by only 2 companies in the sample. Besides, have any independent member. Additionally, the
a closer look on the result suggests that the company management holds an insignificant direct shareholding in
with highest “quantity” is from the plantation industry the companies with an average of 8%. The statistics on
(i.e. Golden Hope Plantations Bhd), while the highest for board characteristics reveals that the CEO serves as
“quality” is from the industrial products industry (i.e. Shell chairman of the board for 11.5% (28) of our sample.
Refining Company (F.O.M.) Berhad). Table 4 presents the finding of descriptive statistic
relating to the continuous variables. All continuous
DESCRIPTIVE STATISTICS variables are not normally distributed as indicated by the
non-parametric Komolgrov-Smirnov normality test. In
This study aims to identify the association between essence, significance level of less than 0.05 indicates non-
corporate governance practices (if any) with the existence, normality (De Vaus 2002). Therefore, the variables are
“quantity” and “quality” of environmental information transformed to normal scores before conducting the
disclosure. Our study utilised six mostly cited important regression analysis since one of the requirements of linear
corporate governance characteristics, namely, “board regression is for the data to be normally distributed (Field
independence,” “CEO duality,” “management ownership,” 2000).
“board size,” “financial expert” and “frequency of board
TABLE 4. Descriptive statistics for the continuous variables
ENVQTY ENVQLTY BInd MOwn BSize ΣAssets FE MF

Mean 4.700 3.236 40.187 8.411 7.810 1608611363 21.2391 5.5267
Std. Dev. 19.766 7.863 11.302 13.451 2.039 5258385837 12.89713 2.42113
Min. 0.000 0.000 0.000 0.000 3.000 1697524 0.00 2.00
Max. 246.000 54.260 83.330 58.550 15.000 63438200000 83.33 21.00
Skewness 8.844 3.380 0.650 1.930 0.513 8.776 0.901 3.063
Kurtosis 96.735 13.412 1.139 2.916 0.540 90.889 1.683 12.691
K-S test 6.329* 5.921* 2.252* 4.145* 1.875* 5.923* 1.870** 4.341**
* Significance at 0.01; K-S with significance <.05, hence data not normally distributed.
CORRELATION ANALYSIS between total assets with board independence and

meeting frequency. On the other hand, management
Table 5 presents the result of the Pearson correlation ownership is negatively associated with total asset and
analysis based on the linear regression used in the study. financial expert. However, none of the associations are
Based on the table, we find that board size has significantly having coefficient correlation of greater than 0.80, a
negative relationship with board independence, CEO situation which indicates no serious multicollinearity
duality and environmental sensitivity, while positive problem exists (Cooper & Schindler 2003; Field 2000).
relationship is found with total assets and meeting
frequency. Significant positive association is also evident
TABLE 5. Pearson correlations
BInd CEODual MOwn BSize ΣAssets EnvSen FE MF

BInd 1.00 .084 -.114 -.198** .165** .005 -.024 -.045
CEODual .084 1.00 .070 -.128* -.079 -.036 -.105 -.046
MOwn -.114 .070 1.00 -.072 -.216** .066 -.148* -.125
BSize -.198** -.128* -.072 1.00 .256** -.168** -.102 .139*
ΣAssets .165** -.079 -.216** .256** 1.00 -.077 .110 .135*
EnvSen .005 -.036 .066 -.168** -.077 1.00 -.084 -.037
FE -.024 -.105 -.148* -.102 .110 -.084 1.000 .090
MF -.045 -.046 -.125 .139* .135* -.037 -.125 1.000
* Significance at 0.05 level.
** Significance at 0.01 level.
REGRESSION ANALYSIS The results of the logistic regression are presented in

