A study of the relationship between company characteristics and the level of disclosure on sustainability reporting of listed firms in mining, manufacturing and construction sectors on the vietnamese stock market

Nội dung text: A study of the relationship between company characteristics and the level of disclosure on sustainability reporting of listed firms in mining, manufacturing and construction sectors on the vietnamese stock market

1. A STUDY OF THE RELATIONSHIP BETWEEN COMPANY CHARACTERISTICS AND THE LEVEL OF DISCLOSURE ON SUSTAINABILITY REPORTING OF LISTED FIRMS IN MINING, MANUFACTURING AND CONSTRUCTION SECTORS ON THE VIETNAMESE STOCK MARKET Nguyen Thi Huong Lien liennth@vnu.edu.vn Nguyen Duc Phong niels.henrik1802@gmail.com Vu Thi Thuy Dung vuthuydung9420@gmail.com Vietnam National University, University of Economics and Business, E4, 144 Xuan Thuy, Cau Giay, Hanoi, Vietnam Abstract The aim of corporate disclosures on sustainable development report is to communicate information on economic, environmental and social aspects to external investors and other stakeholders. Based on literature review and multiple regression analysis, this research examines the actual practices of corporate disclosures on sustainability reporting and measures the impact of several factors related to company characteristics on the disclosure level of listed companies in mining, manufacturing and constructions sectors on the Vietnamese stock market. The results reveal that that the level of disclosure of listed companies in the three chosen sectors on economic, environmental and social issues is lower than 50%. In particular, the level of disclosure of economic information reached the highest rate of 41% whereas the levels of disclosure of environmental and social issues were only 21% and 38% respectively. Other research findings show that several factors related to company characteristics such as company size, media exposure, composition of the board and women in the board of directors have positive impacts on the level of disclosure of sustainable development of listed companies in mining, manufacturing and construction sectors on the Vietnamese stock market. Keywords: company characteristics, level of disclosure, sustainability reporting, 1. Introduction Environmental degradation, resource depletion, global warming, climate change and human rights violations have become threatening issues nowadays, therefore, businesses need to disclose these information to meet the needs of society 89
2. (Sheldon and Park, 2011). Before taking measures to improve the above problems, the first mission of businesses is to disclose fully, accurately and promptly information related to their corporate strategy, environmental and social information. Therefore, sustainability reporting was born to address the information needs of stakeholders. The initial format of sustainable reporting was designed in the 1970s under the reports on social issues attached with financial reports in European countries. In the 1980s, environmental issues such as waste discharge, environmental pollution were disclosed in replace of social problems of the previous decade. By the end of the 1990s, both social and environmental information was disclosed with traditional financial reports (Hahn and Kühnen, 2013). During economic development process, sustainability report has been called Triple Bottom-Line Report, Report on Corporate Social Responsibility, etc., Sustainability report is a tool through which businesses can disclose information related to three pillars: economy, environment and society (SSI & IFC, 2013). Sustainability reporting helps to improve the image of businesses to related parties including investors, creditors, customers, society, etc., Based on sustainability report, these stakeholders could assess impacts of an enterprise's business on the environment and its remuneration policies for employees. Moreover, sustainability reporting is also a channel for State authorities to issue appropriate policies to operational conditions of enterprises. From macro perspective, sustainability reporting benefits all stakeholders. Sustainability reporting plays an important role in society, however, depending on the extent of each industry's impact on the environment, the levels of corporate disclosure requirements for each sector are different. According to Circular no. 155/2015/TT-BTC on Guidelines for information disclosure on securities market, smokeless industries such as finance, insurance, arts, etc., are not required to disclose environmental information whereas these information must be disclosed by mining, manufacturing and construction sectors. These three sectors cause direct impacts on natural resources, the exploitation of resources results in depletion of unrecoverable natural resources, consumption of a lot of materials negatively affecting environment, emissions and waste directly discharged into environment, making the living environment seriously affected. In the context of raising concerns about environmental issues, there should be a research on the level of corporate disclosure of these three sectors and to identify factors affecting the level of disclosure of sustainability reporting in order to promote social responsibility as well as increase the level of corporate disclosure on sustainability reporting. Therefore, this research was conducted to investigate the relationship between company characteristics and the level of disclosure on sustainability reporting of mining, manufacturing and construction sectors on the Vietnamese stock market. 90
