Determinants of Sustainability Disclosure Quality among Plantation Companies in Malaysia

Abstract

This paper aims to examine the determinants of sustainability disclosure quality among plantation companies in Malaysia. Data analysis is based on all 44 listed plantation companies on Bursa Malaysia between 2016 and 2018. The study utilizes a content analysis adapted from the Global Reporting Initiative (GRI)—G4 guideline, Sustainability Accounting Standard Board guidelines, and Bursa Malaysia Guidelines 2018, to measure sustainability disclosure quality (SDQ). Results from ordinary least squares (OLS) regression analysis corrected for standard errors indicate that shariah-compliant status and internal mechanisms (board size, the presence of women directors, the existence of sustainability committees, and CEOs with business knowledge) significantly improve SDQ. Firm size, firm age, leverage, growth, and Big 4 auditors also significantly improve SDQ. The study provides useful insights into the importance of women directors and the presence of sustainability committees towards SDQ. This study contributes to the discussion that internal mechanisms (board size, independent boards, women directors, sustainability committees) and firm characteristics (shariah compliant, family ownership, CEO ownership, foreign ownership) can increase sustainability reporting and disclosure quality. The measurement of SDQ is novel in Malaysian context even though the methodology is often used in the literature.

1. Introduction

Sustainability reporting has progressively become the norm of corporate social responsibility dimension in the new era. Sustainability reporting includes the disclosure of how companies regard the environmental, social, and governance (ESG) criteria in the company strategies. It is common for businesses, especially among large firms, to voluntarily present sustainability information through either corporate websites or printed copies such as in integrated reports, i.e., sustainability reports within the company’s annual reports [1] as recommended by the Global Reporting Initiative, GRI [2]. In addition, listed companies in Malaysia particularly are required to adhere to some guidelines introduced by the national regulators such as the Securities Commission (SC) and Bursa Malaysia (formerly known as Kuala Lumpur Stock Exchange). The trend towards sustainability reporting is based on legitimizing the company’s operations for economic objectives to cater to various stakeholders’ interests. ESG covers broad areas and possibly listed companies focus on certain areas of the ESG. Given that the majority of the listed companies do not get any third-party assurance on their data, the credibility of the data is questionable [3]. Even so, some companies already voluntarily get their data assured, which comes with additional costs. Based on this, the current study examines the determinants of sustainability reporting which consider several factors such as governance aspects (board and ownership), CEO characteristics, and a firm’s shariah-compliant status on Bursa Malaysia. To support the proposed determinants, we used the legitimacy theory, agency theory, stakeholder theory, and upper echelons theory.

Studies on sustainability reporting in the emerging countries, particularly in Malaysia, are scarce compared to the developed countries. Most of the prior studies focused on corporate social responsibility (CSR), such as studies on creating disclosure indexes [4]; on firms’ CSR behavior related to the effect of firm’s economic motivation for seeking legitimacy [5]; on CEOs’ political ideologies/executives’ values on firms’ CSR practices [6]; and on excessive irresponsible CSR activities such as tax avoidance [7]. Prior studies on sustainability reporting in Malaysia are limited in the scope coverage [8,9]. For example, [9] investigates several corporate governance (CG) structures (board independence, BOD training attended, and boards’ sustainability experience) as per revised CG code 2012 (MCCG 2012). The present study introduces additional CG variables other than board size and board independence (such as a board’s gender diversity and existence of sustainability committees), CEO knowledge in business (proxied by CEO age and CEOs’ business degrees), ownership structure (CEO ownership, family ownership, foreign ownership), and the shariah-compliant status on Bursa Malaysia.

Referring to the measurement of sustainability reporting, prior studies in Malaysia adopted the checklist from GRI [9]. Different studies considered different items in the checklist/index. Due to the existence of national guidelines on SR for listed companies on Bursa Malaysia, the current study considers the GRI checklist, Sustainability Accounting Standard Board (SASB) guidelines for agriculture, and national guidelines, i.e., Bursa Malaysia’s 2018 Sustainability Guidelines.

The objectives of this study are as follows: First, it aims to examine the extent of sustainability disclosure quality (SDQ) in the annual reports of Malaysian plantation companies listed on the Bursa Malaysia stock exchange during the period 2016–2018. Second, it aims to investigate the influence of several internal corporate governance mechanisms, ownership structures, and CEO attributes on the SDQ level. Third, it aims to examine the significance of shariah-compliant status on the SDQ level. This study uses robust OLS regression to investigate the determinants of SDQ. Findings from the study indicate that internal mechanisms such as board size, the presence of women directors, the existence of sustainability committee, and CEOs with business knowledge significantly improve SDQ.

It is important to mention that research on this topic in Malaysia is relatively rare, and most of the studies have been conducted in developed nations where the influence of corporate governance mechanisms, ownership structures, and CEO attributes on SDQ may differ from those in developing nations. Therefore, findings from studies in developed nations may not be applicable to emerging countries. Accordingly, the study aims to bridge the gap in the existing SDQ literature that is of a great relevance and has important implications to regulators and different stakeholders in Malaysia.

This study makes several contributions to the literature. First, this study analyzes and measures important classifications of SDQ in terms of environmental, economic, and social disclosures of listed plantation companies in Malaysia, based on GRI checklists and national guidelines on sustainability reporting. To the best of our knowledge, this research is the first study in Malaysia conducted on determinants of sustainability disclosure quality using the recent 2018 Bursa Malaysia Sustainability guidelines. Second, this study considers various potential determinants of SDQ. Finally, this study attempts to provide empirical evidence on SDQ in an emerging Asian country. The findings of the study will alert and encourage directors and regulators to adopt a better guideline based on GRI and the Bursa Malaysia Sustainability Guidelines 2018.

The remainder of the paper consists of seven sections. Section 2 discusses the overview of corporate sustainability in Malaysia. Section 3 discusses theoretical frameworks. Section 4 presents the literature review and hypotheses development. Section 5 discusses data and methodology while Section 6 presents findings and analyses. Finally, Section 7 presents the conclusion, limitations, and future directions of the study.

