e-sRC

CHAPTER ONE
INTRODUCTION
1.1
Background to the Study
The need for corporate organizations to disclose in their annual report the social and
environmental accounting information is increasingly becoming a topical issue globally. This
need is even more apparent in the developed nations, unlike in developing countries where less
attention is being given to social and environmental accounting issues. The emergence and
increasing interest in social and environmental accounting disclosure reflects the increasing
demand for transparency and accountability from corporate organization. This less attention
might not be unconnected with the general notion that, an organization‟s primary objective is to
maximize profit without taking into cognisance the effect of their activities in the society where
they operate.
The traditional view of a „good‟ business manager or an entrepreneur in a capitalist society as
opined by Idowu (2012) is that he is an individual capable of generating profits regardless of the
effect of his actions on jobs, the environment and local, national and international communities,
provided no law is broken in the course of these actions. So, the main concern here is about how
efficient organizations are in terms of how much profit are made and how much dividends are
paid. No serious attention is given to social and environmental accounting information in the
annual reports.
Despite industrialization plays important role towards achieving meaningful economic
development of a nation, it has been observed by Uwuigbe (2012) that economic development is
associated with social and environmental related problems such as global warming,
environmental degradation, accusation and counter accusations of unfair treatment of host
communities and pollution among others. Therefore, it is imperative for firms to behave in a
responsive manner to social and environmental issues parallel to economic issues. One of the
ways of achieving that by the organizations is through increase in the level of disclosure on
social and environmental accounting related issues in the annual reports over and above
regulatory requirements.
The extent of disclosure of social and environmental accounting information in the annual
reports at company level is determined according to two dimensions; the extent of social pressure
that face each company and the strategy adopted by each company in curving this pressure
Hassan (2010). He further posited that, the interaction between corporate characteristics and
media coverage of the company determine the degree of social pressure facing a company, while
corporate governance mechanisms determine how each company responses to such pressure.
Generally, studies on determinants of corporate social and environmental disclosure have been
primarily concerned with the influence of firm characteristics such as firm size, profitability,
leverage and size of audit firms while little attention was given to corporate governance
attributes which is considered as a good explanatory variable that might influence firms to
voluntarily disclose social and environmental information in the annual reports (Susi, 2005;
Echave & Bhati, 2010).
Firms may be influenced by some reasons to disclose such information in their annual reports.
For instance, legitimacy theory suggests that larger firms received greater attention from the
society and would subsequently be subjected to more social pressure than the smaller firms. The
former will increase their disclosure more than the latter so as to establish a good social image as
part of their business strategy (Yao, Wang & Song, 2011). Similarly, capital providers who are
more concern with the financial performance and stability of the companies might also be
concerned over the possibility for environmental liabilities on liquidation of the company, in
response to debt providers. Corporate managers might seek to legitimize environmental
performance through additional disclosure and thereby reducing the need for further scrutiny
(Razeed, 2010).
Furthermore, profitable firms are more likely to disclose more information in order to distinguish
themselves from less profitable firms. Given the substantial costs involved in becoming socially
and environmentally responsible, the economic performance of the firm is an important factor to
consider in determining whether social and environmental issues will be on the priority list.
Elijido-Ten (2007) argued that in period of low economic performance, the firm‟s economic
objectives will be given more attention than environmental and social concerns. Based on this
line of thinking, it could be predicted that firm performance is directly related to social and
environmental disclosures.
Firm age is another variable that might likely influence firms to disclose social and
environmental related issues in their annual report. Owusu and Yeoh (2005) are of the believed
that older firms may have competitive advantage over younger ones because the cost of
gathering and disseminating information will be more difficult for the younger firm.
With regards to strategy adopted by corporate organizations in tackling the pressure from various
groups, corporate governance mechanisms play important role. Good corporate governance is a
critical issue for corporate success. The main issue here is the information asymmetry between
the principal (stockholders) and the agents (managers) where managers consider their own
interest in exercising their managerial judgment and thereby leading to social and disclosure gap.
Information disclosure is an efficient means of safeguarding shareholders and it is the major
responsibility of managers.
One of the corporate governance mechanisms considered to be vital in determining firms‟
behavior toward social and environmental disclosure is board size. Halme and Huse (1997)
argued that the role of the board may be linked to companies‟ environmental attention, the
environmental group and corporate activist may ask the board to make their companies behave in
a socially acceptable manner. A sizable board of directors would lead to greater monitoring and
bring better recommendation that will lead to long term corporate sustainability.
