Intellectual capital disclosure in the context of corporate governance

52 Int. J. Learning and Intellectual Capital, Vol. 10, No. 1, 2013

Copyright © 2013 Inderscience Enterprises Ltd.

Intellectual capital disclosure in the context of corporate governance

Kin Gan* Faculty of Accountancy, Universiti Teknologi MARA, Melaka City Campus, 110 Off Jalan Hang Tuah, 75300, Melaka, Malaysia Fax: (606)-2857014 E-mail: [email protected] E-mail: [email protected] *Corresponding author

Zakiah Saleh Faculty of Business and Accountancy, University of Malaya, 50603 Kuala Lumpur, Malaysia Fax: (603)-79673810 E-mail: [email protected]

Masoud Abessi Department of Industrial Engineering, Faculty of Engineering, University of Yazd, Safaeiah, University Blvd., Yazd, 89168, Iran E-mail: [email protected] E-mail: [email protected]

Ching Choo Huang Faculty of Accountancy, Accounting Research Institute, Universiti Teknologi MARA, Level 14, Menara SAAS, 40450 Shah Alam, Selangor, Malaysia E-mail: [email protected]

Abstract: The study uses content analysis to explore the relationship between board features, audit committee and ownership structures on intellectual capital (IC) disclosure whilst controlling for firm specific characteristics such as firm-size, profitability, leverage and type of auditor. This study also attempts to provide empirical evidence on the influence of corporate governance on voluntary IC information in a developing nation drawing from both the agency and institutional theories. It was found that ownership structure

Intellectual capital disclosure in the context of corporate governance 53

(family-controlled, government-owned and diffused ownership) and audit committee (size of audit committee and financial experts of audit committee members) are able to explain the behavioural practises of the voluntary disclosure of IC. Audit committee and ownership structure were found to influence IC disclosures, suggesting IC disclosures among Malaysian companies can be enhanced by incorporating such information in the corporate governance report. This paper also suggests that guidelines on IC disclosure can perhaps be initiated as a complement to the existing corporate governance report.

Keywords: intellectual capital; IC; corporate governance; ownership structure; intellectual capital disclosure; Malaysia.

Reference to this paper should be made as follows: Gan, K., Saleh, Z., Abessi, M. and Huang, C.C. (2013) ‘Intellectual capital disclosure in the context of corporate governance’, Int. J. Learning and Intellectual Capital, Vol. 10, No. 1, pp.52–70.

Biographical notes: Kin Gan is a Senior Lecturer in the Faculty of Accountancy. Her research interests cover financial reporting, corporate governance and intellectual capital. She is attached to the Faculty of Accountancy, Universiti Teknologi MARA, Melaka City Campus.

Zakiah Saleh is an Associate Professor at the Department of Financial Accounting and Auditing, University of Malaya. Her research interest includes financial accounting and reporting and public sector accounting.

Masoud Abessi is from the Department of Industrial Engineering. He is a Professor of MIS in the Faculty of Engineering, Yazd University, Yazd, Iran. His research interests are in research methodology, data mining, and data analysis in areas related to industrial engineering and management.

Ching Choo Huang is an Associate Professor at the Faculty of Accountancy of the Universiti Teknologi MARA. She is an Associate Research Fellow of the Accounting Research Institute in Malaysia. Her research interests include financial and corporate reporting, intellectual capital, intangibles and voluntary disclosures.

1 Introduction

As a developing nation, Malaysia has undergone various changes in the last two decades. Firstly, the Asian financial crisis in 1997/1998 has resulted in the reformation of corporate governance in Malaysia. The roles of the board of directors and audit committees were strengthened with the establishment of the Malaysian Code on Corporate Governance (The Code) in 2000 and its revision in 2007. In addition, a new blueprint of corporate governance was prepared to further enhance The Code (Bakar, 2010). Secondly, intellectual capital (IC) has also begun to gain importance in the Malaysian economy in the last 20 years. The government’s deliberate efforts in placing Malaysia on the knowledge-based agenda have resulted in greater investments in IC or intangibles such as research and development and training for human resource.

54 K. Gan et al.

The west has long recognised IC as a key contributor to an organisation’s competitive advantage and value creation (Mouritsen et al., 2001). As a result, companies began to supplement information on IC voluntarily due to a greater demand on the information concerning their soft assets (Guthrie and Petty, 2000) as these are not fully capitalised in the traditional financial statements. Such disclosure is deemed important in line with the claims of Cerbioni and Parbonetti (2007) that both corporate governance and voluntary disclosure improve protection on investors and enhance the efficiency of capital market.

