Proceedings of World Business and Economics Research Conference
24 - 25 February, 2014, Rendezvous Hotel, Auckland, New Zealand, ISBN: 978-1-922069-45-0
Board Composition, Islamic Corporate Social Responsibility
and Corporate Reputation of Islamic Banks
Roshayani Arshad* , Muhammad Mukhlis Abdul Fatah** and
Rohana Othman***
This study examines the effect of board composition on Islamic corporate
social responsibility disclosure (ICSR) and whether such disclosure
influences corporate reputation. These relationships are examined based on
content analysis of annual reports of 17 Islamic banks in Malaysia for 2008,
2009 and 2010. Board composition examined in this study comprises of
independent non-executive directors on board, Muslim board members, top
management support and board members with international experience.
Results of this study provide evidence that top management support and
commitment are the main drivers in implementing and reporting ICSR
initiatives while monitoring mechanism through representation of independent
non-executive directors on board and Muslim board members do not
influence ICSR disclosure strategy. This infers that management do
recognise the importance of ICSR disclosure as a mechanism in managing
multiple stakeholders’ perceptions and gaining their support. This is
corroborated by the significant positive relationships between ICSR
disclosure and corporate reputation. The insignificant influence of monitoring
mechanisms on ICSR disclosure implies the necessity for strengthening the
governance mechanism of Islamic banks.
JEL Codes: M 40 “Accounting”
1. Introduction
Increasing awareness on the role of business in society and the nature of a firm‟s social
responsibilities have led to greater political and social demands for companies to increase
their social activities. This in turn has increases the pressure for managers to implement
corporate social responsibility (CSR) activities that can meet the demands of various
stakeholders. As organisation operates within a network of different stakeholders who can
influence the organisation directly or indirectly, the ability of managers in managing their
CSR activities is a strategic issue for an organisation (Galbreath, 2008). Failure to meet
the demands of various stakeholders can lead to withdrawals of support and consequent
adverse effects on firm‟s reputation as socially responsible organisations. This implies that
addressing societal expectations is an important consideration for competitive success in
order to achieve economic sustainability for organisations.
Organisations operating within the principles of Islamic moral law (Sha‟riah), such as
Islamic banks, are exposed to additional demand with regards to their CSR initiatives.
Farook et al. (2011) argue that Islamic banks are expected to disclose CSR initiatives that
meet the demands of Muslim stakeholders.
In addition, they further argue that where Muslim stakeholders represent a larger
proportion of the overall population, there will be an increase pressure on the Islamic
___________
*Associate Professor Dr. Roshayani Arshad, Accounting Research Institute, Universiti Teknologi Mara,
Malaysia. Email : roshayani@salam.uitm.edu.my
** Muhammad Mukhlis Abdul Fatah, Universiti Teknologi Mara, Malaysia.
***Professor Dr. Rohana Othman, Accounting Research Institute, Universiti Teknologi Mara, Malaysia.
Email : rohana799@salam.uitm.edu.my
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Proceedings of World Business and Economics Research Conference
24 - 25 February, 2014, Rendezvous Hotel, Auckland, New Zealand, ISBN: 978-1-922069-45-0
banks to disclose relevant CSR initiatives from an Islamic perspective. Overall, these
arguments suggest that Islamic banks in Malaysia are expected to disclose more
comprehensive disclosure of their CSR activities, reflecting both conventional and Islamic
CSR perspectives. Such disclosures will allow managers of Islamic banks to demonstrate
that they are complying with multiple stakeholders‟ expectations and in turn gain their
support for continued existence of Islamic banks. While organisations in developed
countries have acknowledge the importance of incorporating CSR practices into their
business strategies in enhancing corporate reputation, many companies in developing
countries often lag behind their developed countries‟ counterparts (Gray, Kouhy and
Lavers,1995), including Islamic banks (Farook et al., 2011). A growing body of research
found positive relationships between CSR disclosures and corporate reputation (Porter,
1996). This indicates that an investment in CSR activities and disclosures by organizations
are expected to generate competitive advantage to companies by facilitating them to
develop valuable intangible assets. Availability of these resources allows companies to
differentiate from its competitors and in turn achieve better economic results through
enhancement of their corporate reputation.
The important link between CSR reporting and business sustainability has began to be
recognised by various regulatory efforts in developing countries. In Asia, many countries in
the region began incorporating mandatory CSR reporting as part of their corporate
governance reforms. While corporate governance refers to the mechanisms that protect
outside investors and efficient working of the firm, CSR refers to the objective of the firm
and meeting the needs of various stakeholders. The integration of CSR activities and
reporting into corporate governance is expected to increase companies‟ reputation as
socially responsible organizations, which is paramount to business sustainability (Adam
and Zutshi, 2006). In line with this move, Malaysia introduced mandatory CSR disclosure
in companies‟ annual reports effective from financial year ended 31 December 2007.
