VIETNAM NATIONAL UNIVERSITY HO CHI MINH CITY UNIVERSITY OF ECONOMICS AND LAW FACULTY OF ACCOUNTING AND AUDITING GRADUATION THESIS DETERMINANTS OF SUSTAINABILITY REPORTING QUALITY: AN EMPIRICAL RESEARCH ON VIETNAMESE LISTED COMPANIES SUPERVISOR: MSc. HOANG THI MAI KHANH STUDENT: NGUYEN ANH TUAN STUDENT ID: K134091113 CLASS: K13409C Ho Chi Minh city, May 2017 Table of figures Figure 1: Summary of scoring scheme .18 Figure 2: Minimum required disclosing indicators .19 Figure 3: List of independent variables .24 Figure 4: Model 1's regression analysis results .26 Figure 5: Model 2's aggression analysis results .30 Figure 6: Model 3' aggression analysis results .33 Figure 7: Industry analysis. Introduction Sustainability reporting is increasing popular on a global scale due to broader awareness of sustainable development. Sustainability reporting benefits greatly companies by building trust with stakeholders which helps reduce reputational risks, improving internal management and decision-making process as well as information system, progressing vision and strategy that helps companies address strengths and weaknesses, reducing compliance costs and creating competitive advantage (GRI, The benefits of sustainability reporting, 2014).
In Vietnam, sustainability reporting is still a new practice with dispersed applications. From 2016, the Annual Report Awards (ARA) – a competition which is to honour excellent annual reports, has had new award with respect to sustainability reports. In the same year, Bao Viet Holding was awarded the best Asian sustainability report prize by CSRworks International. This indicates the potential for the popularity and development of sustainability reporting practices in Vietnam.
A research conducted by Nielsen Vietnam in 2015 has revealed that 86% of Vietnamese consumers are willing to pay a premium to buy products or services from sustainable development companies which is the highest percentage in South East Asia. This suggests the increasing awareness of customers relating to sustainable issues and among all, they are one of the most powerful stakeholders. As a result, many corporations have another motive to engage in sustainability practices. Since there has been very limited number of empirical research on sustainability reporting practices in Vietnam, this study is undertaken with the purpose of providing some preliminary empirical evidence on which factors influence sustainability reporting quality.
Research objective The primary objective of this study is to identify the determinants of sustainability reporting quality under Vietnamese circumstances. The study object is the quality of sustainability reports. Research methodology This is an empirical research, all variables after being collected will be analysed by regression model to determine any significant associations. Content analysis will be employed to score the sustainability reports.
Scope and limitations 4. Scope The research is undertaken exclusively on Vietnamese listed companies’ sustainability reports published for the year of 2016. The scope is restricted to only sustainability reports not other kinds of reports. Limitation The study is undertaken exclusively for sustainability reports issued for the year of 2016.
A longitudinal research may provide more significantly meaningful trends. 4 Chapter 1: Literature review and developed hypotheses 1. Sustainability The World Commission on Environment and Development (often known as Brudtland committee) held by United Nations in the 1980s published its reports – Our common future (the Brudtland report) in 1987 which provided a comprehensive definition of sustainability. Sustainability is defined as ‘ensuring that development meets the needs of the present without compromising the ability of future generation to meet their own needs’ (United Nations, 1987).
Sustainable development is development which is ‘not a fixed state of harmony, but rather a process of change in which the exploitation of resources, the direction of investments, the orientation of technological development and institutional change are made consistent with future as well as present needs’ (United Nations, 1987). Brudtland report summarised sustainable development as harmony of many aspects including political system, economic system, social system, production system, technological system, international system and administrative system. There are many approaches to sustainability, one of them is ‘triple bottom line’ which includes: Planet: business conduction is in line with environmental sustainability People: different stakeholders’ interests are balanced up and shareholders’ interests are not prioritised automatically over the ones of stakeholders Profit: returns of the organisation 1. The Global Reporting Initiatives (GRI) To report voluntarily on sustainability practices, companies can adopt various approaches.
GRI is a reporting framework that is most widely used to address sustainable issues. ‘GRI is an international independent organization that helps businesses, governments and other organizations understand and communicate the impact of business on critical 5 sustainability issues such as climate change, human rights, corruption and many others’ (GRI, 2017). With the vision of creating a future which sustainability is integrated into organisational decision-making process, GRI aims at developing a reporting framework that sustainability reports become regular and comparable as financial reporting. The principles for defining reporting quality includes: balance, comparability, accuracy, timeliness, clarity and reliability (Global Reporting Initiative, 2015).
In general, framework of a sustainability report consists of two parts: general standards disclosures and specific standards disclosures. The former includes disclosures relating to strategy and analysis, organisational profile, identified material aspects and boundaries, stakeholder engagement, report profile, governance, ethics and integrity. The latter includes disclosures relating to 6 categories: economic, environmental, labour practices and decent work, human rights, society and product responsibility. Legitimacy theory Organisations in their existence receive supports from surrounding stakeholders, hence in turn they should benefit the society where they base or at least do not cause harms to that society.
Between the organisations and society, there is a ‘social contract’ that constrains organisations’ activities within boundaries set by society. Legitimacy theory suggests that organisations will always want to ensure that their operation is within society’s boundaries and perceived as legitimate by outsiders. Stakeholder theory Stakeholder theory suggests that organisations are accountable to a wide range of stakeholders due to their (potential) significant impact on society that cannot be only responsible to shareholders. Stakeholders are ‘any entity (person, group or possibly non-human entity) that can affect or be affected by the achievements of an organisation’s objectives’ (BPP Learning media, 2016).
