Corporate governance, corporate social responsibility disclosure and financial performance of shariah compliant public listed companies in Malaysia

Abstract

Corporate social responsibility disclosure (CSRD) has become a critical issue, as evidenced by the increasing number of studies conducted in both developed and developing countries. As such, this research aims to develop a new CSRD index for Shariah PLCs, investigate the level of CSRD, examine the impact of corporate governance (CG) board attributes on CSRD and examine the relationship between CSRD and financial performance of Shariah PLCs in Malaysia. A total of 175 Shariah PLCs listed on Bursa Malaysia’s Main Market were chosen as samples for this study from 2007 to 2017. This study chooses 2007 as the starting year since the implementation of the CSR framework by the Bursa Malaysia and most of the PLCs are still using BM CSR framework as their guidelines in disclosing the CSR information in their annual reports. An organization or business is classified as a Shariah PLC if they are not involved or offered products or services which is forbidden in Islam. It is expected that the Shariah PLCs in Malaysia to publish all information in their annual report because of their “Shariah” status. The relationship between CG board attributes and CSRD is explained by the agency and resource dependence theories, while the relationship between CSRD and the financial performance of Shariah PLCs in Malaysia is explained by the stakeholder theory. This study employs a content analysis technique to extract CSR items from the annual reports, as well as a two-step System GMM for analysis. The findings indicate that the level of CSRD in Shariah PLCs in Malaysia remains low. “Community” is the most frequently disclosed theme, while “marketplace” is the least frequently disclosed. Additionally, the data indicated that the plantation industry reported the most CSR actions in their annual reports from 2007 to 2017, while the industrial products reported the least. The empirical analysis also indicates that the board size and Muslim director are positively significant with CSRD practices among the Shariah PLCs in Malaysia, while there is a negatively significant relationship between board meetings and CSRD. Moreover, three out of six CG board attributes tested in this study were not associated with the level of CSRD among the Shariah PLCs in Malaysia which are: (i) board gender; (ii) board independence; and (iii) CEO duality. Additionally, the CSRD is positively significant with financial performance (ROA, ROE and Tobin’s Q). There is a need for additional efforts from the Malaysian government or regulatory bodies to encourage all PLCs to include CSR activities in their annual reports, particularly Shariah PLCs in Malaysia. Future research can therefore examine the determinants and extent of CSRD in Shariah and non-Shariah PLCs in Malaysia or by industry or compare Shariah PLCs to other Shariah PLCs in ASEAN countries (Indonesia, Singapore, Brunei Darussalam, Thailand, Cambodia); and employ alternative financial performance measures (e.g., stock returns, market capitalization, or dividend yields).