THE EFFECT OF CORPORATE GOVERNANCE MECHANISMS ON INTEGRATED REPORTING: A STRUCTURAL EQUATION MODELLING (SEM) APPROACH
Abstract
This study investigates the level of integrated reporting of Malaysian listed companies and explores the potential effects of corporate governance mechanisms on integrated reporting. The annual reports of 150 companies listed on the main market, Bursa Malaysia, for the year ended 2014 were examined to analyze the companies' integrated reporting practices using content analysis. An integrated reporting index was constructed following the key elements of the integrated reporting framework established by the International Integrated Reporting Committee (IIRC). The study considered four corporate governance mechanisms: board composition, board size, board diversity, and ownership structure. The study used Multiple regressions to measure the impact of corporate governance mechanisms on the companies' integrated reporting initiatives. Structural Equation Modelling (SEM) was used to measure the effect of corporate governance mechanisms on the level of the companies' integrated reporting. The results showed that Malaysian companies' reporting of financial and non-financial information has not yet been integrated. Based on SEM analysis, the results indicated that only one variable, namely, the board size, was associated with the extent of integrated reporting. Board size was the most significant variable that influenced the level of integrated reporting of Malaysian public listed companies in 2014. The study contributes to the integrated reporting literature. It presents empirical evidence that corporate governance mechanisms influence companies' disclosure of integrated reporting information and, thus, providing additional data or information that will be significantly helpful for other researchers. The study will also stimulate the interest of academics in research activities concerning the characteristics of corporate governance mechanisms on integrated reporting activities. The findings are limited to the context of the study. It only looks at corporate governance mechanisms as a critical driver of integrated reporting and uses only the annual report disclosures from a single year.
References
Adams, R. B., & Ferreira, D. (2004). Gender diversity in the boardroom. European Corporate Governance Institute, Finance Working paper, 57, 30.
https://doi.org/10.2139/ssrn.594506
Akash, S. B., & Kamble, H. Y. (2013). Integrated Reporting: A Tool for Sustainable Business Growth. International Journal of Applied Financial Management Perspectives, 2(1), 233-236.
Akhtaruddin, M., Hossain, M. A., Hossain, M., & Yao, L. (2009). Corporate governance and voluntary disclosure in corporate annual reports of Malaysian listed firms. Journal of Applied Management Accounting Research, 7(1), 1.
Alnasser, S. (2012). What has changed? The development of corporate governance in Malaysia. The Journal of Risk Finance, 13(3), 269-276.
https://doi.org/10.1108/15265941211229271
Al-Saidi, M. T., Al-Shammari, B. A., & Page, M. (2014). Corporate governance disclosure in Kuwait. Arab Journal of Administrative Sciences, 21(1), 69-104.
Assagaf, A., Yusoff, Y. M., & Hassan, R. (2017). Government subsidy, strategic profitability and its impact on financial performance: Empirical evidence from Indonesia. Investment Management and Financial Innovations (open-access), 14(3), 135-147. doi:10.21511/imfi.14(3).2017.13
https://doi.org/10.21511/imfi.14(3).2017.13
Barako, D. G., Hancock, P., & Izan, H. Y. (2006). Factors influencing voluntary corporate disclosure by Kenyan companies. Corporate Governance: An International Review, 14(2), 107-125.
https://doi.org/10.1111/j.1467-8683.2006.00491.x
Bjorklund, R. L. (2010). Corporate board governance & the diversity-participation paradox: A note on the banking sector. International Journal of Public Information Systems, 6(1).
Branco, C. M., & Rodrigues, L. L. (2008). Social responsibility disclosure: a study of proxies for the public visibility of Portuguese banks. The British Accounting Review, 40, 161-181.
https://doi.org/10.1016/j.bar.2008.02.004
Chanatup, S., Aujirapongpan, S., & Ritkaew, S. (2020). The influence of corporate governance mechanism on the integrated financial reporting and investment risk of Thai listed companies. Entrepreneurship and Sustainability Issues, 7(4), 2818.
https://doi.org/10.9770/jesi.2020.7.4(16)
Cheng, E. C. M., & Courtenay, S. M. (2006). Board composition, regulatory regime and voluntary disclosure. The International Journal of Accounting, 41(3), 262-289.
https://doi.org/10.1016/j.intacc.2006.07.001
Dragu, I., & Tiron-Tudor, A. (2014). From Sustainability to Integrated Reporting - The Political Perspective of Institutional Theory. Studia Universitatis Babeș-Bolyai Oeconomica, 59(2), 20-33.
Dragu, I.-M., & Tiron-Tudor, A. (2013). The integrated reporting initiative from an institutional perspective: Emergent factors. Procedia - Social and Behavioral Sciences, 92(1), 275-279.
https://doi.org/10.1016/j.sbspro.2013.08.672
Durak, M. G. (2013). Factors affecting the companies' preferences on integrated reporting. International Journal of Contemporary Economics and Administrative Sciences, 3(3-4), 68-85.