The objective of this paper is to examine intellectual capital disclosure (ICD) in the context of corporate governance. Drawing on agency and institutional theories, this study examines the relationship between board features, audit committee and ownership structures on ICD whilst controlling for firm specific characteristics such as firm-size, profitability, leverage and type of auditor. Though there were studies in Malaysia on corporate governance and voluntary disclosure (Ghazali and Weetman, 2006; Haniffa and Cooke, 2002), very few examine the relationship between corporate governance and voluntary disclosure of IC in specific. Besides contributing to the body of knowledge, this study enhances the understanding of ICD and its relationships with corporate governance from the lenses of the agency and institutional theories. Moreover, the incorporation of corporate governance attributes into voluntary disclosure is also encouraged by Gul and Leung (2004).

This paper is structured as follows. The next section discusses the literature review and the theoretical perspective of voluntary reporting. This is followed by the development of hypotheses. Section 4 deals with the research design. The results and discussions are described in Section 5. The final section draws some conclusions from the findings, highlights the research limitations and makes recommendations for future research.

2 Literature review and theoretical perspective

In the literature, it was found that corporate governance and ICD have been less researched unlike corporate governance and voluntary disclosures. There were studies on ICD and corporate governance conducted outside Malaysia such as those of Cerbioni and Parbonetti (2007), Firer and Williams (2003), and Li et al. (2008). Firer and Williams (2003) found family-controlled companies (FAMC) have fewer tendencies to disclose IC-related information as compared to companies with diffused ownership (OWNDIFF). Cerbioni and Parbonetti (2007) investigated the impact of size, board composition (INED), board structure and CEO duality on ICD. They found that all the variables have impacted the quantity of ICD. Studies conducted in the UK companies by Li et al. (2008) found significant association between INED, ownership structure, size of audit committee, frequency of audit committee meeting and ICD.

In Malaysia, studies on ICD were also conducted (Foong et al., 2009; Gan and Rajasegaran, 2004; Goh and Lim, 2004; Huang, 2010). Gan and Rajasegaran (2004) investigated the nature and degree of ICD on companies listed in Bursa Malaysia in 2002. They found only 28.3% of the samples disclose IC-related information. Goh and Lim (2004) reviewed the 2001 annual reports of the top 20 profit making companies listed in the Malaysian Market and found IC information disclosed were in qualitative form rather than quantitative. Huang (2010) conducted a cross sectional study on 100 companies and found that IC disclosures (ICD) were mainly in the discursive form. Foong et al. (2009)


investigated further by examining the relationship between ICD and corporate characteristics. They concluded that ICD is still scanty and at its infancy stage in the 2003 annual report of Malaysian companies. Most of the studies conducted on ICD used small sample and only descriptive analysis was conducted except for Foong et al. (2009) who have attempted some inferential statistics. Even though Keenan and Aggestam (2001) suggest that corporate governance and IC are connected, there is a lack of study on IC and corporate governance in terms of ownership structure. This gap motivates the researchers in conducting this research.

This study has drawn on two theories, namely the agency and institutional theories in exploring the relationships between corporate governance attributes and ICD. From the agency theory perspective, it is claimed that a company with high agency costs will be more stringent in monitoring their governance mechanism and provide more voluntary information in its attempt to reduce the cost (Jensen and Meckling, 1976; Fama and Jensen, 1983). Jensen and Meckling (1976) also stated that by disclosing more information investors can reduce uncertainty and this should lower their cost of capital. Based on these arguments, managers should be motivated to disclose more information to enhance the firm’s value as well as to attract investors.

On the other hand, advocates of institutional theory (Deegan, 2007; DiMaggio and Powell, 1983) claim that organisations may adapt their institutional practise. Generally, organisations disclose voluntarily due to forces or pressure imputed upon them to resemble other units that face the same set of environmental conditions (Dillard et al., 2004).

3 Development of hypotheses

3.1 Corporate governance and board structure

In The Code (2007), corporate governance is defined as the process and structure used to direct and manage the business and affairs of a company towards enhancing business prosperity and corporate accountability with the ultimate objective of realising long term shareholder value, whilst taking into account the interests of other stakeholders. The role of directors was being scrutinised more closely after the Enron corporate scandal. The failure of Enron’s board of directors in their watchdog role was stated in the Enron report1 which states that the board had “failed to monitor …to safeguard Enron’s shareholders”. Their failure has resulted in regulatory and legislative changes in the USA, UK, and Canada. One of the notable developments in the enforcement was the enactment of the Sarbanes-Oxley Act in 2002, with the aim to restore credibility to the US corporate governance system. Moreover, Gul and Leung (2004) have claimed that the failure in incorporating corporate governance can affect voluntary disclosure.