However, managers are allowed full discretion in deciding on the extent and nature of
CSR disclosures. The emphasis by regulatory bodies and policy makers on CSR activity
as part of good corporate governance is expected to shift Muslim stakeholders and other
stakeholders‟ expectations toward expecting more adequate disclosure of CSR activity.
However, prior empirical studies indicate that Malaysian corporate reporting practices do
not exhibit greater transparency regardless of the reforming efforts by regulatory bodies
following corporate governance reforms that emerged from the Asian economic crisis of
1997-1998 (Nazli and Weetman, 2006; Haniffa and Cooke, 2002). As these studies do not
focus specifically on corporate reporting from Islamic perspectives, a study on the
relationships between governance mechanisms and the extent of Islamic CSR reporting
will provide new findings with potential policy implications for Islamic banks and regulators.
The aim of this study is twofold. First, is to examine the influence of board composition on
the extent of Islamic corporate social responsibility (ICSR) disclosure. Second, is to
examine the influence of ICSR disclosure on corporate reputation. These relationships are
examined from the agency theory perspective and the resource-based perspective (RBP).
The agency theory posits that management has incentives to disclose more
comprehensive ICSR information because it signals that they are acting in the interests of
the investors and other stakeholders. In relation to RBP, this theory posits that ICSR
disclosures are a medium for organizations to build their corporate reputation by potraying
that they are socially responsible and sensitive to the stakeholders‟ concern (Adam and
Zutshi, 2006; Tucker and Melewar, 2005). Prior studies on reporting by Islamic institutions
and banks have generally adopted the normative or narrative approach and lack empirical
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Proceedings of World Business and Economics Research Conference
24 - 25 February, 2014, Rendezvous Hotel, Auckland, New Zealand, ISBN: 978-1-922069-45-0
analysis with regards to the disclosure practices of these organisations (Farouk et al.,
2011; Maali, Casson and Napier, 2006). Findings in this study will contribute to the lack of
empirical evidence on issues related to ICSR, particularly regarding the relationships
between board composition, ICSR disclosures and corporate reputation of Islamic banks.
Therefore, this study aims to provide new evidence on these relationships. Such an
understanding is useful to regulators, policy makers, preparers and other users of financial
information.
This paper will proceed with the review of past literature from which hypotheses will be
developed. The paper will then proceed to the empirical stage of variable measurement,
sampling, data analysis and discussion of results. The final part of this paper presents
conclusion, limitations and suggestions for future research.
2. Literature Review and Hypotheses Development
The hypotheses in this study are generated from three streams of literature on accounting
research. These are research on voluntary disclosure from an agency theory perspective
concerned with corporate governance mechanisms and disclosure of voluntary information
to mitigate agency conflicts; research on voluntary disclosure from the RBP concerned
with management of corporate resources in creating value to the organizations; and
research on voluntary disclosure as a mechanism to create corporate reputation. This
study focuses on two corporate governance mechanisms, independent non-executive
directors and Muslim board members. In relation to corporate resources, this study
focuses on top management support and international experience of board members.
2.1 Independent Non-Executive Directors and ICSR Disclosure
Fama and Jensen (1983) suggest that board composed of higher percentage of
independent non-executive directors strengthened the extent to which the board is
independent of management and thus is more effective monitors of managerial actions
and decisions. This is based on the premise that shareholders as principal cannot trust the
management as agent to take decisions that is in the interest of shareholders if such
decisions are not also in the interest of management. With regards to Islamic banks,
conflict of interest also arises between the managers and the investment account holders
(Archer, Karim and Al-Deehani, 1998). The investment account holders receive profits or
bear their share of the losses from the pool of assets in which the funds are invested and
are not shareholders of the Islamic banks (Archer et al., 1998) detail that the current
contractual relationships of Islamic banks in Malaysia do not allow the investment account
holders the right of access to monitoring mechanisms that are intended to mitigate
potential conflict of interest between the principal and the agent. Instead, they are
expected to rely on monitoring the management exercised by the shareholders. This infers
that the scope of monitoring by independent non-executive in Islamic banks is wider
relative to conventional banks.