Table 6. The reported pseudo- R2, namely Cox & Snell R2
Logistic regression is used to test the relationship between and Nagelkerke R2 are 0.134 and 0.193, respectively. These
the existence of environmental information in annual results show that the model is significant and qualify for
reports and the corporate governance attributes. The use further assessment. As highlighted in Table 7, only “board
of this analysis is considered appropriate for this study as size” proves to be the interrelated corporate governance
the dependent variable (i.e. “existence”) is a dummy factor that influences the “existence” of environmental
variable (de Vaus 2002; Field 2000). Code “1” is used to reporting.
classify companies that do have environmental reporting The multiple regressions are used in assessing the
and “0” for companies that do not report any “relationship between the quantity” and “quality” of the
environmental information in the annual report. The environmental reporting and corporate governance
normality test is not necessary for logistic regression since characteristics. Prior to performing the regression analysis,
the test can be run even though the data is not normally sensitivity analysis is conducted to assess the stability of
distributed (Tabachnick & Fidell 2001). For data goodness the results. Initially, the linear regression is run using
of fit, the Hosmer Lemeshow test is used to determine any dependent variable and continuous independent variables
significant difference between predicted value and the which is transformed using natural log. The findings
model. According to Field (2000), the insignificant value however are considered unreliable and cannot be justified
of chi square shows that the model is significantly as the value of ANOVA is not significant. Alternatively, we
indifferent with the data tested. Based on the Hosmer transform the variables into rank scores except for total
Lemeshow test, the chi square value for this data is asset which uses natural log scores. Among other previous
insignificant (6.583). This result is also supported by a studies which used rank scores include Wallace, Naser
classification accuracy rate of 74.1%. and Mora (1994) and Wallace and Naser (1995).
TABLE 6. Logistic regression result using “existence” as the dependent variable
Variables Coefficient Wald Statistics p-value

Constant -7.191 7.259 0.007
BSize 0.468 6.854 0.009
BInd 0.239 1.992 0.158
CEODua 0.029 0.003 0.955
MOwnership -0.308 2.969 0.085
FE 0.141 0.709 0.400
MF 0.107 0.404 0.525
ΣAssets 0.315 5.806 0.016
EnvSen -1.015 6.203 0.013
Cox and Snell R2 0.134
Nagelkerke R2 0.193
Tables 7 present the result from the multiple with F-ratio of 5.547. Inspection of Table 8 also indicates
regressions in assessing the “quantity” of environmental that “board size” is significantly associated with the
reporting. In Table 8, the value of R2 is 0.159 which indicates “quantity” of environmental reporting. Additionally,
that the variables used in the study account for 15.9% of “management ownership” also found to be significant
the variability in the extent of environmental reporting. factor in determining the “quantity” of environmental
More importantly, the model is significant at 0.01 levels information provided by the companies.
TABLE 7. Multiple regression results using “quantity” of disclosure as the dependent variable
Variables Coefficient Value t-statistics Sig-t

Intercept -2.356 -3.430 0.001
BSize 0.125 2.432 0.016
BInd .048 1.000 0.318
CEODua -.0.050 -0.351 0.726
MOwnership -0.122 -2.508 0.013
FE 0.037 0.762 0.447
MF 0.020 0.414 0.679
ΣAssets .111 3.281 0.001
EnvSen .280 2.628 0.009
R2 = .159, F-statistic = 5.547, p = .000
Table 8 depicts the multiple regression results, which role in agency framework is to resolve the agency problem
serve to examine the association between corporate with their expertise and experience (Xie et al. 2001).
governance factors and “quality” of environmental However, this study is contrary to the finding of Halme
reporting. In Table 8, the value of R2 is 0.171 which indicates and Huse (1997). This could be because of the difference
that the variables used in the study account for 17.1% of in the date measurement level for independent variable
the variability in the “quality” of environmental whereby the latter used dichotomy of high and low
information disclosure and the model is significant at 0.01 environmental information disclosure.
levels with F-ratio of 6.054. Examination of Table 8 indicates The result for “management ownership” is consistent
two corporate governance variables were found to be with Hossain et al. (1994) and Leung and Horwitz (2004).
significant: “board size” and “management ownership.” The companies with less management shareholding have
Consistent with the study by Byard, Li and Weintrop a tendency to provide more environmental information in
(2006), companies with greater number of board members annual reports and influence the “quality” of
tend to disclose not only more environmental information environmental reporting. As the “management ownership”
in the annual reports but also of higher quality. Byard grows beyond the appropriate level, which means that the
et al. (2006) found that quality of information disclosed ownership becomes concentrated, the control now is
increase with the increase in board size. Thus it supports vested in the management. As asserted by Nagar Nanda
the claim that the greater the number of board members, and Wysocki (2003: 291),
the more expertise was imparted to the company. The result “The proportion of inside ownership affects outside investor
affirms the proposition of agency theory that the board’s demand for disclosure and consequently the need to provide disclosure
TABLE 8. Multiple regression results using “quality” of disclosure as the dependent variable
Variables Coefficient Value t-statistics Sig-t