Agency theory Agency theory concerns the agency problem arising from the separation between ownership and management of a company, which management (the agent) may act in their own interests not the ones of shareholders (the principals). Literature review and hypothesis development Diversity is the variation of social and cultural identities among people existing together in a defined employment or market setting (Cox, 2001). European Commission’s 2011 green paper emphasised the importance of the variety in gender, expertise and professional backgrounds, regional backgrounds to facilitate the efficiency of board’s operation. The report on Women in decision-making highlighted relationship between corporate ethical behaviour and the number of female directors (European Commission, 2012).
While some countries have put steps on legislation enforcement to promote a greater women ratio on board, for example in Norway all listed companies are required to have a minimum percentage of 40% regarding female directors on boards, other nations only encourage gender diversity as a demonstration of corporate governance best practice. On the other hand, in a number of countries where masculinity is still superior to femininity larger proportion of women on boards has remained a controversial issue, even in developed countries (Japan is a good example). Davies Report (2011) argued that the larger proportion of female directors on boards would enhance board’s performance through more active contributions of female NED compared to their male counterparts, conscientious preparation for board meetings and willingness to challenge strategies. Moreover, greater female representation could help the board achieve better corporate governance by monitoring strategy, committing to ethical standards and concerning more on stakeholder issues such as employee, customer satisfaction, sustainable development and corporate social responsibility.
The representation of women on boards could bring diversity due to different values of female directors compared to male directors, they are more stakeholder-oriented than their male counterparts (Adams, 2015). Furthermore, greater number of women on boards can positively associate with ethical and social compliance because of female sensitivity toward these matters (Isidro & Sobral, 2014). Thus creating a legitimate 7 expectation that there would be a relationship between board gender diversity and sustainability reporting practice since diverse boards could increase the transparency and accuracy of financial reports, hence reducing information asymmetry and improving stakeholder engagements (Gul, Hutchinson, & Lai, 2013). Al-Shaer & Zaman (2016) found a significant positive relationship between sustainability reporting quality and board gender diversity measured by five alternatives: number of female directors on boards, percentage of boards’ female directors, number of independent female directors, Shannon index of diversity and Blau index of diversity.
By categorising into two groups: small and large sized companies, the paper also discovered the significance of all board gender diversity measures for the small sized sample while only two measures (number of female directors and number of independent female directors) were significant for large sized firms although all of them had positive association with sustainability reporting quality. The presence of women on boards could help firms become socially responsible by encouraging the adoption of environmentally friendliness and good corporate governance practices (Nadeem, Zaman, & Saleem, 2017). The research also found that gender diversity was positively associated with corporate sustainability practices in Australia. H1: There is a positive association between board gender diversity and sustainability reporting quality The UK’s Higgs report on the role and effectiveness of non-executive directors highlighted the importance of non-executive directors who have no managerial responsibility in assuring boards’ balancing influence and reducing conflicts of interest between principals (shareholders) and their agents (management).
Arguably, non- executive directors are believed to play a key role in challenging and scrutinising the strategy implemented by executive directors due to their wider perspectives. Besides the positive relation of women’s proportion on boards to board effectiveness, female directors are likely to have similar impact possessing by independent directors (Adamsa & Ferreira, 2009). Al-Shaer & Zaman (2016) found a significant positive association of number of independent female directors with sustainability reporting quality. As a result, it is worth to expect that independent and non-executive female directors may require 8 more effort on sustainability practices which eventually benefits shareholders in long- term and in a sustainable way.
H2: Non-executive female directors have a positive association with sustainability reporting quality. While the chairman is responsible for leading the board of directors, the chief executive directors (CEO) lead the management team. The UK’s Higgs report emphasised the vital role of chairman in ensuring the effectiveness of the whole board as well as individual directors by directing boards’ operation to strategic matters, active engaging with shareholders, allocating sufficient time for controversial issues discussions. On the other hand, CEO roles are more likely to involve in running the business, implementing board’s resolutions, assuring organisational objectives achievement and liaison with stakeholders.
Due to these characteristics, it would be a mistake not to address the influence of corporate leadership on companies’ strategy and policies on sustainable development including related public disclosures. McGuinnessa et al. (2017) found that companies led by chairwoman and female CEO tends to have higher corporate social responsibility rating. Furthermore, the effect of female leadership still significantly remained after board gender diversity measures had been controlled.
H3: Female leadership has a positive relationship with sustainability reporting quality. Many studies have revealed the influence of ownership status on amount of disclosures both financial and non-financial reports. Government-owned firms are usually subject to greater scrutiny from the public due to their relatively significance in size and considerably political contribution backed, as a result, they must disclose more environmental and social information to maintain their accountability to society at large (Cormier & Gordon, 2001). Thai firms with government ownership are more likely to have greater amount of CSR disclosure in annual reports, furthermore, many of them publish separate sustainability report (Wuttichindanon, 2017).
With the same result, Ghazali, (2007) found that while the amount of social activities included in annual reports varied considerably among firms, companies whose major shareholder is state or state-owned organisation disclosed substantially more on CSR activities. 9 With unique characteristics of national economy, several important industries in Vietnam are or used to be nationalised.