As such, it is important to examine the constituents of the board of directors as director plays a vital role in managing companies on behalf of the shareholders. In supporting this, Fama and Jensen (1983) opine that the board of directors is one of the most important internal control mechanisms in monitoring top management. The agency theory argues that in order to protect the shareholder interests, the board of directors need to be effective. This is evidenced by the study conducted by McKinsey (2002) which found that institutional investors are willing to pay a premium for well-governed companies, and in the case of Malaysia a premium of up to 20%.2 Generally, Brennan

56 K. Gan et al.

(2006) has found that the effectiveness of the board is influenced by the composition, quality, size and diversity of the board, the duality function of CEO and Chairman, information asymmetries and board culture. Drawing on Brennan’s (2006) claims, this paper looks at whether the size of board, INED, board leadership, board diversity, audit committee size (ACSize), audit committee meeting and financial experts in the audit committee are associated with ICD.

3.1.1 Board size

There are contrasting views with respect to the relationship between the size of board and voluntary disclosure. John and Senbet (1998) advocate that having more members on board can help in enhancing the monitoring capacity of the board. This, however, is offset by the incremental cost of poorer communication as well as inefficiency in decision making as a result of a larger numbers of directors on the board. On the other hand, Cheng and Courtenay (2006) have found that the size of the board is not associated with the level of voluntary disclosure. This is because having more members on the board may result in a delay in the communication process and restrict board’s efficiency. Hence, it is hypothesised that a larger board size (BSIZE) will have a negative association with the voluntary disclosure of IC.

H1(a) There is a negative association between BSIZE and voluntary disclosure of IC information.

3.1.2 Board composition

Another board characteristic which may have an association with ICD is INED. In this study, the INED refers to the proportion of outside (non-executive) directors to the total number of directors as defined by Shamsher and Annuar (1993). According to Jensen and Meckling (1976), agency theory posits that non-executive directors are needed in the board to monitor and control the actions of the opportunistic executive directors. Thus, these non-executive directors act as a check and balance in the mechanism in enhancing boards’ effectiveness. In their studies, Adams and Hossain (1998) and Chen and Jaggi (2000) found significant positive association between voluntary disclosure and the proportion of independent directors (INED) on the board. A more recent study by Li et al. (2008) found a significant positive association between the INED and voluntary disclosure of IC. However, Haniffa and Cooke (2002) and Eng and Mak (2003) have found a negative association between these variables. On the contrary, Ho and Wong (2001) have found no relationship between the proportion of INED and voluntary disclosures. Therefore, the more non-executive INED in the board the more ICD should be present.

H1(b) There is a positive association between INED and voluntary disclosure of IC information.

3.1.3 Board leadership

According to Barako et al. (2006), a unitary leadership structure could significantly impair the boards’ monitoring, disciplining and compensation for senior managers. This dominant position will give room to opportunistic behaviour. Some studies (Forker,


1992; Gul and Leung, 2004) found that duality (roles as CEO and Chairman) is negatively related with voluntary corporate disclosure. Thus, the following is hypothesised.

H1(c) There is a positive association for companies with Chairman that does not hold the position of CEO (RDUAL) and voluntary disclosure of IC information.

3.1.4 Board diversity

The board diversity in this study is referred to as cross-leadership. Haniffa and Cooke (2002) did not find any significant relationship between cross-directorships and the level of disclosure by companies in Malaysia. However, in another study on ‘chairman with multiple directorships’ and corporate social reporting disclosures, it was reported they have significant relationships (Haniffa and Cooke, 2005). Thus, it is hypothesised that cross-leadership encourages voluntary disclosure of IC.

H1(d) There is a positive association between cross-leadership (CRSSL) and voluntary disclosure of IC information.

3.2 Audit committee

Audit committee which acts independently from its executive directors also plays a significant role in enhancing the governance of a company. The role of the audit committee is to ensure that the interests of the shareholders are protected in relation to financial reporting as well as internal control (The Smith Report, 2003). In their studies, Forker (1992) and Ho and Wong (2001) have found that the presence of an audit committee enhances and increases disclosure. Quality of disclosure is further improved when at least a member of the audit committee is a member of the professional accounting bodies. In line with this, it is hypothesised that the size of audit committee, frequency of audit committee meetings (ACMEETING) and more financial experts (using professional membership as a surrogate) in the audit committee should influence the voluntary disclosure of IC.

H2(a) There is a positive association between size of audit committee (ACSize) and voluntary disclosure of IC information.

H2(b) There is a positive association between frequency of audit committee meeting (ACMeeting) and voluntary disclosure of IC information.