2. Overview of Sustainability Disclosures in Malaysia

The Sustainability reporting, sometimes referred to as corporate social responsibility, has been studied for quite some time in Malaysia, since the 1980s [8]. In the early years, the extent and level of sustainability disclosures was minimal [10] due to a lack of education and training on environmental and social responsibility performances. Furthermore, corporations believed that disclosures on sustainability did not provide tangible benefits [10,11]. Ref. [12] argued that the lack of legislation, guidance, and regulation on sustainability disclosure were among the reasons for poor reporting quality.

The government of Malaysia provided various initiatives and incentives, yet sustainability disclosures were still poor in quality compared to developed countries [8,13]. To promote a higher level of sustainability engagement among listed firms, Malaysian companies were required to provide corporate social responsibility (CSR) activities in their annual reports starting from the year 2007. This requirement has also been gazetted in the Bursa Malaysia Listing Requirements under Appendix 9C, Para 29 (Ministry of Finance, 2006). Accordingly, corporations were urged to report their CSR activities using four focal areas, which include marketplace, workplace, environment, and community engagement. Other initiatives were also taken to enhance the sustainability disclosure.

Bursa Malaysia has provided a sustainability guide in 2015 and a second edition of the sustainability reporting guide in 2018 to be applied by companies in preparing their sustainability statements. Sustainability statement was made mandatory to listed companies with market capitalization of MYR 2 billion and above starting on 31 December 2016 after amendments to the Bursa Malaysia Listing Requirements relating to sustainability statements in annual reports. Other listed companies with market capitalization of (i) MYR 1 billion and above and (ii) below MYR 1 billion, were required to produce sustainability statements on or after 31 December 2017 and 31 December 2018, respectively [14]. Bursa Malaysia also provided the Practice Note 9 on internal control, corporate governance, and sustainability statements to clarify and guide companies on preparing information materials required in the sustainability statement.

In parallel with the move towards exercising mandatory practices for sustainability reporting in Malaysia, the recommendation 1.4 in the revised Malaysian Code on Corporate Governance, introduced in 2012 (MCCG, 2012), emphasized the disclosure of sustainability strategies and implementation in the annual reports and websites of publicly listed firms. Therefore, boards of directors were urged to place more importance on ensuring compliance with MCCG (2012) for the dissemination of sustainability disclosure, as effective reporting instils integrity in boards, which fosters greater public confidence [9].

The extensive level of sustainability reporting (either in form of quantity or quality) by Malaysia companies is a concern. Previous studies have indicated that lack of support on sustainable reporting from the companies could be due to lack of awareness, lack of education on environmental and social responsibility, and lack of tangible benefits [10,11]. Other studies have also suggested that lack of stringent legislation and regulation on sustainability disclosure [12] and high cost of reporting and lack of public and stakeholders’ pressure were among the reasons for the low quality of reporting [13]. However, despite various initiatives from the Malaysian government to enhance disclosure, previous studies indicated that the level of sustainability reporting in Malaysia is still falling behind compared to practices in developed countries [8,13]. Thus, the current study intends to investigate the determinants of sustainability disclosure quality (SDQ) from various perspectives: internal corporate governance, ownership structure, CEO attributes, and shariah-compliant status.

3. Theoretical Underpinning

Research on sustainability disclosure and corporate social responsibilities uses multiple theories to justify its sustainability disclosures. In fact, studies demonstrated that sustainability disclosure is a multifaceted issue and therefore one single theory is not sufficient to adequately justify the reasons for companies’ sustainability disclosures [15,16]. Therefore, this study applied a multi-theory approach using the legitimacy theory, stakeholder theory, agency theory, and upper echelons theory to establish the role of important determinants of sustainability practices among plantation companies in Malaysia.

One of the most popular theories linked to sustainability reporting is the legitimacy theory. Sustainability reporting provides pressure in terms of economic, environmental, and social reporting performance through which corporations obtain their legitimacy [17,18]. The legitimacy theory posits that there exists an apparent contract between companies and the society, which obliges most companies to meet societal standards to ensure their survival [19]. Corporations acquire such legitimacy by acting consistently with the standards and norms of society through sustainability practices consistent with this social contract [17,20]. Ref. [21] also argued that sustainability reporting might be used to legitimize corporate activities toward creditors and shareholders, thus providing incentives to engage in sustainability practices. Furthermore, studies argued that corporations tend to comply with sustainable development policies and rulings of the government in return for several benefits such as subsidy, bailout, and others [17].

The stakeholder theory posits that the presence of businesses should provide benefits to all interested stakeholders and not just the direct shareholders. These stakeholders consist of customers, employees, suppliers, regulators, and governments as well as the general public. Ref. [22] described the stakeholders as “those groups without whose support the organization would cease to exist”. According to the stakeholder theory, all stakeholders are eligible to gain access to information on environmental and social accounting information disclosed by organizations and corporations regardless of the strength of any group of stakeholders [23]. Accordingly, corporations’ continued presence requires the support and assistance of the stakeholders; their approval must be sought after and the activities of the corporation must be adjusted and adapted to gain such approval.

The stakeholder theory portrays that corporations use information disclosure as a device to enhance their relationship with society and the various stakeholders [24]. Companies and organizations have the duty to meet the demands of primary stakeholders, because any corporation or organization cannot continue to exist without the consent of these groups [25]. Accordingly, the more powerful the stakeholders are, the greater will be the managerial efforts to meet their demands and expectations. Furthermore, the effect of stakeholders on disclosure varies greatly from country to country due to different social, economic, and political environments [22].

