Studying the effect of corporate governance on the extent of corporate social responsibility disclosure of listed enterprises in Vietnam

Characteristics of BOD: The quantitative research results

demonstrate that there are 2 characteristics of the BOD influencing the

level of disclosure of CSR information. That are, the higher the ratio of

foreign members of the BOD, the higher the level of CSR disclosure,

and enterprises with chairman cum CEO have a higher level of CSR

disclosure than ones whose the chairman is not concurrently CEO. This

supports the research hypotheses

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the structure of the thesis is determined as follows: Chapter I: Theoretical and practical basis of CG, CSR disclosure. Chapter II: Research design. Chapter III: Current situation of CG and the extent of CSR disclosure of listed enterprises in Vietnam. Chapter IV: Research results on the effects of CG on the level of CSR disclosure of listed enterprises in Vietnam. Chapter V: Policy implications CHAPTER I: THEORETICAL AND PRACTICAL BASIS ON CORPORATE GOVERNANCE, CORPORATE SOCIAL RESPONSIBILITY DISCLOSURE 1.1. Corporate governance 1.1.1. Corporate governance concept: CG is a system of principles and characteristics of the BOD, the BOM, Shareholders, Supervisory/Audit and other characteristics to orient the development and to control company operations. 1.1.2. Corporate governance characteristics: The characteristics of CG are manifested through a number of the following characteristics: The size of the BOD; The independence of the BOD; Foreign board membership; Female board representation; The average age of the BOD; The number of BOD meetings; Chairman of the Board cum Chief Executive Officer (CEO); The BOM size; Independent directors; 6 Foreign directors; Female directors; Major shareholders; Institutional shareholders; State shareholders; Foreign shareholders; The ownership of the BOD; the ownership of the BOM; Family shareholders; The size of Supervisory Board; The number of Supervisory Board meetings; Big Four audit. 1.1.3. Measuring corporate governance quality: There are many methods of measuring CG quality such as using CG indicators; using the CG rating system (G-Index); using the Gov-Score index. 1.2. Corporate Social Responsibility Disclosure 1.2.1. Concept of corporate social responsibility CSR is defined as the entire responsibility of the enterprise for the environment, labor, society and other factors that affect society by the decisions and activities of that enterprise. 1.2.2. Concept of disclosure of corporate social responsibility information CSR disclosure is the disclosure of financial and non-financial information related to CSR. 1.2.3. The content of the report on corporate social responsibility There are many organizations that set standards for CSR report such as the United Nations Global Compact - UNGC; ISO 26000 - Social responsibility; The global reporting initiative - GRI; Circular No. 155/2015 /TT-BTC dated October 6, 2015 of the Ministry of Finance of Vietnam. 1.2.4. Measuring the extent of corporate social responsibility disclosure 1.2.4.1. Based on the available corporate social responsibility index - The KLD index, based on the eight characteristics of social activities (community relations, employee relations, environment, 7 product, the behavior with women and minorities, military contracts, nuclear power and funding). - CSID database, which measures the average between strengths and weaknesses of each company for seven factors: community, diversity, employee relations, environment, international operations, products and business practices, and corporate governance. 1.2.4.2. Self-building CSR index (a) Measurement based on single and multiple issue indicators. - Single issue indicator: the calculation of the CSR indicator is based on a certain issue of CSR such as using performance indicators of pollution control reported by The Council on Economic Priorities (CEP) - Multiple issue indicator: combine all the issues in the single issue indicator into multiple issue indicator to conduct CSR indicator calculation. (b) Measurement based on the content analysis of document: Based on the disclosures of CSR information (environment, employees, consumers, society ...) of the enterprise, the study will calculate CSR disclosure indicator. 1.3. Theories related to corporate governance and corporate social responsibility: Stakeholder Theory; Agency Theory; Signaling Theory; Legitimacy Theory; Property Cost Theory; Political Economy Theory 1.4. The impact of CG characteristics on the extent of CSR disclosure 1.4.1. The impact of the BOD characteristics on the extent of CSR disclosure 1.4.1.1. The size of the BOD: Several studies have shown that the size of the BOD has a positive impact on the level of CSR disclosure (see Cheng and Courtenay, 2006; Prado-Lorenzo and Garcia-Sanchez, 2010; 8 Sánchez et al., 2011; Ali and Atan, 2013; Frias-Aceituno et al., 2013; Majeed et al.,, 2015; Rahman and Ismail, 2016). 