Corporate Risk Disclosure and Business Performance: Does Board Gender Diversity Matters?
The collapse of major corporates due to accounting scandals had drawn the public attention and created doubts on the traditional risk management and corporate governance mechanism. These scandals also destroyed a certain level of trustworthiness of an organization towards its stakeholders. Therefore, this study is aimed to examine the impact of corporate risk disclosure on business performance with board gender diversity as a moderator. The study uses secondary data gathered from year 2016 annual reports. Random sampling is chosen to collect data from 130 public listed companies on Main Board of Bursa Malaysia. Structural equation modelling is applied. The results demonstrate that corporate risk disclosure does influence business performance significantly and positively which is consistent with prior studies. However, the moderating effect is found to be insignificant although the relationship between corporate risk disclosure and business performance is slightly strengthen with the existence of female on board. This study is hoped to fill in the research gap on how gender proportions on corporate board playing a role in moderating the relationship between corporate risk disclosure and business performance.
Keywords: Corporate risk disclosureboard gender diversitybusiness performance
The overall business performance of Malaysia is expected to have a decline of 6.9 per cent in the first quarter of 2017 (Department of Statistics Malaysia, 2016). This poor business performance within Malaysia shed the light to the publics about the urgency and importance on the current economic environment. Corporate governance practices and disclosure is believed to be able to improve business performance. Although the government of Malaysia is setting up laws and regulations to improve the corporate governance practice of Malaysian companies, it is still believed that the management of an organization may not fully disclose the risk information because they do not have enough information on their risk or they do not want to reveal their credibly and prevent commercial harm from the competitors (Dobler, 2008). This is due to the fact that disclosure of risk information could bring potential harm to the company as the information is not only publishes to the potential investors, but also for its competitors according to Theory of Proprietary Costs. Furthermore, according to Said and Mellett (2013), there is a need to further identify the nature of risk reporting especially for emerging economy countries due inadequate risk disclosure.
In addition, the culture of Malaysian companies, especially for top management and corporate boards, is still lean towards homogeneous management where there is lesser female to hold higher position in the management team. Although the influence of a diversified corporate board towards the business performance is still remained inconclusive based upon the prior scholars (Wagana & Nzulwa, 2016), undoubtedly, participation of women in the corporate boards is still beneficial to the organization in a certain extent. From the perspective of psychological, women are often seen as the risk averse in comparison to the males and hence, the ladies are believed to be more conservative and cautious in relation to the corporate risk issues as the men tends to be more inclined to pick up a risk (Martin, 1987; Eckel & Grossman, 2002). Therefore, this study is aimed to look in depth of how gender moderates the association between corporate risk disclosure and business performance in Malaysia context as one of the developing country.
Corporate risk disclosure
Overall, corporate risk can be referred as the possibility of loss that will impact the company’s future financial position or business performance (Domínguez & Gámez, 2014). The release of risk information in the annual reports is playing an important role to drive the decision making process of the managements according to the Agency Theory (Jensen & Meckling, 1976). Besides that, better risk disclosure is frequently being argued that it will reduce the “conflict of interest” between stakeholders and agents and improve organizational performance (Jensen & Meckling, 1976; Nahar, Azim, & Jubb, 2016).
Risk is actually an inescapable component from any nature of business and hence, stakeholders prefer the risk information to be reported and disclosure in a timely basis (Amran, Manaf Rosli Bin, & Che 2008). Furthermore, Oliveira, Rodrigues, and Craig, (2011) have proved that risk disclosure helps an organization to stabilize its operational system, market discipline effectiveness as well as sustaining the social support of the company’s stakeholders. An effective risk disclosure is needed to enhance the continuous business growth and profitability (Hanim, Abdul & Omar, 2011).
Risk disclosure research is widely discussed in the developed countries, yet, an interesting question is that do risk governance as important to the developing countries also (Nahar et al., 2016). Besides that, the researchers further pointed out that the past studies the associations of risk governance variables such as risk disclosure with the accounting based of performance. Therefore, this study is aimed to look into the depth of how corporate risk disclosure could impact the business performance of the Malaysian organization.
