January 22, 2024
Rina Neoh Siew Lian, Anbalagan Krishnan, Siti Khadijah Mohammed Nasrah and Franco Gandolfi.
Abstract
The primary objective of this conceptual paper is to investigate the correlation between board composition, diversity, independence, and the extent of environmental, social, and governance (ESG) disclosure within publicly listed boards in Malaysia. This study undertakes a comprehensive review and examination of the extant body of literature pertaining to the relationship between corporate governance variables and ESG disclosure. The results derived from the comprehensive analysis of existing scholarly works indicate that there is a positive relationship between board independence, board size, and women directorship, and the level of voluntary disclosure of ESG-related information. However, it is important to note that board ownership and CEO duality do not exhibit a significant impact on the extent of ESG disclosure. The paper additionally emphasises the significance of board diversity, specifically gender diversity, in fostering transparency, adherence to ethical standards, and overall organisational effectiveness. This study makes a valuable contribution to the existing body of literature on the quality of ESG reporting and the diversity of boards, with a specific focus on emerging markets such as Malaysia.
INTRODUCTION
The concept of Environmental, Social, and Governance (ESG) has garnered significant attention in recent times due to the increasing interest exhibited by investors. ESG reporting pertains to the transparent communication of information regarding environmental, social, and corporate governance aspects. The primary aim of this organisational initiative is to enhance investor transparency by providing insights into a company’s ESG activities.
The United Nations-supported initiatives pertaining to ESG issues are commonly referred to as “Fiduciary Duty in the 21st Century.” This designation underscores the notion that companies tend to achieve improved outcomes when they actively contribute to the well-being of the societies in which they operate. The subject of discussion pertains to the United Nations principles for responsible investment.
The emergence of ESG disclosure can be attributed to the early 2000s, a time when the concept of corporate sustainability and ethical business practises started to garner considerable recognition. ESG disclosure refers to the voluntary communication of a company’s environmental, social, and governance performance, providing stakeholders with information about the organization’s sustainability efforts and their impacts on society and the environment.
REVIEW OF LITERATURE
A multitude of scholarly investigations have been conducted to assess the current state of disclosure
pertaining to ESG factors within publicly traded companies in Malaysia. The study conducted by Wasiuzzaman and Mohammad (2019) aimed to investigate the influence of board gender diversity on the degree of transparency in ESG disclosures in the specific setting of Malaysia. The authors’ research unveiled a significant correlation between the increase in female directors on corporate boards and the improvement of ESG disclosure scores. The discovery suggests that the inclusion of a varied gender makeup in corporate boards has a favourable influence on the degree of transparency witnessed in ESG disclosures within the specific setting of Malaysia (Wasiuzzaman & Mohammad, 2019).
Research conducted by Azhari et al. (2023) investigated the factors influencing the disclosure of ESG information among publicly listed companies in Malaysia, both before and during the COVID-19 pandemic. The study’s findings suggest a positive association between profitability and the inclusion of independent board members in relation to the extent of ESG disclosure throughout the duration of the pandemic outbreak.
Overall, the current state of ESG disclosure among publicly listed companies in Malaysia demonstrates an increased recognition of the importance of ESG factors and a growing tendency towards transparency and disclosure. The influence of specific board characteristics, such as gender diversity and independence, has been observed to affect the advancement of ESG disclosure. The COVID-19 pandemic has exerted an influence on the practises of disclosing ESG- related information. Notably, certain factors, such as profitability and board composition, have demonstrated a discernible impact on the disclosure of ESG information during this period.
The significance of ESG considerations has garnered considerable attention and is now widely recognised as a fundamental aspect of corporate reporting, contributing to the creation of value. Market investors are currently assessing the capacity of firms to effectively communicate their commitment to generating long-term value through the implementation of ESG strategies.
Kamaludin et al. (2022) posit that the influence exerted by stakeholders may serve as a motivating factor for firms to adopt sustainable practises. However, it is worth noting that these objectives often clash with managers’ focus on short-term profitability and their obligation to generate exceptional returns. In contrast, institutional investors exhibit a preference for enduring investments that are supported by robust ESG initiatives. The presence of conflicting incentives gives rise to agency conflicts, which can be alleviated through the implementation of robust corporate governance mechanisms, with a particular emphasis on the effectiveness of the board of directors.
