Rao et al. 2012 Corporate Governance and Environmental Reporting an Australian Study

8/9/2019 Rao et al. 2012 Corporate Governance and Environmental Reporting an Australian Study

1/21

Corporate governance and environmental

reporting: an Australian study

Kathyayini Kathy Rao, Carol A. Tilt and Laurence H. Lester

Abstract

Purpose The purpose of this paper is to investigate the relationship between environmental reporting

and corporate governance attributes of companies in Australia.

Design/methodology/approach The paper adopts a quantitative analysis approach. It examines the

2008 annual reports of the largest 100 Australian firms listed on the Australian Stock Exchange (ASX) to

determine the amount of environmental reporting these data are compared with various corporate

governance measures.

Findings Analysis found a significant positive relationship between the extent of environmental

reporting and the proportions of independent and female directors on a board. The analysis did not,

however, support a negative relationship between the extent of environmental reporting and institutional

investors and board size as has been previously predicted, rather, it showed a positive relationship.

Originality/value This paper offers insights to both regulators and company strategists. Regulators

such as the Australian Stock Exchange (ASX) could consider expanding its Corporate Governance

Council guidelines to include consideration of the environment, which is increasingly considered to be

an important aspect of corporate social responsibility, and one of the responsibilities of the board of

directors. In addition,for companies whichinclude a commitment to theenvironment in their mission and

strategies, it suggests consideration of the impact of board structure and composition is important as

both of these areshown to have a significant effect on theamount of environmental information disclosed

by companies.

KeywordsCorporate governance, Environmental reporting, Corporate strategy, Australia

Paper typeResearch paper

1. Introduction

Companies in Australia and worldwide are under more public scrutiny than ever before and

are pressured to provide information on their environmental performance. Many researchers

and commentators have noted how important it is for organisations to consider their effects

on the natural environment and for them to disclose the results to a wider group of

stakeholders who may have been affected (Deegan, 1994), including employees,

consumers, the community, regulators, the media, the public, and shareholders (Adams

and Zutshi, 2004). This environmental reporting has been defined broadly as providing

information in relation to the environmental implications of their operations (Deegan, 2006).

Reporting on environmental performance not only helps firms to gain stakeholder support,

but also helps firms to assess possible risks involved in conducting such operations, and to

reduce the impact of their operations on the environment. However, social and

Environmental Reporting in Australia is voluntary (Deegan and Gordon, 1996), and

motivation to disclose such information is said to be less likely in the absence of legislation

on the one hand, and quantifiable benefits on the other.

The decision to report on environmental issues, however, is often made within a broader

context and that decision should not be considered in isolation. Hence, it is important to

D OI 10. 1108/14720701211214052 VO L. 12 N O. 2 2012, pp. 143-163,Q Emerald Group Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE j PAGE 143

Kathyayini Kathy Rao is a

Post Graduate Research

Student and Carol A. Tilt is

Professor of Accounting,

and Dean, both at Flinders

Business School, Adelaide,

Australia.

Laurence H. Lester is a

Research Fellow with the

National Institute of Labour

Studies at Flinders

University, Adelaide,

Australia.

Received: September 2011Accepted: January 2011


2/21

consider the level of environmental reporting undertaken by a company, within the context of

how the organisation is governed. Corporate governance has been well researched, but

only recently has this research expanded to consider the relationship between non-financial

reporting and governance mechanisms. Studies have found that strong corporate

governance mechanisms increase the level of corporate disclosure generally (Lakhal,

2005), but research has not been undertaken to investigate whether this also applies to

environmental disclosure. Effective governance should enhance accountability,

transparency and ultimately result in more disclosure, both voluntary as well as

mandatory. This study therefore aims to examine the effectiveness of governance

mechanisms on voluntary disclosure, in particular, environmental disclosure. It comprisesan examination of the environmental disclosure in the annual reports of the top 100 listed

Australian companies, to determine whether there is a relationship between corporate

governance and environmental reporting.

The remainder of this paper is structured as follows. Section 2 provides a overview of the

prior literature which explored the importance of environmental reporting, corporate

governance, and the relationship between environmental disclosure and corporate

governance. Section 3 discusses the development of specific hypotheses as well as

some firm-specific characteristics, which have been identified as important in previous

studies. The data is discussed in Section 4, and Section 5 outlines the research methods.

The sixth section describes and discusses the results of the empirical analysis to test the

stated hypotheses. Finally, the findings are summarised, followed by implications,

conclusions, limitations and areas for future research in Section 7.

2. Review of prior studies

2.1 Environmental reporting

There is an increasing trend for organisations in Australia and throughout the world to provide

information in relation to social and environmental activities (Gibson and ODonovan, 2007).

This trend has become particularly apparent since the early 1990s (Deegan and Gordon,

1996; Gibson and ODonovan, 2007). Further, during the mid 1990s Elkingtons (1998) Triple

Bottom Line (TBL) reporting (information on financial, social and environmental performance)

gained attention in Australia and overseas and more and more organisations adopted TBL

reporting. Many large Australian listed companies, such as BHP Billiton, Westpac Banking

Corporations and Rio Tinto, began producing separate stand-alone social and environmental

reports (Deegan, 2006). Evidence also indicates that Australian companies continue to useannual reports as a primary source of disclosure of environmental information (Adams and

Zutshi, 2004; Brown and Deegan, 1998), which further demonstrates that organisations are

realising the importance of providing such information.

TBL, as discussed above, is a result of corporations acknowledging they have wider

responsibilities towards society including shareholders and a wider group of stakeholders.

According to CPA (2002), TBL is the method by which organisations can legitimise their

operations in terms of long-term sustainability. In a study by Ernst & Young (2002), 147 senior

executives from the global 1,000 group of companies were interviewed. The majority of the

respondents (around 94 per cent) believed that practising and reporting corporate social

responsibility, which includes environmental reporting (Clarke and Gibson, 1999; Deegan and

Gordon, 1996; Hamilton, 2004), could deliver real business benefits (ODonovan, 2002a,b).

In Australia there are no mandatory requirements for firms to disclose information on theirenvironmental performance, however, organisations, which voluntarily disclose information

on their social and environmental performance report a number of reasons. Some of the

drivers discussed by Deegan (2002) are: a desire to comply with legal requirements,

economic rationality considerations, accountability and responsibility beliefs, compliance

with borrowing requirements, community expectations, attraction of ethical investment

funds, and the opportunity to win reporting awards. However, organisations desire to

legitimise their operations is considered to be one of the major motivations and is embraced

by many researchers (Cho and Patten, 2007; Deegan, 2002; de Villiers and van Staden,

PAGE 144 jCORPORATE GOVERNANCEj VOL. 12 NO. 2 2012


3/21

2009; ODonovan, 2002a,b; van Staden and Hooks, 2007). Further, Adams and Zutshi

(2004) believe that environmental reporting can improve financial returns and can increase

firm value even though it may not be quantifiable. Deegan (1999, p. 40) considers that

environmental reporting is crucial for organisations long term survival and organisations

need to be sure that there are no skeletons in the closet which may subsequently come to

the light, damaging the reputation and viability of the organisation. The supporting

arguments for environmental reporting indicate that an entitys profitability, as well as its

existence, could be affected by environmental performance. Evidence provided by de

Villiers et al. (2009), such as the nuclear disaster in 1979 (cost $975 billion), the Bhopal

disaster in 1984 (cost $470 million), the Exxon Valdezoil spill in 1989 (cost $3 billion) andBPs Texas City refinery explosion in 2005 (cost .$1.6 billion), indicate that organisations

can lose billions of dollars in clean up costs, fines and settlements. In addition to economic

loss, organisations are more likely to lose public trust and confidence, which ultimately

becomes a threat to its survival. Environmental reporting is an important way to ensure

transparency and accountability for performance.

