Corporate Governance: The International Journal of Business in Society

Board involvement in corporate sustainability reporting: evidence from Sri Lanka

Nayana Chandani Swarnapali Rathnayaka Mudiyanselage,
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Nayana Chandani Swarnapali Rathnayaka Mudiyanselage, (2018) "Board involvement in corporate sustainability reporting:
evidence from Sri Lanka", Corporate Governance: The International Journal of Business in Society, https://doi.org/10.1108/
CG-10-2017-0252
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 Board involvement in corporate
sustainability reporting: evidence
from Sri Lanka
Nayana Chandani Swarnapali Rathnayaka Mudiyanselage

Abstract Nayana Chandani

Purpose – The purpose of this paper is to explore the role played by the board of directors in corporate Swarnapali Rathnayaka
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sustainability (CS) disclosure within the Asian context in which sustainability reporting (SR) is an Mudiyanselage is based at
emerging phenomenon. School of Management,
Design/methodology/approach – Data are collected from a sample of 100 listed Sri Lankan companies Huazhong University of
over a period of four years (2012-2016), representing practically all the business sectors. This study Science and Technology,
draws on both agency and resource dependence theories, while binary logistic regression is performed
Wuhan, China and
for the data analysis.
Department of
Findings – The results point out that firms that follow a sustainability disclosure policy have larger
Accountancy and Finance,
boards, a higher proportion of independent directors and more female directors. Contrary to certain
common assumptions, firms that practice sustainability disclosure are not influenced by dual leadership, Rajarata University of Sri
board ethnicity and board ownership. This study helps firms to understand whether their boards can Lanka, Mihintale, Sri Lanka.
influence the sustainability disclosure choice or not and further, to validate the appropriateness of the
agency theory and the resource dependence theory for examining issues of this nature.
Originality/value – This study contributes significantly to the extant literature on this subject by
broadening the geographical coverage, which has generally been limited to the West in corporate
disclosure studies.
Keywords Corporate governance, Board of directors, Sustainability, Corporate social responsibility
Paper type Research paper

1. Introduction
Challenges faced in taking forward sustainable development have become a major issue
across the world. The importance of abiding by business ethics and following the
sustainable path are universally acknowledged as dire needs at present as the societies
and economies of all countries are closely interconnected and interdependent and so have
Received 19 October 2017
to follow the same practices (Banai and Sama, 2000; Kolk and Van Tulder, 2004). Revised 8 January 2018
Developing countries are struggling to share in the global economic prosperity within a Accepted 26 March 2018

shrinking environmental and ecological space, and depleting resources. In such a The author would like to
express her gratitude to
backdrop, many big business corporations that contributed to the global economic Associate Professor Luo Le,
expansion and technological progress have been criticized for the serious negative impacts School of Management,
Huazhong University of
they have had on social and environmental issues, such as waste, pollution, rapid resource Science and Technology,
depletion and so on (Reverte, 2009). Stung by such criticism, firms have been increasingly Wuhan, China, for his
unconditional support
motivated to become accountable (Rao et al., 2012) not only to the shareholders but also to extended as PhD research
the larger set of stakeholders including their customers and even the public (Reverte, 2009; supervisor. Further, the author
is grateful to the Editors (Eweje,
Zhang, 2012). Nature of corporate governance (CG) has a decisive effect on sustainability Gabriel and Foley, Maggie) and
to the two anonymous referees
and related disclosures, and this nexus has become the topic of a lively debate in the for their insightful comments
recent corporate literature. As a matter of fact, the board of directors’ role as the main and suggestions on the paper.

