Corporate governance and environmental

reporting: an Australian study

Kathyayini Kathy Rao, Carol A. Tilt and Laurence H. Lester

Kathyayini Kathy Rao is a

Post Graduate Research
Student and Carol A. Tilt is
Professor of Accounting,
and Dean, both at Flinders
Business School, Adelaide,
Australia.
Laurence H. Lester is a
Research Fellow with the
National Institute of Labour
Studies at Flinders
University, Adelaide,
Australia.

Abstract
Purpose The purpose of this paper is to investigate the relationship between environmental reporting
and corporate governance attributes of companies in Australia.
Design/methodology/approach The paper adopts a quantitative analysis approach. It examines the
2008 annual reports of the largest 100 Australian firms listed on the Australian Stock Exchange (ASX) to
determine the amount of environmental reporting these data are compared with various corporate
governance measures.
Findings Analysis found a significant positive relationship between the extent of environmental
reporting and the proportions of independent and female directors on a board. The analysis did not,
however, support a negative relationship between the extent of environmental reporting and institutional
investors and board size as has been previously predicted, rather, it showed a positive relationship.
Originality/value This paper offers insights to both regulators and company strategists. Regulators
such as the Australian Stock Exchange (ASX) could consider expanding its Corporate Governance
Council guidelines to include consideration of the environment, which is increasingly considered to be
an important aspect of corporate social responsibility, and one of the responsibilities of the board of
directors. In addition, for companies which include a commitment to the environment in their mission and
strategies, it suggests consideration of the impact of board structure and composition is important as
both of these are shown to have a significant effect on the amount of environmental information disclosed
by companies.
Keywords Corporate governance, Environmental reporting, Corporate strategy, Australia
Paper type Research paper

1. Introduction
Companies in Australia and worldwide are under more public scrutiny than ever before and
are pressured to provide information on their environmental performance. Many researchers
and commentators have noted how important it is for organisations to consider their effects
on the natural environment and for them to disclose the results to a wider group of
stakeholders who may have been affected (Deegan, 1994), including employees,
consumers, the community, regulators, the media, the public, and shareholders (Adams
and Zutshi, 2004). This environmental reporting has been defined broadly as providing
information in relation to the environmental implications of their operations (Deegan, 2006).
Reporting on environmental performance not only helps firms to gain stakeholder support,
but also helps firms to assess possible risks involved in conducting such operations, and to
reduce the impact of their operations on the environment. However, social and
Environmental Reporting in Australia is voluntary (Deegan and Gordon, 1996), and
motivation to disclose such information is said to be less likely in the absence of legislation
on the one hand, and quantifiable benefits on the other.
Received: September 2011
Accepted: January 2011

DOI 10.1108/14720701211214052

The decision to report on environmental issues, however, is often made within a broader
context and that decision should not be considered in isolation. Hence, it is important to

VOL. 12 NO. 2 2012, pp. 143-163, Q Emerald Group Publishing Limited, ISSN 1472-0701

CORPORATE GOVERNANCE

PAGE 143

consider the level of environmental reporting undertaken by a company, within the context of
how the organisation is governed. Corporate governance has been well researched, but
only recently has this research expanded to consider the relationship between non-financial
reporting and governance mechanisms. Studies have found that strong corporate
governance mechanisms increase the level of corporate disclosure generally (Lakhal,
2005), but research has not been undertaken to investigate whether this also applies to
environmental disclosure. Effective governance should enhance accountability,
transparency and ultimately result in more disclosure, both voluntary as well as
mandatory. This study therefore aims to examine the effectiveness of governance
mechanisms on voluntary disclosure, in particular, environmental disclosure. It comprises
an examination of the environmental disclosure in the annual reports of the top 100 listed
Australian companies, to determine whether there is a relationship between corporate
governance and environmental reporting.
The remainder of this paper is structured as follows. Section 2 provides a overview of the
prior literature which explored the importance of environmental reporting, corporate
governance, and the relationship between environmental disclosure and corporate
governance. Section 3 discusses the development of specific hypotheses as well as
some firm-specific characteristics, which have been identified as important in previous
studies. The data is discussed in Section 4, and Section 5 outlines the research methods.
The sixth section describes and discusses the results of the empirical analysis to test the
stated hypotheses. Finally, the findings are summarised, followed by implications,
conclusions, limitations and areas for future research in Section 7.

2. Review of prior studies

2.1 Environmental reporting
There is an increasing trend for organisations in Australia and throughout the world to provide
information in relation to social and environmental activities (Gibson and ODonovan, 2007).
This trend has become particularly apparent since the early 1990s (Deegan and Gordon,
1996; Gibson and ODonovan, 2007). Further, during the mid 1990s Elkingtons (1998) Triple
Bottom Line (TBL) reporting (information on financial, social and environmental performance)
gained attention in Australia and overseas and more and more organisations adopted TBL
reporting. Many large Australian listed companies, such as BHP Billiton, Westpac Banking
Corporations and Rio Tinto, began producing separate stand-alone social and environmental
reports (Deegan, 2006). Evidence also indicates that Australian companies continue to use
annual reports as a primary source of disclosure of environmental information (Adams and
Zutshi, 2004; Brown and Deegan, 1998), which further demonstrates that organisations are
realising the importance of providing such information.
TBL, as discussed above, is a result of corporations acknowledging they have wider
responsibilities towards society including shareholders and a wider group of stakeholders.
According to CPA (2002), TBL is the method by which organisations can legitimise their
operations in terms of long-term sustainability. In a study by Ernst & Young (2002), 147 senior
executives from the global 1,000 group of companies were interviewed. The majority of the
respondents (around 94 per cent) believed that practising and reporting corporate social
responsibility, which includes environmental reporting (Clarke and Gibson, 1999; Deegan and
Gordon, 1996; Hamilton, 2004), could deliver real business benefits (ODonovan, 2002a,b).
In Australia there are no mandatory requirements for firms to disclose information on their
environmental performance, however, organisations, which voluntarily disclose information
on their social and environmental performance report a number of reasons. Some of the
drivers discussed by Deegan (2002) are: a desire to comply with legal requirements,
economic rationality considerations, accountability and responsibility beliefs, compliance
with borrowing requirements, community expectations, attraction of ethical investment
funds, and the opportunity to win reporting awards. However, organisations desire to
legitimise their operations is considered to be one of the major motivations and is embraced
by many researchers (Cho and Patten, 2007; Deegan, 2002; de Villiers and van Staden,