H2(c) There is a positive association between financial experts in audit committee (FINEXPT) and voluntary disclosure of IC information.

3.3 Ownership structure

The motivation for voluntary disclosure in Singapore and Hong Kong is very much influenced by the form of their ownership and management structure (Mok et al., 1992). Malaysia should share the same characteristic. Thus, this study attempts to investigate the association between ownership structure and voluntary disclosure of IC. Three types of ownership structure adopted from Firer and William (2003), namely FAMC, government-owned companies (GLC) and OWNDIFF are examined in this study.

58 K. Gan et al.

3.3.1 Family-controlled

Companies with a high proportion of family members in the board are able to nominate family members to sit in the board to protect their interests (Ghazali and Weetman, 2006). According to Gray (1988), preference for secrecy is likely to decrease when there is an increase in ownership. In comparison with companies of OWNDIFF, Chau and Gray (2002) found that family-controlled firms are less motivated to disclose beyond mandatory information. As such, FAMC that are with concentrated ownership are less likely to disclose information voluntarily.

H3(a) There is a negative association between family-controlled company (FAMC) and voluntary disclosure of IC information.

3.3.2 Government ownership

Eng and Mak (2003) have found positive relationship between government ownership and disclosure. Government ownership is a unique feature of Asian companies, in particular Singapore and Malaysia (Firer and William, 2003; Ghazali and Weetman, 2006). As argued by Firer and Williams (2003), government ownership has significant influence on corporate disclosure like IC-related information. They advocate that government ownership increases moral hazard and agency problems and disclosure is a means of mitigating these problems. Moreover, most directors that sit in the board are also senior government officials. As such they may directly or indirectly influence the disclosure policies in the support of the initiatives and policies of the government. Hence, GLC are perceived to disclose more voluntarily information in support of the government’s policies and initiatives.

H3(b) There is a positive association between GLC structure and voluntary disclosure of IC information.

3.3.3 Diffused ownership

Agency theory posits that the greater the ownership diffusion in a firm the more information will be disclosed as an attempt to reduce agency costs and information asymmetry (Fama and Jensen, 1983). As such, OWNDIFF encourages additional information signalling that the managers are acting in the best interests of the principals. In a study conducted by Hossain et al. (1994), it was found that there is a negative relationship between OWNDIFF structure and the level of voluntary disclosure. However, this is in contrast with that of Haniffa and Cooke (2002) who found a positive relationship between the two variables. As there is a lack of empirical evidence on IC information in specific, this study proposes the following hypothesis:

H3(c) There is a positive association between OWNDIFF companies and the extent of voluntary disclosure of IC information.


4 Research design

4.1 Sample selection

Top 100 Malaysian companies based on their market capitalisation were selected for this study. According to Vergauwen et al. (2007), larger companies have incentives to provide more information as they are more dependent on their stakeholders. The annual reports3 for the financial years from 2006 to 2008 of these companies were examined.

4.2 Regression model

The regression model for this study is as follows:

0 1 2 3 4

5 6 7 8

9 10 11 12 13

14

ICDScore BSIZE INED RDUAL CRSSLACSize ACMeeting FINEXP T + FAMCGLC OWNDIFF SALES ROE LEVTOPAUD

i i i i i

i i i i

i i i i i

i i

β β β β ββ β β ββ β β β ββ α

= + + + +

+ ++ + + + +

+ +

where

ICDScore IC score which is the sum of HCScore, SCScore and CCScore

BSIZE total number of directors on board

INED proportion of independent non-executive directors on board

RDUAL dummy variable, 1 if the CEO is also chairman of BOD, 0 otherwise

CRSSL ratio of directors on the board with directorships in other companies to the total number of directors

ACSIZE total number of audit committee members

ACMEETING number of ACMEETING held

FINEXPT number of financial expert in the audit committee member

FAMCi dummy variable, if family-controlled, coded as 1, otherwise zero

GLCi dummy variable, if GLC, coded as 1, otherwise zero

OWNDIFFi dummy variable, if widely-held coded as 1, otherwise zero

SALESi natural log of annual sales

ROEi ratio of operating net income to total shareholders’ equity

LEVi total debts divided by shareholders’ equity

TOPAUD dummy variable, 1 if audited by top four auditor, otherwise zero

β1, β2,…β14 coefficient of variables 1 through 14

αi residual term.