Board Gender Diversity
In general, board gender diversity is defined as the presence of women on corporate boards (Julizaerma & Sori, 2012). In the recent years, some countries are encouraging for greater participation of women in the corporate board which is particularly male-dominated currently (Horak & Cui, 2017). The topic of gender diversity on corporate boards is broadly discussed in the past academic studies. For instances, The Lord Davies Report 2011 which developed by the British Government noted that European companies tend to grow faster and outperform their rivals because of the higher proportion of women in the senior management teams (Horak & Cui, 2017).
Nevertheless, according to European Corporate Governance Report 2011, there is only 14 per cent of the European board seated by women representatives (Mensi-Klarbach, 2014). Then, based on Joy (2008), there is only 9.6 per cent of Fortune 500 board seats are held by women and increased to 14.6 per cent by year 2006. She concluded that it would take at least 70 years for the ladies to reach parity with men with this slow growth rate. Moreover, an international report shown that there are 10.3 per cent of the Fortune 500 companies had no female representative in the corporate boards (Lenard, Yu, York, & Wu, 2014).
On the other hand, gender diversity is also used by prior literatures to find out how the presence of women on boards will impact corporate disclosure in general. Campbell and Minguez-Vera (2008) argued that gender composition of a corporate board can influence the monitor role and the financial reporting quality. Gul, Srinidhi, and Ng, (2011) confirmed that a gender-diverse board is better in monitoring and thus helps to improve the quality of accounting disclosure. In addition, Lenard et al. (2014) reported with evidence that gender diversity of the board really makes a difference and proved that a higher proportion of women in corporate boards is correlated with a lower variability of stock market return and leads to better corporate performance.
Although the interest is rising on the board gender diversity throughout these decades, however, there are still limited studies that investigated on how gender proportions might act as a moderator in the relationship between corporate risk disclosure and business performance. From the standpoint of Agency theory, it is inconclusive whether participation of women in boards retracts corporate governance and consequently, the company’s profitability (Arayssi, Dah, & Jizi, 2016). In addition, although there are existing literatures that indicated the relationship among corporate disclosure, gender diversity and business performance, yet, most of the studies have largely placed and drawn from the developed countries and it is limited and scarce for developing countries.
Corporate risk disclosure had been studied by some researchers previously based on empirical evidences from western countries (Lajili & Zéghal, 2005; Linsley & Shrives, 2006; Abraham & Cox, 2007); French and Latin regions (Beretta & Bozzolan, 2004); Asia Pacific areas (Amran et al., 2008) and Arab countries (Hassan, 2009). Somehow, the quantitative risk disclosure and practices is still vague and infancy (Roulstone, 1999; Solomon, Solomon, Norton, & Joseph, 2000). Basically, corporate risk disclosure can be categorized into two types which are mandatory and voluntary disclosure (Hassan & Marston, 2010). These financial reporting and disclosure are playing an important role as they are the tools of management to communicate with external investors (Qu, Leung, & Cooper, 2013).
According to the Business Tendency Survey which conducted by Department of Statistics Malaysia, the business performance of Malaysia is expected to decrease in the first quarter of 2017. The overall business performance of Malaysia is expected to have a decline of 6.9 per cent in the first quarter of 2017. Hence, the overall poor business performance within Malaysia shed the light to the publics about the urgency and importance on the current economic environment within Malaysia. Corporate governance practices and disclosure is believed to be able to improve business performance.
One the other hand, the culture of Malaysian companies, especially for top management and corporate boards, is still lean towards homogeneous management where there is lesser female to hold higher position in the management team. Although the influence of a diversified corporate board towards the business performance is still remained inconclusive based upon the prior scholars (Wagana & Nzulwa, 2016), undoubtedly, participation of women in the corporate boards is still beneficial to the organization in a certain extent. From the perspective of psychological, women are often seen as the risk averse in comparison to the males and hence, the ladies are believed to be more conservative and cautious in relation to the corporate risk issues as the men tends to be more inclined to pick up a risk (Martin, 1987; Eckel & Grossman, 2002).