PAGE 144 CORPORATE GOVERNANCE VOL. 12 NO. 2 2012

2009; ODonovan, 2002a,b; van Staden and Hooks, 2007). Further, Adams and Zutshi
(2004) believe that environmental reporting can improve financial returns and can increase
firm value even though it may not be quantifiable. Deegan (1999, p. 40) considers that
environmental reporting is crucial for organisations long term survival and organisations
need to be sure that there are no skeletons in the closet which may subsequently come to
the light, damaging the reputation and viability of the organisation. The supporting
arguments for environmental reporting indicate that an entitys profitability, as well as its
existence, could be affected by environmental performance. Evidence provided by de
Villiers et al. (2009), such as the nuclear disaster in 1979 (cost $975 billion), the Bhopal
disaster in 1984 (cost $470 million), the Exxon Valdez oil spill in 1989 (cost $3 billion) and
BPs Texas City refinery explosion in 2005 (cost .$1.6 billion), indicate that organisations
can lose billions of dollars in clean up costs, fines and settlements. In addition to economic
loss, organisations are more likely to lose public trust and confidence, which ultimately
becomes a threat to its survival. Environmental reporting is an important way to ensure
transparency and accountability for performance.
Even though environmental reporting is showing an increasing trend, a recent report by
Jones et al. (2005) found low levels of sustainability reporting by Australian companies. They
suggest that more accessible approaches and guidelines need to be developed so that
entities can discharge a broader accountability than is currently reflected in reporting
practices in the public and private sectors in Australia. Hence it is important to have some
control mechanisms within the organisation to make sure that environmental information is
disclosed properly. The Corporate Governance Principles provided by the Australian Stock
Exchange (ASX) include the Provision of environmental information to legitimate
stakeholders as a key component. Further, Gibson and ODonovan (2007) state that an
increase in environmental reporting could be achieved by strong corporate governance,
which includes the provision of environmental information to legitimate stakeholders. Thus,
while there is indication that corporate governance plays a role in environmental reporting,
only a limited amount of research has been undertaken that considers this relationship.
2.2 Corporate governance
The Australian Stock Exchange (ASX) established a Corporate Governance Council (CGC)
in 2002 with the aim to develop agreed corporate governance requirements and establish
best practice recommendations for Australian companies (Gibson and ODonovan, 2007).
Corporate Governance is defined as the system by which companies are directed and
managed (ASX, 2003, p. 3). The main intention of principles and associated
recommendations and guidelines is to increase the corporate performance and
accountability in the interests of both shareholders and the broader community (ASX, 2003).
The CGC released its ten principles of good corporate governance in March 2003 with the
aim to optimise corporate performance and accountability in the interest of shareholders
and the broader community (Baker, 2009). According to the requirements, listed companies
must provide information on their governance structure. The principles and guidelines of
corporate governance are not compulsory; however justification must be provided if any
listed company chooses not to follow these recommendations. The ten core principles
recommended by the ASX are listed below:
1. Lay solid foundations for management and over-sight.
2. Structure the board to add value.
3. Promote ethical and responsible decision-making.
4. Safeguard integrity in corporate reporting.
5. Make timely and balanced disclosure.
6. Respect the rights of shareholders.
7. Recognise and manage risks.
8. Encourage enhanced performance.

VOL. 12 NO. 2 2012 CORPORATE GOVERNANCE PAGE 145

9. Remunerate fairly and responsibility.

10. Recognise the legitimate interests of stakeholders (ASX, 2007).
Corporate governance has been defined as . . . the system by which companies are directed
and managed (ASX, 2003, p. 3). Many researchers suggest corporate governance
mechanisms as the solution to agency problems (Eng and Mak, 2003; Shan, 2009) and as a
means of mitigating managements lack of commitment which arises due to agency problems
(Bergolf and Pajuste, 2005). Therefore corporate governance is primarily designed to include
effective mechanisms to control and prevent self-interested managerial behaviour.
Even though corporate governance emerged as a potential solution to agency problems, a
broader view of corporate governance concentrates on protecting the interests of
stakeholders (Canadian Institute of Chartered Accountants, 1995; Donnelly and Mulcahy,
2008; Wise and Ali, 2008). Hence it is expected that existence of an effective corporate
governance system will have a positive effect on overall performance of the corporation,
both financial and non-financial. Corporate governance encourages the company to
promote ethics, fairness, transparency and accountability in all their dealings (Jamali et al.,
2008) and enhances a disclosure-based environment in which managers are forced to act in
the interests of both shareholders and stakeholders (Hamilton, 2004). One of the recent
studies (Beekes et al., 2008) found that firms with effective governance structures provide
more documents to the market. Further, companies are more likely to omit material
information relevant to stakeholders in the absence of mandatory requirements and
ineffective governance mechanisms (Unerman et al., 2007, cited in Mathews, 2008) and this
information asymmetry problem could be solved by good corporate governance, in
particular by an effective board of directors (Donnelly and Mulcahy, 2008). It therefore
follows that transparency and accountability enabled by corporate governance would
enhance the disclosure behaviour of the organisations. Such influence of corporate
governance on organisations disclosure behaviour, in particular environmental disclosure,
is the focus of this study. Studies that consider the link between governance and reporting
are therefore reviewed in the next section.
2.3 Corporate governance and environmental reporting
The broader view of corporate governance suggests that corporate governance should
focus on both shareholders and stakeholders and thereby widens corporations
responsibility and accountability. The ASXs tenth principle, to recognise the legitimate
interests of stakeholders further highlights the importance of corporate governance in
protecting stakeholders who are directly or indirectly related to the organisation. The
relationship between corporations responsibility, i.e. corporate social responsibility (CSR),
and corporate governance has been highlighted in many previous studies (Gibson and
ODonovan, 2007; Jamali et al., 2008; Wise and Ali, 2008). It has been argued that CSR can
have a positive effect on profitability as well as on enhancing sustainability effective
corporate governance can help organisations to achieve this.
Previous research has suggested that corporate governance is linked with corporate
disclosure. These studies examine various governance variables and their relationship with
various types of disclosure, such as: voluntary disclosure (Cheng and Courtenay, 2006;
Donnelly and Mulcahy, 2008; Eng and Mak, 2003; Gul and Leung, 2004; Ho and Wong, 2001);
financial disclosure (Chen and Jaggi, 2000); voluntary earnings disclosure (Lakhal, 2005);
annual report public disclosure (Laidroo, 2009); and related party disclosure (Shan, 2009).
Even though these studies provided mixed results, most indicated that corporate governance
variables do affect companies disclosure behaviour. Hence it is assumed that under effective
corporate governance managers are most likely to provide all the relevant information to users,
whether mandatory or voluntary, and thus enhance the overall disclosure behaviour of the firm.
Only a few studies however, have explicitly investigated the relationship between corporate
governance and environmental disclosure, and even fewer specifically in Australia. This
study attempts to fill this gap by providing a preliminary investigation into the relationship
between some measures of corporate governance and the level of environmental reporting

PAGE 146 CORPORATE GOVERNANCE VOL. 12 NO. 2 2012

by Australian companies. Most often it is at the discretion of firm management to decide the
level of disclosure. They may be influenced by some external or internal pressure to reveal
more information to users. However, if the internal control systems are effective then it would
be expected that more disclosure would result, particularly non-mandatory disclosure.
Further, some of the recommendations of recent researchers highlight the importance of
governance in environmental reporting. A study by Adams and Zutshi (2004) recommends
that an appropriate governance structure is required to ensure that social and environmental
impacts and concerns of key stakeholder groups are addressed in corporate
decision-making. Similarly Wise and Ali (2008, p. 143) recommend that good corporate
governance should ensure fair treatment to all stakeholders . . . disclosure processes should
be transparent. Hence this study makes a contribution to research in this area as it
highlights whether governance mechanisms are related to an increase the level of
environmental disclosure in the annual report. In order to test whether effective corporate
governance increases the level of environmental disclosure, a series of hypotheses are
developed for four important corporate governance attributes: board independence,
Institutional ownership, board size and the inclusion of female directors on the board.
Hypothesis development is discussed in the next section.