Even though environmental reporting is showing an increasing trend, a recent report by

Jones et al. (2005) found low levels of sustainability reporting by Australian companies. They

suggest that more accessible approaches and guidelines need to be developed so that

entities can discharge a broader accountability than is currently reflected in reporting

practices in the public and private sectors in Australia. Hence it is important to have some

control mechanisms within the organisation to make sure that environmental information is

disclosed properly. The Corporate Governance Principles provided by the Australian Stock

Exchange (ASX) include the Provision of environmental information to legitimate

stakeholders as a key component. Further, Gibson and ODonovan (2007) state that an

increase in environmental reporting could be achieved by strong corporate governance,

which includes the provision of environmental information to legitimate stakeholders. Thus,

while there is indication that corporate governance plays a role in environmental reporting,

only a limited amount of research has been undertaken that considers this relationship.

2.2 Corporate governance

The Australian Stock Exchange (ASX) established a Corporate Governance Council (CGC)

in 2002 with the aim to develop agreed corporate governance requirements and establish

best practice recommendations for Australian companies (Gibson and ODonovan, 2007).

Corporate Governance is defined as the system by which companies are directed and

managed (ASX, 2003, p. 3). The main intention of principles and associatedrecommendations and guidelines is to increase the corporate performance and

accountability in the interests of both shareholders and the broader community (ASX, 2003).

The CGC released its ten principles of good corporate governance in March 2003 with the

aim to optimise corporate performance and accountability in the interest of shareholders

and the broader community (Baker, 2009). According to the requirements, listed companies

must provide information on their governance structure. The principles and guidelines of

corporate governance are not compulsory; however justification must be provided if any

listed company chooses not to follow these recommendations. The ten core principles

recommended by the ASX are listed below:

1. Lay solid foundations for management and over-sight.

2. Structure the board to add value.

3. Promote ethical and responsible decision-making.

4. Safeguard integrity in corporate reporting.

5. Make timely and balanced disclosure.

6. Respect the rights of shareholders.

7. Recognise and manage risks.

8. Encourage enhanced performance.

VOL. 12 NO. 2 2012 jCORPORATE GOVERNANCEjPAGE 145


4/21

9. Remunerate fairly and responsibility.

10. Recognise the legitimate interests of stakeholders (ASX, 2007).

Corporate governance has been defined as . . . the system by which companies are directed

and managed (ASX, 2003, p. 3). Many researchers suggest corporate governance

mechanisms as the solution to agency problems (Eng and Mak, 2003; Shan, 2009) and as a

means of mitigating managements lack of commitment which arises due to agency problems

(Bergolf and Pajuste, 2005). Therefore corporate governance is primarily designed to include

effective mechanisms to control and prevent self-interested managerial behaviour.

Even though corporate governance emerged as a potential solution to agency problems, a

broader view of corporate governance concentrates on protecting the interests of

stakeholders (Canadian Institute of Chartered Accountants, 1995; Donnelly and Mulcahy,

2008; Wise and Ali, 2008). Hence it is expected that existence of an effective corporate

governance system will have a positive effect on overall performance of the corporation,

both financial and non-financial. Corporate governance encourages the company to

promote ethics, fairness, transparency and accountability in all their dealings (Jamali et al.,

2008) and enhances a disclosure-based environment in which managers are forced to act in

the interests of both shareholders and stakeholders (Hamilton, 2004). One of the recent

studies (Beekeset al., 2008) found that firms with effective governance structures provide

more documents to the market. Further, companies are more likely to omit material

information relevant to stakeholders in the absence of mandatory requirements and

ineffective governance mechanisms (Unermanet al., 2007, cited in Mathews, 2008) and this

information asymmetry problem could be solved by good corporate governance, in

particular by an effective board of directors (Donnelly and Mulcahy, 2008). It therefore

follows that transparency and accountability enabled by corporate governance would

enhance the disclosure behaviour of the organisations. Such influence of corporate

governance on organisations disclosure behaviour, in particular environmental disclosure,

is the focus of this study. Studies that consider the link between governance and reporting

are therefore reviewed in the next section.

2.3 Corporate governance and environmental reporting

The broader view of corporate governance suggests that corporate governance should

focus on both shareholders and stakeholders and thereby widens corporations

responsibility and accountability. The ASXs tenth principle, to recognise the legitimate

interests of stakeholders further highlights the importance of corporate governance inprotecting stakeholders who are directly or indirectly related to the organisation. The

relationship between corporations responsibility, i.e. corporate social responsibility (CSR),

and corporate governance has been highlighted in many previous studies (Gibson and

ODonovan, 2007; Jamaliet al., 2008; Wise and Ali, 2008). It has been argued that CSR can

have a positive effect on profitability as well as on enhancing sustainability effective

corporate governance can help organisations to achieve this.

Previous research has suggested that corporate governance is linked with corporate

disclosure. These studies examine various governance variables and their relationship with

various types of disclosure, such as: voluntary disclosure (Cheng and Courtenay, 2006;

Donnelly and Mulcahy, 2008; Eng and Mak, 2003; Gul and Leung, 2004; Ho and Wong, 2001);

financial disclosure (Chen and Jaggi, 2000); voluntary earnings disclosure (Lakhal, 2005);

annual report public disclosure (Laidroo, 2009); and related party disclosure (Shan, 2009).Even though these studies provided mixed results, most indicated that corporate governance

variables do affect companies disclosure behaviour. Hence it is assumed that under effective

corporate governance managers are most likely to provide all the relevant information to users,

whether mandatory or voluntary, and thus enhance the overall disclosure behaviour of the firm.

Only a few studies however, have explicitly investigated the relationship between corporate

governance and environmental disclosure, and even fewer specifically in Australia. This

study attempts to fill this gap by providing a preliminary investigation into the relationship

between some measures of corporate governance and the level of environmental reporting



5/21

by Australian companies. Most often it is at the discretion of firm management to decide the

level of disclosure. They may be influenced by some external or internal pressure to reveal

more information to users. However, if the internal control systems are effective then it would

be expected that more disclosure would result, particularly non-mandatory disclosure.

Further, some of the recommendations of recent researchers highlight the importance of

governance in environmental reporting. A study by Adams and Zutshi (2004) recommends

that an appropriate governance structure is required to ensure that social and environmental

impacts and concerns of key stakeholder groups are addressed in corporate

decision-making. Similarly Wise and Ali (2008, p. 143) recommend that good corporate

governance should ensure fair treatment to all stakeholders . . . disclosure processes shouldbe transparent. Hence this study makes a contribution to research in this area as it

highlights whether governance mechanisms are related to an increase the level of

environmental disclosure in the annual report. In order to test whether effective corporate

governance increases the level of environmental disclosure, a series of hypotheses are

developed for four important corporate governance attributes: board independence,

Institutional ownership, board size and the inclusion of female directors on the board.

Hypothesis development is discussed in the next section.

3. Hypotheses development

3.1 Board independence and environmental reporting

Board independence is the most debated corporate governance issue faced by corporations.

The ASX (2003), in its second of ten corporate governance principles, recommends thatboards of listed organisations should comprise a majority of non-executive, independent

directors so that the board is able to appropriately discharge its responsibilities and duties. It

is widely accepted that board independence increases board effectiveness and thereby

enhances the firms overall performance (Bonn, 2004; Shah et al., 2008; ONeal and Thomas,

1995). Outside directors can better monitor management due to their non-official position in

the organization (Donnelly and Mulcahy, 2008) and have incentives to build reputations as

expert monitors which discourage them from colluding with inside directors (Carter et al.,

2003). Hence a lack of material interest and independent judgement would encourage board

members to act in favour of both the shareholders as well as legitimate stakeholders. Many

previous studies highlight the importance of independent directors in corporate disclosure

behaviour both mandatory and voluntary (Chen and Jaggi, 2000; Eng and Mak, 2003; Ho and

Wong, 2001; Lakhal, 2005; Cahaya et al., 2009; Shan, 2009). Moreover several studies on

voluntary disclosure found a positive association between independent directors and

voluntary disclosures (Cheng and Courtenay, 2006; Shan, 2009; Donnelly and Mulcahy, 2008).