Based on the problem statement above, this study strives to answer the following research questions:
Does corporate risk disclosure influence business performance?
Does board gender diversity moderate the relationship between corporate risk disclosure and business performance?
Purpose of the Study
Overall, the main objective for this study is to examine the association between corporate risk disclosure and business performance of the selected public listed companies on Main Board of Bursa Malaysia. This study also aims to investigate on the potential role of gender diversity in the relationship between corporate risk disclosure and business performance.
The population of this study are all the public listed companies on the Main Board of Bursa Malaysia. The total population of public listed companies on Main Board of Bursa Malaysia in year 2016 is 806 while there are seventeen companies categorized under PN17. Then, there is a sum of fifty companies found in Finance, REIT and Closed-End Fund sector, which are 31, 18 and 1 company respectively. Lastly, Hotels, Mining, IPC and SPAC sectors were contributed a total of twelve companies only and thus they are removed from data collection for this study as well. As a result, the final population is 727 companies. There are fourteen sectors listed within Main Market of Bursa Malaysia but only seven sectors were selected by filtering out the sectors as above which were provided large scale and higher number of main market players. The sample size of this study is 130 listed companies.
Measurement of variables
The dependent variable, business performance, is measured using return on equity (ROE) as being used in most of past studies such as Solakoglu and Demir (2016). Whereas for the independent variable, corporate risk disclosure, is being categorized into six sub-components (i.e. financial risk, operational risk, empowerment risk, information processing and technology, integrity risk and strategic risk). The extent of corporate risk disclosure is then calculated using content analysis of the annual reports as per suggestion of Amran et al. (2008).
As for the moderator, board gender diversity, this study using dummy measurement, if women is present on the board, then this it is coded with “1” and “0” if otherwise (Tantri & Sholihin, 2012; Solakoglu & Demir, 2016).
Firm size, firm age and board size were selected as the control variables in this study. Firm age is measured using the years from the establishment date (Solakoglu & Demir, 2016). Firm size by natural logarithm of the total assets (Ng, Chong, & Ismail, 2013), and board size will be measured by the number of board members as suggested by Solakoglu and Demir (2016).
Descriptive analysis is used in this study to provide a summary of characteristics towards all the studied variables because this statistics will be able to give a breakdown of analysis in terms of mean and standard deviations of all the variables. Table
Based on Table
Hypothesis testing for the Direct Effect
Path analysis is employed to test the hypothesis developed for the model. As PLS assumes that the data is not normally distributed, thus, it relies on a nonparametric bootstrap procedure to test and validate the significance of estimated path coefficients. Generally, the process of creating a subsample is repeated 5000 times to estimate the proposed model and hence, the subsample for this study is created after running the process for 5000 times for a one-tailed test at the significant level of 0.05.
R-squared (R2) is widely used to measure the goodness of fit for a model by giving an explanation on model quality in a suggested model. Based on Cohen (1992), an acceptable R2 is 0.02 for weak, 0.13 for moderate and 0.26 for substantial. The calculated R2 value of Business Performance (ROE) at 0.171 which signifies that 17.1% of the variation in business performance can be explained by corporate risk disclosure (TR). According to Cohen (1992) on R2, the value of 0.171 is considered moderate for this model.
For the purpose of hypothesis testing, the determinant of t-value on a one-tailed test of statistical significance must be greater than 1.645 when tested at 0.05 level of significance. Figure
Hypothesis H1 predicts that corporate risk disclosure is significantly influencing business performance. The result of analysis shows that H1 is statistically significant at p<0.05 and positively related (path coefficient = 0.262, t-value = 2.099), hence, hypothesis H1 is fully supported.
The findings are consistent with several past studies where the results showed that when the companies decided to disclose as much corporate risk information in their annual reports, it would lead to better business performance of the companies. Agency theory which developed by Jensen and Meckling (1976) proved that the release of risk information drives the decision making process of the managements.