3. 2. Literature review The integration of policy and international best practices on environmental and social issues into corporate strategy and governance has become an inevitable trend to help businesses fully detect and promptly response to business risks. Pham Thi Minh Hong (2016) analyzed the application of sustainability reporting in Australia, Brazil, China, India, South Africa and the United States based on collected secondary data. In addition, the study also evaluated the status of disclosing sustainability reports of large corporations in Vietnam such as Bao Viet Holdings (BVH), Vietnam Dairy Products Joint Stock Company (VNM), etc., Finally, recommendations for Vietnamese businesses were given to improve the level of disclosure of sustainability reporting. In 2018, Leeds University’s survey on environmental safety and social indicators of 150 countries showed that no country in the world met the basic needs of people in terms of sustainable level of using resources (Daniel et al., 2018). In the US, only 9 social indicators were achieved, but all 7 indicators related to the environmental issues were violated. In Vietnam, 6 social indicators including life expectancy, minimum income, nutrient requirements for daily life, employment rate, education and democracy have been satisfied, however, CO2 emissions index exceeded environmental safety threshold. By surveying the 50 largest firms in the US and Japan, Ho and Taylor (2007) studied the impact of business attributes on the level of disclosure of economic, social, and environmental issues. Based on quantitative regression models using six independent variables such as firm size, corporate profitability, leverage, liquidity, industry membership, national disclosure environment, the study results have shown that firm size positively affected the level of information disclosure on sustainability reporting but profitability, liquidity and industry membership negatively affected the level of disclosure of sustainability reporting. Michelon G. (2011) collected and analyzed the information gathered from the 2003 annual reports of businesses based on the criteria of global reporting initiative 2002 (GRI 2002). GRI 2002 is an international practice of developing a sustainable development report to publish economic, social and environment information. The study conducted a survey of the level of information disclosure of 114 companies in the UK and the US. The study used hypothesis testing method based on regression model to study the relationship between the scale of publication of sustainability report and the factors related to firm’s reputation, including commitment to stakeholders, profitability, market profitability, media exposure, size, age, industry, leverage, membership of the Dow Jones sustainability index and country. The study showed that commitment to stakeholders and media exposure had a positive impact on the publication of sustainability reports. In addition, the higher the level of 91
4. commitment to stakeholders was, the more information about environmental and social responsibility would be disclosed. Arayssi et al., (2016) showed the results of women’s participation in management would increase the corporate release of environmental, social and governance information. The social information disclosure score of Bloomberg and the results of panel data regression analysis showed that increased participation of women in the board of directors would directly affect the corporate disclosure of governance, environment and society. Female directors will promote the implementation of social and community programs, thereby improving the profile related to corporate social responsibility. By using secondary data, Nguyen Thi Xuan Vy (2017) studied factors affecting the level of disclosing Vietnam's sustainability reporting. The study results showed several main factors including corporate governance, mission, vision and strategy, attributes of listed companies, cultural, social and legal factors had impact on sustainability reporting. Pham Ngoc Toan and Le Thi Thu Hong (2017) showed that there was a positive relationship between six independent variables including firm size, board composition, liquidity, profitability, financial leverage, auditing firm and the level of information disclosure of financial statements of listed companies on Ho Chi Minh City Stock Exchange. Based on these research results, the authors recommended listed companies increase the level of information disclosure to enhance their credibility and easily attract investors on the stock market. Dang Ngoc Hung et al., (2018) surveyed 289 companies listed on the Ho Chi Minh Stock Exchange and tested a regression model with six independent variables: profitability, independent audit, firm size, financial leverage, number of members of the board of directors, and CEO concurrently serving as director of the board. By surveying the level of disclosure of social responsibility information and sustainable development, the study showed that among 289 firms, 74 firms, accounting for 26% did not disclose information, while only 73 firms, accounting for 25% announced social responsibility information, and only 15 firms, accounting for 5% used GRI standards to prepare its sustainability reporting. The research results showed there were three factors including profitability, independent audit and firm size affecting the level of information disclosure on social responsibility and sustainable development. Karaman et al., (2018) conducted an empirical investigation of the factors affecting GRI based on sustainability reporting and the relationship between these factors with the business operation of the aviation industry from 2006 - 2015. The study used regression method with various independent variables including firm size, 92