1.4.1.2. The Independence of the BOD: A number of previous researches has released that the higher proportion of independent Board members, the greater extent of disclosure of CSR information. (see Sánchez et al., 2011; Khan et al., 2012; Ali and Atan, 2013; Frias and Aceituno et al., 2013; Jizi et al., 2014; Hong et al., 2016). 1.4.1.3. Foreign board membership: Frias and Aceituno et al. (2013) pointed out the positive relationship between the proportion of foreign board members and the CSR disclosure level because the presence of foreigners on the Board may influence business of the entrepreneur depending on the cultural characteristics of each Board member’s country, thereby affect the practices of CSR information disclosure. 1.4.1.4. Female board representation: Giannarakis (2014) showed that there are women or not in the BOD does not affect the level of CSR disclosure while Majeed et al. (2015) argued that if there are women in the BOD, the information on CSR may be less published because of women carefulness, they are afraid that the disclosure of CSR will have a negative impact on the company's operations. On the contrary, Frias- Aceituno et al. (2013) indicated that female board representation have a positive impact on the extent of CSR disclosure. 1.4.1.5. The average age of the board members: Elder directors may have more experience so their judgment ability are likely be better (Bantel and Jackson, 1989); Therefore, they could avoid misunderstanding from adopting new business administration model (Vroom and Pahl, 1971). 1.4.1.6. Board meetings: A number of studies has shown that the number of Board meetings is positively related to the disclosure of CSR (see Prado-Lorenzo and Garcia-Sanchez, 2010; Frias and Aceituno et al. , 9 2013; Jizi et al., 2014). They explained that more meetings of the Board would prompt the BOD to release more information, including CSR information. In contrast, the study of Sánchez et al. (2011) illustrated a negative relationship between the number of Board meetings and the disclosure of CSR information. 1.4.1.7. Chairman of the BOD cum CEO: Previous empirical researches (see Haniffa and Cooke, 2005; Barako et al., 2006; Sánchez et al., 2011; Jizi et al., 2014; Habbash and Habbash, 2016) pointed out that if there is a Chairman of the BOD cum CEO, there would be more information disclosure about CSR because the plurality ensures the consistence in the management of CSR disclosure. 1.4.2. Effect of the BOM characteristics on the extent of CSR disclosure 1.4.2.1. The size of BOM: A number of studies have shown that the greater size of BOM, the greater level of disclosure of social responsibility (see Khan, 2010; Razak and Mustapha, 2013). This is explained by the scholars that in a company where the division of work is high among the directors, the higher the requirement of one department for the other, so the level of information disclosure would also be higher. 1.4.2.2. Independent director: Some previous studies reported a significant positive relationship between the independence of the BOM and CSR disclosure (see Cheng and Courtenay, 2006; Clemente and Labat, 2009; Razak and Mustapha, 2013; Rusmanto et al., 2014), because the presence of independent directors helps ensure the rights of shareholders, this will promote the extent of CSR disclosure. 1.4.2.3. Foreign director: From the perspective of CSR, prior researches have indicated that foreign directors have a positive impact on CSR disclosure (see Khan, 2010; Rusmanto et al. , 2014). 10 1.4.2.4. Female director: Some previous research has proved that the gender diversity of management team helps to improve the CSR disclosure level (see Khan, 2010; Prado-Lorenzo and Garcia-Sanchez, 2010; Dienes and Velte, 2016) while there are other researches showing that female directors have a negative impact on the extent of CSR disclosure (Rusmanto et al., 2014). 1.4.3. The influence of shareholder characteristics on the extent of CSR disclosure 1.4.3.1. Major shareholders: A number of prior studies have illustrated that major shareholders have a positive impact on the extent of disclosure of CSR information (see Said et al., 2009; Barako et al., 2006; Wang and et al., 2014; Majeed et al., 2015). This could be explained that due to the conflict of interests between shareholders and the management board, more and more major shareholders, in order to ensure their own interests, tend to push the management board to release more information including CSR information. 1.4.3.2. Institutional shareholders: Empirical researches have demonstrated that the level of CSR disclosure is greater when the enterprise has institutional shareholders (see Barako et al., 2006; Fauzi et al. et al, 2007; Majeed et al, 2015; Hong et al., 2016). 