60 K. Gan et al.

4.2.1 Dependent variable (ICDScore)

The dependent variable in this study is ICDScore which is the voluntary disclosure of IC information. The three components of IC, namely human capital (HC), structural capital (SC) and customer capital (CC) are examined. These three components are found to be consistent in the context of Malaysia (Huang et al., 2007). The level of ICD is measured using a disclosure index via a content analysis which is commonly used in the voluntary disclosure studies in Malaysia (Foong et al., 2009; Gan and Rajasegaran, 2004; Goh and Lim, 2004; Huang, 2010). In this study, the ICD checklist was adapted and modified from literature review. The final checklist comprises 33 items group under HC (17), SC (9) and CC (7). It was adapted from the studies of Abeysekera and Guthrie (2005), Beattie and Thomson (2007), Bozzolan et al. (2003), Guthrie and Petty (2000), Huang (2010) and Vergauwen et al. (2007). The checklist together with its operational definition is given in Appendix.

The total ICDScore is computed as follows:

1

HCScore SCScore CCScoreICDScore

jm

i i ii

jjm

=

+ +

=∑

The unit of analysis in this study is sentences and the contents of the analysis are classified into three categories: qualitative with narrative, quantitative with numerical and quantitative with monetary. The scoring system from ‘0’ to ‘3’ of Guthrie and Petty (2000) is adopted:

• ‘0’ for no disclosure

• ‘1’ for a disclosure in narrative form

• ‘2’ for a disclosure in numerical term

• ‘3’ for a disclosure in monetary value.

4.2.2 Independent variables

There are three main independent variables, namely board features, audit committee and ownership structure as discussed in the section on development of hypotheses. These variables are operationalised in the above the regression model.

4.2.3 Control variables

Control variables such as size of the firm, leverage, financial performance, and industry are commonly incorporated in multiple regression analysis (Firer and Williams, 2003). In this study, the following control variables are incorporated, namely size, profitability, leverage and type auditor.


5 Results and discussions

5.1 Descriptive analysis

Table 1 shows the means for each year and the overall means of the variables used in the study. The overall mean score for IC disclosure (ICDScore) is 0.860. The mean scores for ICD for 2006, 2007 and 2008 show an increasing trend with mean scores of 0.805, 0.855 and 0.920 respectively. This finding indicates that corporations are increasingly disclosing voluntary IC information in their annual reports over the three years’ period. Table 1 Means of variables

Variables 2006 2007 2008 Overall

Intellectual capital score (ICDScore) 0.805 0.855 0.920 0.860 Board size (BSIZE) 9.000 9.060 9.150 9.070 Board composition (INED) 0.407 0.411 0.433 0.417 Cross leadership (CRSSL) 0.712 0.701 0.702 0.705 Audit committee size (ACSize) 3.940 3.890 3.760 3.860 Audit committee meeting (ACMeeting) 4.960 4.910 5.060 4.980 Financial expert (FINEXPT) 1.540 1.670 1.800 1.670 Returns on equity (ROE) 19.980 22.389 20.136 19.981 Leverage (LEV) 0.217 0.214 0.219 0.217 Firm size (Sales RM000) 2,045,212 4,854,774 5,509,544 4,891,260

The overall mean of board size is 9 with a maximum of 15 directors. On INED, the mean ratio of INED on board increases from 0.407 (2006) to 0.433 (2008). All the companies met the requirement of the Code, which is one third of the board is made up of INED. The mean scores of cross leadership (CRSSL) for 2006, 2007 and 2008 are 0.712, 0.701 and 0.702 respectively. There is a slight decrease in the mean of ACSize from 2006 to 2008, from 3.94 to 3.76. This could be due to the requirement of the revised Code that all audit committee members must be independent non-executive directors. Prior to that, the Code only specifies that the majority of the audit committee members should be independent. As for the number of audit committee meeting, frequency of meetings held over the three years have increased, from 4.96 (2006) to 5.06 (2008).

With regards to the number of financial experts in the audit committee, the mean scores increased from 1.54 (2006) to 1.80 (2008). Again, this rise could be due to the response to the revision of the Code that is to strengthen the function of the audit committee in promoting greater transparency. The overall mean for sales is RM 4,891,260,000, while the overall means for return on equity and leverage are 19.981 and 0.217 respectively. Sales (a measure of size) over the three years have increased from RM 2,045,212,000 to RM 5,509,544,000. However, return on equity (a measure of profitability) for the same period has an average of about 20. Leverage over the three years period is relatively stable at around 0.2.

62 K. Gan et al.

Table 2 Pearson product moment correlation coefficient (N = 162)

BS

IZE

INED

C

RSSL

RD

UAL

AC

Size

AC

MEE

TIN

GFI

NEX

PTFA

MC

G

LC

OW

ND

IFF

ROE

LEV

INSA

LES

TOPA

UD

BSI

ZE

1

INED

–.

324*

* 1

CR

SSL

–.04

7 .2

73**

1

R

DU

AL

–.04

7 –.