The various regulatory efforts in promoting CSR initiatives and transparency in Malaysia
are expected to increase the independent non-executive directors‟ awareness and
recognition of the strategic importance of CSR initiatives in creating and enhancing
corporate reputation. Concurrently, independent non-executive directors align their
monitoring objectives to those of the external regulatory bodies and encourage managers
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Proceedings of World Business and Economics Research Conference
24 - 25 February, 2014, Rendezvous Hotel, Auckland, New Zealand, ISBN: 978-1-922069-45-0
to disclose more comprehensive information of ICSR. While prior studies have reported
inconclusive results with regards to the association between the independent nonexecutive directors on the board and managers‟ disclosure tendencies (Haniffa and
Cooke, 2005; Ho and Wong, 2001; Leung and Horwitz, 2004), the importance of
disclosing ICSR information as a signal that Islamic banks are acting in the interests of the
investors, investment account holders and other stakeholders are expected to increase
the monitoring effectiveness of the independent non-executive directors. Hence, it is
contended in this study that the independent non-executive directors on the board will
influence managers of Islamic banks to increase disclosure of ICSR information in the
annual reports. This leads to formulation of the following hypothesis:
H1: The percentage of independent non-executive directors is significantly positively
related to the extent of ICSR disclosure.
2.2 Muslim Board Members and ICSR Disclosure
The potential influence of religion on management disclosure practices has began to be
examined by studies in jurisdictions where there are expectations by stakeholders that
associate religion with certain behavioral style. For example, Hassan & Christopher (2005)
argue that the majority Muslim dominated society in Malaysia expects higher level of
disclosure practices in companies‟ annual reports. Such disclosure is seen as a
communication mechanism in promoting Islamic values practiced by companies. Several
other studies have also investigated the relationships between organisations conducting
their businesses in accordance to Islamic principles and the extent of voluntary
disclosures (Anuar et al., 2004; Yahya et al., 2005; Haniffa and Hudaib, 2007). These
studies find that Shari‟ah approved companies have higher level of environmental
reporting relative to non-Shari‟ah companies. In summary, these studies suggest that
companies conducting their businesses in accordance to Shari‟ah principles are making
attempts to present their corporate reporting which embodies the Islamic principles. In
Malaysia, the emphasis on CSR initiatives and disclosure by various regulatory efforts are
expected to shift stakeholders‟ dominated by Muslim society expectations towards
expecting more ICSR initiatives. Concurrently, it is also expected to increase pressure on
companies with operations in Islamic products to increase their ICSR initiatives and
disclosures. In line with these expectations, Muslim board members are expected to
influence managers to increase their ICSR disclosures. Following these arguments, it is
hypothesised that:
H2: The percentage of Muslim board members is significantly positively related to the
extent of ICSR disclosure.
2.3 Top Management Support and ICSR Disclosure
One of the corporate resources identified by the RBP literature with regards to the
implementation of CSR strategies is capability (Branco and Rodrigues, 2006; Sueyoshi
and Goto, 2010). Branco and Rodrigues (2006) refer to capabilities as actions taken to
deploy different resources in a coordinated fashion, using organisational processes, to
achieve a desired objective. In accomplishing the desired objective, study by D‟Amato and
Roome (2009) suggests that leadership support and commitment by top management are
key elements in setting the directions, creating alignment and maintaining commitment of
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Proceedings of World Business and Economics Research Conference
24 - 25 February, 2014, Rendezvous Hotel, Auckland, New Zealand, ISBN: 978-1-922069-45-0
the organizations. For example, study by Albacete-Saez, Fuentes-Fuentes and Bojica
(2011) indicated that leadership support can influence the enhancement of financial result
and company‟s performance. In relation to CSR initiatives, past literatures (D‟Amato and
Roome, 2009; Menz, 2011; MacLean and Rebernak, 2007) argue that involvement of key
leaders, such as chief executive officer/chairman/managing director is essential in
directing and aligning various corporate resources in ensuring effective CSR strategy
implementation. As implementation of ICSR by Islamic banks involves new perspectives of
CSR policies and strategies, it is crucial that the ICSR initiatives are accepted by various
stakeholders in order to ensure successful implementation of the initiatives. Galbreath
(2009) argues that facing and addressing uncertain social factors is not simply acting
„responsibly‟; it is also related to corporate credibility, acceptance and support from the
stakeholders in driving excellence in CSR. In line with this, Guarnieri and Kao (2008) find
that leader‟s involvement in CSR lends automatic credibility and a greater chance for
success of CSR initiatives. Hence, this study expects top management support will
influence the managers and other stakeholders of Islamic banks in driving excellent
implementation of ICSR initiatives.
The above arguments infer that organisations having leaders directly involved in various
CSR initiatives are more able in strengthening the organisations overall reputation in the
marketplace (Guarnieri and Kao, 2008). This in turn implies that capabilities can facilitate
companies to accomplish their CSR strategies and activities that will have a positive effect
on corporate reputation (Branco and Rodrigues, 2006, Sueyoshi and Goto, 2010).