According to Kamaludin et al. (2022), a proficient Board of Directors (BOD) offers oversight, guidance, and consultation that effectively harmonises the concerns of both management and shareholders. A board that exhibits independence, diversity, and diligence plays a crucial role in promoting and improving ESG practises and disclosure. This is because ESG measures are of paramount importance for ensuring a firm’s sustained long-term performance and value. This research focuses on the fundamental issue of the significance of ESG factors. The primary objective is to determine the influence of board characteristics on the disclosure and reporting of ESG information.
Furthermore, the BOD sets the strategy and direction for the company and is thus answerable to its stakeholders. Wasiuzzaman & Wan Mohammad (2019) found that an experienced and diversified board composition can influence the decision- making process within company, especially on the stakeholder’s interests. However, there is a lack of clear understanding on how board composition, diversity, independence, and CEO tenure affect ESG disclosure which ultimately affects a publicly listed firm’s performance. This research aims to analyse whether the BOD’s diverse composition, diversity, and independence has direct impact
in influencing the firm’s ESG compliance and disclosure. Furthermore, the study will examine the role of the CEO’s tenure in mediating the relationship between ESG disclosure and the firm’s Return on Equity (ROE).
A diverse board can bring different perspectives and experiences to the table, which can lead to better ESG practices and improved overall performance. For example, a board with diverse members may be more likely to consider the long- term impact of ESG issues on the company’s reputation and financial performance, and to implement strategies to address these issues. In turn, companies with a strong commitment to ESG practices are often seen as being more socially responsible and may be able to attract a wider range of customers and investors. This research aims to gain a better insight of the benefits of ESG disclosure in promoting a firm’s performance and in achieving high level of diversity among board members of private limited companies in Malaysia.
The term ‘board composition’ refers to the traits and qualities of the board of directors, such as the number of independent members, the size of the board, and the diversity of the board. Cucari et al. (2017) state that board membership plays a significant role in determining the level of ESG disclosure. The company’s CSR performance and adherence to ESG practises are influenced by the board’s decisions, motivations, and values. According to various studies within a European context, the board of directors has a bigger impact on CSR performance than the firm’s CEO (Cucari et al., 2017). Understanding the extent of ESG disclosure in publicly traded firms requires an analysis of the corporate governance framework, particularly the board makeup.
The literature on ESG disclosure has shown interest in board diversity, particularly gender diversity. A diverse board, with a higher presence of women, has been linked in studies to increased openness, ethics compliance, and ESG disclosure (Manita et al., 2018). According to Manita et al. (2018), a critical mass of women on boards can increase the degree of ESG disclosure since the presence of women on boards has been proven to positively correlate with ESG disclosure. Therefore, encouraging board diversity – including gender diversity, – can help public listed businesses’ ESG disclosure practises.
When we talk about board independence, we refer to independent directors on the board who are not connected to the business or its management. Lagasio & Cucari (2019) stress that board independence has a beneficial impact on ESG disclosure. The different viewpoints, experience, and objectivity that independent directors offer to the board can strengthen the organization’s commitment to ESG practises and transparency. Board independence is considered a key component of sound corporate governance and is linked to greater levels of ESG disclosure (Lagasio & Cucari, 2019). Therefore, increasing ESG transparency in publicly traded firms is possible by ensuring the board has a sufficient number of independent directors.
CEO tenure is the period of time a CEO has held his or her current post. CEO tenure can affect ESG disclosure and overall company performance (Triyani et al., 2020). Indicating that CEOs with more experience are more likely to prioritise ESG practises and disclosure, it has been discovered that longer CEO tenure improves the quality of ESG disclosure. According to Triyani et al. (2020), CEO tenure also modifies the association between ESG disclosure and business performance, implying that the impact of ESG disclosure on firm performance may differ depending on the CEO’s tenure. Therefore, taking CEO tenure into account is crucial to understanding how ESG disclosure and business success are related.
The impact of CEO tenure, diversity, independence, and board composition on ESG disclosure in publicly traded firms may be influenced by the interaction of board membership, diversity, independence, and CEO tenure. According to Pucheta-Martnez & Gallego-lvarez (2018), the interaction of these variables can have an impact on the degree of ESG disclosure and company performance. For instance, higher levels
of ESG disclosure and better business performance may be the outcome of a diverse board, one that has a sufficient number of independent directors, and a CEO with a longer tenure. Understanding the intricate link between board qualities and ESG disclosure requires examining how these elements interact.