Intercept -2.362 -3.463 0.001
BSize 0.130 2.565 0.011
BInd 0.055 1.161 0.247
CEODua -0.073 -0.511 0.609
MOwnership -0.126 -2.62 0.009
FE 0.032 0.668 0.505
MF 0.031 0.641 0.522
ΣAssets 0.111 3.305 0.001
EnvSen 0.291 2.750 0.006
R2 = .171, F-statistic = 6.054, p = .000
incentives. For instance, if the managers own 100 percent of the Karamanou and Vafeas (2005). The rationale explanation
firm, outside demand for information is absent” (Nagar et al. 2003: is that, although board is meeting regularly, the effective
291).
monitors of management is influence by other factors such
This study fails to provide evidence on the as external ownership can take the place of board
relationships between remaining four variables, namely monitoring actions and that efficient coordination among
“board independence,” “ CEO duality,” “meeting directors can be attained when boards are greater in
frequency” and “financial expert” with “existence,” number.
“quantity” and “quality” of environmental reporting. The The results for control variables are largely consistent
result for “board independence” is consistent with the with prior studies (Cormier & Gordon 2001; Cormier &
finding of Ho and Wong (2001). According to Barako Magnan 2003; Frost & Wilmshurst 2000; Halme & Huse
et al. (2006), although non-executive directors are 1997; Jaffar et al. 2002). Tables 7 and 8 show that there is
presumed to be independent, in fact they may not be, and a positive relationship between company size and
are therefore, not effective as monitors. In fact, as environmental sensitivity with “existence,” “quantity” and
suggested by MIA (2004), independence may be divided “quality” of environmental reporting. The study revealed
into independence of mind and independence of that large companies and the companies that are classified
appearance. Thus, although the board members appear to as high environmentally sensitive tend to disclose more
be independent, state of mind may be affected by information and also provide higher quality of reporting.
influences that compromise one’s professional judgment It necessitates further investigation in order to
and skepticism, integrity and objectivity. evaluate consistent results in term of association between
Consistent with research conducted by Mohd Ghazali the “quantity and quality” of environmental reporting and
and Weetman (2006) in investigating the relationship corporate governance variables. Thus, correlation tests
between board characteristic and extent of voluntary are performed using both Pearson (for normalised data)
disclosure in annual reports of Malaysian companies as and Spearman’s rank correlation analyses (for non-
well as other studies such as Arcay and Vazquez (2005), normalised data). Both tests showed high correlation
Barako et al. (2006), Cheng and Courtenay (2006) and Ho between the two dependent variables (Pearson = .988;
and Wong (2001), this study did not find any association Spearman = .996) and the correlation is significant at 0.01
between of “CEO duality” and dependent variables. This level. This indicates that companies with greater amount
implies that duality role is less influential in inducing firm of environmental information disclosed higher quality
to report more information on environmental concern. One information.
of the reasons is perhaps the separation may not be crucial
element since many companies are well run even with roles
combined and have strong and capable board for CONCLUSION
monitoring (Haniffa & Cooke 2002). Furthermore, it is also
possible that the duality CEO is also the substantial The main aim of this study is to investigate any possible
shareholder (Mohd Nasir & Abdullah 2004). linkage between corporate governance and environmental
For “financial expert,” the result is consistent with performance proxied to environmental reporting. The issue
Xie et al. (2001). A possible explanation is that, although of whether good governance practices enhance the level
directors with corporate and finance background tend to and quality of environmental reporting is largely
have better understanding on financial reporting as unexplored. This study is crucial since it examines whether
compared to those who do not have that knowledge, they the firms that complied with MCCG provide more
are less likely to encourage management to engage in environmental disclosure. It is important to examine the