5. free cash flow per share, profitability, leverage, growth, ownership structure and firm value. The regression results showed firm size and financial leverage were positively related to the level of reporting sustainability information. On the contrary, the ownership variable had negative relationship with the sustainability report. In addition, free cash flow per share, growth and profitability had no significant impact on sustainability reporting, as a result, sustainable reporting did not play an important role in improving the firm's performance. In summary, not many in-depth studies focusing on the three pillars of sustainable development reports including economy, environment and society have been found in Vietnam. Differences in content and levels of disclosing sustainability reporting in each sector on the Vietnamese stock market and the reasons for those differences have not been explained. The mining, manufacturing and construction sectors are considered to have direct impact on the environment, deplete natural resources, consume a lot of raw materials and discharge waste to the environment. Therefore, this study was conducted to identify factors related to company characteristics affecting the level of disclosure of sustainability reports, measuring the level of information disclosure on sustainability reporting of listed companies in the mining, manufacturing and construction sectors in order to enhance the disclosure of sustainability reporting of listed companies on the Vietnamese stock market. 3. Research methodology Previous studies in the literature review have shown the relationship between company characteristics and the level of disclosure of sustainability reporting information. Therefore, this study will focus on the factors related to company characteristics to re-test the above relationship for listed firms on the Vietnamese stock market. 3.1. Hypotheses Based on the literature review and collectible data, six hypotheses are established as follows: Hypothesis H1: The level of disclosure of sustainability reporting is positively associated with the company’s size. Hypothesis H2: The level of disclosure of sustainability reporting is negatively associated with the percentage of the director of the board concurrently serving as the CEO. Hypothesis H3: The level of disclosure of sustainability reporting is positively associated with the company audited by Big Four. Hypothesis H4: The level of disclosure of sustainability reporting is positively associated with the company frequently appearing in mass-media. Hypothesis H5: The level of disclosure of sustainability reporting is positively associated with a larger number of non-executive members in the board of director. 93
6. Hypothesis H6: The level of disclosure of sustainability reporting is positively associated with a larger number of women in the board of directors. 3.2. Research models The regression model to measure the impact of company characteristics on the level of disclosure of sustainability reporting of listed companies on the Vietnamese stock market could be described as follows: SR= β0 + β1 CS +β2 Co + β3 AU +β4 ME + β5 IB + β6 WB The measurement of variables used in the models is explained in Table 1 below. Table 1. Measurement of variables in the regression model Type of information Variables Description (Measurement) ß0 Factors not included in the model 99 criteria published by Vietnam Chamber of Commerce and Industry (VCCI) were used to measure the level of sustainability reporting, of which there are 18 criteria of governance and strategy, 12 criteria of The level of environmental issues and 69 criteria of social - labor sustainability SR issues. Each criterion was given 1 point if the company reporting fully disclosed relevant information and was given 0 point if that company didn’t disclose such information. The total score of 99 criteria is the dependent variable value on the level of sustainability reporting. Company size CS Logarithm of total assets of a company Dummy variable: Equal to 1 when the audit firm is Big Audit firm AU Four and 0 otherwise Dummy variable: Equal to 1 when the company is Media exposure ME ranked top 100 sustainable enterprises in Vietnam and 0 otherwise Composition of the The number of non-executive members of the board of IB Board director Women on Board WB The number of women in the board of director Dummy variable: Equal to 1 when director of the board Concurrent Co concurrently serving as the CEO and 0 otherwise (Source: Summary of literature review) 3.3. Data Secondary data was collected from annual reports, sustainability reports (if any) and websites of all 477 listed companies in the manufacturing, mining and 94