Independent directors improve the transparency of corporate boards and voluntarily disclose

additional information (Chen and Jaggi, 2000; Donnelly and Mulcahy, 2008; Cheng and

Courtenay, 2006). They are . . . less aligned to management (Eng and Mak, 2003, p. 331)

and therefore have the capacity to force the management to disclose corporate social

responsibility (Cahaya et al., 2009). Further in a recent survey of independent directors in

Australia, respondents indicated that independent directors play an active role in ensuring that

a company meets its social responsibility (Brooks et al., 2009). The survey also indicated that

independent directors ranked this responsibility quite highly (with a mean of 2.28 out of 5).

Therefore it is expected that boards with more independent directors are more likely to ensure

that a company discharges its social responsibility, including environmental responsibility.

According to De Villierset al.(2009) boards with more independent directors force managers

to take decisions in favour of environmental activity, and they found that firms with strong

environmental performance have more independent directors. Further it is considered that

inside directors primarily focus on increasing shareholder value and are less likely to disclose,

or be concerned with, environmental issues (Kassins and Vafeas, 2002). Therefore it is

hypothesised that voluntary environmental reporting is more likely to increase with an increase

in the proportion or number of independent, non-executive directors on the board:

H1. There is a positive relationship between independent non-executive directors and

the amount of environmental reporting.



6/21

3.2 Institutional ownership (ownership concentration) and environmental reporting

Ownership concentration is considered to be an important aspect of corporate governance

whether it is dispersed or concentrated (Habib and Jiang, 2009; Shan, 2009). Institutional

ownership is one form of concentrated ownership and is measured by the percentage of

shares held by large and/or institutional shareholders. They include major collectors of

savings and suppliers of funds to financial markets such as insurance firms, pension funds

and investment firms etc. (Lakhal, 2005).

Having a majority of institutional investors may reduce board effectiveness. Large investors

are more likely to dominate and influence managements decisions (Lauet al., 2009) as theyhold large numbers of shares in the firm. This leads to a lack of board activism as well as a

lack of board independence (Bergolf and Pajuste, 2005) and sometimes may even limit or

restrict mangers decisions (Lakhal, 2005).

According to Jensen and Meckling (1976), increasing demand for information is due to the

separation of ownership and control. Hence, there is continuous pressure on management to

provide more information. However, it is suggested that large or institutional shareholders are

less likely to demand more disclosure as they can easily access internal information (Lakhal,

2005; Shan, 2009). Further . . . having access to all the information they need, block holders

could put pressure on management to keep public disclosure to the minimum (Laidroo, 2009,

p. 15). In addition firms may even have less incentive to disclose additional information as they

do not need to attract outside capital (Habib and Jiang, 2009). This ultimately results in a

decrease in overall disclosure made by the firm. Contrary to this view however, some previous

research has argued that there is a positive relationship between disclosure and institutional

ownership (Donnelly and Mulcahy, 2008; Laidroo, 2009). These studies suggest that

institutional investors having less than 25 per cent holdings have limited control over the

company, and in order to attract capital from other sources, companies need to provide more

disclosure. Consistent with their prediction, Donnelly and Mulcahy (2008) found a positive

relationship between the proportion of shares held in blocks by institutional investors and the

extent of voluntary disclosure. However, the majority of studies have found a negative

relationship between institutional ownership and corporate disclosures (Habib and Jiang,

2009; Shan, 2009; Lakhal, 2005). Under concentrated ownership managers are better able to

influence corporate values, including environmental values (Halme and Huse, 1997), and tend

to act in a socially irresponsible manner (Kassisns and Vafeas). Further, Brammer and Pavelin

(2008) found that with greater ownership concentration, firms are less likely to disclose their

environmental policy. Powerful shareholders often have more influence on managements

decisions and hence the organisation itself is expected to be less independent under highly

concentrated ownership. Independence has been measured in a variety of ways, such as

assigning an independence score or factor (Measurement of variables is discussed in the

next section). Therefore it is hypothesised that there will be less environmental reporting by

less independent organisations, or firms with concentrated ownership:

H2. There is a negative relationship between ownership concentration and

environmental reporting.

3.3 Board size and environmental reporting

Board size, that is, the number of directors on the board, plays an important role in

monitoring the boards performance. Studies that examine board size and performance are

briefly reviewed before considering studies that directly relate board size with disclosure.Board size has been found to be both positively and negatively associated with the firm

performance. Most of the literature argues in favour of smaller sized boards and importance

is attributed to limiting board size (Adams et al., 2005; Cheng, 2008; Jensen, 1993; Lau et al.,

2009; Lipton and Lorsch, 1992; van Ees et al., 2003; Yermack, 1996).

Smaller sized boards are more effective in monitoring managements actions (Lakhal, 2005;

de Villiers et al., 2009) and can function effectively as they can come to a unanimous

decision easily (Jensen, 1993; Cheng, 2008). Other studies argue that larger boards are

more effective as they can bring more experience and knowledge and offer better advice



7/21

(Dalton et al., 1999; Bonn, 2004). However major drawbacks are identified with larger

boards, including a lack of communication, slow decision making, and a lack of unanimity

that ultimately affects board effectiveness and efficiency.

Many prior studies relate board size to disclosure. Decisions such as the content and extent

of environmental disclosure to go in the annual reports need intensive involvement, more

unanimity, effective communication, and coordination by board members. As discussed

earlier, these characteristics are less likely to be achieved by larger sized boards. Further

Kassins and Vafeas (2002) found that larger boards are less effective in preventing

behaviour that leads to environment related lawsuits. In addition, Australian firms have been

reported to have smaller sized boards than in other countries (Bonn, 2004; Lee and Shailer,2008) and hence it is hypothesized that the relationship between board size and

environmental disclosure will be negative:

H3. There is a negative relationship between board size and environmental reporting.

3.4 Proportion of female directors and environmental reporting

The level of diversity on a board affects their decisions and activities (Adams and Ferreira,

2004) and has been reported as having a positive effect on firm performance in Australia

(Bonn, 2004). One considerably debated characteristic of board diversity is gender. The

importance of gender diversity in the boardroom has been raised in recent proposals for

governance reform (Adams and Ferreira, 2004). It is increasingly being viewed that women

can make a significant contribution to the board. Huse and Solberg (2006) found that women

are more committed and involved, more prepared, more diligent, ask questions andultimately create a good atmosphere in the boardroom. Similarly, Adams and Ferreira (2004)

found that more women on the board improves the decision making process, enhances

board effectiveness and that women have better attendance/participation.

In addition to firm performance, having more female directors on the board can also have

positive effect on disclosure, both financial and non financial; adding women on corporate

boards may have important signalling effects to stakeholders . . . Bringing women onto

corporate boards should thus have positive bottom line effects (Huse and Solberg, 2006,

p. 114). According to Ibrahim and Angelidis (1994) female directors exhibit greater

responsibilities, in their analysis they found that women are more philanthropically driven

and less concerned with economic performance. Another argument in favour of having more

female directors is that they are able to enhance the boards independence (Kang et al.,

2007) and Independence is an important factor which enhances accountability, and therebyhas the potential to increase the level of disclosure. In summary, female directors active

involvement, better preparation, independence and other unique qualities, enable them to

make a significant contribution to complex discussions and decisions such as environmental

disclosure. Hence it is expected that more female directors on a board will increase the

amount of environmental disclosure made by the firm:

H4. There is a positive relationship between the proportion of female directors on board

and environmental reporting.

3.5 Control variables

As noted in the literature, firm specific characteristics may also affect the extent of

environmental disclosure in the annual report and so this study includes firm size,

profitability and Industry as control variables.Many studies have found that firm size is significantly associated with corporate disclosure

(Donnelly and Mulcahy, 2008; Eng and Mak, 2003; Gul and Leung, 2004; Ho and Wong,

2001; Laidroo, 2009; Lakhal, 2005). Association between firm size and environmental

disclosure has also been suggested, in that larger firms are more likely to identify

environmental issues (Al-Tuwaijriet al., 2004; Clarksonet al., 2008; Patten, 1992; Patten and

Trompeter, 2003). Further de Villierset al.(2009) found that firm size is positively associated

with the presence of strong environmental performance, and evidence also exists that

indicates a positive association between environmental disclosure and firm size (Deegan



8/21

and Gordon, 1996; Halme and Huse, 1997). Three measures of firm size are used in this

study: total assets, market capitalisation and operating revenue.