In Malaysia, the link between top management support and commitment and effective
implementation of corporate strategy has been observed in relation to CSR initiatives.
According to „Report of the Judges‟ by ACCA Malaysia Sustainability Reporting Awards
(MaSRA, 2009), companies with good CSR initiatives and reports are those where top
management are involved. In contrast, CSR report that is prepared with less support from
the key leaders reflects a pure public relation exercise. Generally, these reports contained
broad policy statements, less comprehensive and no quantitative information (ACCA
Malaysia, 2009). In line with these arguments, it is expected that top management
commitment and support are associated with the implementation of ICSR initiatives. This
in turn is expected to lead to an increase in the extent of ICSR disclosure in annual reports
in communicating management effectiveness in implementing such initiatives. This leads
to the following hypothesis:
H3: Support and commitment from leadership are significantly positively related to
the extent of ICSR disclosure.
2.4 International Experience and ICSR Disclosure
Another category of capabilities is international experience of individuals. Carpenter et al.
(2001) suggest that international experience of individuals possess valuable, rare, and
inimitable characteristics that can contribute to the creation of competitive advantage of
companies utilising their experiences. International experience of chief executive officer
(CEO)/chairman/board members is developed through international assignments in
foreign companies. These individuals are exposed to the CSR issues and activities faced
by these foreign companies. The CSR activities of these companies are likely to be
influenced by the culture, laws, rules and regulations in the country where these
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Proceedings of World Business and Economics Research Conference
24 - 25 February, 2014, Rendezvous Hotel, Auckland, New Zealand, ISBN: 978-1-922069-45-0
companies operate. Such exposure can facilitate board members of Islamic banks in
managing the complexities associated with ICSR implementation. Concurrently, it is also
likely that these board members will promote and implement more proactive initiatives of
ICSR activities from an Islamic perspective in their organizations.
Islamic banks in Malaysia operate within the principles of Islamic moral law (Sha‟riah). As
such, these organizations are expected to act and be seen to act within the bounds of
CSR considered as acceptable in accordance to the expectations of the Muslim
dominated stakeholders. In meeting these expectations, CSR disclosure with particular
emphasis on Islamic perspective, is an important tool for these organisations to signal to
various stakeholders that they are responsible and ethical members of the society. A
positive image with the stakeholders is expected to enhance the effects of CSR on
corporate reputation. In line with this, Hasseldine, Salama and Toms (2005) argue that it
will be difficult for companies to invest in CSR activities and to achieve competitive
advantage without making the associated disclosures. Hence, it is expected that
CEO/chairman and board members with international experience are more likely to
acknowledge the importance of reporting as a communication instrument that can be used
to create, protect or enhance their corporate image in the creation of corporate reputation.
Hence, it is hypothesised that:
H4: Board members with international experience are significantly positively related
to the extent of ICSR disclosure.
2.5 ICSR Disclosure and Corporate Reputation
Stakeholders are increasingly demanding organisations to demonstrate that their actions
and policies are socially responsible. As organisations operate within a network of different
stakeholders who can influence the organisation directly or indirectly, the ability of
managers to address societal expectations is crucial in building good relationships
between the organizations and the various stakeholders. Fombrum (2005) argue that the
ability to do so can help organizations to build reputation as socially responsible
organizations. In contrast, failure to meet the demands of various stakeholders can lead to
withdrawals of support and consequent adverse effects on the organisation‟s image and
economic sustainability. These arguments imply that perceptions of multiple stakeholders
contribute to the creation of corporate reputation (Brammer and Pavelin, 2004). In this
context, past empirical studies infer that CSR disclosure has been used by organizations
to potray that they are socially responsible and sensitive to the stakeholders‟ concern
(Adams and Zutshi, 2006; J. Clarke and Gibson-Sweet, 1999). These companies are
perceived to have good corporate values and intangible assets that could be positively
translated in many ways such as attracting customers, generating investment interest,
attracting the best talent, motivating workers, enhancing job satisfaction, generating more
positive media coverage and receiving positive comments from financial analysts (Laufer
and Coombs, 2006).