1.4.3.3. State shareholders: Several studies have shown a positive relationship between state ownership and disclosure of CSR (see Said et al., 2009; Khan et al., 2012; Sufian and Zahan, 2013; Juhmani, 2013; Rahman and Ismail, 2016; Habbash and Habbash, 2016) because in addition to the issue of economic benefits, state shareholders are also interested in social issues. 1.4.3.4. Foreign shareholders: Literature has displayed a positive relationship between foreign ownership and CSR disclosure (see Barako et al., 2006; Haniffa and Cooke, 2005; Said et al. 2009; Khan et al., 11 2012; Hu et al., 2016) because foreign shareholders are likely to need more information and have knowledge about foreign markets, so enterprise is encouraged to disclose more information including information about social responsibility for foreign shareholders to make decisions. 1.4.3.5. The ownership of the BOD: The results from the empirical studies have all asserted that the higher the percentage of shares held by the BOD, the more it would negatively affect the extent of CSR disclosure (see Karamanou and Vafea, 2005; Mohd Ghazali, 2007; Block and Wagner, 2010; Khan et al., 2012; Juhmani, 2013). Scholars argue that BOD members have been provided with sufficient basic information by the BOM; BOD members tend to be interested in their interests rather than the implementation of social responsibility activities, which would negatively influence the level of disclosure of social responsibility information. 1.4.3.6. The ownership of the BOM: Prior researches has pointed out that there is a negative relationship between the ownership of the BOM and disclosure of CSR (see Said et al., 2009; Razak and Mustapha, 2013) because directors are the people who release CSR information, when their ownership increases, it would have an adverse effect to the BOM when more unfavorable CSR information is disclosed. 1.4.3.7. Family shareholders: Studies have shown that family ownership is positively associated with the extent of social responsibility disclosure (see Block and Wagner, 2010; Block et al., 2015; Habbash). and Habbash, 2016). 1.4.4. Impact of Supervisory/Audit characteristics on the extent of CSR disclosure. 1.4.4.1. The size of Supervisory Board: The size of Supervisory board is measured by the number of Supervisory Board members. Previous 12 researches have indicated that the size of the Supervisory Board has a positive but negligible impact on the extent of CSR disclosure (see Jizi et al., 2014; Dienes and Velte, 2016) because as the size of the Supervisory board increases, more information would be required to perform the supervision, including information on CSR. 1.4.4.2. The number of Supervisory Board meetings: This characteristic is measured by the number of meetings of the Supervisory Board in the year. Prior studies has demonstrated a positive relationship between the number of Supervisory Board meetings and the level of CSR disclosure (see Karamanou and Vafeas, 2005; Jizi et al., 2014) due to a lot of information needed for the operation of the Supervisory Board. In contrast, Dienes and Velte (2016) suggests that the more the number of Supervisory Board meetings, the less information about CSR is published. 1.4.4.3. Big Four Audit: The Big Four audit variable is a dummy variable, equals 1 if the enterprise audited by the Big Four, otherwise equals 0. Barako et al. (2006) showed that companies audited by the Big Four will increase the quality of its disclosure. 1.5. The impact of CG quality on CSR disclosure The research on the impact of CG quality on CSR disclosure in the world today has been still quite limited. The study of Chan et al. (2014) based on 222 listed companies in Australia illustrated that CG quality has a positive influence on the extent of CSR disclosure. CHAPTER II: RESEARCH DESIGN 2.1. Research hypotheses Summary of research hypotheses is presented in Table 2.1 Table 2.1: Summary of research hypotheses 13 Hypothesis Expected impact direction Hypothesis Expected impact direction H1 + H12 + H2 + H13 + H3 + H14 - H4 + H15 - H5 - H16 - H6 + H17 + H7 + H18 - H8 + H19 + H9 + H20 + H10 + H21 + H11 + H22 + Source: Author’s own 2.2. Research models 2.2.1. Research model to assess the influence of CG characteristics on the extent of CSR disclosure CSRD1 = β0 + βi*HĐQT +αj*BGĐ + £l*CĐ + ¥m*KSKT + πn*BienKS + ε where CSRD1 is the extent of CSR disclosure; i = 1, 2, ... .7; j = 1,2, 3, 4; l = 1, 2, ... 