3. Hypotheses development
3.1 Board independence and environmental reporting
Board independence is the most debated corporate governance issue faced by corporations.
The ASX (2003), in its second of ten corporate governance principles, recommends that
boards of listed organisations should comprise a majority of non-executive, independent
directors so that the board is able to appropriately discharge its responsibilities and duties. It
is widely accepted that board independence increases board effectiveness and thereby
enhances the firms overall performance (Bonn, 2004; Shah et al., 2008; ONeal and Thomas,
1995). Outside directors can better monitor management due to their non-official position in
the organization (Donnelly and Mulcahy, 2008) and have incentives to build reputations as
expert monitors which discourage them from colluding with inside directors (Carter et al.,
2003). Hence a lack of material interest and independent judgement would encourage board
members to act in favour of both the shareholders as well as legitimate stakeholders. Many
previous studies highlight the importance of independent directors in corporate disclosure
behaviour both mandatory and voluntary (Chen and Jaggi, 2000; Eng and Mak, 2003; Ho and
Wong, 2001; Lakhal, 2005; Cahaya et al., 2009; Shan, 2009). Moreover several studies on
voluntary disclosure found a positive association between independent directors and
voluntary disclosures (Cheng and Courtenay, 2006; Shan, 2009; Donnelly and Mulcahy, 2008).
Independent directors improve the transparency of corporate boards and voluntarily disclose
additional information (Chen and Jaggi, 2000; Donnelly and Mulcahy, 2008; Cheng and
Courtenay, 2006). They are . . . less aligned to management (Eng and Mak, 2003, p. 331)
and therefore have the capacity to force the management to disclose corporate social
responsibility (Cahaya et al., 2009). Further in a recent survey of independent directors in
Australia, respondents indicated that independent directors play an active role in ensuring that
a company meets its social responsibility (Brooks et al., 2009). The survey also indicated that
independent directors ranked this responsibility quite highly (with a mean of 2.28 out of 5).
Therefore it is expected that boards with more independent directors are more likely to ensure
that a company discharges its social responsibility, including environmental responsibility.
According to De Villiers et al. (2009) boards with more independent directors force managers
to take decisions in favour of environmental activity, and they found that firms with strong
environmental performance have more independent directors. Further it is considered that
inside directors primarily focus on increasing shareholder value and are less likely to disclose,
or be concerned with, environmental issues (Kassins and Vafeas, 2002). Therefore it is
hypothesised that voluntary environmental reporting is more likely to increase with an increase
in the proportion or number of independent, non-executive directors on the board:
H1.

There is a positive relationship between independent non-executive directors and

the amount of environmental reporting.

VOL. 12 NO. 2 2012 CORPORATE GOVERNANCE PAGE 147

3.2 Institutional ownership (ownership concentration) and environmental reporting

Ownership concentration is considered to be an important aspect of corporate governance
whether it is dispersed or concentrated (Habib and Jiang, 2009; Shan, 2009). Institutional
ownership is one form of concentrated ownership and is measured by the percentage of
shares held by large and/or institutional shareholders. They include major collectors of
savings and suppliers of funds to financial markets such as insurance firms, pension funds
and investment firms etc. (Lakhal, 2005).
Having a majority of institutional investors may reduce board effectiveness. Large investors
are more likely to dominate and influence managements decisions (Lau et al., 2009) as they
hold large numbers of shares in the firm. This leads to a lack of board activism as well as a
lack of board independence (Bergolf and Pajuste, 2005) and sometimes may even limit or
restrict mangers decisions (Lakhal, 2005).
According to Jensen and Meckling (1976), increasing demand for information is due to the
separation of ownership and control. Hence, there is continuous pressure on management to
provide more information. However, it is suggested that large or institutional shareholders are
less likely to demand more disclosure as they can easily access internal information (Lakhal,
2005; Shan, 2009). Further . . . having access to all the information they need, block holders
could put pressure on management to keep public disclosure to the minimum (Laidroo, 2009,
p. 15). In addition firms may even have less incentive to disclose additional information as they
do not need to attract outside capital (Habib and Jiang, 2009). This ultimately results in a
decrease in overall disclosure made by the firm. Contrary to this view however, some previous
research has argued that there is a positive relationship between disclosure and institutional
ownership (Donnelly and Mulcahy, 2008; Laidroo, 2009). These studies suggest that
institutional investors having less than 25 per cent holdings have limited control over the
company, and in order to attract capital from other sources, companies need to provide more
disclosure. Consistent with their prediction, Donnelly and Mulcahy (2008) found a positive
relationship between the proportion of shares held in blocks by institutional investors and the
extent of voluntary disclosure. However, the majority of studies have found a negative
relationship between institutional ownership and corporate disclosures (Habib and Jiang,
2009; Shan, 2009; Lakhal, 2005). Under concentrated ownership managers are better able to
influence corporate values, including environmental values (Halme and Huse, 1997), and tend
to act in a socially irresponsible manner (Kassisns and Vafeas). Further, Brammer and Pavelin
(2008) found that with greater ownership concentration, firms are less likely to disclose their
environmental policy. Powerful shareholders often have more influence on managements
decisions and hence the organisation itself is expected to be less independent under highly
concentrated ownership. Independence has been measured in a variety of ways, such as
assigning an independence score or factor (Measurement of variables is discussed in the
next section). Therefore it is hypothesised that there will be less environmental reporting by
less independent organisations, or firms with concentrated ownership:
H2.

There is a negative relationship between ownership concentration and

environmental reporting.