Profitability has also been shown to affect disclosure levels, and in this study is measured by

Return on Assets (ROA). Reported profit was not used because of the effects of the time lag

related to annually reported profit. The use of ROA is consistent with other disclosure based

studies (Cheng and Courtenay, 2006; de Villiers et al., 2009; Gul and Leung, 2004).

Profitability has given contradictory results in previous literature. Some studies found

positive associations (Al-Tuwaijri et al., 2004; de Villiers et al., 2009), other studies found

negative association (Chen and Jaggi, 2000; Laidroo, 2009) whereas some found no

relationship (Eng and Mak, 2003; Patten, 1991).

The industry within which the firm operates may also affect the level of disclosure (Ho and

Wong, 2001; Lakhal, 2005; Patten, 1991). Environmentally sensitive industries (forestry,

metals, coal, oil, gas, paper, chemicals and electricity) usually disclose more environmental

information (Cho and Patten, 2007; Deegan and Gordon, 1996; Halme and Huse, 1997).

Further, de Villiers et al. (2009) suggest that firms with strong environmental performance are

more likely to operate in environmentally sensitive industries. In this study dummy variables

for industry classification are included.

Table I provides a summary of studies of corporate governance and disclosure, the

variables used, and the relationships found.

4. DataThe sample used in this study is the largest 100 Australian firms listed on the Australian Stock

Exchange (ASX) in 2008, selected on the basis of market capitalisation. Three firms were

dropped because of insufficient data and one due to unexplained outliers resulting in a

sample of 96 companies.

The 2008 annual reports of the 96 firms were examined to determine the amount of

environmental reporting these data will be compared with various corporate governance

measures. While companies communicate their disclosure with stakeholders by other

means these means are outside the scope of this study.

Table II summarises variables used and how they are measured in this study. Data for the

explanatory variables of interest (i.e. independent) and control variables were extracted

from the electronic database OSIRIS (www.bvdinfo.com/Products/Company-Information/

International/OSIRIS.aspx). Industry category which is based on the Global IndustryClassification code (GICS, n.d.), but with the nine sectors reclassified into five categories:

Materials, Energy, Consumer discretionary, Finance, and IT & Telecommunication.

Independence of the firm was measured by, first, the proportion of institutional investors,

and second, using an independence factor score, assigned by the publishers of the OSIRIS

database. This measure is an indicator that characterises the degree of independence of a

company with regard to its shareholders. The BVD Independence Indicators are classified

as A, B, C, D and U with further qualifications. As the majority of companies in the sample fell

into classification A or B, these were recorded into a dummy variable for inclusion in the

regression model, 1 companies in classification A, 0 all other companies (companies

classified as 1 having higher independence than those classified as 0). A summary of the

classification is provided in Table III.

Table IV presents the descriptive statistics for the variables used in this study. As shown inthe table, the dependent variables, environmental disclosure (env_disc and env_perc)

exhibit substantial spread (and are significantly positively skewed) and so they are

transformed by taking the natural logarithm (giving lnenv_disc and lnenv_perc).

With regard to corporate governance variables, the level of Institutional Ownership (inst_inv)

is relatively high with a mean of 67.6 per cent, and about 60 per cent of the board of directors

are independent (ind_dir). That is, the majority of Australian companies have reasonably

concentrated ownership and they have a high proportion of independent directors on their

boards.



9/21

Table I Summary of studies that examine corporate governance and disclosure

Study Sample (country) Dependent variable CG variables Relationships

de Villierset al. (2009) Top 100 companies

(USA)

Corporate environmental

performance

Board size PositiveInstitutional investors NegativeProportion of independent

directors

Positive

CEO duality Negative

Shan (2009) 120 companies (China) Related party disclosure Ownership concentration Negative

Foreign ownership PositiveState ownership PositiveProportion of independent

directors

Positive

Professional supervisors

proportion

Positive

Gul and Leung (2004) 385 companies (Hong

Kong)

Voluntary corporate

disclosure

CEO duality NegativeProportion of expert outside

directors

Negative

Cheng and Courtenay

(2006)

115 companies

(Singapore)

Voluntary disclosure Proportion of independent non

executive directors

Positive

Board size No relationshipCEO duality No relationship

Lakhal (2005) 207 companies (France) Voluntary earnings

disclosure

Proportion of independent

directors

No relationship

Board size No relationshipInstitutional ownership NegativeForeign ownership Positive

Halme and Huse (1997) 140 firms (Finland)

(Norway) (Spain)

(Sweden)

Environmental reporting Ownership concentration No relationshipBoard size No relationship

Laidroo (2009) 52 companies (three

European emerging

capital markets)

Public announcements

disclosures

Ownership concentration NegativeForeign ownership NegativeInstitutional ownership Positive

Ho and Wong (2001) Questionnaire

(Responds from 98 CFOs

and 92 analysts) (Hong

Kong)

Voluntary disclosure Proportion of independent

directors

No relation

Audit committee PositiveDominant personalities

(CEO/Chairman duality)

No relation

Percentage of family members Negative

Donnelly and Mulcahy

(2008)

51 companies annual

reports (Irish market)

Voluntary disclosure Proportion of non- executive

directors

Positive

CEO/Chairman duality Positive (weak)Managerial ownership No relationshipInstitutional investors No relationship

Eng and Mak (2003) 158 companies

(Singapore)

Voluntary disclosure Managerial ownership NegativeBlock holder ownership No relationshipGovernment ownership PositivePercentage of independent

directors

Negative

Cahaya et al.(2009) 33 companies

(Indonesia)

Voluntary labour

practices and decent

work disclosures

Board independence No relationship

Chen and Jaggi (2000) Top 87 firms (Hong Kong) Financial disclosure Percentage of independent

directors

Positive

Ibrahim and Angelidis

(1994)

398 Survey Corporate responsibility Percentage of female directors Positive

Habiband Jiang (2009) 116 companies (New

Zealand)

Voluntary disclosure

practices

Ownership concentration:Institutional NegativeManagerial PositiveGovernment Positive



10/21

5. Methods

The bivariate relationships between the variables are examined using Pearsons product

moment (pair wise) correlation coefficients; this allows examination of whether there is a

statistically significant association between the variables. As well as providing information in

its own right, these measures allow assessment of the likelihood of econometric problems

when conducting the regression analysis; high correlation between independent variables is

Table II Summary of variables

Full variable name

Abbreviated

variable name Variable description/measurement

Dependent variablesEnvironmental disclosure env_disc Total number of words dedicated to

environmental issues in the annual reportProportion of environmental

disclosure

env_perc Total number of words dedicated to

environmental issues in the annual report divided

by total words in the annual reportIndependent variablesIndependent directors p_inddir Number of independent directors on board

divided by total number of directorsInstitutional investors inst_inv Percentage of Institutional InvestorsFirm independence Indfactdy BVD independence factor dummyBoard Size tot_dir Number of directors on boardFemale directors p_femdir Number of female directors on board divided by

total number of directorsControl variablesFirm size tot_asst Total assets ($m)

mkt_cap Market capitalisation ($m)op_revn Operating revenue ($m)

Profitability ret_ta Return on asset (ROA)Industry INDUSTRY Industry classification dummy set

energy Energy

mat_ind Materials/Industrialsc_dis_hc Consumer discretionary/consumer staples/heath

carefinance Financialsit_tel_ul Information technology/telecom services/utilities

Table III BVD independence factor

IF Description

A High independence: attached to the company where shareholders are identified and no more

than 25 per cent of direct or total ownership is held by these identified shareholders. This is

further qualified as A , A or A- depending on the ability to identify number of shareholders

B Attached to the company where shareholders are identified and no more than 50 per cent of

direct or total ownership is held by these identified shareholders but having one or more

shareholders with an ownership percentage .25 per cent. This is further qualified as B , B or

B 2 depending on the ability to identify number of shareholders

C Attached to the company with a recorded shareholder with a total or a calculated total ownership

over 50 per cent. This is further qualified as C , C depending on total of direct ownership

percentage

D Low independence: Attached to the company with a recorded shareholder with a direct

ownership of over 50 per cent

U Attached to the companies that do not fall into any of the above categories (A, B, C Or D)

i.e. unknown degree of independence

Source: BVD (2009)



11/21

a sufficient (but not necessary) indicator[1] of multicollinearity, which renders estimators

unreliable.