045

–.04

4 1

AC

Siz

e .3

48**

.0

28

–.07

9 –.

028

1

AC

Mee

ting

–.00

2 .1

93*

.127

.1

04

.290

**

1

FI

NEX

PT

.082

.0

82

.147

.0

00

.043

.2

86**

1

FA

MC

.0

37

–.10

2 –.

193*

.3

70**

–.

161*

.1

01

–.14

3 1

GLC

.0

56

.112

.0

69

–.21

7**

.317

**

.260

**

.272

**

–.41

5**

1

OW

ND

IFF

–.08

5 .0

02

.127

–.

170*

–.

119

–.32

4**

–.09

7 –.

611*

*–.

467*

* 1

RO

E –.

193*

.0

00

–.25

8*

–.03

5 –.

050

–.18

5*

–.07

7 .0

19

–.11

4 .0

81

1

LEV

.2

03**

–.

125

.183

* –.

027

.003

–.

012

.111

.0

58

–.02

2 –.

037

.135

1

INSA

LES

–.06

8 –.

038

.059

.0

13

.104

.2

73**

.2

69**

–.

116

.310

**

–.15

7*

.039

.1

40

1

TOPA

UD

–.

236*

* .2

09**

.0

85

–.17

9*

.128

.1

03

.163

* –.

408*

*.2

17**

.2

08**

.0

21

–.01

1 .0

71

1

Not

es: *

*Cor

rela

tion

is si

gnifi

cant

at t

he 0

.01

leve

l (tw

o-ta

iled)

*C

orre

latio

n is

sign

ifica

nt a

t the

0.0

5 le

vel (

two-

taile

d).


5.2 Correlations analysis

Pearson correlation coefficients were computed to examine the associations between the independent variables (see Table 2 for detail). According to Ramanathan (2002), the rule of thumb is, if the pair-wise between two independent variables is in excess of 0.8, serious multicollinearity exist. The maximum pair-wise value in this study is 0.611 (see Table 2), thus multicollinearity should not be a concern for regression analysis.

BSIZE as shown in Table 2 is significantly negatively correlated (–0.324) with INED and positively correlated (0.348) with ACSize. This implies that larger board has lesser number of INED. On the contrary, the number of audit committee is larger with larger boards. INED are also positively correlated (0.273) with cross-leadership (CRSSL) indicating that the higher proportion of INED in the board the greater is the number of directors with financial expertise (FINEXPT).

However, there is a negative correlation (–0.193) between CRSSL and FAMC. This is not surprising as family run companies tend to nominate family members to sit in the board so as to protect their interests (Ghazali and Weetman, 2006). GLC as well as companies with OWNDIFF have significant negative correlation (–0.467) with duality role (RDUAL). This finding is not surprising as family run company tends to have the same person holding both the roles of CEO and Chairman, whereas, government-linked and OWNDIFF companies tend to separate these roles.

With regard to audit committee, it was found that the bigger the ACSize, the more frequent is the number of ACMEETING and also the higher the number of personnel with FINEXPT sitting in the board. GLC are found to correlate positively with all the audit committee attributes which are the size of audit committee (ACSize), number of ACMeeting and the number of FINEXPT.

5.3 Regression analysis

The multiple regression4 result is shown in Table 3. The adjusted R square of 0.441 for the model implies that 44% of the variance in ICD can be explained by the variances of audit committee (FINEXPT and ACSize) and ownership structures (FAMC, GLC and OWNDIFF).

None of the board features investigated is able to predict the behaviour of voluntary ICD. In other words, all the hypotheses on board features, H1(a), H1(b), H1(c) and H1(d) are rejected. Hypotheses, H2(a) and H2(c) are accepted as both the size of audit committee (ACSize) and FINEXPT (FINEXPT) have significant positive coefficients. This supports the claim that institutional theory under the normative isomorphism that the professional association such as the audit committee create pressure on companies to provide more voluntary information.

Under the ownership structure variables, GLC and OWNDIFF have significant positive p value, while FAMC shows the coefficient in negative p value, accepting hypotheses, H3(a), H3(b) and H3(c). The findings in this study are consistent with those of Haniffa and Cooke (2002) and Chau and Gray (2002) which claim that FAMC have little motivation to disclose voluntary information due to a lesser demand from companies of this ownership structure. In contrast, GLC and OWNDIFF companies provide more voluntary information as such action is regarded as for the best interest of the principals. Chau and Gray (2002) have advocated the increased voluntary disclosure is mainly due to the “growing pressure for internalisation and global transparency”.