The agency theory acknowledges the conflicting relationship between managers and stakeholders considering the presence of information asymmetry, opportunistic behaviour of agents, and conflicts of interest between principals (shareholders) and agents (managers). Therefore, it is desirable to monitor the agents closely in order to align the principal–agent goals, reduce conflicts, and maximise the wealth of stockholders [26]. Accordingly, the agency theory posits that companies voluntarily produce disclosure to reduce agency cost between managers and shareholders and between companies and creditors [27]. Thus, corporate governance mechanisms and ownership structures are some mechanisms used to reduce agency cost.

The top management of an organization exists to a large extent to make decisions regarding the path of the organization. The upper echelons theory [28] puts forward the idea that strategic decisions are connected to the background characteristics of an organization’s management. CEOs and top management teams (TMT) are a group of top-level managers and directors within a firm [29,30] possessing specific expertise in areas that will enable an organization to make informed decisions. This expertise encapsulates the tangible and intangible knowledge and characteristics an individual possesses. According to [28], individual characteristics and cognitions are developed by past experiences, education, and personal values. Cognitions shaped by these characteristics influence the way top managers analyze and respond to situations, and the strategy chosen for the organization. Ref. [31] found that age, tenure, and education level all influence the degree to which individuals are receptive to change, willing to take risks, creative, and innovative. These characteristics will influence the strategic decisions made by top managers regarding change, risk, and innovation. Thus, for this study, some of these CEO characteristics are examined based on previous literature, such as age and education, to see their effects on the SDQ.

4. Determinants of Sustainability Disclosures

4.1. Shariah Status

Extant studies acknowledge that religion is powerful potential source of ethical behavior in businesses and organizations [32,33,34]. Consistently, Ref. [35] reports that religion helps sustain and enforce ethical behavior. Islamic teachings and shariah laws provide tenets of good quality governance through protection of rights, fair treatment to shareholders, and transparent and accountable behavior by managers, which help provide high quality management and financial reports [36]. Another study by [37] concludes that a large proportion of Muslim directors in an audit committee would result in lower earnings management as these managers believe that they are held answerable to their stakeholders as well to the Almighty God—Allah in the hereafter life; and accordingly, they behave honestly in discharging their duties.

In Malaysia, a shariah-compliant listed company need to undergo two-tier quantitative screening levels as prescribed by the Shariah Advisory Committee (SAC) before they can be declared to be a shariah-compliant company. These two levels of screening are (i) a business activities benchmark, and (ii) a financial ratio filter. Then, it is followed by a qualitative screening test.

In the first screening of business activities, companies must be free from having activities related to interest (riba), uncertainty (gharar), gambling, or any production and sales of prohibited products and services [38]. Those activities related to financing institution such as practiced by conventional banks and insurance companies are therefore considered non-shariah compliant. Activities such as casinos, gaming, and producing and marketing alcoholic drinks and non-halal meat such as pork are also non-shariah-compliant activities. Likewise, providing immoral services such as prostitution are examples of non-halal or non-shariah-compliant activities. Depending on the type of activities, there is (i) the 5 percent benchmark and (ii) 20 percent benchmark.

In order to be considered a shariah-compliant company, the contribution from non-compliant activities such as interest (riba) from conventional banking, conventional insurance, gambling (maisir), liquor, non-halal food and beverages, shariah-non-compliant entertainment, tobacco and related activities, dividends from non-shariah-compliant firms and the like should be less than five percent of the group revenue or group profit before tax. On the other hand, the contribution from non-shariah share trading activities, stock broking, and rentals from non-shariah-compliant firms must be less than 20 percent of the group revenue or group profit before tax.

In the second screening process, companies are assessed on the financial ratio test. The financial statement of a shariah-compliant company must pass the financial ratio test on a yearly basis. The SAC considers two ratios: cash over total assets and debt over total assets. These ratios are intended to measure the impact of interests (riba) in a company’s financial position. The inclusion of cash from conventional accounts and instruments as well as interest-bearing debt must be less than 33 percent.

Finally, a company must pass a qualitative screening test where image, maslahah, and company policy are considered which are usually investigated on a case-by-case basis [38]. Companies that advertise alcoholic drinks, or serve alcoholic drinks and non-halal food on public transport are normally considered non-shariah compliant.

The above description demonstrates the rigorous process that companies have to go through in order to be a shariah-compliant company. Ref. [35] argued that companies with shariah status supply a higher quality of information and earnings quality in their annual reports to attract foreign investment. Based on 3048 observations from 508 Bursa Malaysia shariah-compliant companies during a six-year period between the years 2003 and 2008, they found that shariah-compliant companies have greater incentives for high-quality financial reporting because of their shariah status as they are subjected to superior scrutiny by regulators and institutional stockholders. Likewise, Ref. [39] found that shariah-compliant firms observing religious principles had an increased tendency to engage in CSR activities among listed Pakistani firms for the period between 2012 and 2018. Based on the above argument it is hypothesized that a shariah status encourages a firm to supply more high-quality information in sustainability reporting. In this regard, we propose the following hypothesis:

Hypothesis 1 (H1). 

Shariah-compliant status significantly affects sustainability disclosure quality (SDQ).

4.2. Sustaninability Committee

A sustainability committee is a sub-committee in the board of directors, which is responsible for assisting the board in sustainability-related issues. It is also known as corporate social responsibility committee or environmental committee. The sustainability committee is responsible for making strategic plans and implementing and reviewing current policies related to sustainability issues such as social and environmental issues [40]. Although it is not compulsory to establish a standalone committee for sustainability issues, many companies take the initiative to establish a separate sustainability committee and distinguish it from other committees such as audit committees [41]. It is expected that with the focused task of monitoring sustainability issues, the existence of a sustainability committee can improve the sustainability values and practices of the company and lead to better reporting of sustainability information as required by several corporate governance guidelines, including the Malaysian Code Corporate Governance (2017).