Multivariate analysis is conducted using linear regression, i.e. Ordinary Least Squares

(OLS). The relationship being examined is assumed to be linear; to fulfil data requirements

for linearity several variables are transformed (see discussion above).

The underlying model is based on the linear (in parameters) specification:

Yi b1 b1X1i b2X2i. . . bkXki 1i 1

Where Yiis the dependent variable for firm i; Xs are independent and control variables (from

1 to k); bs are the estimated parameters of the model, and 1 is the zero mean,

homoscedastic and serially independent regression error.Following estimation the usual battery of diagnostic tests are performed to ensure

assumption of the OLS are fulfilled.

Modelling voluntary environmental reporting does present empirical problems. As with all

statistical modelling, there is a potential for omitted variable bias due to unknown,

immeasurable or unavailable data. According to the Ramsey RESET test, however, the

final model exhibits no evidence of omitted variables (see below).

The second issue is that of endogeneity: for example, if environmental reporting increases

due to an increase in the proportion of independent directors, but reporting levels attracts

independent directors, the measures are endogenous[2]. Controlling potential endogeneity

analytically requires an Instrumental Variables (IV) estimator. As is also well known, IV

estimators cannot always be applied as necessary instruments are not available. To the

extent that there may be omitted variables or endogeneity, estimates must be treated withcaution. Note that model residuals are approximately normally distributed and this can be

taken as an informal sign that there are no obvious estimation issues.

6. Results and discussion

Table V contains the Pearsons Correlation Coefficients for the dependent and independent

variables. An initial examination suggests that some relationships are contrary to all four

hypotheses. Environmental disclosure (env_perc) is, as expected, positively, statistically

Table IV Descriptive statistics

Measure Minimum Maximum Mean Std. dev

tot_ast $mAU 0.17 656.799 34.76 105.21op_rev $mAU 0.0004 79.57286 6.05 12.02mkt_cap $mAU 1.72 146.66 10.01 17.83ret_ta % 269.46 567.48 14.98 59.67inst_inv n 4.65 99.87 67.76 23.69tot_dir n 5.0 21.0 10.17 2.96Ind_dir n 2.0 11.0 6.03 1.90p_inddir % 26.0 90.0 60.26 13.43fem_dir n 0 4.0 1.35 1.05p_femdir % 0 38.0 12.88 9.34env_disc n 16.0 1,0015.0 1,561.28 1,807.11lnenv_disc n 2.77 9.21 6.76 1.23env_perc % 0.07 11.59 2.47 2.34lnenv_perc n 22.70 2.45 0.45 1.05energy n 0 1 0.17 0.37finance n 0 1 0.29 0.46mat_ind n 0 1 0.30 0.46it_tel_ul n 0 1 0.05 0.22c_dis_hc n 0 1 0.19 0.39indfacty n 0 1 0.76 0.43

Notes:Number of observations (n) 96; (2) The means for dummy variables can be interpreted as the proportion in that group



12/21

Table

V

Pearsonscorrelationcoefficient(r)matrix

tot_asst

op_

revn

Mkt_cap

ret_ta

inst_inv

Tot_dir

Ind_

dir

p_

inddir

fem_

dir

p_

femdir

tot_wrd

env_

disc

env_

perc

tot_asst

1

op_

revn

0.2

320*

1

mkt_cap

0.4

635*

0.6

184*

1

ret_ta

20.0

682

20.0

379

20.0

48

1

inst_inv

20.1

011

20.0

903

20.0

906

0.0

96

1

tot_dir

0.1

128

0.4

335*

0.3

754*

0.0

715

20.0

613

1.0

000

ind_

dir

0.2

227*

0.2

976*

0.1

495

0.1

431

20.1

090

0.6

837*

1.0

000

P_

inddir

0.1

810

20.0

325

20.0

931

0.0

659

20.1

170

20.2

122*

0.5

404*

1

fem_

dir

0.1

767

0.2

266*

0.2

611*

0.0

482

20.2

443*

0.4

530*

0.4

499*

0

.0967

1

P_

femdir

0.1

720

0.1

140

0.1

556

0.0

143

20.2

455*

0.1

324

0.2

613*

0

.2044*

0.9

140*

1

tot_wrd

0.5

657*

0.6

154*

0.5

989*

20.0

283

20.1

153

0.4

059*

0.4

231*

0

.1847

0.3

350*

0.2

686*

1

env_

disc

20.0

055

0.4

679*

0.1

638

20.0

793

0.1

375

0.3

625*

0.2

465*

20

.0622

0.1

2

0.0

217

0.4

65

6*

1

env_

perc

20.1

596

0.1

168

20.0

788

20.0

873

0.2

659*

0.1

577

0.0

606

20

.1113

0.0

262

20.0

332

0.0

86

6

0.8

551*

1

Notes:n

96;*represents

p-valueforstatisticalsignificance#

0.0

5



13/21

significantly, correlated with institutional investors (inst_inv) (r 0.2659, p-value 0.009).

However, the correlation with board size (tot_dir) is not significant (r 0.1577, p-value

0.125) and nor it is negatively correlated with percentage of independent directors (p_inddir)

(r 2 0.1113, p-value 0.280) or the percentage of female directors (p_femddir)

(r20.0332,p-value 0.748).

As correlations only indicate a potential bivariate relationship, and alone are not sufficient to

make inferences, the next stage in the analysis is to examine multivariate regression models.

6.1 Modelling results

In the regression model the percentage of environmental disclosure (env_perc) is regressed

on five corporate governance variables: percentage of independent directors (p_inddir),

proportion of institutional investors (inst_inv), an independence dummy (indfactdy), board

size (tot_dir) and percentage of female directors (p_femdir). In addition, control variables for

firm size, profitability and industry are included.

Various forms of the models were explored incorporating different measures of the

dependent variable (ln_envperc, env_perc, and lnenv_disc), but are not reported here as

the results were not significantly different. In addition, exploratory models considered

alternative explanatory variable specifications[3]. The following model is estimated and the

results presented in Table VI[4].

lnenv_perc b0 b1p_inddir b2inst_inv b3tot_dir b4p_femdir b5mkt_cap

b6op_rev b7tot_asst b8ret_ta b9 indfactdyb10c_dis_hc

b11it_tel_ul b12energy b13finance 2

where:

lnenv_perc> Natural log of percentage of environmental disclosure.

p_inddir> Percentage of independent directors.

inst_inv Percentage of institutional investors.

tot_dir Total number of directors.

p_femdir Percentage of female directors.

mkt_cap Market capitalisation ($m).

Table VI Regression model results

lnenv_perc Coefficient Std. err. t -statistic

Significance

( p. [t])

tot_asst 20.001 0.001 20.670 0.502op_revn 0.011 0.009 1.230 0.221mkt_cap 20.008 0.007 21.220 0.228Ret_ta 20.005 0.001 23.200 0.002*Energy 0.204 0.255 0.800 0.425c_dis_hc 21.146 0.248 24.620 0.000*Finance 21.169 0.247 24.730 0.000*

it_tel_ul 2

1.186 0.391 2

3.030 0.003*Indfactdy 0.203 0.206 0.980 0.328Inst_inv 0.013 0.004 3.370 0.001*Tot_dir 0.070 0.033 2.110 0.038*p_inddir 0.013 0.007 1.860 0.067**p_femdir 0.025 0.010 2.550 0.013*_cons 21.666 0.693 22.400 0.019

Notes: *Significant at the 5 per cent level; **Significant at the 10 per cent level, F-test is for all coefficients simultaneously zero;

(Independent variables using percentage of independent and female directors); Dependent variable Log of env_perc (lnenv_perc);

Number of observations 96;R2 0.5193; AdjustedR2 0.4431; F(13, 82) 6.81; Probability . F 0.000



14/21

op_rev Operating revenue ($m).

tot_asst Total assets ($m).

ret_ta Return on total assets.

indfactdy BVD Independence factor (dummy).