environmental reporting and influence the quantity and effectiveness of corporate governance as the monitoring
quality of environmental reporting. The result for “meeting and control mechanism in scrutinizing the activities of
frequency” is consistent with Zhang et al. (2007) and management. This study made a significant contribution
by demonstrating whether the composition and quality of environmental reporting in annual reports. Future research
the board of directors influence managers to disclose more may adopt content analysis to examine the environmental
environmental information. reporting in other media such as web report, stand alone
In relation to the extent of environmental reporting report and press media. Finally, due to the lack of previous
practices among Malaysian companies, the results of this studies (except Halme & Huse 1997; Haniffa & Cooke
study indicate that environmental reporting practices in 2005), this study only utilised a few corporate governance
Malaysia is still low. It is found that only 28% of the variables to be tested on environmental reporting. Further
companies disclosed environmental information in annual studies could consider other variables such as board
report with 6.2% reported in a separate environmental competency. With regard to corporate characteristics, we
section. Additionally, on average, each company reported tested two most significant variables, namely, company
4.70 sentences, while the quality, as measured by the size and environmental sensitivity. This is consistent with
disclosure index shows an average of 3.24. The study also Patten (1991) who asserts that size and industry influence
identifies that only board size and management ownership the level of political cost facing an organisation. Other
are significant in influencing the extent of environmental variables that are not tested but could provide important
reporting. These provide limited evidence to support that, findings include cash flow, leverage and audit firms. This
companies with good corporate governance may also would be the aim of future studies. A continued research
practice better environmental management system. We in this line based on these variables may be essential to
also found that larger companies and companies that provide a clearer picture about the possible association
conduct activities with high impacts to the environment between potential determinants and the existence of
disclosed more environmental information. environmental reporting practice in Malaysia. The
This study contributes to the literature by providing findings may be different if these variables had been
the recent state of the corporate governance and applied and, therefore, would be able to explain
environmental reporting practices in Malaysia. Based on environmental reporting behaviours. Additionally, the
vigorous effort by the government and various non-profit results will enlighten us on the motive and consequences
organisations, perhaps we can observe the difference in of environmental disclosure.
the practices as compared to the previous studies.
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Jurnal Pengurusan 32(2011) 55 - 71

Corporate Governance Practices and Environmental Reporting of Companies

INTRODUCTION information. Among the factors found in prior study were

CEO Duality ENVIRONMENTAL

Frequency of board meeting

FIGURE 1. Essential attributes of corporate governance that lead to environmental reporting

FREQUENCY OF BOARD MEETING The environmental reporting practices of the sample

TABLE 2. Distribution of reporting companies

Frequency Environmental Section

TABLE 3. Quantity and quality of environmental information

Quantity (Sentences) Quality (Disclosure Score)

TABLE 4. Descriptive statistics for the continuous variables

ENVQTY ENVQLTY BInd MOwn BSize ΣAssets FE MF

CORRELATION ANALYSIS between total assets with board independence and

TABLE 5. Pearson correlations

BInd CEODual MOwn BSize ΣAssets EnvSen FE MF

REGRESSION ANALYSIS The results of the logistic regression are presented in

TABLE 6. Logistic regression result using “existence” as the dependent variable

Variables Coefficient Wald Statistics p-value

Variables Coefficient Value t-statistics Sig-t

Variables Coefficient Value t-statistics Sig-t

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