Previous studies have documented mixed findings about the impact of existence of sustainability committees on sustainability reporting. An earlier study by [42] found no significant relationship between the existence of environmental committees and environmental information among U.S. firms. Another study, also in the U.S., discovered that sustainability committees do not have an impact on companies’ environmental projects [43]. Later, Ref. [40] discovered that environmental committees in UK firms significantly influenced the level of environmental information on GHG emissions. However, the studies above focused only on environmental issues and ignored social issues. A recent study by [44] found evidence that existence of sustainability committees has impact on the social and environmental information among Australian firms. A similar finding was discovered in a study in Southeast Asian countries involving Indonesia, Singapore, Malaysia, Thailand, and the Philippines [45]. The findings of the previous studies indicate the growing recognition of sustainability committees in addressing sustainability issues in companies.

In this study, it is argued that having a sustainability committee at the board level can assist the board in discharging their governance role effectively, especially in sustainability issues. It also consistent with the stakeholder theory in expecting the company to disclose the information related to social and environmental issues to various stakeholders. Therefore, it is proposed that:

Hypothesis 2 (H2). 

Sustainability committees significantly affect sustainability disclosure quality (SDQ).

4.3. Board Size, Board Independence and Board Diversity

Studies document that a larger board size provides a significant impact on the level of sustainability and CSR disclosures, and that it is crucial that board composition and professionalism have diverse perspectives and improve corporate sustainability performances [26,46]. Ref. [47] argues that a large board size lowers the diversity gap and entails highly diverse skills and resources. Through a large board size, a corporation is able to reduce agency conflicts, and thus convey favorable signals to public and stakeholders. Thus, a large board size improves sustainability disclosure and performance.

Prior studies document a significant and positive association between a large board size and sustainability disclosures [47,48]. Consistent with the argument, Ref. [49] finds that a larger board was indeed an important predictor of sustainability-type disclosures in Malaysia followed by the total number of board members possessing professional qualifications. However, studies also find negative associations between a large board size and sustainability disclosure partly due to poor coordination and real-time decision-making problems [50]. Likewise, Ref. [51] claims that a larger board size is detrimental to governance efficiency. Consistent with the effectiveness of board supervision, function can be greatly influenced by its size, thus we hypothesize the following:

Hypothesis 3a (H3a). 

Board size significantly affects sustainability disclosure quality (SDQ).

Independent directors can significantly strengthen the board by potentially reducing costs [47], monitoring the management, and protecting stakeholders’ interests. Previous studies documented that an independent board can offer strong engagement with stakeholders to promote a high degree of transparency in corporate social responsibility disclosure and sustainability reporting [52]. Bursa Malaysia defines an independent director as a person without executive position and without significant equity ownership in the company. Since July 2001, Bursa Malaysia requires listed firms to have at least two directors or one-third of the board of directors, whichever is the higher, to be independent directors [9]. The monitoring role of independent directors may decrease agency conflicts between managers and shareholders. Accordingly, we argue that independent boards are more focused on long-term performance goals and thus offer effective monitoring on sustainability matters to improve long-term sustainability goals.

Hypothesis 3b (H3b). 

Independent boards significantly affect sustainability disclosure quality (SDQ).

The agency theory posits that a more balanced mix of experiences and capabilities enhances monitoring and assessing management strategies [53]. Previous studies claimed that board gender diversity increases board independence to improve efficiency and monitoring and achieve better financial outcomes [54]. Studies documented that women board members usually have different ethical criteria; they are often perceived to be more caring and accordingly would provide better transparency on sustainability issues [55]. The findings on board gender diversity from previous studies were mixed. Some studies found a significant positive relationship between female directorship and CSR disclosures [56,57,58] while Ref. [59] found no relationship between gender diversity and CSR disclosures.

A general consensus denotes that women directors are more stakeholder oriented and more sensitive to CSR issues, which supports mechanisms of stakeholder engagement, and promotes sustainability practices [60,61]. Women directors are also known for litigation aversion, which motivates them to be more engaged in sustainable corporate activities. Finally, women directors can bring diverse perceptions and values to the boardroom and promote democratic and participative decision-making, which leads to improvement in CSR activities. Accordingly, we hypothesize the following:

Hypothesis 3c (H3c). 

Board gender diversity significantly affects sustainability disclosure quality (SDQ).

4.4. CEO Characteristics

A CEO is an important key decision maker in CSR and environmental disclosure-related decisions. The CEO is responsible for formulating corporate strategies and involved in promoting the image of their firm through social responsibility [62]. Engaging in CSR may contribute to higher firm’s profitability [63]. According to the upper echelons theory, managerial characteristics such as CEO characteristics are expected to have impacts on firms’ outcomes, strategic choices, and performance levels [28]. It is argued that the individual characteristics of the CEO, such as age, tenure, and educational background, play an important role in the extent to which CSR and external environmental pressures are attended to and how they are interpreted and acted upon [64,65]. Differences in knowledge and experience lead to differences in interpretation, which explains why CEOs that face similar institutional pressures pursue different environmental strategies.

CEO age and tenure are commonly associated with experience. Age is found to be correlated with tenure, and older directors would have better cognitive resources for decision-making tasks [66]. CEO age is one of the most significant factors which affect CEOs’ behaviors. Empirical evidence has shown that older CEOs are good in certain tasks. Older managers have more experience and are more efficient consultants. A study has shown that the influence of rewards or rival motivations are less attractive to older people [67]. Older CEOs care more about public responsibility and are more cautious to avoid making risky decisions [68,69,70]. They invest less in research and development or risky activities, resulting in lower firm risks [71].

Research evidence also reports that young CEOs focus on short-term market performance and do not like to take long-term investments into consideration as such investments yield future returns [72]. Ref. [73] examines the dynamics of CEO disclosure style over their tenure. Based on longitudinal analysis of newly hired CEOs, Ref. [73] shows that CEOs’ forward-looking disclosures and their disclosures’ relative optimism decline in their tenure. The authors also found that younger CEOs exhibit greater optimism in disclosures. Likewise, Ref. [74], also found that younger CEOs are associated with environmental disclosures in Thailand.