3.3 Board size and environmental reporting

Board size, that is, the number of directors on the board, plays an important role in
monitoring the boards performance. Studies that examine board size and performance are
briefly reviewed before considering studies that directly relate board size with disclosure.
Board size has been found to be both positively and negatively associated with the firm
performance. Most of the literature argues in favour of smaller sized boards and importance
is attributed to limiting board size (Adams et al., 2005; Cheng, 2008; Jensen, 1993; Lau et al.,
2009; Lipton and Lorsch, 1992; van Ees et al., 2003; Yermack, 1996).
Smaller sized boards are more effective in monitoring managements actions (Lakhal, 2005;
de Villiers et al., 2009) and can function effectively as they can come to a unanimous
decision easily (Jensen, 1993; Cheng, 2008). Other studies argue that larger boards are
more effective as they can bring more experience and knowledge and offer better advice

PAGE 148 CORPORATE GOVERNANCE VOL. 12 NO. 2 2012

(Dalton et al., 1999; Bonn, 2004). However major drawbacks are identified with larger
boards, including a lack of communication, slow decision making, and a lack of unanimity
that ultimately affects board effectiveness and efficiency.
Many prior studies relate board size to disclosure. Decisions such as the content and extent
of environmental disclosure to go in the annual reports need intensive involvement, more
unanimity, effective communication, and coordination by board members. As discussed
earlier, these characteristics are less likely to be achieved by larger sized boards. Further
Kassins and Vafeas (2002) found that larger boards are less effective in preventing
behaviour that leads to environment related lawsuits. In addition, Australian firms have been
reported to have smaller sized boards than in other countries (Bonn, 2004; Lee and Shailer,
2008) and hence it is hypothesized that the relationship between board size and
environmental disclosure will be negative:
H3.

There is a negative relationship between board size and environmental reporting.

3.4 Proportion of female directors and environmental reporting

The level of diversity on a board affects their decisions and activities (Adams and Ferreira,
2004) and has been reported as having a positive effect on firm performance in Australia
(Bonn, 2004). One considerably debated characteristic of board diversity is gender. The
importance of gender diversity in the boardroom has been raised in recent proposals for
governance reform (Adams and Ferreira, 2004). It is increasingly being viewed that women
can make a significant contribution to the board. Huse and Solberg (2006) found that women
are more committed and involved, more prepared, more diligent, ask questions and
ultimately create a good atmosphere in the boardroom. Similarly, Adams and Ferreira (2004)
found that more women on the board improves the decision making process, enhances
board effectiveness and that women have better attendance/participation.
In addition to firm performance, having more female directors on the board can also have
positive effect on disclosure, both financial and non financial; adding women on corporate
boards may have important signalling effects to stakeholders . . . Bringing women onto
corporate boards should thus have positive bottom line effects (Huse and Solberg, 2006,
p. 114). According to Ibrahim and Angelidis (1994) female directors exhibit greater
responsibilities, in their analysis they found that women are more philanthropically driven
and less concerned with economic performance. Another argument in favour of having more
female directors is that they are able to enhance the boards independence (Kang et al.,
2007) and Independence is an important factor which enhances accountability, and thereby
has the potential to increase the level of disclosure. In summary, female directors active
involvement, better preparation, independence and other unique qualities, enable them to
make a significant contribution to complex discussions and decisions such as environmental
disclosure. Hence it is expected that more female directors on a board will increase the
amount of environmental disclosure made by the firm:
H4.

There is a positive relationship between the proportion of female directors on board

and environmental reporting.

3.5 Control variables

As noted in the literature, firm specific characteristics may also affect the extent of
environmental disclosure in the annual report and so this study includes firm size,
profitability and Industry as control variables.
Many studies have found that firm size is significantly associated with corporate disclosure
(Donnelly and Mulcahy, 2008; Eng and Mak, 2003; Gul and Leung, 2004; Ho and Wong,
2001; Laidroo, 2009; Lakhal, 2005). Association between firm size and environmental
disclosure has also been suggested, in that larger firms are more likely to identify
environmental issues (Al-Tuwaijri et al., 2004; Clarkson et al., 2008; Patten, 1992; Patten and
Trompeter, 2003). Further de Villiers et al. (2009) found that firm size is positively associated
with the presence of strong environmental performance, and evidence also exists that
indicates a positive association between environmental disclosure and firm size (Deegan

VOL. 12 NO. 2 2012 CORPORATE GOVERNANCE PAGE 149

and Gordon, 1996; Halme and Huse, 1997). Three measures of firm size are used in this
study: total assets, market capitalisation and operating revenue.
Profitability has also been shown to affect disclosure levels, and in this study is measured by
Return on Assets (ROA). Reported profit was not used because of the effects of the time lag
related to annually reported profit. The use of ROA is consistent with other disclosure based
studies (Cheng and Courtenay, 2006; de Villiers et al., 2009; Gul and Leung, 2004).
Profitability has given contradictory results in previous literature. Some studies found
positive associations (Al-Tuwaijri et al., 2004; de Villiers et al., 2009), other studies found
negative association (Chen and Jaggi, 2000; Laidroo, 2009) whereas some found no
relationship (Eng and Mak, 2003; Patten, 1991).
The industry within which the firm operates may also affect the level of disclosure (Ho and
Wong, 2001; Lakhal, 2005; Patten, 1991). Environmentally sensitive industries (forestry,
metals, coal, oil, gas, paper, chemicals and electricity) usually disclose more environmental
information (Cho and Patten, 2007; Deegan and Gordon, 1996; Halme and Huse, 1997).
Further, de Villiers et al. (2009) suggest that firms with strong environmental performance are
more likely to operate in environmentally sensitive industries. In this study dummy variables
for industry classification are included.
Table I provides a summary of studies of corporate governance and disclosure, the
variables used, and the relationships found.

4. Data
The sample used in this study is the largest 100 Australian firms listed on the Australian Stock
Exchange (ASX) in 2008, selected on the basis of market capitalisation. Three firms were
dropped because of insufficient data and one due to unexplained outliers resulting in a
sample of 96 companies.
The 2008 annual reports of the 96 firms were examined to determine the amount of
environmental reporting these data will be compared with various corporate governance
measures. While companies communicate their disclosure with stakeholders by other
means these means are outside the scope of this study.
Table II summarises variables used and how they are measured in this study. Data for the
explanatory variables of interest (i.e. independent) and control variables were extracted
from the electronic database OSIRIS (www.bvdinfo.com/Products/Company-Information/
International/OSIRIS.aspx). Industry category which is based on the Global Industry
Classification code (GICS, n.d.), but with the nine sectors reclassified into five categories:
Materials, Energy, Consumer discretionary, Finance, and IT & Telecommunication.
Independence of the firm was measured by, first, the proportion of institutional investors,
and second, using an independence factor score, assigned by the publishers of the OSIRIS
database. This measure is an indicator that characterises the degree of independence of a
company with regard to its shareholders. The BVD Independence Indicators are classified
as A, B, C, D and U with further qualifications. As the majority of companies in the sample fell
into classification A or B, these were recorded into a dummy variable for inclusion in the
regression model, 1 companies in classification A, 0 all other companies (companies
classified as 1 having higher independence than those classified as 0). A summary of the
classification is provided in Table III.
Table IV presents the descriptive statistics for the variables used in this study. As shown in
the table, the dependent variables, environmental disclosure (env_disc and env_perc)
exhibit substantial spread (and are significantly positively skewed) and so they are
transformed by taking the natural logarithm (giving lnenv_disc and lnenv_perc).
With regard to corporate governance variables, the level of Institutional Ownership (inst_inv)
is relatively high with a mean of 67.6 per cent, and about 60 per cent of the board of directors
are independent (ind_dir). That is, the majority of Australian companies have reasonably
concentrated ownership and they have a high proportion of independent directors on their
boards.