DOI 10.1108/CG-10-2017-0252 j
© Emerald Publishing Limited, ISSN 1472-0701 CORPORATE GOVERNANCE j
 internal governing body of a firm is indispensable for the effective functioning of any kind of
business. The board of directors ensures that the business is running well and is headed in
the right direction (Krechovská and Procházková, 2014). Board as the main internal
governance mechanism in a firm has the power to decide on company mission and policy,
and is responsible for safeguarding the interests of the firm’s stakeholders (Wijethilake
et al., 2015). Board’s involvement in all corporate strategic directions, including
sustainability disclosure, is crucial, particularly in single-tier board structures (Shamil et al.,
2014). Listed companies in Sri Lanka are governed by one-tier boards, so board
involvement has a greater influence on the corporate strategic direction compared to listed
companies operating in many other countries. As board involvement shapes the corporate
sustainability (CS) choice, it is very important to pay attention to the board’s composition.
After all, the directors are the ones who will decide whether the company will embrace
sustainability policies. Sri Lankan companies are still in the early stages of adopting and
initiating this vital strategy of CS practices as a matter of principle and to stay competitive in
the local and global markets by enhancing their public image.
Although there is no shortage of literature on board involvement in sustainability and social
responsibility disclosures, most of those studies focus attention on the developed
economies, and there are hardly any references to sustainability as applicable to
developing economies. One possible reason for the lack of discourse on sustainability in
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developing economies could be due to the long time lag between the adoption of any new
development in the West and its gradual acceptance in the East. Interestingly, Eweje (2014)
noted that there has been an awake in the sustainability studies in developing countries
over the recent periods. However, literature has highlighted the importance of conducting
studies on sustainability in other institutional settings other than in the Western context
(Reverte, 2009; Eweje, 2014; Muttakin and Subramanian, 2015). Moreover, Alrazi et al.
(2016) emphasized the significance of country specific differences that may exist due to
unique environmental disclosure regulations, reflecting the diverse environmental norms
that prevail across the world. The institutional settings of developed countries are usually
quite different from the organizational setups of developing and emerging countries. While
developed countries’ firms operate within stable political systems, well-developed
institutional and regulatory frameworks and effective governance mechanisms, firms in
developing countries operate within unstable political systems, in which weak institutional
and regulatory frameworks exist.
However, aiming for sustainable development within the country, the Sri Lankan
Government launched a national program called “Haritha (Green) Lanka” in 2009, which is
administered by the National Council for Sustainable Development. With the mission of
“greening the industries”, industries and service providers are encouraged to adopt cleaner
production practices while minimizing environmental degradation caused by their work
processes. Following this, the National Green Reporting System, which is a framework for
Sri Lankan sustainability reporting (SR), was launched with the objective of facilitating
organizations to become more transparent with their sustainable performance initiative. It is
quite evident that emerging countries are playing an increasingly important role in the world
economy, while also providing researchers with interesting institutional settings that enable
them to acquire new insights to enrich existing academic literature. This paper intends to
make use of this opportunity to narrow the existing research gap by exploring the effect of
board involvement in CS disclosure decision in a developing economy setting in which SR
is a new phenomenon. Interestingly, sustainability disclosure practice in Sri Lankan
companies is voluntary in nature, as it is not mandated by any authority. However, the
importance of engaging in this voluntary practice cannot be underestimated for any firm
that is desirous of projecting a good corporate image. This is because voluntary disclosure
is perceived as having far greater value by the public than mandatory disclosure (Healy
and Palepu, 2001). Moreover, scholars emphasize the importance of sustainability and

j CORPORATE GOVERNANCE j
 related disclosure as a means of achieving competitive advantages (Gregory et al., 2014;
Krechovská and Procházková, 2014).
The rest of this paper is structured as follows: Section 2 is devoted to the literature review
and derivation of the hypotheses based on the agency and resource dependence theories.
Section 3 outlines the research design, whereas the empirical results of the study are
presented along with the discussions in the Section 4. Section 5 ends with a brief
conclusion.

2. Literature review and hypotheses development

The basic conceptions of sustainability disclosure have been extended and broadened.
This helps firms to disclose more sustainability related information aimed at realizing capital
market benefits (Shamil et al., 2014). In this manner, SR becomes an important channel for
communicating corporate ethical behavior, necessary to deal with the pressures exerted by
a rather diverse set of stakeholders (Aguilera, 2005; Hahn and Kühnen, 2013). From the
legitimacy perspective, firms disclose corporate social responsibility information with the
intention of demonstrating their conformance to social norms (De Villiers and Marques,
2016).
The application of ethics to corporate decisions is really critical as these decisions will
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pervade every aspect of corporate operations (Banai and Sama, 2000). In this context, the
composition of the board of any firm will play a pivotal role in creating an ethical business
atmosphere. Zhang (2012) attested that board involvement and sustainability-related
disclosures are rooted in both agency and resource dependence theories. The agency
theory as the dominant theoretical underpinning of CG literature (Reverte, 2009; Styhre,
2016) posits that managers respond to the internal monitoring mechanism by making a
greater effort to improve the quality of corporate disclosure (Shamil et al., 2014). Arousing
controversy, Chintrakarn et al. (2016) argued that managers might disclose sustainability
information to comply with stringent internal monitoring mechanisms and to reduce agency
problems and costs. Though managers have incentives to issue sustainability reports to
reduce agency costs and monitoring costs, the argument of causality regarding managers’
influence on sustainability disclosure is much less plausible. This is because an effective
governance mechanism is usually put in place to mitigate the agency problem. Chintrakarn
et al. (2016) noted that firms that have effective governance mechanisms in place will be
able to restrict the managers’ ability to maximize their self-interest benefits at the cost of
shareholders. Thus, the causal relationship between CG characteristics and sustainability
disclosure is much more admissible than managers’ incentives with sustainability
disclosure.
As per the agency theory, the board of directors’ active involvement is rather crucial, as by
closely monitoring the managers’ opportunistic behavior it will be possible to reduce the
agency costs and enhance the information symmetry (Jensen and Meckling, 1976; Fama
and Jensen, 1983; Gleason et al., 2012; Chintrakarn et al., 2016). Anwar (2016, p. 26)
defined agency problem as “a principal’s dissatisfaction with the outcome of an agent’s
performance.” The imbalance between agent and principal information availability is known
as information asymmetry, which hinders the principal’s monitoring ability over the
manager’s self-interest activities (Anwar, 2016). Similarly, SR as an integral part of an
entity’s voluntary disclosure activities becomes an important means of addressing any
informational asymmetry issues (Fuhrmann et al., 2016). Agency theorists further argue that
the dual leadership structure (chairman and chief executive officer [CEO] roles are
separated) inspires managers to publish more corporate information, as the CEO duality
(chairman and CEO roles are combined) compromises the independence of the board
(Shamil et al., 2014). CEO duality increases the information asymmetry issue, as it supports
the concealment of more valuable information from others, in particular from independent
directors. This leads to more opportunistic manager behaviors, ineffective internal