Ref. [75] examines CEO characteristics, sustainability reporting format, and environmental disclosures in India. They found that CEO age alone has insignificant association with environmental disclosure. However, the combined effect between CEO age and report format shows a significant association suggesting the stand-alone sustainability reporting in environmental communication disclosures is a strategic benefit that secures strategic investors and investments in the firm. Due to the mixed findings, we hypothesize the following:

Hypothesis 4a (H4a). 

CEO age significantly affects sustainability disclosure quality (SDQ).

The education level is often viewed as a good proxy for human capital, knowledge, or intellectual competence [28,76,77]. It is one of the significant factors which contribute to CEOs’ management skills [28,78]. CEOs with higher education may achieve better management quality and are able to select better projects and improve firms’ investment performance. CEOs with higher educational attainments are better at processing information and direct significant changes within firms [79] and changes in corporate strategies [31].

Ref. [80] shows that educational background influences CEO management style. They found that CEOs who major in business, economics, or humanities exhibit markedly different management styles compared to their counterparts with backgrounds in science and technology. CEOs with an MBA are found to be more aggressive in strategic and capital structure choices [81]. Ref. [82] finds that new CEO appointments with impressive education records would have a positive impact on the stock market. Ref. [83] finds CEOs with financial education are related to CSR disclosure. Likewise, Ref. [65] finds that firms having CEOs with MBA degrees are more likely to disclose environmental activities on carbon projects than other firms are.

In Thailand, Ref. [74] found financial expertise is associated with corporate environmental disclosure. In a study of the non-financial firms listed in Malaysia, Ref. [84] found that CEOs with an educational background in humanities or social sciences such as law, accounting, and business are more likely to engage in CSR disclosure by taking into account stakeholders’ interests. Overall, the empirical evidence suggests that CEOs with business education backgrounds indicate a highly experienced and knowledgeable manager who will influence the quality of strategic information disclosed. Thus, it is hypothesized that:

Hypothesis 4b (H4b). 

CEOs with a business degree significantly affect sustainability disclosure quality (SDQ).

4.5. Ownership

Ownership structure of a firm will determine the alignment of interest between two contracting parties, i.e., shareholders and managers [21]. The agency theory suggests that an agency cost will arise due to the conflict between these two parties. Therefore, to reduce the information asymmetry and the conflict, and to maximize the wealth of shareholders, managers will disclose more information to the shareholders [26]. The ownership structure, being a family, manager, or foreign ownership, will determine the extent of voluntary disclosure of strategic information, including sustainability information.

Many Malaysian firms are owned and operated by family members. Family firms in Malaysia make up about 70% of the listed firms and contribute tremendously to the GDP [85]. There are several reasons as to why family firm exist, such as to achieve family unity, continuity, and employment for family members; sometimes profit maximization is not the primary goal [86]. Studies show that family firms are concerned with and committed to reputation and social legitimation [87]. Ref. [17] argues conceptually that family firms can greatly influence the extent and level of SDQ. Therefore, it is argued that family firms can significantly affect sustainability disclosures.

Hypothesis 5a (H5a). 

Family ownership significantly affects sustainability disclosure quality (SDQ).

CEOs’ shares ownership affects their incentives to maximize shareholder value [88]. Through the shareholding mechanism, CEOs’ incentives affect not only their risk-aversion but also their decision-making [89,90]. Prior studies on sustainability practices documented a negative effect for the relationship between CEO ownership and sustainability disclosure [83,91]. Ref. [92] found that CEOs with ownership are less likely to engage in sustainability disclosures. Likewise, ref. [83] found a negative impact of CEO ownership on corporate social responsibility disclosures among 179 Pakistani listed firms between the years 2009 and 2018. This implies that the lower the equity shares a CEO possesses in the firm, the higher the odds for CSR disclosure. Hence, based on the empirical evidence cited above, we argue that there is a negative relationship between CEO ownership and sustainability reporting in sustainability-sensitive industries.

Hypothesis 5b (H5b). 

CEO ownership significantly affects sustainability disclosure quality (SDQ).

Foreign shareholders have different cultures and values compared to local shareholders. Studies argued that foreign shareholders tend to possess diverse experiences and expertise working in different countries and environments. Studies show that foreign investors often demand more economic, social, and environmental disclosures due to their exposure to [93,94] and long-term interest in sustainability. Thus, it can be concluded that foreign investors use sustainability reporting as a medium for legitimacy benefits which leads to long-term growth for their investments [21].

Ref. [95] found a significant positive effect on CSR reporting among Bangladeshi commercial banks. Likewise, Ref. [94] found the same result in Bangladeshi corporations. Similarly, Ref. [21] found a positive relationship of foreign shareholding on Malaysian listed companies. Similarly, Ref. [47] investigated the relationship of foreign ownership and sustainability disclosures among 188 listed companies in three South Asian countries namely India, Pakistan, and Bangladesh and found a significant and positive association. However, Ref. [49] did not find a significant relationship between foreign ownership and SDQ in Malaysia. Therefore, based on the theoretical argument and empirical evidence above, it is predicted that:

Hypothesis 5c (H5c). 

Foreign ownership significantly affects sustainability disclosure quality (SDQ).

5. Data and Methodologies

Our data comprises all plantation companies listed on Bursa Malaysia for the fiscal years 2016 to 2018. We focused only on companies in the plantation sector. The plantation sector was chosen as it has a great impact on the environment. Malaysia ranks second after Indonesia in the world’s production of palm oil [96] and this sector is highly productive and significantly contributes to the Malaysian economy. In 2017, Malaysia produced 21 million metric tons of palm oil [96]. However, this sector also receives criticisms concerning deforestation, environmental pollution, and human rights issues. The European Union (EU) banned the use of palm oil in biofuels out of a concern that oil palm cultivation may accelerate deforestation and global warming issues [97]. Therefore, it is interesting to look at how these companies adapt and meet to the new sustainability disclosure requirements. We investigated the sustainability disclosure quality by analyzing stand-alone sustainability reports or embedded sustainability reports in corporate annual reports. These data were manually collected. Annual data on financial variables (growth, profit, and leverage) were collected from Thomson Reuters DataStream. The final sample comprises 128 firm-year observations from 2016 to 2018.