Industry dummy variables: c_dis_hc Consumer discretionary, staples or health care

spending, it_tel_ul Information technology, telecom services or utilities, energy Energy,

finance Financials, mat_ind Materials or Industrials (excluded base-case).

The adjusted coefficient of determination (Adjusted R2) is 0.4431 and R2 indicates that

about 52 per cent of the variation in the dependent variable (about its mean) is explained by

variation in the independent variables suggesting the explanatory power of the model is

satisfactory given the nature of the sample.

Diagnostic tests indicate no modelling problems. Examination and testing of the model

residuals suggest they are approximately normally distributed. Specifically: the Ramsey

RESET test for omitted variables cannot reject the null hypothesis (F(3, 79), p-value 0.312);

the variance inflation factor test suggest no collinearity of Xs with the error (mean VIF1.48,

highest 2.16); there is no evidence of heteroskedasticity (Whites test p-value 0.3983); or for

heteroskedasticity, skewness or kurtosis according to Cameron and Trivedis (2005)

decomposition of IM-test (minimum p-value 0.283); and finally the plot of residuals is

approximately normal.

Control variables

Regression results suggest that industry type plays some part in explaining environmental

reporting: consumer discretionary, staples or health care spending (c_dis_hc), finance, and

Information technology, telecom services or utilities (it_tel_ul) have significant coefficients

around 21.2 (the Wald tests of linear hypotheses indicates the coefficient for the three

dummy variables are not statistically different F(2, 82) 0.01,p-value 0.99). Accordingly,

the model suggests being in one of these industries decreases the proportion of

environmental reporting in annual reports compared to other industries. This result is not

unexpected and can be explained by the fact that significant dummies (e.g. materials and

energy) are highly environmentally sensitive industries and therefore more scrutinised by

regulators and the general public. Hence the companies in these industries tend to disclose

more information on the environment. This result is consistent with the majority of theprevious literature (Cho and Patten, 2007; Deegan and Gordon, 1996; de Villiers et al., 2009;

Halme and Huse, 1997).

Control variables for firm size (tot_asst, op_revn, mkt_cap) are not statistically significant

(lowestp-value 0.221). This result is in contrast to the prediction that large firms disclose

more environmental information found in previous studies (Donnelly and Mulcahy, 2008; Eng

and Mak, 2003; Gul and Leung, 2004; Ho and Wong, 2001; Laidroo, 2009; Lakhal, 2005).

One possible explanation for the difference in this study is that firms in the sample are all

large, coming from the top 100 listed Australian companies.

On the other hand, the control for profitability (ret_ta) is highly significant ( p-value 0.002)

the coefficient (20.0046) suggesting that an increase in profitability reduces the proportion

of environmental reporting. The impact is not substantial. However, an increase in return on

assets of 1 per cent reduces the proportion of environmental reporting by just under 1 percent[5]. This result is in contrast to findings of several prior studies, although the results have

been mixed. One could argue that more profitable firms are well established and may not be

motivated to disclose environmental information to their stakeholders, or may be disclosing

this in an alternative medium, such as a separate environmental report.

Explanatory variables

The Independence Factor dummy variable is not significant ( p-value 0.328), but institutional

Investors (inst_inv), total directors (tot_dir) and female directors (p_femdir) are statistically



15/21

significant at the 5 per cent level, while independent directors (p_indir) is significant at about

the 7 per cent level ( p-value 0.067).

The coefficients vary between approximately0.013 to0.070 hence the impact of a change

in one unit in the explanatory variables increases the proportion of environmental reporting

by about 1 per cent[6]. (Testing indicates that the four coefficients are not statistically

different.) Hence the influence on the proportion of environmental reporting of these corporate

governance variables is relatively small. That is, an addition of one independent, or one

institutional director, or a 1 per cent increase in the proportion of independent or female

directors all increase the proportion of environmental reporting by about 1 per cent.

One suggestion for the lack of difference in the impact of various categories of directors is

due to the small size of the sample a smaller sample is associated with a larger standard

deviation.

6.2 Results of hypothesis testing

6.2.1 Proportion of independent directors and environmental reporting. The first hypothesis

(H1) suggests that the percentage of independent directors is positively associated with the

level of environmental disclosure. The result is statistically significant ( p-value 0.067)

which suggests that Australian firms with more independent directors do provide more

information on their environmental performance. Therefore, H1 is supported.

The result is consistent with the findings of many previous studies (Chen and Jaggi, 2000;

Cheng and Courtenay, 2006; de Villiers et al., 2009; Donnelly and Mulcahy, 2008; Ho andWong, 2001; Shan, 2009) which all found a positive association between independent

directors and various types of disclosure. Further, de Villierset al.(2009) in particular, found

that a firm with more independent directors resulted in better environmental performance. In

addition an interesting point to be noted is that in previous studies which found a positive

association between independent directors and disclosure Ho and Wong (2001) in Hong

Kong, Cheng and Courtenay (2006) in Singapore, and Shan (2009) in China it was found

that Boards had an average of only 28 to 36 per cent independent directors. Whereas the

descriptive statistics for this study reveal that there is a greater representation of

independent, non-executive directors on the boards of Australian firms (average 60 per

cent). This indicates that the proportion of independent directors whether small or large, can

have a strong positive effect on the disclosure behaviour of firms.

6.2.2 Institutional investors and environmental reporting. The second hypothesis (H2)suggested that the less concentrated ownership of a firm is (that is, the fewer institutional

investors) the more environmental disclosure is likely. The result in this study appears to

provide a contrary conclusion: institutional investors have a small but positive impact

( p-value 0.001). As this is opposite to that hypothesized, H2 is not supported. One

possible explanation for this unexpected relationship could be that institutional investors in

Australia, as mentioned earlier, include insurance firms, pension funds and investment firms.

As these entities have limited control over the reporting firms they may not have sufficient

access to the information they need and therefore are more likely to rely on public disclosure.

In addition, during recent years, poor environmental performance and environmental

disasters became a major threat to many organisationssurvival. As institutional investors are

the main suppliers of funds to financial markets, firms environmental performance

information may be perceived as important in assessing the possible risk involved in

financing. Therefore, they may put pressure on management to disclose more information onenvironmental performance, hence explaining the result in this study.

Another reason could be the makeup and size of the sample. The sample comprises 96 of

the top 100 listed Australian companies, and each of these large companies is more likely to

have a large number of institutional investors. This may mean that the model might not be

able to differentiate the variation in the disclosure. A larger sample with different sized firms

would useful for future research. Alternatively, it may be that the proportion of institutional

investors is not a good proxy for the level of control exercised over a firm. For this reason, an

additional variable, the BVD independence factor, was also included in the model, but this



16/21

measure is not statistically insignificant and hence does not appear to be influential in

environmental disclosure ( p-value 0.328).

6.2.3 Board size and environmental reporting. The third hypothesis (H3) predicted that

board size would be negatively associated with environmental disclosure. Contrary to H3,

the result showed a statistically significant positive relationship between board size and

environmental disclosure ( p-value 0.038), therefore H3 is not supported. The result is

consistent with de Villierset al.(2009) who found a positive association between board size

and environmental performance, suggesting that larger boards possess the necessary

expertise to ensure strong environmental performance. However the result is in contrast to

other previous findings that found significant negative relationships between board size andboth firm performance and disclosure (Cheng, 2008; Kassins and Vafeas, 2002; ONeal and

Thomas, 1995; Yermack, 1996) as well as with others that found no significant association

(Cheng and Courtenay, 2006; Lakhal, 2005; Halme and Huse, 1997).