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Table I Summary of studies that examine corporate governance and disclosure

Study

Sample (country)

Dependent variable

CG variables

Relationships

de Villiers et al. (2009)

Top 100 companies

(USA)

Corporate environmental
performance

Board size
Institutional investors
Proportion of independent
directors
CEO duality

Positive
Negative
Positive

Shan (2009)

120 companies (China)

Related party disclosure

Ownership concentration
Foreign ownership
State ownership
Proportion of independent
directors
Professional supervisors
proportion

Negative
Positive
Positive
Positive

Negative

Positive

Gul and Leung (2004)

385 companies (Hong

Kong)

Voluntary corporate
disclosure

CEO duality
Proportion of expert outside
directors

Negative
Negative

Cheng and Courtenay

(2006)

115 companies
(Singapore)

Voluntary disclosure

Proportion of independent non

executive directors
Board size
CEO duality

Positive

Lakhal (2005)

207 companies (France)

Voluntary earnings
disclosure

No relationship
No relationship

Proportion of independent
directors
Board size
Institutional ownership
Foreign ownership

No relationship
No relationship
Negative
Positive

Halme and Huse (1997)

140 firms (Finland)

(Norway) (Spain)
(Sweden)

Environmental reporting

Ownership concentration
Board size

No relationship
No relationship

Laidroo (2009)

52 companies (three
European emerging
capital markets)

Public announcements
disclosures

Ownership concentration
Foreign ownership
Institutional ownership

Negative
Negative
Positive

Ho and Wong (2001)

Voluntary disclosure
Questionnaire
(Responds from 98 CFOs
and 92 analysts) (Hong
Kong)

Proportion of independent
directors
Audit committee
Dominant personalities
(CEO/Chairman duality)
Percentage of family members

No relation

Donnelly and Mulcahy

(2008)

51 companies annual
reports (Irish market)

Voluntary disclosure

Proportion of non- executive

directors
CEO/Chairman duality
Managerial ownership
Institutional investors

Positive
No relation
Negative
Positive
Positive (weak)
No relationship
No relationship

Eng and Mak (2003)

158 companies
(Singapore)

Voluntary disclosure

Managerial ownership
Block holder ownership
Government ownership
Percentage of independent
directors

Negative
No relationship
Positive
Negative

Cahaya et al. (2009)

33 companies
(Indonesia)

Voluntary labour
practices and decent
work disclosures

Board independence

No relationship

Chen and Jaggi (2000)

Top 87 firms (Hong Kong) Financial disclosure

Positive

Ibrahim and Angelidis

(1994)

398 Survey

Corporate responsibility

Percentage of independent
directors
Percentage of female directors

Positive

Habiband Jiang (2009)

116 companies (New

Zealand)

Voluntary disclosure
practices

Ownership concentration:
Institutional
Managerial
Government

Negative
Positive
Positive

VOL. 12 NO. 2 2012 CORPORATE GOVERNANCE PAGE 151

Table II Summary of variables

Full variable name

Abbreviated
variable name

Dependent variables
Environmental disclosure

env_disc

Proportion of environmental env_perc

disclosure
Independent variables
Independent directors

p_inddir

Institutional investors
Firm independence
Board Size
Female directors

inst_inv
Indfactdy
tot_dir
p_femdir

Control variables
Firm size

Profitability
Industry

tot_asst
mkt_cap
op_revn
ret_ta
INDUSTRY
energy
mat_ind
c_dis_hc
finance
it_tel_ul

Variable description/measurement

Total number of words dedicated to

environmental issues in the annual report
Total number of words dedicated to
environmental issues in the annual report divided
by total words in the annual report
Number of independent directors on board
divided by total number of directors
Percentage of Institutional Investors
BVD independence factor dummy
Number of directors on board
Number of female directors on board divided by
total number of directors
Total assets ($m)
Market capitalisation ($m)
Operating revenue ($m)
Return on asset (ROA)
Industry classification dummy set
Energy
Materials/Industrials
Consumer discretionary/consumer staples/heath
care
Financials
Information technology/telecom services/utilities

Table III BVD independence factor

IF

Description

High independence: attached to the company where shareholders are identified and no more
than 25 per cent of direct or total ownership is held by these identified shareholders. This is
further qualified as A , A or A- depending on the ability to identify number of shareholders

Attached to the company where shareholders are identified and no more than 50 per cent of
direct or total ownership is held by these identified shareholders but having one or more
shareholders with an ownership percentage .25 per cent. This is further qualified as B , B or
B 2 depending on the ability to identify number of shareholders

Attached to the company with a recorded shareholder with a total or a calculated total ownership
over 50 per cent. This is further qualified as C , C depending on total of direct ownership
percentage

Low independence: Attached to the company with a recorded shareholder with a direct
ownership of over 50 per cent

Attached to the companies that do not fall into any of the above categories (A, B, C Or D)
i.e. unknown degree of independence

Source: BVD (2009)

5. Methods
The bivariate relationships between the variables are examined using Pearsons product
moment (pair wise) correlation coefficients; this allows examination of whether there is a
statistically significant association between the variables. As well as providing information in
its own right, these measures allow assessment of the likelihood of econometric problems
when conducting the regression analysis; high correlation between independent variables is

PAGE 152 CORPORATE GOVERNANCE VOL. 12 NO. 2 2012

Table IV Descriptive statistics

tot_ast
op_rev
mkt_cap
ret_ta
inst_inv
tot_dir
Ind_dir
p_inddir
fem_dir
p_femdir
env_disc
lnenv_disc
env_perc
lnenv_perc
energy
finance
mat_ind
it_tel_ul
c_dis_hc
indfacty

Measure

Minimum

Maximum

Mean

Std. dev

$mAU
$mAU
$mAU
%
n
n
n
%
n
%
n
n
%
n
n
n
n
n
n
n

0.17
0.0004
1.72
269.46
4.65
5.0
2.0
26.0
0
0
16.0
2.77
0.07
22.70
0
0
0
0
0
0

656.799
79.57286
146.66
567.48
99.87
21.0
11.0
90.0
4.0
38.0
1,0015.0
9.21
11.59
2.45
1
1
1
1
1
1

34.76
6.05
10.01
14.98
67.76
10.17
6.03
60.26
1.35
12.88
1,561.28
6.76
2.47
0.45
0.17
0.29
0.30
0.05
0.19
0.76

105.21
12.02
17.83
59.67
23.69
2.96
1.90
13.43
1.05
9.34
1,807.11
1.23
2.34
1.05
0.37
0.46
0.46
0.22
0.39
0.43

Notes: Number of observations (n) 96; (2) The means for dummy variables can be interpreted as the proportion in that group

a sufficient (but not necessary) indicator[1] of multicollinearity, which renders estimators

unreliable.
Multivariate analysis is conducted using linear regression, i.e. Ordinary Least Squares
(OLS). The relationship being examined is assumed to be linear; to fulfil data requirements
for linearity several variables are transformed (see discussion above).
The underlying model is based on the linear (in parameters) specification:
Yi b1 b1 X1i b2 X2i . . . bk Xki 1i