The dependent variable is sustainability disclosure quality (SDQ). Sustainability disclosure quality is a self-developed index based on a sustainability disclosure checklist adapted from a combination of GRI (G4) launched in 2013, the Sustainability Accounting Standard Board (SASB) for agriculture, and the Bursa Malaysia Sustainability Guidelines 2018 checklists. A total of 52 items were assessed which consisted of 30 environment items, 5 economics items, and 17 social items. The list of items included in the sustainability disclosure score sheet is provided in the Appendix A.

The measurement of quality is based on a weighted scoring method to emphasize the levels of importance given to particular reporting items. Following previous studies, this study utilized a four-point scale adopted from [9,49] with modifications as summarized in

Table 1. A four-point scale.

Score	Description
0	No disclosure
1	General disclosure, one to two sentences
2	Brief qualitative disclosures, at least three sentences
3	Quantitative disclosure

:

We developed the following empirical model to test our hypotheses:

SDQ_it = α +β₁SHARIAH_it+ β₂SC_it+ β₃BDSZ_it + β₄BIND_it +β₅PWOMEN_it +β₆CEOAGE_it + β₇ CEOBus_it +β₈FAMOWN_it+ β₉CEOWN_it +β₁₀FOROWN_it +β₁₁FIRMAGE_it + β₁₂GROWTH_it + β₁₃PROFIT_it + β₁₄LEV_it+ β₁₅SIZE_it + β₁₆BIG4_i + Ɛ_it

(1)

Based on previous empirical studies such as in [9,44,45,47], we used ordinary least squares adjusted for robust standard errors to estimate this model.

Table 2. Operational measurement of variables.

Dependent Variable: Sustainability Disclosure Quality			Operational Measurement	Source
SDQ	=	Sustainability disclosure quality	Sustainability reporting index (based on a weighted scoring method) that is computed by the ratio of actual score of sustainability reporting awarded to the maximum score attainable by the firm.	Sustainability reports or annual reports
Independent variables
SHARIAH	=	Shariah	Dichotomous variable, measured as 1 if a shariah-compliant firm, 0 otherwise.	Shariah-compliant list
SC	=	Sustainability committee	Dichotomous variable, measured as 1 if sustainability committee is present in a firm, 0 otherwise.	Annual reports
BDSZ	=	Board size	Number of directors on board.	Annual reports
BIND	=	Board independent	Percentage of independent board members on board.	Annual reports
PWOMEN	=	Women director	Percentage of women directors on board.	Annual reports
CEOAGE	=	CEO age	The age of the CEO.	Annual reports
CEOBUS	=	CEO Business background	CEO qualification in business-related degree. Dichotomous variable, measured as 1 if a CEO has a business-related degree, 0 otherwise.	Annual reports
FAMOWN	=	Family ownership	Percentage of family ownership.	Annual reports
CEOWN	=	CEO ownership	CEO ownership percentage.	Annual reports
FOROWN	=	Foreign ownership	The percentage of foreign ownership.	Annual reports
Control variables
FIRMAGE	=	Firm age	The age of the firm.	DataStream
GROWTH	=	Firm growth	The growth of the firm measured as market to book value.	DataStream
PROFIT	=	Profitability	Measured as return on assets (ROA).	DataStream
LEV	=	Leverage	Measured as total debt to total assets.	DataStream
SIZE	=	Firm size	Measured as natural log of total assets.	DataStream
BIG4	=	Audit type	Dichotomous variable, measured as 1 if audited by the Big 4, 0 otherwise.	Annual report
Ɛ	=	Error term

presents the operational measurements and sources of variables used in the equation.

Control Variables

To reduce model misspecification, we control additional variables that could affect the level of sustainability disclosures quality. Following previous studies, this study employs firm size as measured by natural log of total assets [98,99]. In line with previous studies, we account for profitability as measured by return on assets (ROA) as a control variable (see for example in [98,100]). We also account for leverage as a control variable measured by the ratio of total debt to total assets (see for example, [98,99]). It is reasonable to assume that the information needs of the creditors increase with leverage [4].

In addition, this study employs firm age, growth, and auditor type as additional control variables. Older companies are more accustomed to the community and environment they operate in, and they want to be good citizens by disclosing more CSR-related information. A number of studies tried to correlate firm age and the level of voluntary disclosure [101,102]. Firm growth as measured by the ratio of market-to-book value is expected to influence sustainability reporting due to firms’ ability to grow in the long term [103]. Lastly, firms that are audited by the Big 4 are assumed to have better sustainability reporting because of the better resources and higher quality audit process than their smaller counterparts [104].

6. Results and Discussion

Table 3. Descriptive analysis and VIF.

	Mean	Median	Min	Max	Std. Deviation	VIF
BDSZ	7.72	7.00	4.00	12.00	2.12	2.30
BIND	0.475	0.444	0.25	1.00	0.15	1.92
PWOMEN	0.08	0.06	0.00	0.38	0.09	1.37
CEOAGE	58.98	59.00	30.00	82.00	9.58	1.17
FAMOWN	32.84	36.99	0.00	70.27	24.68	2.40
CEOWN	27.46	32.33	0.00	70.27	24.94	2.47
FOROWN	4.13	0.00	0.00	63.01	13.17	1.27
FIRMAGE	25.11	28.00	1.00	46.00	9.65	1.47
GROWTH (mtbv)	0.987	0.821	0.111	3.812	0.666	1.61
PROFIT (roa)	2.85	1.91	−16.84	31.08	5.45	1.68
LEV	0.29	0.29	0.012	0.78	0.20	1.62
SIZE	13.45	13.23	10.05	17.16	1.55	2.28
SDQ	0.335	0.314	0.134	0.635	0.12

presents a descriptive analysis and VIF of the continuous variables while

Table 4. Dichotomous variables and VIF.