One possible explanation could be that the majority of the companies (66 out of 96) in the

sample had approximately 8 to 12 members on their board, that is, there was little variation in

the size of the boards. It is more likely that in a small sample where the majority of companies

consist of a similar number of total directors, the results would not highlight the influence of

board size. In addition, previous literature provides a great deal of evidence of an upward

trend in environmental reporting in Australia during recent years, which may be another

reason for the positive influence.

6.2.4 Proportion of female directors and environmental reporting. The fourth hypothesis (H4)

suggested that the percentage of female directors on a board is positively associated withthe level of environmental disclosure. Consistent with the hypothesis the coefficient is

statistically significant ( p-value 0.013) and suggests that as the percentage of female

directors on boards in large Australian companies increases, environmental disclosure also

increases. Therefore,H4 is supported.

This result is consistent with many previous studies that found female directors have the

potential to increase overall performance of the firm (Adams and Ferreira, 2004; Bonn, 2004;

Carteret al., 2003; Huse and Solberg, 2006) and that the number of females on a board is

positively associated with corporate disclosure (Julie, 1996; Ibrahim and Angelidis, 1994).

Descriptive statistics clearly indicate that only approximately 13 per cent of the total director

positions in 96 of 100 of Australias top companies are occupied by females. In addition 23

companies did not have any female directors at all, while 34 companies had only one female

director. Therefore, despite the low percentage of female directors in these companies, thisstudy shows a positive and significant relationship, indicating that female directors do have

a positive effect on environmental disclosure practices.

7. Conclusion

Major findings in this study both support and contradict conventional wisdom regarding the

proportion of environmental reporting by Australias largest companies.

All of the 96 of the top 100 companies in Australia studied had some level of environmental

reporting, suggesting that Australian firms do attribute importance to environmental

reporting and supports the evidence that environmental reporting is becoming a more

predominant activity. Moreover, strong corporate governance does appear to have an effect

on the proportion of environmental reporting in the annual reports of Australias largestcompanies. In this study all measures of corporate governance were found to be significant,

although not all in the predicted direction. Nonetheless, these findings show that boards that

include both independent and female directors are likely to have a positive influence on

firms environmental reporting, which is important for wider stakeholders and for the public in

general, in light of the many environmental problems facing global society.

The finding that as board size increases environmental reporting increases, although

contrary to the majority of literature, has been found in a few other studies as discussed

previously. This has implications for firms CEOs in determining the optimal size for the



17/21

board. However, the result needs to be interpreted with caution, particularly given that it

contrasts with most other studies that the majority of companies in the sample had a

relatively small board size, and that the sample comprises larger companies. As for the

result that indicates that the higher the number of institutional investors that a company has,

the higher the amount of environmental reporting that occurs, this is unexpected and

interesting. This might again simply be an artefact of the sample, that is, a size effect, as

these are all large companies and had an average of approximately 68 per cent of

institutional investors (the maximum being almost 100 per cent). A comparative study of

companies with fewer institutional investors is important to consider this further.

These results have implications for regulators, directors, and company strategists. They are of

interest to regulators, such as the ASX, as the ASX explicitly requires the recognition of

stakeholders other than shareholders. The ASX could consider expanding its CGC to include

consideration of the environment, which is increasingly considered to be an important aspect

of corporate social responsibility, and one of the responsibilities of the board of directors. In

addition, the results have important implications for companies themselves, as they indicate

that companies, which include a commitment to the environment in their mission and

strategies should consider the impact of board structure and composition, as both of these are

shown to have a significant effect on the amount of environmental information disclosed by

companies. Further, the results that show a positive relationship between institutional investors

and environmental reporting indicates a need for further measures to obtain more accurate

data on the percentage of shares held by each institutional investor.

Limitations and further research

As with all research, this study has some limitations. First, in this investigation only annual

reports are considered as a major means for corporations to disclose environmental

information to stakeholders. Further, only 96 of the top 100 Australian, large (publicly listed)

companies, annual reports were reviewed and hence the results are generalisable only to

the Australian market; these results may not apply to other locations, or to smaller or unlisted

companies. Second, it is not within the scope of this study to measure the quality of the

disclosures. Finally, only four corporate governance variables were included which may not

be comprehensive enough to conclude there is a significant relationship between corporate

governance and environmental reporting, but this study provides some preliminary

evidence, and areas for further consideration.

A number of potential areas for future research arise from this study. First, an investigation

using a larger sample, and including small, medium and private companies would provide

more certainty of the influence of corporate governance on environmental reporting.

Second, future research could consider the use of various means to gather information other

than annual reports such as stand-alone reports, or the corporate website. In addition, a

longitudinal study, case studies and interviews with board members should be considered

as these would provide a more in-depth analysis. Fourth, a comprehensive study, which

involves comparing data from different countries, would then allow the results to be

generalised to wider locations. Finally, including a broader set of corporate governance

variables and measures (e.g. board committees, types of remuneration, CEO duality) that

have been examined in other studies, would then allow investigation of how other elements

of corporate governance affect environmental reporting.

This study has provided a glimpse of the relationship between corporate governance andenvironmental reporting, two important aspects of business operations in a global society.

The results provide some evidence that environmental reporting is a common practice for

most companies, and is positively related to at least some corporate governance measures.

Notes

1. High pair wise correlation may suggest the presence of co-linearity but it cannot identify

multicollinearity. A less technical approach is taken; signs of multicollinearity are examined by



18/21

estimating models with sub-sets of variables. There is no evidence that multicollinearity is present in

the final model presented.

2. This study has not explored the theoretical possibility that reporting influences the type of directors

appointments.

3. All results available from the contact author on request.

4. The general-to-specific method was used to obtain the parsimonious model. Statistically significant

variables do not change; there are very small change in their size results available from the

contact author on request.

5. That is, e-0.0046 0.995.

6. That is, e0.0126 1.0127 and e0.0695 1.0720.

References

Adams, C. and Zutshi, A. (2004), Corporate social responsibility: why business should act responsibly

and be accountable, Australian Accounting Review, Vol. 14, pp. 31-40.

Adams, R., Almeida, H. and Ferreira, D. (2005), Powerful CEOs and their impact on corporate

performance,Review of Financial Studies, Vol. 18, pp. 1403-32.

Adams, R.B. and Ferreira, D. (2004), Gender diversity in the boardroom, ECGI Working Paper Series

in Finance, No. 58, European Corporate Governance Institute (ECGI), Brussels.

Al-Tuwaijri, S.A., Christensen, T.E. and Hughes, K.E. II (2004), The relations among environmental

disclosure, environmental performance, and economic performance: a simultaneous equations

approach,Accounting, Organisations and Society, Vol. 29, pp. 447-71.

ASX (2003), Corporate Governance Council principles of good corporate governance and best

practice recommendations, Australian Stock Exchange, available at: www.asx.com.au

ASX (2007), Revised corporate governance principles and recommendations, Australian Stock

Exchange, available at: www.asx.com.au

Baker, R.C. (2009), From member of the company to registered auditor in corporate governance,

AAR-Australian Accounting Review, CPA Australia, Vol. 19, pp. 24-32.

Beekes, W., Brown, P. and Chin, G. (2008), Do better-governed firms make more informative

disclosures? Canadian evidence, Corporate Governance, Special Interest Group Newsletter, British

Accounting Association, Vol. 10, pp. 1-8.

Bergolf, E. and Pajuste, A. (2005), What do firms disclose and why? Enforcing corporate governance

and transparency in Central and Eastern Europe, Oxford Review of Economic Policy, Vol. 21,

pp. 178-97.

Bonn, I. (2004), Board structure and firm performance: evidence from Australia, Journal of the

Australian and New Zealand Academy of Management, Vol. 10, pp. 14-24.

Brammer, S. and Pavelin, S. (2008), Factors influencing the quality of corporate environmental

disclosure,Business Strategy and the Environment, Vol. 17, pp. 120-36.