7; m = 1, 2, 3; n = 1, 2, 3, 4 2.2.2. Research model to investigate the impact of CG quality to the extent of CSR disclosure CSRD2 = µ0 + µ1*Gov-Score + µ2*TTS + µ3*ROA + µ4*ROE + µ5*Tuoi + αi where CSRD2 is the extent of CSR disclosure; Gov-Score is Quality of CG; Total assets (TTS), Return on assets (ROA), Return on equity (ROE) and Company age (Tuoi) 2.3. Measurement of Research variables 14 2.3.1. Measurement of Corporate governance characteristics Table 2.2. Measurement of Corporate governance characteristics Variable Variable description Variable Measurement HĐQM the size of the BOD The number of BOD members HĐĐL the independence of the BOD The proportion of the number of independent directors to the total number of BOD members HĐNg Foreign board membership The proportion of the number of Foreign board members to the total number of BOD members HĐNu Female board representation No female board member = 0, otherwise =1 HĐTu Average age of board members Average age of Board members HĐHo The number of Board meetings in a year Less than 4 Board meetings a year = 0, otherwise = 1 HĐGĐ Chairman of the BOD cum CEO Chairman of the BOD cum CEO = 1; otherwise = 0 GĐQM the size of BOM The number of BOM members GĐĐL Independent director No Independent director = 0, otherwise = 1 GĐNg Foreign director No Foreign director = 0, otherwise = 1 GĐNu Female director The proportion of the number of Female directors in the BOM CĐLo Major shareholders Number of shares held by major shareholders/total shares 15 Variable Variable description Variable Measurement CĐTC Institutional shareholders Number of shares held by Institutional shareholders/total shares CĐNN State ownership Number of shares held by State shareholders/total shares CĐHĐ Ownership of the BOD Number of shares held by Board members/total shares CĐGĐ Ownership of the BOM Number of shares held by BOM members/total shares CĐNg Foreign shareholders No Foreign shareholder = 0, otherwise = 1 CĐGĐi Family shareholders No Family shareholder = 0, otherwise = 1 KSQM Size of Supervisory Board The number of Supervisory Board member KSHo Number of Supervisory Board meetings No Supervisory Board meeting = 0, otherwise = 1 KTBF Big Four Audit Audited by Big Four = 1; otherwise = 0 Source: Author’s own 2.3.2. Measurement of corporate governance quality The measurement of CG quality is determined as follows: 𝐺𝑜𝑣 − 𝑆𝑐𝑜𝑟𝑒𝑖 =∑Yij/n 𝑛 𝑖=1 where Gov-Scorei: the index of CG quality of enterprise i. Yij = 1 if the CG index is appropriate, otherwise Yij = 0. 2.3.3. Measurement of the extent of CSR disclosure 16 The measurement of the extent of CSR disclosure of a company is as follows: 𝐶𝑆𝑅𝐷𝑖 =∑Yij/n 𝑛 𝑖=1 where Yij equals 1 if the index j is disclosed, otherwise, Yij equals 0; n is the number of index which company has to disclose. 2.4. Data collection 2.4.1. Secondary data This study is conducted on a sample of 529 enterprises in the manufacturing, trading and service sectors listed on the Hanoi Stock Exchange (HNX), Ho Chi Minh Stock Exchange (HOSE), accounting for 72.7% of the number of listed enterprises. 2.4.2. Primary data In this research, a semi-structured questionnaire is developed to clarify some of the results of quantitative research for example why the size of the BOD, the extent of BOD independence, the average age of Board members, the ownership proportion of major shareholders and the size of Supervisory board does not affect the extent of CSR disclosure, why the greater ownership of institutional shareholder, the lower level of CSR disclosure and why the greater ownership of state shareholders, the greater CSR disclosure level. 2.5. Data processing 2.5.1. Secondary data processing The study uses descriptive statistical methods to compare, evaluate CG and the extent of CSR disclosure by different criteria. Besides, SPSS software is used to synthesize and compare data among industry groups. 2.5.2. Primary data processing 17 The research uses the method of statistic of answers and cites some of the answers of the semi-structured questionnaire to make remarks and evaluate the causes of the impact of some CG characteristics to the extent of CSR disclosure. CHAPTER III: CURRENT SITUATION OF CORPORATE GOVERNANCE AND THE EXTENT OF CORPORATE SOCIAL RESPONSIBILITY DISCLOSURE OF LISTED ENTERPRISES IN VIETNAM 3.1. The current situation of corporate governance of listed enterprises in Vietnam - Some businesses have not complied with the government regulations on CG such as the Vegetexco Port Joint Stock Company which has only 02 members of the BOD while the minimum requirement is 03 members; According to regulations, at least 1/3 of the members of the BOD are independent members, but there are 323 enterprises (accounting for 61.06%) that do not reach the proportion of independent members of the BOD. There are, worse, 143 enterprises that do not have independent BOD members; There are 134 enterprises out of 529 businesses, accounting for 25.33%, with the Chairman cum CEO violating the provision that the Chairman of the BOD cannot concurrently hold the position of CEO; According to regulations, the number of supervisors in the Supervisory Board of a company is at least 03 people and at most 05 people. However, the number of Supervisory Boards with less than 3 people is 23 enterprises (accounting for 4.35%), the number of Supervisory Boards with more than 5 people is 08 enterprises (accounting for 1.51%) ... 