As CSR reporting has become an increasingly important part of how stakeholders assess
company‟s reputation (Bebbington, Larrinaga-Gonzalez and Moneva-Abadia, 2008; Lewis,
2003), more organisations are disclosing their CSR activities in enhancing their corporate
reputation. For example, an ACCA (2007) web-based survey on 244 respondents
comprising of corporate representatives, academic scholars, governmental and
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Proceedings of World Business and Economics Research Conference
24 - 25 February, 2014, Rendezvous Hotel, Auckland, New Zealand, ISBN: 978-1-922069-45-0
international agencies reported that thirty percent of the respondents stated that CSR
reporting is highly important while 50 percent stated somewhat important in building
company‟s reputation. Only a small percentage of the respondents (20 percent) stated
that such reporting has no impact on their views of the company‟s reputation. This
example highlights that CSR disclosure is paramount in managing the perceptions of the
multiple stakeholders, which is crucial in building and enhancing corporate reputation
(Branco and Rodrigues, 2008). With regards to organizations that are governed by the
principles of Islamic moral law (Shari‟ah), it is expected that stakeholders expect certain
behavioral practices by these organizations. In particular, the majority Muslim dominated
society in Malaysia expects relevant CSR disclosure practices that promote Islamic values
practiced by these organizations (Hassan and Christopher, 2005). In addition to these
disclosures, these organizations are also expected to disclose other CSR activities that
can meet the remaining stakeholders‟ concern. This in turn is expected to result in more
comprehensive disclosures of CSR activities by these organizations. Such disclosures will
influence the stakeholders‟ perceptions of these organizations as socially responsible,
from the Islamic and conventional perspectives, with potential positive effect on corporate
reputation. Based on these arguments, it is hypothesised that:
H5: The extent of ICSR disclosure is significantly positively related to corporate
reputation.
3. Methodology
3.1 Sample and Data Collection
The sample comprised of all Islamic banks in Malaysia for the year 2008, 2009 and 2010.
For the three years sampled, the sample comprised 50 cases. The research approach
involves the content analysis of Islamic banks‟ published annual reports. Content analysis
has been widely employed in prior studies to measure CSR disclosure (Hackston and
Milne, 1996; Smith, Yahya and Amiruddin, 2007).
The extent of ICSR disclosure in this study is measured using a self constructed
disclosure index. The identification of items to be included in the index is guided by the
review of prior studies on regulatory recommendations on CSR in Malaysia (Nejati and
Amran ,2009; Saleh, Zulkifli and Muhamad,2010; Smith et al., 2007), CSR disclosures
(Drews, 2010; Lin, Yang and Liou, 2009) and ICSR disclosures (Hassan and Harahap,
2010; Pratten and Mashat, 2009). Based on these review, the following themes
considered as relevant content of ICSR reporting in Malaysia are identified:
 development and social goals/philanthropy
 employees
 environment
 customers
 general/public stakeholder/community
 workplace
 marketplace
 shari‟ah supervisory board
The extent of ICSR disclosure (ICSRD) is measured by comparing the contents of each
annual report to the items in the index and coded as “1” if the item is disclosed and “0” if
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Proceedings of World Business and Economics Research Conference
24 - 25 February, 2014, Rendezvous Hotel, Auckland, New Zealand, ISBN: 978-1-922069-45-0
not. As in previous studies, disclosure item considered as not applicable to a company will
not be penalized. Further, in assessing the applicability of a particular item, the entire
annual report will be read to be reasonably certain that no similar information can be found
in any part of the annual reports before a judgement is made on this matter.
For each company, the ICSRD index score is calculated as a ratio of the actual score
awarded to the company divided by the maximum potential score awarded to that
company. The ICSRD index used for each company in order to measure the level of
ICSRD is calculated as follows:
nj
X
ICSRD j =
ij
i=1
nj
Where nj = number of items expected for jth company, nj is ≤ 32,
X i j = 1 if i th item disclosed and 0 if i th item not disclosed,
So that 0 ≤ I j ≥ 1
The total score ICSRDj represents the number of points awarded to company j and it is an
ordinal measure of the level of ICSRD for each company. The score is additive and
unweighted. Unweighted scores are used in this study for several reasons. First, the use
of unweighted index assumes that each item disclosed by a company is of equal
importance to the relevant stakeholders‟ decision-making process. Second, using a
weighted disclosure index will involve assigning weights to reflect the importance of certain
types of information (Chow and Wong-Boren, 1987). The degree of importance is
generally based on rankings obtained from pooled opinions of a group of subjects
(analysts or any preferred user group). The subjective judgements involved in assigning
the weights (Gray et al., 1995) reduces the objectivity of the index as a measure of the
extent of ICSRD. Further, Chow and Wong-Boren (1987) suggest that the use of weighted
or unweighted disclosure index is interchangeable because they find almost equivalent
results using either one of the index. Finally, the scoring approach using unweighted
disclosure index in this study is also supported by the approach employed and adopted in
several prior studies on disclosures (Gray et al., 1995; Haniffa & Cooke, 2005).