7. construction sectors on Vietnam's stock market. Preliminary survey was conducted on the whole population of 477 companies to evaluate the current level of disclosure of sustainability reporting. The sample of 169 listed companies, accounting for 35% of 477 listed companies in the above three sectors was chosen for in-depth survey based on the Corporate Sustainability Index 2018 (CSI 2018) criteria. 4. Current level of disclosure of sustainability reporting of listed companies in mining, manufacturing and construction sectors on the Vietnamese stock market 4.1. Number of companies disclosing information of sustainability reporting 477 companies listed on Hochiminh and Hanoi Stock Exchange were surveyed to evaluate the level of disclosure of environmental and social-labor information. Survey results are shown in Table 2 below. Table 2. Number of companies disclosing information on sustainability reporting (Unit: no. of companies) Number of Environmenta Sustainabilit companies l and social- Number of y reports Independent disclosing labor companies Sectors integrated in sustainabilit sustainable information on HOSE annual y reports developmen disclosed in and HNX reports t annual reports information Manufacturing 145 80 11 236 251 Mining, 22 6 1 29 35 quarrying and oil and gas extraction Construction 126 33 1 160 191 Total 293 119 13 425 477 (Source: Survey results of 477 listed companies) At December 31st 2017, there were totally 477 listed companies in the mining, manufacturing and construction sectors on Hochiminh and Hanoi Stock Exchange, of which 293 companies had annual reports disclosing environmental and social-labor information, 119 companies published sustainability reports integrated in annual reports, and only 13 companies had independent sustainability reports. Disclosures of environmental and social-labor information in annual reports of 293 companies revealed low level of disclosure, lack of factor analysis affecting business sustainable development. Disclosed indicators in annual reports were short-term, lacked long- term targets and no quantification of business sustainable development strategy was found. Among 119 companies having sustainability reports integrated in annual 95
8. reports, several big firms had adequate level of disclosure, clearly presented their strategies and goals for sustainable development. However, many reports of companies operating in mining, manufacturing and construction sectors failed to disclose how to manage and measure sustainable development indicators of key areas such as quantified emissions and waste in the environment. For the 13 companies having independent sustainability reports, the quality of these reports was evaluated to be closed to the best international practices of sustainability reports based on GRI standards. Although the Ministry of Finance and State Securities Commission of Vietnam do not require independent sustainability reporting, these 13 companies voluntarily disclosed full information of sustainable development. The typical examples of these best disclosure companies are Baoviet Holdings (BVH), Vietnam Dairy Products Joint Stock Company (VNM). 4.2. Evaluation of the level of disclosure of sustainability reporting of listed companies on Vietnamese stock market based on CSI 2018 criteria. Survey of the disclosure of sustainability reporting of 169 companies in mining, manufacturing and construction sectors listed on Hochiminh and Hanoi Stock Exchange was conducted based on CSI 2018 criteria. 99 indicators related to economic, social and environmental aspects of the CSI 2018 were chosen to assess the level of disclosure of sustainability reporting of 169 listed companies. The survey results are shown in Graph 1 below. Graph 1. The level of disclosure of sustainable development reports of 169 listed companies 45% 41% 40% 38% 35% 30% 25% 21% 20% 15% 10% 5% 0% Information about corporate Information about the environment Information on labor - society governance and strategy (Source: Survey results of 169 listed companies) Based on CSI 2018 criteria, the in-depth survey results showed that the level of disclosure on governance and strategy of 169 listed companies was 41%, the highest level compared to 38% for disclosure of labor and social issues and 21% for 96
9. environmental disclosure. This revealed that majority of businesses failed to meet the requirements of disclosure on corporate governance and strategy. In addition, 94% of businesses had no corporate strategy towards 17 sustainable development goals by the United Nations of the 2030 agenda for sustainable development. Most businesses did not build appropriate risk management policies including full steps such as identifying, evaluating, measuring, managing and monitoring risks. Environmental information was published with the lowest level of 21%. This showed that listed companies were not ready to announce the impact of business operations on the environment. Mining, quarrying and oil and gas extraction, manufacturing and construction sectors having direct impacts on the environment were required to publish environmental information in accordance with Circular no 155/2015/TT-BTC but the level of information disclosure remained very low. Despite being involved in mineral exploitation, listed companies in the mining sector did not have clear plan for management and protection of mineral resources. In the same way, most manufacturing companies having direct impact on land resources did not have practical activities to protect land and treat wastewater. Besides, listed companies in the construction sector failed to reduce greenhouse gas emissions during construction process. Although all the listed firms in mining, manufacturing and constructions sectors are required to fully disclose information related to the exploitation and usage of resources, the actual low level of disclosure of environmental issues was worrying. The level of disclosure of social - labor issues in mining, manufacturing and construction sectors was 38%, showing that listed companies did not pay much attention to labor practices and human rights. An obvious evidence was that these companies disclosed few information related to occupational safety, labor health and female labor protection. Disclosure of democracy in the workplace and the effectiveness of collective labor agreement was not found, therefore, it was questionable whether human rights of employees were protected in the surveyed listed companies. 4.3. Descriptive statistics The statistical data of Table 3 showed among 169 listed companies in mining, manufacturing and construction sectors on Hochiminh and Hanoi Stock Exchange, the average number of companies using audit service of Big Four (AU variable) was 40.24%. The percentage of non-executive members in the board (IB variable) was quite high, reaching 64%. 13.4% of listed companies in the surveyed sample was ranked top 100 sustainable enterprises in Vietnam (ME variable). The number of women in the board of directors (WB variable) was extremely large at 95.73%. Other 97