18 - Examining the differences in CG of different businesses sectors (manufacturing, commerce, and services) also shows the differences in several characteristics such as the size of the BOD, the size of the BOM, independent director, the ownership of the BOD, the ownership of the BOM. That shows, businesses sector also has an impact on CG. In other words, because the business sector is different, CG is also different. - The quality of CG is still quite low (only 36%), the quality of CG of commercial enterprises is highest (37%), followed by manufacturing enterprises (36%) and finally service enterprises (34%). 3.2. The current situation of the extent of CSR disclosure of listed enterprises in Vietnam (1) The extent of disclosure of CSR information has been quite limited. The average mandatory CSR disclosure (CSRD) index is only 46.57%, less than a half. The other CSRD indicators are below 15%. (2) None of the enterprises discloses 100% of the indexes (33 enterprises have disclosed 14/15 mandatory CSRD indexes, the largest percentage is 93.33%), many businesses have not disclosed any indexes (the smallest value is 0) such as Da Nang Book and School Equipment Joint Stock Company. There is no index disclosed by all enterprises. (3) The different measure of CSRD leads to different index of CSRD. Enterprises tend to disclose mandatory CSR information the most (mandatory CSRD = 46.57%) and publish voluntary CSR information the least (voluntary CSRD = 7.14%). (4) With the same measure, enterprises in different business sectors have different levels of disclosure of CSR information (sig. = 0 <5%). Manufacturing enterprises have a greater level of CSR disclosure than commercial and service enterprises. 19 (5) The extent of CSR disclosure by GRI of Vietnam is lower than other countries’ ones. CHAPTER IV: RESEARCH RESULTS ON THE EFFECT OF CORPORATE GOVERNANCE ON THE EXTENT OF CORPORATE SOCIAL RESPONSIBILITY DISCLOSURE OF LISTED ENTERPRISES IN VIETNAM Research results indicate that there are 7 CG characteristics that affect the level of CSR information disclosure. Characteristics of BOD: The quantitative research results demonstrate that there are 2 characteristics of the BOD influencing the level of disclosure of CSR information. That are, the higher the ratio of foreign members of the BOD, the higher the level of CSR disclosure, and enterprises with chairman cum CEO have a higher level of CSR disclosure than ones whose the chairman is not concurrently CEO. This supports the research hypotheses. Size of BOD: the Board size does not affect the level of CSR disclosure because the disclosure of CSR information is decided by an individual no matter how great the board size is or because the awareness of CSR of BOD members may be limited, they do not disclose CSR information. The independence of the BOD: Quantitative research results illustrate that the level of independence of the Board does not affect the extent of CSR disclosure. Because independent board members have limited understanding of CSR information and mainly care about business performance, they do not require companies to disclose CSR information. Or due to the fact that the disclosure of CSR information is voluntary, independent members of the BOD do not require disclosure. 20 Characteristics of BOM: There are two characteristics of BOM that influence the level of CSR information disclosure. First, the larger size of the BOM, the higher level of CSR information disclosure. Second, the higher percentage of female directors, the higher level of CSR disclosure. These results support the research hypotheses and are also consistent with results from prior studies in the world. Characteristics of Shareholders: There are two characteristics of shareholders having impact on the level of CSR information disclosure and these results do not support the research hypotheses. First, the higher the ownership of institutional shareholders, the lower the level of CSR disclosure. This is because the institutional shareholders are only interested in the company's business. This result is consistent with Habbash and Habbash, 2016 and Hu et al, 2016. Second, the higher the state ownership in enterprise, the higher the level of CSR disclosure. As the state is restricting outward investment, state-invested companies are strictly controlled. The state requires enhancing the responsibility of the manager of the state capital to manage enterprises receiving state capital investment more closely. Since that, the state capital representative will ask the invested enterprise to disclose more information. Major shareholders: the ownership of major shareholders does not affect the level of CSR disclosure, because major shareholders have limited understanding of CSR or they are likely to be interested in business performance rather than CSR issues. Supervisory/Audit characterist

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