Eccles, R. G., & Armbrester, K. (2011). Integrated reporting in the Cloud. IESE Insight, 8(1), 13-20.
https://doi.org/10.15581/002.ART-1890
Eccles, R. G., & Krzus, M. P. (2010). One report: Integrated reporting for a sustainable strategy. New York: John Wiley & Sons, Inc.
Eng, L. L., & Mak, Y. T. (2003). Corporate governance and voluntary disclosure. Journal of Accounting and Public Policy, 22(4), 325-345.
https://doi.org/10.1016/S0278-4254(03)00037-1
Ezat, A., & El-Masry, A. (2008). The impact of corporate governance on the timeliness of corporate internet reporting by Egyptian listed companies. Managerial Finance, 34(12), 848 - 867.
https://doi.org/10.1108/03074350810915815
Frías-aceituno, J. V, Rodríguez-ariza, L., & García-sánchez, I. M. (2013). Is integrated reporting determined by a country's legal system? An exploratory study. Journal of Cleaner Production, 44(1), 45-55.
https://doi.org/10.1016/j.jclepro.2012.12.006
Frias-Aceituno, J. V., Rodriguez-Ariza, L., & Garcia-Sanchez, I. (2013). The role of the board in the dissemination of integrated corporate social reporting. Corporate Social Responsibility and Environmental Management, 20(1), 219-233.
https://doi.org/10.1002/csr.1294
Frias-Aceituno, J. V., Rodríguez-Ariza, L., & Garcia-Sánchez, I. M. (2014). Explanatory factors of integrated sustainability and financial reporting. Business Strategy and the Environment, 23(1), 56-72.
https://doi.org/10.1002/bse.1765
García Sánchez, I., Rodríguez Domínguez, L., & Gallego Álvarez, I. (2011). Corporate governance and strategic information on the internet. Accounting, Auditing & Accountability Journal, 24(4), 471-501.
https://doi.org/10.1108/09513571111133063
Hair, J. F. (2010). Multivariate data analysis. Pearson College Division.
https://doi.org/10.1007/978-3-642-04898-2_395
Haniffa, R. M., & Cooke, T. E. (2002). Culture, corporate governance and disclosure in Malaysian corporations. Abacus, 38(3), 317-349.
https://doi.org/10.1111/1467-6281.00112
Hashim, H. A., & Rahman, M. S. A. (2011). Multiple board appointments: Are directors effective? International Journal of Business and Social Science, 2(17), 137-143.
Hassan, R., & Marimuthu, M. (2014). Gender diversity on boards and market performance: An empirical investigation on Malaysian listed companies. PLATFORM-A Journal of Engineering, Science and Society, 10, 17-25.
Hassan, R., & Marimuthu, M. (2015). Corporate governance effect on ownership and control in firms: An empirical evidence from Pakistan. International Journal of Business and Management, 10(8), 212.
https://doi.org/10.5539/ijbm.v10n8p212
Hassan, R., & Marimuthu, M. (2016). Corporate Governance, Board Diversity, and Firm Value: Examining Large Companies Using Panel Data Approach. Economics Bulletin, 36(3), 1737-1750.
Hassan, R., & Marimuthu, M. (2017). Does corporate diversity really matter in the plantation sector? Empirical evidence from a world islamic leading country and market reaction. International Journal of Financial Studies, 5(3), 17.
https://doi.org/10.3390/ijfs5030017
Hassan, R., Marimuth, M., Tariq, E., & Aqeel, R. (2017b). Ethnic and gender diversity in top level management and firm performance: Shareholder's perspectives. Journal of International Women's Studies, 18(4), 1-12.
Hassan, R., Marimuthu, M., & Johl, S. K. (2015a). Diversity, corporate governance and implication on firm financial performance. Global Business and Management Research, 7(2), 28.
Hassan, R., Marimuthu, M., & Johl, S. K. (2015b). Demographic diversity and firm value: A review on large companies using panel data approach. In Technology Management and Emerging Technologies (ISTMET), 2015 International Symposium on (pp. 197-201). IEEE.
https://doi.org/10.1109/ISTMET.2015.7359028
Hassan, R., Marimuthu, M., & Johl, S. K. (2015c). Ethnic Diversity on Boards and Market Performance: An Empirical Investigation in Malaysia. Advanced Science Letters, 21(5), 1099-1103.
https://doi.org/10.1166/asl.2015.6036
Hassan, R., Marimuthu, M., & Johl, S. K. (2016). Women on boards and market performance: An exploratory study on the listed companies. International Business Management, 10(2), 84-91.