The current academic literature on the relationship between board composition, diversity, and independence and ESG disclosure in the context of publicly listed boards in Malaysia is limited. This is despite the increasing interest in this area and its potential implications for firm performance. Previous research has been conducted in various countries, including Italy (Cucari et al., 2017), the USA (Manita et al., 2018), GCC countries (Arayssi et al., 2020), and Saudi Arabia (Chebbi & Ammer, 2022). However, it is necessary to conduct research that specifically addresses the Malaysian context.
According to Arayssi et al. (2020), Malaysia is currently experiencing significant growth in its capital market and has actively sought to attract foreign investments. Consequently, it has become imperative for companies to exhibit good corporate citizenship and fulfil their social responsibilities. Hence, the primary objective of this study is to address this research gap by examining the correlation and consequences of board composition, diversity, and independence on the disclosure of ESG practises within publicly listed boards in Malaysia.
Despite the existence of various studies investigating the correlation between board composition, diversity, independence, and ESG disclosure, there remains a dearth of comprehensive analysis that encompasses all these factors concurrently. Existing literature often exhibits a tendency to concentrate on singular or dual dimensions of board characteristics, such as gender diversity or independence, while neglecting to examine the collective impact of multiple factors (Wasiuzzaman & Mohammad, 2019; Kamaludin et al., 2022). Further in-depth research is needed to investigate the specific impact of gender diversity on ESG disclosure in Malaysian publicly listed companies. The existing literature provides mixed findings on the relationship between gender diversity and ESG disclosure. For instance, studies in other countries have found positive associations between gender diversity on boards and ESG performance (Adams et al., 2018), while some studies suggest that gender diversity may not have a significant impact on ESG disclosure (Leitch et al., 2018). Therefore, exploring the role of gender diversity in the context of Malaysian publicly listed companies would help to address this research gap.
Historically speaking, the impetus for sustainability emerged in the 1950s with the identification of the notion of Corporate Social Responsibility (CSR), initially emphasising the ‘social dimension’ of business. Subsequently, during the 1980s, stakeholders increasingly prioritised ‘environmental’ disclosure. In the following decade, sustainability efforts broadened to encompass social, environmental, and economic aspects.
The practise of disclosing sustainability reports has become commonplace among firms globally, and it has emerged as a noteworthy consideration for businesses due to the growing interest of stakeholders (Amin-Chaudhry, 2016; Crane & Glozer, 2016). The pressure exerted by stakeholders prompted firms to extend their disclosure practises beyond annual financial reports to encompass social, environmental, and governance issues. According to Newcomb et al. (2015), to enhance comprehension of the organization’s sustainability endeavours, there is a growing emphasis on non- financial metrics that may possess an intangible nature.
Following the occurrence of the financial meltdown of 2008, the European Commission implemented various measures aimed at improving the standard of reporting by firms to cater to the diverse needs of stakeholders. In April 2019, the United Nations (UN) Global Compact further strengthened the initiative by aligning their sustainability strategies with ten principles across four key areas: human rights, labour rights, the environment, and anti- corruption.
The current state of ESG reporting is characterised by a lack of coherence, as numerous reporting standards generate a multitude of acronyms, resulting in a fragmented landscape devoid of a systematic framework to guide corporate disclosures. In October 2015, Bursa Malaysia revised the Main Market Listing Requirements (Main LR) and ACE Market Listing Requirements (ACE LR) with regards to the inclusion of sustainability statements in annual reports, also referred to as the Sustainability Amendments. The Sustainability Amendments require that listed issuers incorporate a comprehensive account of the management of significant economic, environmental, and social risks and opportunities (referred to as “EES”) in their annual reports. This account is known as the ‘Sustainability Statement’ and serves as a replacement for the previous declaration regarding the obligatory reporting of CSR activities or practises by listed issuers.
Lagasio and Cucari (2019) conducted a meta- analytical review that offers a comprehensive analysis of the impact of corporate governance on ESG disclosure. Their study represents the first of its kind in examining such a relationship. The study examines a comprehensive selection of 24 empirical studies to investigate the impact of board independence, board size, and women directorship on the level of ESG voluntary disclosure. The findings of the study indicate a positive and significant relationship between these board characteristics and the extent of ESG voluntary disclosure. However, it should be noted that there is no evidence to suggest that board ownership and CEO duality have a positive impact on ESG disclosure. The study emphasises the significance of board composition and diversity in facilitating the disclosure of ESG-related information.