j CORPORATE GOVERNANCE j
 governance mechanisms, leadership issues (Said et al., 2009) and low corporate
disclosure. Thus, a dual leadership structure is warranted for effective board function and
board independence.
From a strategic perspective, “Resource dependence theory characterizes an organization
as an open system dependent on contingencies in the external environment” (Wijethilake
et al., 2015, p. 253). This perspective prominently focuses on the environment as an
important resource factor which can shape a firm’s destiny. On the other hand, uncertainty
and organizational interdependence with its environment can have harmful effects on the
firm’s operations and even survival. This is because the environment can influence the firm’s
control over resources and choice of strategies, hindering day-to-day functioning.
Eventually, it can result in lower organizational autonomy and a more uncertain future for the
firm (Rivas, 2012).
The board of directors is one of the critical resources in a firm that can make a solid
contribution toward minimizing environmental dependency (Wijethilake et al., 2015; Rivas,
2012). Also, the board is recognized as the co-operative mechanism that connects the firm
with many external resources (Aguilera, 2005) that can assist in making critical facilities
available to the firm. Rivas (2012, p. 296) also stated that “Playing a resource-dependence
role, directors can sometimes misjudge and serve to connect the firm with external factors
that generate uncertainty and external dependencies.” Theory predicts that board
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members with diverse skills and experiences, of both genders, and from different ethnic,
racial and cultural backgrounds can serve as essential strategic resources, linking valuable
external resources to the firm (Fidanoski et al., 2014). According to the suggestion of this
theory, larger boards are more likely to have access to a wider range of resources and
opportunities than smaller boards (Shamil et al., 2014). In keeping with this perspective of
resource dependence, it is argued that gender balance is an important element of
competitiveness (Higgins and Coffey, 2016). In line with the views on resource
dependence, resource-rich boards are identified as a critical resource that can broaden
access to environmental resources, counsel management and provide advice to the firm,
thereby improving inter alia corporate environmental performance (De Villiers et al., 2011).
Summing up, board diversity enhances the quality of corporate strategic decisions that
enable better company performance, which can act as an incentive, driving the firm toward
making more meaningful CS disclosures.
Sustainability perspective has to be an integral part of a progressive firm’s strategic
direction and giving leadership for achieving this is one of the board’s ultimate
responsibilities (Amran et al., 2014; Barako and Brown, 2008). It is commonly
acknowledged that the scope of disclosure, degree of transparency and matters relating to
assurance depend on the CEO’s discretion (Amran et al., 2014), because the board’s
decision has to be communicated through the CEO. On the other hand, agency theorists
assert that larger boards with specialist experts that possess board independence and
board ownership will be better equipped to exercise effective corporate monitoring to
restrict the self-serving behavior of managers, leading to greater environmental
performance (Hillman and Dalziel, 2003; De Villiers et al., 2011). In such a context, the
importance of board involvement in sustainability disclosure cannot be dismissed lightly.
Thus, there is a compelling need to establish bigger and more elaborate boards for an
effective disclosure setting where presently the one-tier board structure is prevalent.
Not everyone agrees on this point though. Some scholars have found that board size has a
significant and positive impact on corporate disclosure (De Villiers et al., 2011; Ntim and
Soobaroyen, 2013; Shamil et al., 2014), whereas other scholars found no significant
relationship between board size and sustainability disclosure (Amran et al., 2014; Said
et al., 2009; Kiliç et al., 2015). The degree of board independence as measured by the
number of independent directors over the total number of directors is considered as an
important element of the CG mechanism. Agency theorists suggest that when the board