Hassan, R., Marimuthu, M., & Johl, S. K. (2017a). Bridging and bonding: How gender diversity influence organizational performance. Global Business and Management Research, 9(1s), 117.
Hua, L. L., & Ragayah, H. M. Z. (2007). Corporate governance: Theory and some insights into the Malaysian practices. Akademika, 71, 31-60.
Hussainey, K., & Al-Najjar, B. (2011). Future-oriented narrative reporting: Determinates and use. Journal of Applied Accounting Research, 12(2).123 - 138.
https://doi.org/10.1108/09675421111160691
IIRC (2011). Towards Integrated Reporting-Communicating Value in the 21st Century (2011) on IIRC. http://theiirc. org/wp-content/uploads/2011/09. IR-Discussion-Paper-2011_ spreads. pdf
James, M. L. (2013). Sustainability and integrated reporting: Opportunities and strategies for small and Midsize companies. Entrepreneurial Executive, 18, 17.
Jensen, M. C. (1986). Agency cost of free cash flow, corporate finance, and takeovers. Corporate Finance, and Takeovers. American Economic Review, 76(2).
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360.
https://doi.org/10.1016/0304-405X(76)90026-X
Joshi, P. L., Sallah, N. M. Z., Hamzah, H., Wasiuzzaman, S. & Krishnan, A. (2016). Determinants of compliance and disclosure requirements by top listed companies under Malaysian Code of Corporate Governance. Afro-Asian Journal of Finance and Accounting, 6(2), 135-159.
https://doi.org/10.1504/AAJFA.2016.077333
Kaya, C. T., & Turegun, N. (2014). Integrated Reporting for Turkish small and medium-sized enterprises. International Journal of Academic Research in Accounting, Finance and Management Sciences, 4(1), 358-364.
https://doi.org/10.6007/IJARAFMS/v4-i1/659
Kelton, A. S., & Yang, Y. (2008). The impact of corporate governance on Internet financial reporting. Journal of Accounting and Public Policy, 27(1), 62-87.
https://doi.org/10.1016/j.jaccpubpol.2007.11.001
Khan, H. (2010). The effect of corporate governance elements on corporate social responsibility (CSR) reporting. International Journal of Law and Management, 52(2), 82-109.
https://doi.org/10.1108/17542431011029406
Khan, H., Hassan, R., & Marimuthu, M. (2017). Diversity on Corporate boards and firm performance: An empirical evidence from Malaysia. American Journal of Social Sciences and Humanities, 2(1), 1-8.
https://doi.org/10.20448/801.21.1.8
Kiron, D. (2012). Get ready: Mandated integrated reporting is the future of corporate reporting. MIT Sloan Management Review, 53(3), 1-5.
Kuzina, R. W. (2014). Integrated reporting as a mechanism of increasing business value. Actual Problems of Economics, 8(158), 385-393.
Lipunga, A. M. (2015). Integrated reporting in developing countries: Evidence from Malawi. Journal of Management Research, 7(3), 130-156.
https://doi.org/10.5296/jmr.v7i3.7195
Malaysian Code On Corporate Governance (2012). Corporate governance In Malaysia. http://micg.org.my/upload/file/articles/11/CODE-CG-2012.pdf
Marn, J. T. K., & Romuald, D. F. (2012). The Impact of Corporate Governance Mechanism and Corporate performance: A study of Listed Companies in Malaysia. Journal for the Advancement of Science, 3(1), 31-45.
Navi, B. S. (2014). Presentation of financial and non-financial performance in integrated reporting: A study. International Journal of Applied Financial Management Perspectives, 3(1), 751-755.
Patelli, L., & Prencipe, A. (2007). The relationship between voluntary disclosure and independent directors in the presence of a dominant shareholder. European Accounting Review, 16(1), 5-33.
https://doi.org/10.1080/09638180701265820
Prado-Lorenzo, J.-M., & Garcia-Sanchez, I.-M. (2010). The role of the board of directors in disseminating relevant information on greenhouse gases. Journal of Business Ethics, 97(3), 391-424.
https://doi.org/10.1007/s10551-010-0515-0
Said, R., Hj Zainuddin, Y., & Haron, H. (2009). The relationship between corporate social responsibility disclosure and corporate governance characteristics in Malaysian public listed companies. Social Responsibility Journal, 5(2), 212-226.
https://doi.org/10.1108/17471110910964496
Said, R., Omar, N., & Nailah Abdullah, W. (2013). Empirical investigations on boards, business characteristics, human capital and environmental reporting. Social Responsibility Journal, 9(4), 534-553.
https://doi.org/10.1108/SRJ-02-2012-0019
Samaha, K., Dahawy, K., Hussainey, K., & Stapleton, P. (2012). The extent of corporate governance disclosure and its determinants in a developing market: The case of Egypt. Advances in Accounting, 28(1), 168-178.