Where Yi is the dependent variable for firm i; Xs are independent and control variables (from
1 to k); bs are the estimated parameters of the model, and 1 is the zero mean,
homoscedastic and serially independent regression error.
Following estimation the usual battery of diagnostic tests are performed to ensure
assumption of the OLS are fulfilled.
Modelling voluntary environmental reporting does present empirical problems. As with all
statistical modelling, there is a potential for omitted variable bias due to unknown,
immeasurable or unavailable data. According to the Ramsey RESET test, however, the
final model exhibits no evidence of omitted variables (see below).
The second issue is that of endogeneity: for example, if environmental reporting increases
due to an increase in the proportion of independent directors, but reporting levels attracts
independent directors, the measures are endogenous[2]. Controlling potential endogeneity
analytically requires an Instrumental Variables (IV) estimator. As is also well known, IV
estimators cannot always be applied as necessary instruments are not available. To the
extent that there may be omitted variables or endogeneity, estimates must be treated with
caution. Note that model residuals are approximately normally distributed and this can be
taken as an informal sign that there are no obvious estimation issues.

6. Results and discussion

Table V contains the Pearsons Correlation Coefficients for the dependent and independent
variables. An initial examination suggests that some relationships are contrary to all four
hypotheses. Environmental disclosure (env_perc) is, as expected, positively, statistically

VOL. 12 NO. 2 2012 CORPORATE GOVERNANCE PAGE 153

PAGE 154 CORPORATE GOVERNANCE VOL. 12 NO. 2 2012

1
0.2320*
0.4635*
20.0682
20.1011
0.1128
0.2227*
0.1810
0.1767
0.1720
0.5657*
20.0055
20.1596
1
0.6184*
20.0379
20.0903
0.4335*
0.2976*
20.0325
0.2266*
0.1140
0.6154*
0.4679*
0.1168

op_revn

1
20.048
20.0906
0.3754*
0.1495
20.0931
0.2611*
0.1556
0.5989*
0.1638
20.0788

Mkt_cap

1
0.096
0.0715
0.1431
0.0659
0.0482
0.0143
20.0283
20.0793
20.0873

ret_ta

inst_inv

1
20.0613
20.1090
20.1170
20.2443*
20.2455*
20.1153
0.1375
0.2659*

Notes: n 96; *represents p-value for statistical significance # 0.05

tot_asst
op_revn
mkt_cap
ret_ta
inst_inv
tot_dir
ind_dir
P_inddir
fem_dir
P_femdir
tot_wrd
env_disc
env_perc

tot_asst

Table V Pearsons correlation coefficient (r) matrix

1.0000
0.6837*
20.2122*
0.4530*
0.1324
0.4059*
0.3625*
0.1577

Tot_dir

1.0000
0.5404*
0.4499*
0.2613*
0.4231*
0.2465*
0.0606

Ind_dir

1
0.0967
0.2044*
0.1847
20.0622
20.1113

p_inddir

1
0.9140*
0.3350*
0.12
0.0262

fem_dir

1
0.2686*
0.0217
20.0332

p_femdir

1
0.4656*
0.0866

tot_wrd

1
0.8551*

env_disc

env_perc

significantly, correlated with institutional investors (inst_inv) (r 0.2659, p-value 0.009).

However, the correlation with board size (tot_dir) is not significant (r 0.1577, p-value
0.125) and nor it is negatively correlated with percentage of independent directors (p_inddir)
(r 2 0.1113, p-value 0.280) or the percentage of female directors (p_femddir)
(r 2 0.0332, p-value 0.748).
As correlations only indicate a potential bivariate relationship, and alone are not sufficient to
make inferences, the next stage in the analysis is to examine multivariate regression models.
6.1 Modelling results
In the regression model the percentage of environmental disclosure (env_perc) is regressed
on five corporate governance variables: percentage of independent directors (p_inddir),
proportion of institutional investors (inst_inv), an independence dummy (indfactdy), board
size (tot_dir) and percentage of female directors (p_femdir). In addition, control variables for
firm size, profitability and industry are included.
Various forms of the models were explored incorporating different measures of the
dependent variable (ln_envperc, env_perc, and lnenv_disc), but are not reported here as
the results were not significantly different. In addition, exploratory models considered
alternative explanatory variable specifications[3]. The following model is estimated and the
results presented in Table VI[4].
lnenv_perc b0 b1 p_inddir b2 inst_inv b3 tot_dir b4 p_femdir b5 mkt_cap
b6 op_rev b7 tot_asst b8 ret_ta b9 indfactdy b10 c_dis_hc
b11 it_tel_ul b12 energy b13 finance

where:
lnenv_perc> Natural log of percentage of environmental disclosure.
p_inddir>

Percentage of independent directors.

inst_inv

Percentage of institutional investors.

tot_dir

Total number of directors.

p_femdir

Percentage of female directors.

mkt_cap

Market capitalisation ($m).

Table VI Regression model results

lnenv_perc
tot_asst
op_revn
mkt_cap
Ret_ta
Energy
c_dis_hc
Finance
it_tel_ul
Indfactdy
Inst_inv
Tot_dir
p_inddir
p_femdir
_cons

Coefficient

Std. err.

t-statistic

Significance
( p . [t])

20.001
0.011
20.008
20.005
0.204
21.146
21.169
21.186
0.203
0.013
0.070
0.013
0.025
21.666

0.001
0.009
0.007
0.001
0.255
0.248
0.247
0.391
0.206
0.004
0.033
0.007
0.010
0.693

20.670
1.230
21.220
23.200
0.800
24.620
24.730
23.030
0.980
3.370
2.110
1.860
2.550
22.400

0.502
0.221
0.228
0.002*
0.425
0.000*
0.000*
0.003*
0.328
0.001*
0.038*
0.067**
0.013*
0.019

Notes: *Significant at the 5 per cent level; **Significant at the 10 per cent level, F-test is for all coefficients simultaneously zero;
(Independent variables using percentage of independent and female directors); Dependent variable Log of env_perc (lnenv_perc);
Number of observations 96; R 2 0.5193; Adjusted R 2 0.4431; F (13, 82) 6.81; Probability . F 0.000

VOL. 12 NO. 2 2012 CORPORATE GOVERNANCE PAGE 155

op_rev

Operating revenue ($m).

tot_asst

Total assets ($m).

ret_ta

Return on total assets.

indfactdy

BVD Independence factor (dummy).