In addition to the ICSR index, this study also constructs an index to measure corporate
reputation. The index is developed based on RepTrakTM model, Bursa Malaysia CSR
Framework and GRI Guidelines. RepTrakTM model (the earlier version is known as
Reputation QuotientSM) is a metric used by Reputation Institute and Australia‟s Reputex
to measure corporate reputation. This study adopts this model as it has been tested on a
global scale, that is in 27 countries on over 1,000 companies and proven to be a valid and
reliable instrument. Further, multiple stakeholders have been included as respondents
based on this model. As such, this method is seen as overcoming the criticism of focusing
only on certain stakeholders, mainly senior executives and financial analysts, by other
metrics of reputation such as Fortune‟s Most Admired Companies and Financial Times‟
Europe Most Respected Company. Such focus has also been argued to be biased to
financial criteria in measuring corporate reputation (Bebbington, Larrinaga-Gonzalez and
Moneva-Abadia, 2008) In contrast, the RepTrak TM model measures corporate reputation
incorporating seven diverse dimensions, which are product and services, performance,
citizenship, workplace, governance, leadership, and innovation. Of these dimensions, this
study adopted three dimensions of RepTrak TM model, which are citizenship, workplace
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Proceedings of World Business and Economics Research Conference
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and governance as these dimensions are related to CSR. In addition, these dimensions
are also consistent with the CSR dimensions of „Bursa Malaysia Framework‟, which
comprises of communities (citizenship), environment (citizenship), workplace and
marketplace (governance). Based on these dimensions, the reputation measurement in
this study comprises of four dimensions as defined by the „Bursa Malaysia Framework‟.
The scoring of the reputation index (CREP) is based on an equal-weighted, which means
that a point is awarded for each construct in relation to items identified for each
dimension. In total, 25 constructs were developed as indicators of the index. The
constructs were adopted from Global Reporting Initiative (GRI) guidelines as it has been
widely used as a tool in increasing the trustworthiness of corporate reporting globally as
well as gaining positive perception of external reputation (Bebbington et al., 2008).
The CSR reputation score indexes are constructed as follows:
mj
dj
N
i f
The index indicates the level of CSR reputation for a company, where N is the maximum
number of relevant items and dj is equal to 0 if there is no initiative; score of 1 if the
initiative is briefly described or mainly descriptive; and score of 2 if the initiative is
explained in detail, or quantified, or indicating that certain standards or best practices have
been achieved such as ISO14001 and MS1500 (halal), or showing the prestigious awards
received in relation to CSR initiatives such as Prime Minister CSR awards, ACCA
Sustainability awards and Hibiscus awards. The scoring approach is consistent with
previous studies that suggest quantified or monetary information is more reputable than
those of descriptive information (Deegan and Rankin, 1996; Hassan and Christopher).
This study also includes one firm characteristic identified in prior research as determinants
of management disclosure decisions (Gray et al., 1995; Haniffa and Cooke, 2005) as
control variable. This variable is size. The definition and measurement of variables used in
this study are listed in Table 1.
Variable
Acronym
ICSRD
INED
MBS
TMS
BODIE
Table 1: Definition and Measurement of Variables
Definition
Measurement
The extent of ICSR Self-constructed disclosure index
disclosure
Independent
non- Percentage of independent non-executive
executive directors
directors on the board to total number of
board members
Muslim board members Percentage of Muslim board members on the
board to total number of board members
Top
management Dichotomous score which score of “1” where
support
and CEO/managing directors/Chairman‟s reviews
commitment
are linked to the ICSR disclosure and score
of “0” for otherwise
Board members with Percentage of board members with
international experience international experience to total number of
board members
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Proceedings of World Business and Economics Research Conference
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CREP
Corporate Reputation
SIZE
Firm size
CREP index is developed based on
RepTrakTM model, Bursa Malaysia CSR
Framework and GRI Guidelines
Total assets
4. Analysis and Results
4.1 Descriptive Statistics
There are two dependent variables in this study, ICSR disclosure and CREP. Table 2
presents the descriptive statistics on these dependent variables over the period of three
years under study. The results of descriptive statistics for continuous independent
variables and control variables are presented in Table 3.
Table 2: Descriptive Statistics for ICSR Disclosure in 2008-2010
Maximum
Minimum
Mean
ICSRD (%) 93.75
18.75
63.75
CREP (%) 80.00
0.00
38.26
Table 2 reported that ICSRD ranges from a minimum of 18.75% to 93.75% for year 20082010. Overall, the extent of ICSR is at a moderate level as indicated by the mean value of
63.75%. In relation to CREP, Table 2 reported that some Islamic banks have 0.00% extent
of CREP while some banks have 80.00% extent of CREP. The mean value of 38.26%
indicates relatively low extent of CREP.