Variables	Frequency		Percentage		VIF
	0	1	0	1
SHARIAH	29	99	23%	77%	1.91
BIG4	47	81	37%	63%	1.32
CEOBUS	76	52	59%	41%	1.39
SC	106	22	83%	17%	1.29

presents the dichotomous variables and VIF. On average, the board size of the sample is 7 directors with a minimum and maximum number of 4 and 12, respectively. On average, approximately 47.5 percent of the board consists of independent board members. The percentage of women directors on plantation boards is incredibly low, with an average of 8 percent and a maximum of 38 percent. The average CEO age is approximately 59 years, with a minimum age of 30 and a maximum of 82 years.

The mean value for family ownership is about 33 percent and the maximum value is about 70 percent. CEO ownership is slightly lower with an average value of about 27 percent and the maximum value of about 70 percent. Foreign ownership has a mean value of about 4 percent with a maximum value of about 63 percent. The sample firm age is between 1 year and 46 years while the growth rate is between 0.111 and 3.812. On average the ROA is 2.85 and the maximum value is 31.08. The sample leverage is between 0.012 and 0.78 and the firm size measured as natural log of total assets has an average value of 13.45.

The average SDQ for the sample is 0.335 with a maximum value of 0.635. Further observation indicates that on average the score for environmental items is 0.2432, for social items it is 0.5288, while the score for economic items is 0.2. On environmental items, many companies indicate they get certifications on their land used and have conservation areas. There is limited discussion on water management, effluents, chemicals, and waste management. However, none of the companies provide discussions on GHG emission and energy management. On social and economic items, most companies provide overviews of the economic, environmental, and social engagements. Based on Table 4, about 77 percent of the sample firms are shariah-compliant companies and about 63 percent of the sample firms were audited by the Big 4 auditing companies. About 41 percent of the CEOs have qualifications in business-related studies. Meanwhile, only 17 percent of the sample firms have formed a sustainability committee in the board.

The study employed Pearson’s correlation matrix to investigate multicollinearity among the predictors. Studies such as [105] documented that if the correlation between the two predictors is higher than 0.90, it evidences the problem of multicollinearity. The statistics reported in

Table A4. Pearson correlation matrices.

		1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16
1	SHARIAH	1
2	FIRMAGE	−0.124	1
3	BDSZ	−0.002	−0.273 **	1
4	PWOMEN	0.211 *	−0.205 *	0.195 *	1
5	PIND	0.192 *	0.219 *	−0.465 **	0.001	1
6	CEOAGE	0.189 *	0.135	−0.048	0.015	−0.039	1
7	CEOBUS	−0.274 **	−0.036	−0.161	−0.208 *	0.223 *	−0.084	1
8	SC	0.148	−0.025	−0.027	−0.049	0.061	0.088	0.087	1
9	FAMOWN	0.037	0.235 **	0.070	−0.050	−0.245 **	0.089	−0.074	−0.116	1
10	CEOWN	0.267 **	0.115	0.016	0.091	−0.163	0.169	−0.129	0.111	0.687 **	1
11	FOROWN	−0.048	0.161	−0.287 **	−0.039	0.069	0.171	−0.049	−0.095	0.128	−0.033	1
12	BIG4	−0.103	0.012	0.217 *	0.224 *	0.012	0.006	0.003	0.218 *	0.021	−0.019	−0.079	1
13	GROWTH(mtbv)	0.245 **	0.128	0.284 **	0.008	−0.090	0.015	−0.069	0.180 *	0.051	0.171	−0.148	0.111	1
14	PROFIT(roa)	0.064	0.116	0.129	−0.104	−0.190 *	0.025	−0.073	0.183 *	0.072	0.078	−0.032	0.266 **	0.423 **	1
15	SIZE (lnta)	0.263 **	0.004	0.356 **	0.237 **	0.117	0.018	0.032	0.095	0.032	0.135	−0.101	0.385 **	0.584 **	0.222 *	1
16	LEV	0.375 **	−0.150	0.146	0.179 *	0.062	0.003	−0.183 *	0.102	−0.052	0.209 *	−0.250 **	−0.077	0.140	−0.262 **	0.372 **	1

* Correlation is significant at the 0.05 level (2-tailed). ** Correlation is significant at the 0.01 level (2-tailed).

in Appendix B show that the highest correlations between predictors are equal to or lower than 0.67; thus, there is no serious multicollinearity issue. Additionally, the study also employed the variance inflation factor (VIF) to investigate multicollinearity. The findings for VIF as reported in Table 3 and Table 4 accordingly show that all values are below the threshold of 3 and therefore there is no serious multicollinearity issue [106]. Additionally, it is found that the data are heteroscedastic. As a result, we adjusted for heteroscedasticity. Due to the dummy nature of some important variables, such as shariah, the study was unable to employ fixed effects. Most of the variables were transformed to 0 if fixed effects were employed because once a firm complied with shariah, it did so for the entire three-year period. Thus, the study used pooled OLS adjusted for standard error for the model.

Table 5. Regression results of multiple regression with robust standard error.