Industry dummy variables: c_dis_hc Consumer discretionary, staples or health care

spending, it_tel_ul Information technology, telecom services or utilities, energy Energy,
finance Financials, mat_ind Materials or Industrials (excluded base-case).
The adjusted coefficient of determination (Adjusted R 2) is 0.4431 and R 2 indicates that
about 52 per cent of the variation in the dependent variable (about its mean) is explained by
variation in the independent variables suggesting the explanatory power of the model is
satisfactory given the nature of the sample.
Diagnostic tests indicate no modelling problems. Examination and testing of the model
residuals suggest they are approximately normally distributed. Specifically: the Ramsey
RESET test for omitted variables cannot reject the null hypothesis (F(3, 79), p-value 0.312);
the variance inflation factor test suggest no collinearity of Xs with the error (mean VIF1.48,
highest 2.16); there is no evidence of heteroskedasticity (Whites test p-value 0.3983); or for
heteroskedasticity, skewness or kurtosis according to Cameron and Trivedis (2005)
decomposition of IM-test (minimum p-value 0.283); and finally the plot of residuals is
approximately normal.
Control variables
Regression results suggest that industry type plays some part in explaining environmental
reporting: consumer discretionary, staples or health care spending (c_dis_hc), finance, and
Information technology, telecom services or utilities (it_tel_ul) have significant coefficients
around 2 1.2 (the Wald tests of linear hypotheses indicates the coefficient for the three
dummy variables are not statistically different F(2, 82) 0.01, p-value 0.99). Accordingly,
the model suggests being in one of these industries decreases the proportion of
environmental reporting in annual reports compared to other industries. This result is not
unexpected and can be explained by the fact that significant dummies (e.g. materials and
energy) are highly environmentally sensitive industries and therefore more scrutinised by
regulators and the general public. Hence the companies in these industries tend to disclose
more information on the environment. This result is consistent with the majority of the
previous literature (Cho and Patten, 2007; Deegan and Gordon, 1996; de Villiers et al., 2009;
Halme and Huse, 1997).
Control variables for firm size (tot_asst, op_revn, mkt_cap) are not statistically significant
(lowest p-value 0.221). This result is in contrast to the prediction that large firms disclose
more environmental information found in previous studies (Donnelly and Mulcahy, 2008; Eng
and Mak, 2003; Gul and Leung, 2004; Ho and Wong, 2001; Laidroo, 2009; Lakhal, 2005).
One possible explanation for the difference in this study is that firms in the sample are all
large, coming from the top 100 listed Australian companies.
On the other hand, the control for profitability (ret_ta) is highly significant ( p-value 0.002)
the coefficient (20.0046) suggesting that an increase in profitability reduces the proportion
of environmental reporting. The impact is not substantial. However, an increase in return on
assets of 1 per cent reduces the proportion of environmental reporting by just under 1 per
cent[5]. This result is in contrast to findings of several prior studies, although the results have
been mixed. One could argue that more profitable firms are well established and may not be
motivated to disclose environmental information to their stakeholders, or may be disclosing
this in an alternative medium, such as a separate environmental report.
Explanatory variables
The Independence Factor dummy variable is not significant ( p-value 0.328), but institutional
Investors (inst_inv), total directors (tot_dir) and female directors (p_femdir) are statistically

PAGE 156 CORPORATE GOVERNANCE VOL. 12 NO. 2 2012

significant at the 5 per cent level, while independent directors (p_indir) is significant at about
the 7 per cent level ( p-value 0.067).
The coefficients vary between approximately 0.013 to 0.070 hence the impact of a change
in one unit in the explanatory variables increases the proportion of environmental reporting
by about 1 per cent[6]. (Testing indicates that the four coefficients are not statistically
different.) Hence the influence on the proportion of environmental reporting of these corporate
governance variables is relatively small. That is, an addition of one independent, or one
institutional director, or a 1 per cent increase in the proportion of independent or female
directors all increase the proportion of environmental reporting by about 1 per cent.
One suggestion for the lack of difference in the impact of various categories of directors is
due to the small size of the sample a smaller sample is associated with a larger standard
deviation.
6.2 Results of hypothesis testing
6.2.1 Proportion of independent directors and environmental reporting. The first hypothesis
(H1) suggests that the percentage of independent directors is positively associated with the
level of environmental disclosure. The result is statistically significant ( p-value 0.067)
which suggests that Australian firms with more independent directors do provide more
information on their environmental performance. Therefore, H1 is supported.
The result is consistent with the findings of many previous studies (Chen and Jaggi, 2000;
Cheng and Courtenay, 2006; de Villiers et al., 2009; Donnelly and Mulcahy, 2008; Ho and
Wong, 2001; Shan, 2009) which all found a positive association between independent
directors and various types of disclosure. Further, de Villiers et al. (2009) in particular, found
that a firm with more independent directors resulted in better environmental performance. In
addition an interesting point to be noted is that in previous studies which found a positive
association between independent directors and disclosure Ho and Wong (2001) in Hong
Kong, Cheng and Courtenay (2006) in Singapore, and Shan (2009) in China it was found
that Boards had an average of only 28 to 36 per cent independent directors. Whereas the
descriptive statistics for this study reveal that there is a greater representation of
independent, non-executive directors on the boards of Australian firms (average 60 per
cent). This indicates that the proportion of independent directors whether small or large, can
have a strong positive effect on the disclosure behaviour of firms.
6.2.2 Institutional investors and environmental reporting. The second hypothesis (H2)
suggested that the less concentrated ownership of a firm is (that is, the fewer institutional
investors) the more environmental disclosure is likely. The result in this study appears to
provide a contrary conclusion: institutional investors have a small but positive impact
( p-value 0.001). As this is opposite to that hypothesized, H2 is not supported. One
possible explanation for this unexpected relationship could be that institutional investors in
Australia, as mentioned earlier, include insurance firms, pension funds and investment firms.
As these entities have limited control over the reporting firms they may not have sufficient
access to the information they need and therefore are more likely to rely on public disclosure.
In addition, during recent years, poor environmental performance and environmental
disasters became a major threat to many organisations survival. As institutional investors are
the main suppliers of funds to financial markets, firms environmental performance
information may be perceived as important in assessing the possible risk involved in
financing. Therefore, they may put pressure on management to disclose more information on
environmental performance, hence explaining the result in this study.
Another reason could be the makeup and size of the sample. The sample comprises 96 of
the top 100 listed Australian companies, and each of these large companies is more likely to
have a large number of institutional investors. This may mean that the model might not be
able to differentiate the variation in the disclosure. A larger sample with different sized firms
would useful for future research. Alternatively, it may be that the proportion of institutional
investors is not a good proxy for the level of control exercised over a firm. For this reason, an
additional variable, the BVD independence factor, was also included in the model, but this