64 K. Gan et al.

Table 3 Multiple regression results

Coefficients t-statistic

BSIZE –0.023 –0.302 INED 0.029 0.423 RDUAL 0.023 0.352 CRSSL 0.021 0.312 ACSize 0.155 2.148** ACMEETING –0.013 –0.184 FINEXPT 0.160 2.421** FAMC –0.350 –1.746** GLC 0.405 4.811*** OWNDIFF 0.346 4.334*** ROE 0.152 2.295** LEV –0.203 –3.095*** INSALES 0.385 5.763*** TOPAUD –0.125 –1.807* Adjusted R-square 0.441 F-value 10.781** N 162

Notes: ***Significant at 0.01 level; **significant at 0.05 level; *significant at 0.10 level.

6 Summary and conclusions

Correlation and regression results in this study have shown that FAMC are still strictly adhering to their secrecy nature of not disclosing more than what is stipulated by law, in supporting the agency theory. In supporting the institutional theory, the findings also reveal that GLC and OWNDIFF companies tend to disclose more IC-related information which is consistent with what Firer and Williams (2003) found. Normative and mimetic isomorphism is used in explaining the motivation for GLC and OWNDIFF companies in the provision of voluntary information of IC in the annual reports. OWNDIFF companies resorts to disclosing more voluntary information so as to avoid being criticised and avoid having to face legitimacy problems, thus conforming to the normal expectations. Both GLC and OWNDIFF companies could have provided voluntary information in anticipating of what they view as an inevitable action of mandatory reporting in the future, responding ahead of others. It is speculated that these companies behave in this manner to ensure a continued access to capital market as well as to garner support from the capital market.

The size of audit committee and FINEXPT of audit committee are able to predict the voluntary disclosure of IC, supporting institutional theory under normative isomorphism whereby professional associations, here the audit committee, create pressure in providing more voluntary information. This could also in response to the government’s concern on the roles played by this committee. Thus, the significant roles played by this committee may form the backbone to push for further disclosure of ICD.


This study extends on the previous studies concerning voluntary disclosure. As this study is conducted in Malaysia, the findings on the relationships between board features, audit committee and ownership structures contributes to the development of IC literature in developing nations. This study provides empirical evidence to explain ICD from both the institutional and agency theoretical perspective.

As the accounting profession is actively looking for a solution to the challenges and issues of current financial reporting, the findings of this study should provide some insights into the influence of corporate governance on ICD. Guidelines on IC disclosure can perhaps be initiated as a complement to the existing corporate governance report. As IC-related information is being disclosed by some developing nations such as UK in their operating financial review, greater attention should be given by the Malaysian counterparts. With the issuance of Management Commentary (not mandatory) by the International Accounting Standards Board in December 2010, there is even a greater need to promote ICD in Malaysia.

As with all studies, this research is not without its limitations. First and foremost, this study only examined large companies based on market capitalisations in Malaysia. Smaller companies were excluded in the study. As such, the findings may not be generalised to all companies listed in the Malaysian Market. Secondly, this study only used corporate annual reports to investigate the disclosure of voluntary information on IC. As the current reporting practise of IC is voluntary, current disclosures may not reveal embedded-IC.

Thus, future studies should cover also smaller companies of Malaysian Market. As current study only examined annual reports, future studies can review other documents such as press releases, analysts’ reports and other reports like quarterly reports to further enrich the findings. This is in line with the suggestion of Striukova et al. (2008, p.311) which state that ‘other types of corporate reports are gaining more importance’ in disclosure studies. Future study can study on the associations between corporate governance and internal IC information as an extension of the Malaysian study by Huang et al. (2010). Finally, research using other approaches such as interviews or case studies may be conducted to help supplement the findings of this study in order to get a fuller picture of the influence of corporate governance on ICD.

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Notes 1 Report of investigation by the special investigation committee of the board of directors of

Enron Corp by Powers et al. (2002) is available at http://www.news.findlaw.com/wp/docs/ enron/specinv020102rpt1.pdf.

2 McKinsey (2002) Global Investor Opinion Survey, updated 2004. 3 Krippendorff’s (2004) alpha was computed to assess the inter-coder reliability among two

independent coders in this study. Krippendorff’s alpha score of 77.1% was achieved, the result is considered acceptable in content analysis (Bozzolan et al., 2006).

4 The assumptions underlying multiple regressions in this study have not been violated from various tests conducted on outliers, multicollinearity as well as normality, linearity, homoscedasticity and independence of residuals. Consistent with Haniffa and Cooke (2005), normal P-Plot and scatter plot conducted infers no problem of heteroscedasticity and linearity.