Variables	Coef	Robust Std. Error	p-Value
SHARIAH	0.090	0.0214	0.000 ***
BDSZ	0.012	0.0046	0.012 **
BIND	−0.179	0.0675	0.009 ***
PWOMEN	0.251	0.0662	0.000 ***
SC	0.066	0.0213	0.002 ***
CEOAGE	−0.001	0.0007	0.272
CEOBUS	0.032	0.0166	0.058 *
FAMOWN	0.001	0.0004	0.063 *
CEOWN	−0.001	0.0003	0.000 ***
FOROWN	−0.000	0.0003	0.071 *
BIG4	0.054	0.0183	0.004 ***
PROFIT(ROA)	−0.004	0.0020	0.034 **
LEV	0.079	0.0434	0.069 *
SIZE (lnta)	0.054	0.0107	0.004 ***
FIRMAGE	0.002	0.0095	0.042 **
GROWTH (mtbv)	0.062	0.0153	0.000 ***
const	0.009	0.1992	0.962
No. observation	128
R-squared	0.621
Prob > F	0.000
Root MSE	0.084

Note: *, **, *** significant at 10%, 5% and 1% respectively.

summarizes the regression results of Equation (1). The result on SHARIAH is positive and very significant at 1 percent indicating that shariah-compliant firms provide significantly higher sustainability disclosure for the period under study, between 2016 to 2018. Board size (BDSZ) is also positive and significant which means that the larger the board size, the more likely the firm will provide a higher quality sustainability disclosure. This result is consistent with empirical findings of previous studies [107,108,109].

The result on independent board (BIND) is negative and very significant at 1 percent, indicating that having an independent board does not promote a high level of quality sustainability disclosures. The result contradicts previous findings such as in [110,111]. This result may be due to the fact that many companies in Malaysia are family-owned and the fact that it is very difficult to have a truly independent director due to family involvement in the selection process [112]. The result on gender diversity (PWOMEN) is positive and very significant at a 1 percent level, supporting the results of [56,57,58]. This indicates that having female directors improves the likelihood to have better sustainability disclosure, which supports the notion of the agency theory that having more balanced and diverse experiences and capabilities enhances monitoring and assessing management strategies, and the fact that women are more caring and accordingly would provide better transparency on sustainability issues.

Sustainability Committees (SC) have a significantly positive influence on sustainability disclosure quality (SDQ). The result suggests that the existence of a separate committee, which focuses on strategic issues and practices related to sustainability, and monitors compliance with sustainability standards, helps to improve the disclosure level of sustainability information as demanded by the stakeholders. The result is consistent with studies conducted in Australia [44] and Southeast Asia [45] and provides support to the stakeholder theory. The result indicates that the role of SC is crucial in enhancing sustainability practices among plantation companies in Malaysia although it is not mandatory to have a separate SC on the Board.

The result on CEO age (CEOAGE) shows an insignificant relationship with sustainability disclosure, suggesting that CEO age does not matter in the context of sustainability disclosure. The result on the qualification of CEO in business-related studies (CEOBUS) is positive and significant at a 10-percent level. This result is consistent with empirical findings of previous studies [83,84]. The result supports the influence of knowledge in business on sustainability disclosure, which suggests that CEOs who have business degrees value the benefits obtained by disclosing the sustainability information to stakeholders.

Family ownership (FAMOWN) shows a positive significant relationship with SDQ. This means that family members are concerned with sustainability issues and are committed to long-term visions to sustain the family business, reputation, and social legitimation. The result on CEOWN is significantly negative meaning that the higher the CEO ownership, the lower the level of SDQ. This result is similar to the studies [83,91] who found that CEO ownership firms are less likely to engage in sustainability disclosures. The result on foreign ownership (FOROWN) is significantly negative at 10 percent. This means that the higher the foreign ownership, the lower the level of SDQ which is not as expected.

The result on the control variable BIG4 audit firm is significantly positive which indicates that having been audited by the Big 4 audit firms plays a vital role in encouraging better sustainable reporting quality. Likewise, leverage is positively and significantly associated with better SDQ. However, profitability is negatively correlated with SDQ. All other control measures, firm age, firm size, and growth, are significantly and positively related to SDQ.

Robust Analysis

Robust cluster effect regression analysis was also conducted for the model. For all relevant variables, the outcomes were not statistically different. The model was also run using panel-corrected standard error (PCSE), and the results and coefficients for all significant variables were largely consistent with OLS.

7. Conclusions, Limitations and Future Research

This study attempts to empirically investigate the determinants of SDQ among plantation companies in Malaysia for the period between 2016 and 2018 using multiple regression analysis of 128 observations. We extend previous studies on SDQ by considering the impact of BOD, CEO, and ownership characteristics in the context of an emerging country.

The findings deduced from this study demonstrate that SDQ is significantly related to shariah status. Our results suggest that regulators and policy makers should promote inclusion of shariah compliance for firms listed on the stock exchange as it improves the sustainability of the firms [39]. In addition, firms with existence of women directors, and the presence of sustainability committees also show increased SDQ. Larger board size also promotes improvement of SDQ while independent boards are negatively related to SDQ. These findings provide a new perspective on the relationship between board attributes and SDQ.

The results on CEOs with business backgrounds and family ownership show a positive and significant relationship which supports the idea that CEOs with a business background and family ownership influence SDQ. Likewise, companies audited by the Big 4 auditing firms and with high leverage levels, show a positive and significant influence on SDQ. Firm size, firm age, and growth level all positively influence SDQ.

In addition, this study contributes to the theoretical enrichment of the existing literature by exploring the determinants of SDQ in plantation industry. Findings from this study may be relevant to regulators, legislators, and standard-setters because they highlight the necessity of releasing disclosure rules in order to increase public understanding of the value of sustainability reporting in developing nations.

This study is subject to some limitations. This study relies mainly on the availability of stand-alone sustainability reports or sustainability statements in annual reports. However, with modern technologies, many companies also provide sustainability reports on websites. Therefore, future studies may include the companies’ websites as source of reference. Future studies may include different methods of research such as using interviews, questionnaires, or survey methods to get expert opinions on barriers and ways forward for sustainability disclosure quality. The current study employs women directors as a measure of diversity. Future studies may use other measures of diversity, for example ethnicity, age, and education level. Despite the above limitations, this study contributes to the literature by providing empirical evidence that the shariah status, the existence of women directors, the presence of sustainability committees, CEOs’ business backgrounds, family ownership, auditing by the Big 4 auditing firms, leverage level, firm size, firm age, and growth level affect sustainability disclosure quality.