A study conducted by Manita et al. (2018) investigates the correlation between board gender diversity and the disclosure of ESG-related information in the United States. The research reveals empirical evidence supporting the existence of a “critical mass” phenomenon, wherein a substantial increase in female representation on corporate boards leads to enhanced levels of transparency and adherence to ethical standards. This improvement is measured by the extent of disclosure pertaining to ESG factors. This research study provides empirical evidence in support of the proposition that a board of directors characterised by diversity, specifically in terms of gender diversity, has the potential to positively influence the adoption and implementation of ESG disclosure practises.
In a study conducted by Ellili (2022), the primary focus is to examine the influence of corporate governance on the disclosure of ESG factors. The research specifically aims to distinguish between financial and non-financial firms in this context. The study reveals a positive relationship between institutional ownership, foreign ownership, board independence, board diversity, and the extent of ESG disclosure in both financial and non-financial firms. The research emphasises the significance of corporate governance elements in facilitating the disclosure of ESG information among various categories of firms.
In Buallay’s (2019) study, an investigation is conducted to explore the correlation between sustainability reporting, specifically ESG reporting, and performance within the European banking industry. The research reveals a statistically significant and positive association between the disclosure of ESG factors and key performance indicators, namely return on assets, return on equity, and Tobin’s Q. The study aims to elucidate the potential advantages associated with ESG reporting in relation to financial performance.
Fayyaz et al.’s (2022) study examines the correlation between board diversity and firm performance within a panel data framework, focusing on a sample of nonfinancial sustainable firms in the European Union (EU). The research reveals that organisations characterised by a diverse board of directors, encompassing both structural and demographic dimensions, exhibit a notable enhancement in terms of overall firm performance. The study highlights the significant influence of board diversity on the financial performance of firms.
Kamaludin et al. (2022) investigates the impact of various board characteristics, such as independence, diversity, and diligence on the extent of ESG disclosure within companies listed on Bursa Malaysia. The research demonstrates that there is a significant positive relationship between board independence and diversity, and the practise of disclosing ESG information across various sectors. This study emphasises the significance of board characteristics in facilitating the disclosure of ESG information within the Malaysian market.
Unequivocally, the literature review provides evidence that the composition, diversity, and independence of boards have a significant impact on the disclosure practises related to ESG factors in publicly listed companies. The results of this current study indicate that there is a positive relationship between board independence, board size, women directorship, diversity, and the extent of ESG disclosure. However, the study did not find any significant impact of board ownership and CEO duality on ESG disclosure. The results underscore the significance of corporate governance elements in fostering transparency, adherence to ethical standards, and overall organisational performance by means of disclosing ESG information.
The subject matter of this present study pertains to the burgeoning significance surrounding the status of board governance and ESG disclosure within the context of Malaysia. Numerous scholarly studies have been conducted to explore the correlation between board characteristics and the disclosure of ESG factors in companies listed in Malaysia. Previous research has primarily concentrated on various factors, including but not limited to, the independence of the board, diversity within the board, the level of diligence exhibited by board members, and the representation of different genders within the board.
According to a recent study conducted by Kamaludin et al. (2022), empirical evidence suggests that there is a positive correlation between board independence and diversity, and the adoption of ESG disclosure practises in Malaysian companies across various sectors. The inclusion of autonomous directors within the board of directors introduces a range of viewpoints and specialised knowledge, thereby enhancing the organization’s dedication to ESG principles and the transparent communication of relevant information within firms.
Nevertheless, there are still persistent challenges that need to be addressed regarding the formulation of policies and the establishment of clear standards for ESG disclosure in Malaysia. The challenges associated with promoting ESG disclosure in Malaysia are primarily attributed to the voluntary nature of sustainability disclosure (Kengkathran, 2019). Transnational regulatory bodies, such as the Association of Southeast Asian Nations (ASEAN), encounter challenges in their efforts to promote ESG disclosure. These difficulties arise from the inherent limitation of their authority, which prevents them from directly influencing national legislation (Kengkathran, 2019).
Moreover, it is worth noting that the extent of ESG disclosure in Malaysian corporations exhibits variation across diverse sectors and company scales. Mohammad et al. (2022) assert that there is a notable disparity in the representation of women directors on corporate boards between large companies and small-cap companies. The findings suggest that larger companies tend to exhibit a higher percentage of women directors, whereas small-cap companies demonstrate a greater inclination towards meeting regulatory requirements in this regard. The varying results concerning the influence of board diversity on ESG disclosure can be ascribed to excessive monitoring within inadequately governed large corporations, which inadequately address ESG disclosure concerns (Mohammad et al., 2022).