10. variables related to company size (CS) and concurrent position between CEO and director of the board (Co) were shown in Table 3 below. Table 3. Descriptive statistics of independent variables No Variable Mean Median Maximum Minimum 1 AU 0.402439 0 1 0 2 IB 0.64061 0.67 1 0 3 ME 0.134146 0 1 0 4 CS 6.18311 6.185 8.33 4.77 5 Co 0.280488 0 1 0 6 WB 0.957317 1 4 0 (Source: Survey results of 169 listed companies) 4.4. Regression results The regression model using the six factors affecting the level of disclosure of sustainability reporting of listed companies in Vietnam shows the following results: SR = -0.76 + 11.05 CS + 0.1 AU + 6.09 ME + 11.4 IB + 2.41 WB - 1.09 Co (11.87) (1.79) (3.23) (6.12) (1.07) (1.09) Adjusted R-squared = 29.64%; Durbin Watson = 1.4 The adjusted R-squared value is 29.64% indicating that independent variables can explain 29.64% variation in the level of sustainability reporting (SR). From the regression results, at the 5% significance level, the change of audit service by Big four (AU) and concurrent position between CEO and director of the board (Co) are not statistically significant. The remaining four variables of company size (CS), media exposure (ME), composition of the board (IB) and women in the board of directors (WB) have statistical impacts on the level of disclosure of sustainability reporting. First, company size (CS) has positive effect on the level of disclosure of sustainability reporting, therefore, hypothesis H1 is accepted, and this result is in agreement with positive results in Dang Ngoc Hung et al., (2018), Ho and Taylor (2007), Karraman et al., (2018). When company size is large, it is under greater pressures from stakeholders, such as investors, network of customers and suppliers, community, therefore big companies have a higher level of disclosure of sustainable development to meet the information needs of stakeholders. Second, the media exposure (ME) has a positive impact on the level of sustainability reporting (SR), therefore hypothesis H4 is accepted and confirms the results in Michelon (2011). When the company was honored by the mass media as 98
11. top 100 sustainable enterprises in Vietnam, it would try to enhance the company's image in public eyes. Therefore, branded companies regularly update and disclose information on sustainable development. Besides, listed companies also commit to community about their corporate social responsibility to disclose full information on sustainability reporting on a timely manner. Third, composition of the board (IB) also positively impacts the level of sustainability reporting, therefore, hypothesis H2 is accepted. This result agrees with positive results in Pham Ngoc Toan and Le Thi Thu Hong (2017). The more non- executive members in the board of directors there are, the more likely the level of disclosure of sustainability reporting is high. The reason is that non-executive members in the board control the quality of information related to sustainable development more independently and objectively. This also creates a counterbalance mechanism between executive and non-executive members of the board to monitor each other to help improve the transparency of disclosure. Fourth, women in the board of directors (WB) have positive impacts on the level of sustainability reporting. Therefore, hypothesis H6 is accept and this result is in line with Arayssi et al., (2016). This explains gender differences in environmental concern because women's environmental and social - labor concerns is normally higher than men’s concerns. Therefore, if the company has higher percentage of women participating in the board of directors, the level of environmental information disclosure is likely to be higher. 5. Conclusion Based on the preliminary survey on 477 listed firms and in-depth survey on 169 listed firms in the mining, manufacturing and construction sectors about the level of disclosure of economic, environmental and social aspects of sustainability reporting, the research results showed the actual level of disclosure of sustainability reporting of listed firms was quite low (less than 50%). Although the three sectors chosen in the sample have direct impacts on the environment and society, this low level of disclosure of listed firms in these sectors is worrying. In addition, the regression results showed there was a relationship between company characteristics and the level of disclosure of sustainability reports. Company characteristics illustrated by company size, media exposure, composition of the board and women in the board of directors have positive impacts on the level of corporate disclosure of sustainable development. This is of great significance for listed companies on the Vietnamese stock market to improve the level of disclosure of sustainability reporting to meet the information needs of stakeholders. 99
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