Table 3: Descriptive Statistics for Independent and Control Variables
Maximum
Minimum
Mean
INED (%)
75.00
25.00
43.70
MBS (%)
100.00
29.00
75.10
TMS
0.00
1.00
0.78
BODIE (%) 100.00
0.00
83.12
Size (mil)
2242.16
2.96
1.35E8
Table 3 reported that the average value for INED is 43.70%. This is more than the
minimum requirement of one third INED on the board as recommended by the Malaysian
Code on Corporate Governance (REF). In relation to MBS, the minimum value is 29%
while the maximum value is 100% for all sampled years. The mean value of 75.10%
indicates a relatively high representation of MBS on the board. Of the independent
variables related to corporate capabilities, Table 3 reported that the mean value of TMS is
0.78. This indicates strong top management support for ICSR activities and disclosures.
As for BODIE, the minimum value is 0.00% and the maximum value is 100.00%. The
mean value of 83.12% indicates that there is a high representation of board members with
international experience on the board. Finally, Table 3 reported that the control variable,
SIZE ranges from a minimum value of RM2.96 million to a maximum value of RM2,242.16
million.
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4.2 Multivariate Analysis
In this study, linear multiple regression is used as the basis of analysis for testing H1 to
H5. The hypothesized relationships for H1 to H5 respectively are modeled as follows.
Model 1(tests of H1 to H4):
ICSRD = β0 + β1INED + β2MBS + β3TMS + β4BODIE + β5SIZE + εt
Model 2 (test of H5):
CREP = β0 + β2ICSRD + β3SIZE + εt
where variable definitions are given in Table 1.
In the above regression models, multicollinearity was tested using the variance inflation
factor and tolerance levels, and found to be well within the satisfactory range. The results
of the regression analysis are presented in Table 4 and Table 5 respectively and are now
discussed in terms of tests of each of the hypotheses.
Table 4: Multiple Regression Results For Factors Influencing ICSR Disclosure
Dependent Variable: ICSRD
R Square
0.584
Adjusted R2
F
Sig
0.527
10.290
0.000
Model
(Constant)
INED
MBS
TMC
BODIE
SIZE
Beta
-0.024
0.108
0.089
0.232
-0.223
0.270
t
-0.274
1.048
0.710
2.171
-2.217
2.459
Sig.
0.785
0.300
0.481
0.035**
0.032**
0.018
Coefficient for each variable is shown with t values in parentheses. * Significant at 10 per
cent level (1-tailed test); * * Significant at 5 per cent level (1-tailed test); * * * Significant
at 1 per cent level (1-tailed test).
Results of the multiple regression analysis in Table 4 report that the adjusted R 2 is 0.527.
H1 predicts that INED is significantly positively related to ICSR disclosure. The results in
Table 4 reveal an insignificant relationship. Hence, HI is rejected. The insignificant result is
consistent with several previous findings on the relationships between INED and voluntary
disclosure in Malaysia (Haniffa and Cooke, 2002; Nazli and Weetman, 2006). It is possible
that the voluntary nature of the content of ICSRD reporting in Malaysia reduces INED
motivations to monitor and exert pressure on managers to increase ICSR disclosure. In
other words, more comprehensive mandatory disclosure requirements can be a useful
mechanism to motivate INED monitoring of managers‟ disclosure strategies (Cheng and
Courtenay, 2006).
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With regards to MBS, the result in Table 4 also reveals an insignificant relationship. This
indicates that Muslim board members are not influencing ICSR disclosure of Islamic
banks. Hence, H2 is rejected. The result infers that it is also important to consider the
characteristics of the board members as extant literature argued that board characteristics
can determine the monitoring effectiveness of the board members. For example, Farook
et al. (2011) argue that directors‟ knowledge may influence managers‟ disclosure strategy.
In this context, lack of practical commercial knowledge on the current implications of Islam
for Islamic banks, particularly with regards to ICSR disclosure may reduce MBS‟s
monitoring effectiveness and influence on ICSR activities and disclosure. In addition, it is
also possible that lower societal expectations from the Muslim dominated society with
regards to ICSR disclosure reduces the motivation of MBS to influence managers to
disclose more comprehensive ICSR information to legitimize Islamic banks as socially
responsible organisations.