VOL. 12 NO. 2 2012 CORPORATE GOVERNANCE PAGE 157

measure is not statistically insignificant and hence does not appear to be influential in
environmental disclosure ( p-value 0.328).
6.2.3 Board size and environmental reporting. The third hypothesis (H3) predicted that
board size would be negatively associated with environmental disclosure. Contrary to H3,
the result showed a statistically significant positive relationship between board size and
environmental disclosure ( p-value 0.038), therefore H3 is not supported. The result is
consistent with de Villiers et al. (2009) who found a positive association between board size
and environmental performance, suggesting that larger boards possess the necessary
expertise to ensure strong environmental performance. However the result is in contrast to
other previous findings that found significant negative relationships between board size and
both firm performance and disclosure (Cheng, 2008; Kassins and Vafeas, 2002; ONeal and
Thomas, 1995; Yermack, 1996) as well as with others that found no significant association
(Cheng and Courtenay, 2006; Lakhal, 2005; Halme and Huse, 1997).
One possible explanation could be that the majority of the companies (66 out of 96) in the
sample had approximately 8 to 12 members on their board, that is, there was little variation in
the size of the boards. It is more likely that in a small sample where the majority of companies
consist of a similar number of total directors, the results would not highlight the influence of
board size. In addition, previous literature provides a great deal of evidence of an upward
trend in environmental reporting in Australia during recent years, which may be another
reason for the positive influence.
6.2.4 Proportion of female directors and environmental reporting. The fourth hypothesis (H4)
suggested that the percentage of female directors on a board is positively associated with
the level of environmental disclosure. Consistent with the hypothesis the coefficient is
statistically significant ( p-value 0.013) and suggests that as the percentage of female
directors on boards in large Australian companies increases, environmental disclosure also
increases. Therefore, H4 is supported.
This result is consistent with many previous studies that found female directors have the
potential to increase overall performance of the firm (Adams and Ferreira, 2004; Bonn, 2004;
Carter et al., 2003; Huse and Solberg, 2006) and that the number of females on a board is
positively associated with corporate disclosure (Julie, 1996; Ibrahim and Angelidis, 1994).
Descriptive statistics clearly indicate that only approximately 13 per cent of the total director
positions in 96 of 100 of Australias top companies are occupied by females. In addition 23
companies did not have any female directors at all, while 34 companies had only one female
director. Therefore, despite the low percentage of female directors in these companies, this
study shows a positive and significant relationship, indicating that female directors do have
a positive effect on environmental disclosure practices.

7. Conclusion
Major findings in this study both support and contradict conventional wisdom regarding the
proportion of environmental reporting by Australias largest companies.
All of the 96 of the top 100 companies in Australia studied had some level of environmental
reporting, suggesting that Australian firms do attribute importance to environmental
reporting and supports the evidence that environmental reporting is becoming a more
predominant activity. Moreover, strong corporate governance does appear to have an effect
on the proportion of environmental reporting in the annual reports of Australias largest
companies. In this study all measures of corporate governance were found to be significant,
although not all in the predicted direction. Nonetheless, these findings show that boards that
include both independent and female directors are likely to have a positive influence on
firms environmental reporting, which is important for wider stakeholders and for the public in
general, in light of the many environmental problems facing global society.
The finding that as board size increases environmental reporting increases, although
contrary to the majority of literature, has been found in a few other studies as discussed
previously. This has implications for firms CEOs in determining the optimal size for the

PAGE 158 CORPORATE GOVERNANCE VOL. 12 NO. 2 2012

board. However, the result needs to be interpreted with caution, particularly given that it
contrasts with most other studies that the majority of companies in the sample had a
relatively small board size, and that the sample comprises larger companies. As for the
result that indicates that the higher the number of institutional investors that a company has,
the higher the amount of environmental reporting that occurs, this is unexpected and
interesting. This might again simply be an artefact of the sample, that is, a size effect, as
these are all large companies and had an average of approximately 68 per cent of
institutional investors (the maximum being almost 100 per cent). A comparative study of
companies with fewer institutional investors is important to consider this further.
These results have implications for regulators, directors, and company strategists. They are of
interest to regulators, such as the ASX, as the ASX explicitly requires the recognition of
stakeholders other than shareholders. The ASX could consider expanding its CGC to include
consideration of the environment, which is increasingly considered to be an important aspect
of corporate social responsibility, and one of the responsibilities of the board of directors. In
addition, the results have important implications for companies themselves, as they indicate
that companies, which include a commitment to the environment in their mission and
strategies should consider the impact of board structure and composition, as both of these are
shown to have a significant effect on the amount of environmental information disclosed by
companies. Further, the results that show a positive relationship between institutional investors
and environmental reporting indicates a need for further measures to obtain more accurate
data on the percentage of shares held by each institutional investor.

Limitations and further research

As with all research, this study has some limitations. First, in this investigation only annual
reports are considered as a major means for corporations to disclose environmental
information to stakeholders. Further, only 96 of the top 100 Australian, large (publicly listed)
companies, annual reports were reviewed and hence the results are generalisable only to
the Australian market; these results may not apply to other locations, or to smaller or unlisted
companies. Second, it is not within the scope of this study to measure the quality of the
disclosures. Finally, only four corporate governance variables were included which may not
be comprehensive enough to conclude there is a significant relationship between corporate
governance and environmental reporting, but this study provides some preliminary
evidence, and areas for further consideration.
A number of potential areas for future research arise from this study. First, an investigation
using a larger sample, and including small, medium and private companies would provide
more certainty of the influence of corporate governance on environmental reporting.
Second, future research could consider the use of various means to gather information other
than annual reports such as stand-alone reports, or the corporate website. In addition, a
longitudinal study, case studies and interviews with board members should be considered
as these would provide a more in-depth analysis. Fourth, a comprehensive study, which
involves comparing data from different countries, would then allow the results to be
generalised to wider locations. Finally, including a broader set of corporate governance
variables and measures (e.g. board committees, types of remuneration, CEO duality) that
have been examined in other studies, would then allow investigation of how other elements
of corporate governance affect environmental reporting.
This study has provided a glimpse of the relationship between corporate governance and
environmental reporting, two important aspects of business operations in a global society.
The results provide some evidence that environmental reporting is a common practice for
most companies, and is positively related to at least some corporate governance measures.

Notes
1. High pair wise correlation may suggest the presence of co-linearity but it cannot identify
multicollinearity. A less technical approach is taken; signs of multicollinearity are examined by

VOL. 12 NO. 2 2012 CORPORATE GOVERNANCE PAGE 159

estimating models with sub-sets of variables. There is no evidence that multicollinearity is present in
the final model presented.
2. This study has not explored the theoretical possibility that reporting influences the type of directors
appointments.
3. All results available from the contact author on request.
4. The general-to-specific method was used to obtain the parsimonious model. Statistically significant
variables do not change; there are very small change in their size results available from the
contact author on request.
5. That is, e-0.0046 0.995.
6. That is, e0.0126 1.0127 and e0.0695 1.0720.

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About the authors

Kathyayini Kathy Rao is a Post Graduate Research Student at Flinders University. Her
research interests are corporate governance and environmental reporting.
Professor Carol A. Tilt is Professor of Accounting, and Dean of Flinders Business School. Her
research is mainly in the area of social and environmental responsibility and reporting. Carol
A. Tilt is the corresponding author and can be contacted at: Carol.Tilt@flinders.edu.au
Dr Laurence H. Lester is a Research Fellow with the National Institute of Labour Studies at
Flinders University. His main area of expertise is econometrics and statistical modelling.

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