Brooks, A., Oliver, J. and Veljanovski, A. (2009), The role of the independent directors: evidence from a

survey of independent directors in Australia, Australian Accounting Review, Vol. 19, pp. 161-77.

Brown, N. and Deegan, C. (1998), The public disclosure of environmental performance information

a dual test of media agenda setting theory and legitimacy theory,Accounting and Business Research,

Vol. 29, pp. 21-42.

BVD (2009), Bereau van Dijk Electronic Publishing, available at: www.bvdinfo.com/Products/Company-

Information/International/OSIRIS.aspx

Cahaya, F.R., Porter, S., Tower, G. and Brown, A. (2009), Labour practices and decent work disclosures

in Indonesia, paper presented at the AFAANZ Conference, Adelaide.

Cameron, A.C. and Trivedi, P.K. (2005), Microeconometrics: Methods and Applications, Cambridge

University Press, New York, NY.



19/21


20/21

Halme, M. and Huse, M. (1997), The influence of corporate governance, industry and country factors

on environmental reporting, Scandinavian Journal of Management, Vol. 13, pp. 137-57.

Hamilton, K. (2004), The need for effective communication with market stakeholders, Australian

Accounting Review, Vol. 14, pp. 3-9.

Ho, S.M. and Wong, S.K. (2001), A study of relationship between corporate governance structures and

the extent of voluntary disclosure, Journal of International Accounting, Auditing & Taxation, Vol. 10,

pp. 139-56.

Huse, M. and Solberg, A.G. (2006), Gender related boardroom dynamics: how Scandinavian women

make and can make contributions on corporate boards, Women in Management Review, Vol. 21,pp. 113-30.

Ibrahim, N.A. and Angelidis, J.P. (1994), Effect of board members gender on corporate social

responsiveness orientation,Journal of Applied Business Research, Vol. 10, pp. 35-41.

Jamali, D., Safieddine, M.A. and Rabbath, M. (2008), Corporate governance and corporate social

research synergies and interrelationships, Corporate Governance: An International Review, Vol. 16, p.443.

Jensen, M.C. (1993), The modern industrial revolution, exit, and the failure of internal control systems,

The Journal of Finance, Vol. 48, pp. 831-80.

Jensen, M.C. and Meckling, W.H. (1976), Theory of the firm: managerial behaviour, agency costs and

ownership structure,Journal of Financial Economics, Vol. 3 No. 4, pp. 305-65.

Jones, P.S., Frost, G., Loftus, J. and van der Laan, S. (2005), Sustainability Reporting Practices,

Performance and Potential: A Research Project Commissioned by CPA Australia, BusinessManagement, Australia.

Julie, S. (1996), The relationship of board member diversity to organizational performance,Journal of

Business Ethics, Vol. 15, pp. 1313-21.

Kang, H., Cheng, M. and Gray, S.J. (2007), Corporate governance and board composition: diversity

and independence of Australian boards, Corporate Governance, Vol. 15 No. 2, pp. 194-207.

Kassins, G. and Vafeas, N. (2002), Corporate boards and outside stakeholders as determinants of

environmental litigation,Strategic Management Journal, Vol. 23, pp. 399-411.

Laidroo (2009), Association between ownership structure and public announcements disclosures,

Corporate Governance: An International Review, Vol. 71, pp. 13-34.

Lakhal, F. (2005), Voluntary earnings disclosures and corporate governance: evidence from France,

Review of Accounting & Finance, Vol. 4, pp. 64-86.

Lau, J., Sinnadurai, P. and Wright, S. (2009), Corporate governance and chief executive officer

dismissal following poor performance: Australian evidence, Accounting & Finance, Vol. 49, pp. 161-82.

Lee, J. and Shailer, G. (2008), The effect of board-related reforms on investors confidence, Australian


Lipton, M. and Lorsch, J.W. (1992), A modest proposal for improved corporate governance,

The Business Lawyer, Vol. 48, pp. 59-78.

Mathews, R. (2008), Personal reflections on a tale of two books: social and environmental accounting

research in the past, present and future, Australian Accounting Business& Finance Journal, Vol.2, pp. 1-13.

ODonovan, G. (2002a), Triple bottom line solution,Australian CPA, Vol. 72, pp. 14-16.

ODonovan, G. (2002b), Environmental disclosures in the annual report: extending the applicability and

predictive power of legitimacy theory, Accounting, Auditing & Accountability Journal, Vol. 15 No. 3,pp. 344-71.

ONeal, D. and Thomas, H. (1995), Director networks/director selection: the boards strategic role,

European Management Journal, Vol. 13, pp. 79-90.

Patten, D.M. (1991), Exposure, legitimacy and social disclosure, Journal of Accounting and Public

Policy, Vol. 10, pp. 297-309.

Patten, D.M. (1992), Intra industry environmental disclosures in response to the Alaska oil spill: a note

on legitimacy theory, Accounting, Organisations & Society, Vol. 15, pp. 471-5.



21/21

Patten, D.M. and Trompeter, G. (2003), Corporate responses to political costs: an examination of the

relation between environmental disclosure and earnings management, Journal of Accounting and

Public Policy, Vol. 22, pp. 83-94.

Shah, S.A., Shah, S.A. and Zafar, N. (2008), Non executive directors and performance of firms:

empirical evidence from an emerging market, The Business Review, Vol. 10, pp. 207-13.

Shan, Y.G. (2009), Related party disclosures in China: influences of factors identified from agency,

legitimacy, and signalling theories, paper presented at the Symposium SA, February 2009.

Unerman, J., Bebbington, J. and ODwyer, B. (2007), Sustainability Accounting and Accountability,

Routledge, London.van Ees, H.E., Postma, T.J. and Sterken, E. (2003), Board characteristics and corporate performance in

The Netherlands, Eastern Economic Journal, Vol. 29, pp. 41-59.

van Staden, C.J. and Hooks, J. (2007), A comprehensive comparison of corporate environmental

reporting and responsiveness,The British Accounting Review, Vol. 39, pp. 197-210.

Wise, V. and Ali, M. (2008), Case studies on corporategovernance and corporate social responsibility,

South Asian Journal of Management, Vol. 15, pp. 136-50.

Yermack, D. (1996), Higher market valuation of companies with a small board of directors, Journal of

Financial Economics, Vol. 40, pp. 185-211.

Further reading

Chang, A. and Awan, N.M. (2009), Can good corporate governance practices improve firm financialperformance? A survey on the perceptions of CEOs in Malaysia, paper presented at the AFAANZ

Conference, Adelaide.

Cortese, C. (2009), A profile of the non-executive directors of Australias largest companies, Australian


Fama, E. andJensen,M.C. (1983), Separation of ownershipand control, Journal of Law & Economics,

Vol. 26, pp. 301-25.

Guthrie, J. and Abeysekera, I. (2006), Content analysis of social, environmental reporting: what is

new?, Journal of HRCA: Human Resource Cost and Accounting, Vol. 10, pp. 114-24.

Rashid, A. (2009), Board composition, board leadership structure and firm performance: evidence

from Bangladesh, paper presented at the AFAANZ Conference, Adelaide.

About the authors

Kathyayini Kathy Rao is a Post Graduate Research Student at Flinders University. Herresearch interests are corporate governance and environmental reporting.

Professor Carol A. Tilt is Professor of Accounting, and Dean of Flinders Business School. Herresearch is mainly in the area of social and environmental responsibility and reporting. CarolA. Tilt is the corresponding author and can be contacted at: [email protected]

Dr Laurence H. Lester is a Research Fellow with the National Institute of Labour Studies atFlinders University. His main area of expertise is econometrics and statistical modelling.

j j

To purchase reprints of this article please e-mail: [email protected]

Or visit our web site for further details: www.emeraldinsight.com/reprints

Rao et al. 2012 Corporate Governance and Environmental Reporting an Australian Study

Documents

Transcript of Rao et al. 2012 Corporate Governance and Environmental Reporting an Australian Study