From a capacity factor perspective, results in Table 4 reported that both TMC and BODIE
are significantly associated with ICSR disclosure. H3 predicts that TMC is significantly
positively related to ICSR disclosure. Hence, H3 is accepted. This result indicates that top
management in Islamic banks acknowledges the importance of ICSR activities and
disclosure in managing the perceptions of various stakeholders. In addition, it also
indicates that these leaders are directing and aligning various corporate resources in
ensuring effective ICSR strategy implementation (D‟Amato and Roome, 2009; Menz,
2011; MacLean and Rebernak, 2007). This in turn is expected to enhance ICSR
disclosure with consequent positive effects on corporate reputation.
The second capacity factor examined in this study is BODIE. H4 predicts that BODIE is
significantly positively related to ICSR disclosure. However, the result in Table 4 reveals
that BODIE is significantly negatively related to ICSR disclosure. Hence, H4 is rejected.
This result indicates that BODIE are not motivated to implement CSR activities and
disclosures from an Islamic perspective. It is possible that their international experience
may influence them to emphasise on conventional CSR initiatives and disclosures relative
to Islamic perspectives.
Table 5: Multiple Regression Results For Factors Influencing Corporate Reputation
Dependent Variable:
CREP
R Square
0.630
2
Adjusted R
0.606
F
26.420
Sig
0.000
Model
Beta
t
Sig.
(Constant)
0.037
0.971
0.004
ICSRD
0.779
6.944
0.000***
SIZE
0.037
0.336
0.739
Coefficient for each variable is shown with t values in parentheses. * Significant at 10
per cent level (1-tailed test); * * Significant at 5 per cent level (1-tailed test); * * *
Significant at 1 per cent level (1-tailed test)
H5 predicts that the extent of ICSR disclosure is significantly positively related to CREP.
Results in Table 5 reveal a positive and significant relationship between ICSRD and
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CREP. Hence H5 is accepted. This finding suggests effective implementation of ICSR
initiatives that that can meet the demand of various stakeholders. This in turn has a
positive effect in building corporate reputation. In addition, it also highlights that
management perceive their ICSR information to have sufficient signalling potential in
communicating that their organisations are socially responsible and sensitive to various
stakeholders‟ concern from the Islamic perspectives. Such perception reflects
management commitment and support with regards to implementation of ICSR initiatives
and disclosure as corroborated by the positive association between TMC and ICSR
disclosure discussed earlier.
5. Conclusion and Limitations
This study examines the effect of board composition on ICSR disclosure and whether
such disclosure influences corporate reputation. Of board composition, the results
revealed significant positive relationships only between TMS and ICSR disclosure. These
results suggest that top management support and commitment are the main drivers in
implementing and reporting ICSR initiatives. This result highlight that management are
proactively implementing and disclosing ICSR activities that meet the needs of multiple
stakeholders. This is particularly important for organisations operating in an environment
of increasing pressure from jurisdictions dominated by Islamic stakeholders. In this
context, the significant positive relationships between ICSR and CREP infer that
disclosure of ICSR initiatives is an important tool that can be used to strengthened
stakeholder relations and support for the organisations which consequently enhance
corporate reputation.
The insignificant results between two monitoring mechanisms and ICSR, INED and MBS,
indicate that monitoring mechanisms are not influencing ICSR disclosure strategy. As
ICSR disclosure contributes to corporate reputation and sustainability (Bebbingto et al.,
2008; Fombrun and Gardberg, 2000) it is important that Islamic banks recognize the need
to invest more in enhancing their level of governance. For example, relevant training to
board members with regards to Islamic laws and principles applicable to Islamic banking
can lead to more effective monitoring, particularly with regards to ICSR activities and
disclosure.
In summary, the findings in this study suggest that ICSR is an important business strategy
that can contribute to the creation of corporate reputation. These findings have practical
implications to organisations in developing and integrating their ICSR activities into their
overall business strategies as a tool to enhance corporate reputation, regulatory bodies in
promoting and improving ICSR and corporate transparency, other policy makers in
strengthening Islamic capital market environment, to investment community and other
stakeholders who rely on corporate disclosures in making their Islamic ethical decisions.
Finally, there are some limitations in this study. First, this study focuses on ICSR
disclosures in companies‟ annual reports. Other forms of communication channels such
as the company‟s web site, standalone sustainability-type reports, newspapers and inhouse magazines have been used to communicate corporate social responsibility
activities. Hence, future research may consider such disclosures. In addition, future
research could also include data collection through more extensive interviews with
preparers of the annual reports in order to gain more insights with regards to incorporating
ICSR activities as part of their overall business strategies. Second, this study focuses only
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some measures board composition. Future research could also include other measure
such as Shari‟ah supervisory board members, board size and reputations of board
members.
Acknowledgment
The authors would like to express their gratitude to the Accounting Research Institute,
Ministry of Education, Malaysia and Universiti Teknologi MARA for funding and facilitating
this research project.
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