Moreover, with the better disclosure of risk information in the annual report, it is believed to reduce the impact of conflict of interest between the stakeholders and agents as well as improve operational performance (Jensen & Meckling, 1976). Amran et al. (2008) also proved that the stakeholders preferred the risk information to be published and disclosed in timely basis. An effective risk disclosure is needed to enhance the continuous business growth and profitability (Hanim et al., 2011). Therefore, it can be concluded that a good risk reporting and disclosure practice can lead to the better business performance of an organization according to the researchers. The findings of this study are proved to be consistent with the view of the previous scholars too.
Hypothesis testing for the Moderating Effect
Moderating effect, also recognized as Interaction effect, is activated by variables that influence the strength of a relationship between independent and dependent variable. In other words, a moderator raises the influences towards the effects of an antecedent based on the results. In this study, gender is served as the moderating variable that might influence the effect of corporate risk disclosure on business performance. Figure
Investigation of the moderating effect of gender on the relationship between corporate risk disclosure and business performance is not supported by the findings in this study. With respect to gender diversity in corporate boards, there is a big question whether or not women in management contributed economically to an organization. Although there are many empirical studies on corporate governance perspective, however, the relationship between gender diversity and business performance is still inconclusive. Some scholars found that there is positive correlation between gender diversity and business performance (Miller & Triana, 2009; Smith, Smith, & Verner, 2006; Carter, Simkins, & Simpson, 2003) while other studies rejected the positive relationship (Naranjo‐Gil, Hartmann, & Maas, 2008; Rose, 2007).
There are researchers that found no clear and significant relationship too (Horak & Cui, 2017). From the standpoint of Agency theory, it is inconclusive whether participation of women in boards retracts corporate governance and consequently, the company’s profitability (Arayssi et al., 2016). In addition, although there are existing literatures that indicated the relationship among corporate disclosure, gender diversity and business performance, yet, most of the studies have largely placed and drawn from the developed countries and it is limited and scarce for developing countries (Table
Therefore, the result and findings for this study is showed that gender diversity slightly moderated the relationship between corporate risk disclosure and business performance. Unfortunately, the moderating effect is insignificant in Malaysia context. Although the awareness of gender equality is risen around the globe in the recent decades, the corporate board is still dominated by the male directors currently especially in the Malaysia context. The result of insignificant moderating effect of gender is actually aligned with past academic studies. For instances, there is only 14 per cent of the European board seated by women representatives (Mensi-Klarbach, 2014). She concluded that it would take at least 70 years for the ladies to reach parity with men with this slow growth rate.
The results of this study show that corporate risk disclosure tends to be positive and significantly associated with business performance. Therefore, the findings in this study support prior literature argument on disclosing potential risks to the stakeholders would provide appropriate signals to them and lead them to better strategize the company in order to come out with a wiser decision (Linsley & Shrives, 2006; Beretta & Bozzolan, 2004).
Basically, corporate risk disclosure has often been overlooked in the research arm of corporate governance. This study has established a connection between corporate risk disclosure and business performance based on the risk categorization. As the stakeholders preferred to engage with companies that are actively disclose more corporate and risk information to the public (Amran et al., 2008), the companies are expected to be more conscious in terms of their information disclosure. As a result, many companies begin to believe that corporate risk disclosure consists of more than just value, but also as one of the most important economic factors because it is believed that operational performance would improve with a better disclosure on the corporate risk information (Jensen & Meckling. 1976).
Unfortunately, the moderating effect of gender is insignificant towards the relationship between corporate risk disclosure and business performance. A possible explanation on this finding is that Malaysian companies are still dominated by male directors and the sample size for this study is limited. Therefore, it is suggested the future research to conduct this study in a longitudinal investigation to help draw a more meaningful picture on the impact of gender diversity.
This study has extended existing research on several levels. Overall, it adds to the pool of literature by providing empirical evidence of applicability of existing corporate risk disclosure and business performance within the Malaysian context. Then, this study also adds to literature the supporting evidence of gender acting as a moderator, but it needs to be confirmed if such moderation effects also exist in other contexts.
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