https://doi.org/10.1016/j.adiac.2011.12.001
Samaha, K., Khlif, H., & Hussainey, K. (2015). The impact of board and audit committee characteristics on voluntary disclosure: A meta-analysis. Journal of International Accounting, Auditing and Taxation, 24, 13-28.
https://doi.org/10.1016/j.intaccaudtax.2014.11.001
Sharif, M., & Rashid, K. (2013). Corporate governance and corporate social responsibility (CSR) reporting: an empirical evidence from commercial banks (CB) of Pakistan. Quality & Quantity, 48(5), 2501-2521.
https://doi.org/10.1007/s11135-013-9903-8
Stubbs, W., & Higgins, C. (2011). Sustainability and integrated reporting: A study of the inhibitors and enablers of integrated reporting [Report, Institute of Chartered Accountants in Australia]. http://hdl.handle.net/10536/DRO/DU:30064924
Suttipun, M., & Bomlai, A. (2019). The relationship between corporate governance and integrated reporting: Thai evidence. International Journal of Business & Society, 20(1).
Velte, P. (2022). Archival research on integrated reporting: a systematic review of main drivers and the impact of integrated reporting on firm value. Journal of Management and Governance, 26(3), 997-1061.
https://doi.org/10.1007/s10997-021-09582-w
Wan Ahamed, W. S., Almsafir, M. K., & Al-Smadi, A. W. (2014). Does corporate social responsibility lead to improve in firm financial performance? Evidence from Malaysia. International Journal of Economics and Finance, 6(3), 126-139.
https://doi.org/10.5539/ijef.v6n3p126
Weber, R. P. (1990). Basic content analysis (2nd ed., pp. 40-56). SAGE Publication.
https://doi.org/10.4135/9781412983488
Zainal, D., Zulkifli, N., & Saleh, Z. (2013). Corporate board diversity in Malaysia: A longitudinal analysis of gender and nationality diversity. International Journal of Academic Research in Accounting, Finance and Management Sciences, 3(1), 136-148.
Copyright Transfer Statement for Journal
1) In signing this statement, the author(s) grant UNIMAS Publisher an exclusive license to publish their original research papers. The author(s) also grant UNIMAS Publisher permission to reproduce, recreate, translate, extract or summarize, and to distribute and display in any forms, formats, and media. The author(s) can reuse their papers in their future printed work without first requiring permission from UNIMAS Publisher, provided that the author(s) acknowledge and reference publication in the Journal.
2) For open access articles, the author(s) agree that their articles published under UNIMAS Publisher are distributed under the terms of the CC-BY-NC-SA (Creative Commons Attribution-Non Commercial-Share Alike 4.0 International License) which permits unrestricted use, distribution, and reproduction in any medium, for non-commercial purposes, provided the original work of the author(s) is properly cited.
3) For subscription articles, the author(s) agree that UNIMAS Publisher holds copyright, or an exclusive license to publish. Readers or users may view, download, print, and copy the content, for academic purposes, subject to the following conditions of use: (a) any reuse of materials is subject to permission from UNIMAS Publisher; (b) archived materials may only be used for academic research; (c) archived materials may not be used for commercial purposes, which include but not limited to monetary compensation by means of sale, resale, license, transfer of copyright, loan, etc.; and (d) archived materials may not be re-published in any part, either in print or online.
4) The author(s) is/are responsible to ensure his or her or their submitted work is original and does not infringe any existing copyright, trademark, patent, statutory right, or propriety right of others. Corresponding author(s) has (have) obtained permission from all co-authors prior to submission to the journal. Upon submission of the manuscript, the author(s) agree that no similar work has been or will be submitted or published elsewhere in any language. If submitted manuscript includes materials from others, the authors have obtained the permission from the copyright owners.
5) In signing this statement, the author(s) declare(s) that the researches in which they have conducted are in compliance with the current laws of the respective country and UNIMAS Journal Publication Ethics Policy. Any experimentation or research involving human or the use of animal samples must obtain approval from Human or Animal Ethics Committee in their respective institutions. The author(s) agree and understand that UNIMAS Publisher is not responsible for any compensational claims or failure caused by the author(s) in fulfilling the above-mentioned requirements. The author(s) must accept the responsibility for releasing their materials upon request by Chief Editor or UNIMAS Publisher.
6) The author(s) should have participated sufficiently in the work and ensured the appropriateness of the content of the article. The author(s) should also agree that he or she has no commercial attachments (e.g. patent or license arrangement, equity interest, consultancies, etc.) that might pose any conflict of interest with the submitted manuscript. The author(s) also agree to make any relevant materials and data available upon request by the editor or UNIMAS Publisher.