Appendix

Disclosure checklists and their operationalisation definitions

A. Human capital (HC) Operational definition Education 1 Employee education

programmes (HC1) Education programmes initiated by the firm for the support of its executives/staff or community members, for example school or university programme/scholarship.

2 Vocational qualifications (HC2)

Qualifications obtained other than academic achievement by its employees such as team building courses, communication skills, etc.

Employee 3 Industrial relations (HC3) Relations between employers and employees (Oxford Learners

Dictionary, Advanced, 2000) 4 Union activity (HC4) Refers to details of union representing employees 5 Employee thanked (HC5) Publicly expression of gratitude to employee/employees as a

token of appreciation on job well done. (Other key word search, award).

6 Employee featured (HC6) Special display of prominence of employees of the firm. 7 Employee involvement in

the community (HC7) Employees involvement in the community work such as charity, fund-raising activity.


Disclosure checklists and their operationalisation definitions (continued)

A. Human capital (HC) Operational definition

Training and development 8 Training programmes

(HC8) Refers to the in-house or external training programme and for its executives and staff other than those mandatory training programmes stipulated by Bursa’s Listing requirements.

9 Career planning and development programme (HC9)

Career development opportunities of an employee’s career with the firm (other terms HC development programme).

10 Succession planning (HC10)

Refers to the process of identifying and preparing suitable employees to replace key players, for example, the CEO as his term expires.

Innovation 11 Entrepreneur skills

(HC11) Refer to ability to build on previous knowledge and generate new knowledge (Roos et al., 1997) (other key word search, new products, new ideas, continued improvement of existing lines of products).

Equity issues 12 Equity issues (HC12) Equal career opportunities for all irrespective of race, religion,

gender and policy in place for employment of the disables. Employee safety and health 13 Employee safety and

health (HC13) Company’ prevention and reduction of health and safety hazards at work.

Work-related knowledge 14 Know-how (HC14) Relates to the knowledge and skills possessed by employees

(other key words; skills, competence). 15 Professional experience

(HC15) Average number of years that executives worked in their profession [Sveiby, (1997), p.79].

16 Expert seniority (HC16) Years of employment of executives with the firm [Sveiby, (1997), p.81]

17 Senior executive performance and results (HC17)

Results achieved by senior executives over a given period of time period (Guthrie and Petty, 2000)

B. Structural capital (SC) Operational definition

18 Management philosophy (SC1)

Refers to the vision and mission statement. (Search terms cover philosophy and strategy)

19 Corporate culture (SC2) Refers to disclosure of the attitudes, experience, beliefs and values of the firm. Search terms included; code of ethics, code of conduct)

20 Management processes (SC3)

Covers policies, procedures, reengineering and other process and quality certifications associated with the firm (Guthrie et al., 2006). Other search terms cover business process, performance report, management plan and performance indicators).

21 Quality/recognition/achievements (SC4)

Disclosure of awards achieved by the firm as a measure of its high quality.

70 K. Gan et al.

Disclosure checklists and their operationalisation definitions (continued)

B. Structural capital (SC) Operational definition

22 Information systems (SC5)

Covers systems designed to manage the major functions of the firms such as database, IT system, computer network, hardware, software, etc.

23 Networking systems (SC6)

Information technologies encompassing a broad array of communication media and devices which network with others, gaining access to customers, suppliers, databases. (Other search term covers internet, video-conferencing, fax, etc.

24 Financial relations (SC7) Relationship between the management and its finance providers such as investors, bankers, analysts

C. Customer capital (CC) Operational definition

25 Brands (CC1) Details of brands associated with the firm 26 Customers (CC2) Refer to customers’ evaluation of its product or service.

Reflected in customer loyalty, normally found out by survey, customer feedback. (Other key words associated to this; customer confidence, high reputation for goods and services).

27 Company names (CC3) The esteem held or effect of the firms’ name by its stakeholders.

28 Favourable contracts (CC4)

A contract obtained because of the unique market position held by the firm [Brooking, (1996), pp.33–34].

29 Market share (CC5) Firm’s share of the market. 30 Distribution channels

(CC6) Information/details on the infrastructure of how firm provide its products/services to its customers.

31 Business collaborations (CC7)

Other business partnering in producing or creating the product or services. (Other search term; alliance, partnership, joint product).

32 Licensing agreements (CC8)

Refers to wide ranging agreements that give contracts to other organisations or entities to sell its products or services.

33 Franchising agreements (CC9)

A contractual agreements that grants the license by a person (franchiser) to another (franchisee) to carry out a franchise, franchisee to provide assistance to franchisee in payment of a fee [Brooking, (1996), p.32].

Documents

Intellectual capital disclosure in the context of corporate governance