Similarly, inclusion of non-executive directors on the board would result in more individuals
having the incentive to protect their reputation by promoting higher transparency through
disclosure of material information including social and environmental impact of business
activities (Ajibolade & Uwuigbe, 2013). The proportion of directors‟ shareholding in a firm
(managerial ownership) may also have some influence on information disclosure behavior
exhibited by such company. Fama and Jensen (1983) proposed that where there is diffusion in
ownership, the potential for conflict between the management and owners is greater. On the
other hand, Uwuigbe (2011b) observed that the higher the proportion of directors‟ equity interest
in a firm, the more they will be socially friendly to the environment in which they operate. In
addition to that the greater the managerial ownership the less inclined the managers are to divert
resource away from value maximization.
On the other hand, industrial goods sector listed on the Nigeria Stock Exchange (NSE) comprises
of four different sub sectors namely: building materials, the electrical and electronics products,
the packaging/container, and the tool and machinery (NSE Fact book, 2013). The sector is made
up of a category of companies that are involved in the production of tools, materials,
components, machinery, and other products used in construction, manufacturing and other
industrial applications. Their production processes are more likely to negatively affect the
environment in which they operate. Much is expected from these firms in terms of social and
environmental responsibilities and are subjected to comply with various enactments and most
importantly the market capitalization of the selected firms. To this end, it is imperative to
conduct a study that will examine the relationship between corporate characteristics and social
and environmental accounting disclosure of listed industrial goods firms in Nigeria.
1.2
Statement of the Problem
The demand for corporate organizations to integrate social and environmental accounting issues
into their annual reports has increased worldwide as users of the information become more
attentive. The increasing demands for clear facts about the corporate social performance of
organizations by an increasingly well-informed breed of stakeholders have made corporate social
and environmental accounting disclosure an essential issue of debate (Uwuigbe, 2011a).
The rationale behind such disclosure is to ensure accountability and transparency from the part of
the management who are charged with the responsibility of preparing financial statements. But in
most cases, disclosure does not serve the need of the users because of the information asymmetry
where managers prioritize their own interest in exercising their managerial judgment and
thereby, leading to social and environmental disclosure gap. Promoters of corporate social
responsibility disclosure argued that corporate social and environmental accounting disclosure is
an important ingredient for business success and that where social and environmental activities
are fairly reported in the financial statement for all to see, some of the problems would be
minimized if not eliminated (Davies &Okorotie, 2007).
Most of the previous studies on relationship between firm characteristics and social and
environmental accounting disclosure were conducted in the industrialized Western countries
(Kokubo, Noda, Onishi & Shinabe, 2001; Cormier, Magnan & Velthoven, 2004; Razeed, 2010;
Hassan, 2010). In contrast, only few studies have so far been conducted in developing economies
(Hossain, Islam & Andrew, 2006; Barako, 2007; Haron, Isma‟il &Yahya, 2008; Buniamin,
2010). In Nigeria, most of the related studies concentrated on multinational oil companies and
the financial sector (Owolabi, 2008).
Earlier research work on factors influencing firms to disclose social and environmental
accounting issues examined various company attributes but failed to consider the inclusion of
corporate governance variables as possible factors that could influence companies to disclose
social and environmental accounting information in their annual financial reports. Little is also
known about the relationship between firm characteristics and social and environmental
accounting disclosure quality in developing markets such as those in Nigeria particularly, using
data on industrial good firms. It is therefore pertinent to conduct a study that will fill this
literature gap.
Studies conducted by Umoren and Okougbo (2011), Ajibolade and Uwuigbe (2013) which
considered the incorporation of corporate governance variables, their analysis did not concentrate
on a particular sector of the Nigerian economy. As a result, their findings appeared too generic
and not sector specific. Furthermore, most of the studies conducted in developing countries pay
scant attention to analysing the quality of social and environmental accounting information
disclosure, which limits the understanding of the issue. A number of studies focused on
multinational organization and financial sector of the economy.
As a result, a study that will extend its analysis to corporate governance attributes and similarly
focus on firms other than the financial sector is therefore desirable. This study aimed at filling
these gaps that are evident in the literatures.
1.3
Research Questions
In line with the problem statement, the following research questions are raised to guide the study:

What is the effect of firm size on social and environmental accounting disclosure of listed
industrial goods firms in Nigeria?
What is the effect of Firm leverage on social and environmental accounting disclosure of
listed industrial goods firms in Nigeria?
How does firm profitability affect social and environmental accounting disclosure of
listed industrial goods firms in Nigeria?
To what extent does firm age affect social and environmental accounting disclosure of
listed industrial goods firms in Nigeria?
What is the effect of board size on social and environmental accounting disclosure of
listed industrial goods firms in Nigeria?
What is the effect of board composition on social and environmental accounting
disclosure of listed industrial goods firms in Nigeria?
vii.
How does managerial ownership affect social and environmental accounting disclosure of
listed industrial goods firms in Nigeria?