A recognised obstacle faced by both large and small-cap companies in Malaysia pertains to the absence of well-defined policies and regulations concerning the disclosure of ESG factors. The inherent voluntary nature of sustainability reporting presents difficulties in fostering uniform and standardised practises in the realm of ESG reporting. The implementation of compulsory reporting obligations and guidelines can contribute to the establishment of a more standardised and transparent framework for disclosing ESG information.
Another significant obstacle concerns the lack of explicit and well-defined criteria for ESG reporting. The degree of maturity pertaining to sustainability disclosures exhibits variation among diverse sectors and company sizes. The enhancement of comparability and facilitation of meaningful analysis and benchmarking can be achieved through the development of clear and standardised metrics and indicators for ESG reporting.
The effective management and reporting of ESG information poses a significant challenge for large- cap companies. The efficacy of ESG disclosure may be impacted by the organisational management framework of the company. The implementation of robust governance practises and the establishment of accurate and reliable data collection and reporting processes are imperative for large- cap companies to improve their ESG disclosure practises.
Small-cap companies face difficulties due to limited resources and a lack of awareness regarding ESG practises. These companies might encounter challenges in resource allocation for ESG reporting and may exhibit a deficiency in the requisite expertise and knowledge to proficiently execute ESG practises. Assisting small-cap companies in the implementation of ESG practises and reporting can serve as a viable solution to address these obstacles.
Notwithstanding these obstacles, there exists an increasing cognizance and enthusiasm regarding ESG disclosure within the Malaysian listed companies. The growing recognition of sustainability concerns has resulted in a rise in the voluntary disclosure of ESG practises within annual reports (Ismail & Latiff, 2019). Ahmad et al. (2021) assert that corporations are increasingly acknowledging the significance of incorporating ESG factors into their operational practises to secure enduring and sustainable financial gains. Nevertheless, there remains a need for further advancements in the standardisation of ESG reporting, as well as the augmentation of transparency and the overall quality of disclosures (Ismail et al., 2019).
ESG compliance among publicly listed boards in Malaysia can yield substantial economic advantages, encompassing both macro and micro dimensions. At the macroeconomic level, adherence to ESG standards has the potential to enhance the long-term sustainability and resilience of the Malaysian economy. Alsayegh et al. (2020) emphasize that the incorporation of ESG factors in investment decisions can attract conscientious investors, resulting in enhanced capital inflows and improved market stability. Similarly, Aboud and Diab (2018) assert that adherence to ESG standards can potentially bolster the standing of Malaysian corporations in the international marketplace, thereby enticing foreign capital inflows and cultivating economic advancement.
At the micro level, adherence to ESG standards can yield numerous benefits for individual companies. To begin with, the incorporation of environmental and social risk management practises can lead to a reduction in potential liabilities and reputational harm, thereby enhancing risk management efforts (Alsayegh et al., 2020). Additionally, the adherence to ESG standards has the potential to improve operational efficiency and generate cost savings by implementing sustainable strategies and optimising resource utilisation (Alsayegh et al., 2020).
Furthermore, companies with robust ESG commitments have the potential to allure and retain highly skilled employees, as evidenced by the growing trend of talented individuals seeking employment in such organisations (Alsayegh et al., 2020). The adherence to ESG standards has the potential to enhance stakeholder relationships, encompassing customers, suppliers, and local communities, thereby exerting a favourable influence on business performance. (lsayegh et al., 2020).
CONCLUDING THOUGHTS
This conceptual paper highlights the importance of board composition, diversity, independence, and CEO tenure in influencing ESG disclosure in publicly listed companies in Malaysia. The findings from existing literature and empirical studies suggest that these factors play significant roles in promoting ESG disclosure and enhancing firm performance. Board composition, including the number of independent directors, board diversity, and CEO tenure, must be carefully considered to ensure effective corporate governance and sustainable business practices. The adherence to ESG standards has the potential to yield economic advantages on a broader scale, benefiting both the overall Malaysian economy and the specific performance of individual companies. This commitment to ESG compliance can foster sustainability and resilience, bolster the long- term viability of the economy, and enhance the operational effectiveness of businesses.
Finally, in Malaysia, it is of utmost importance for companies and policymakers to accord priority to board governance and ESG practises to secure enduring prosperity and foster sustainable progress. Further empirical research is much needed to validate and expand upon the findings presented in this conceptual paper.