j CORPORATE GOVERNANCE j
 independence is higher (boards with a higher proportion of independent directors), better
board monitoring quality and lower agency cost are the outcomes. However, contrasting
findings have been reported in terms of board independence and sustainability related
disclosures. Consistent with the agency-driven predictions, board independence reported
a positive and significant impact on corporate disclosure (De Villiers et al., 2011; Kiliç et al.,
2015; Muttakin et al., 2015), whereas other researchers reported an insignificant influence
on corporate disclosure (Said et al., 2009; Shamil et al., 2014). The relationship between
board leadership duality and corporate disclosure is also mixed. Board leadership duality
was found to be positively associated with sustainability disclosure by some researchers
(Shamil et al., 2014), whereas it was found to be negatively or insignificantly associated with
sustainability disclosure by others (Ntim and Soobaroyen, 2013; Said et al., 2009).
The relationship between board with female directors and corporate disclosure is also not
consistent. Resource dependence theorists argue that female directors are more likely to
disclose sustainability-related information than their male counterparts (Frias-Aceituno et al.,
2013; Hafsi and Turgut, 2013; Glass et al., 2015). Controversially, some researchers did not
find any significant association between the two variables (Amran et al., 2014; Ntim and
Soobaroyen, 2013), whereas others found a negative association (Shamil et al., 2014;
Muttakin et al., 2015). Empirical studies have widely reported that heterogeneous (multi-
ethnic) boards positively influenced sustainability disclosure (Haniffa and Cooke, 2005;
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Hafsi and Turgut, 2013; Ntim and Soobaroyen, 2013), whereas Shamil et al. (2014) reported
an insignificant relationship between board ethnicity and sustainability disclosure. Although,
according to some researchers board ownership is statistically significant with corporate
disclosure (De Villiers et al., 2011), it was rejected by Said et al. (2009) who reported a
statistically insignificant result.
Although mixed findings have been gathered on the association between board
involvement and corporate disclosure, a positive association is widely acknowledged. On
the basis of the two theoretical arguments discussed above, the following hypotheses are
proposed and tested:
H1. Board size has a positive impact on sustainability disclosure.
H2. Board independence has a positive impact on sustainability disclosure.
H3. Dual leadership has a positive impact on sustainability disclosure.
H4. Female directors on board have a positive impact on sustainability disclosure.
H5. Board ethnicity has a positive impact on sustainability disclosure.
H6. Board ownership has a positive impact on sustainability disclosure.

3. Research design
3.1 The sampling
Initially, the proportional stratified sampling technique was used and then a sample of 100
companies listed in the Colombo Stock Exchange (CSE) was randomly selected. The recent
four-year period (from 2012 to 2016) was chosen for observations, yielding a final sample of
400 firm-year observations. The secondary data extracted from the firms’ annual reports,
CSE website and stand-alone sustainability reports were used for the analysis.

3.2 Dependent and independent variables

The dependent variable, “sustainability reporting” was measured as a dichotomous
variable, which was marked “0” if a particular company did not publish a sustainability
report and “1” if a company published a sustainability report. As for the independent
variables, six types of board-specific variables were identified. Board size (BSZ) was the

j CORPORATE GOVERNANCE j
 first independent variable, measured by natural log of the total number of directors serving
on the board (Shamil et al., 2014), whereas board independence (BIND) was measured by
the proportion of independent directors to total directors (Muttakin et al., 2015). The dual
leadership (BLD) was coded as a binary variable, marked “0” if the CEO was also the
chairman of the board and “1” if otherwise (Hafsi and Turgut, 2013; Liao et al., 2015).
Female representation in the board (BFD) as the independent variable was measured by
coding “0” for no females in the boardroom and “1” for females in the boardroom (Glass
et al., 2015). Similarly, board ethnicity (BE) was coded “0” for homogeneous board, and “1”
for heterogeneous board (Shamil et al., 2014), while percentage of shares owned by the
directors out of the firm’s total issued shares was proxied for the board ownership (BO)
(Wijethilake et al., 2015; Said et al., 2009).

3.3 Control variables

The study used six firm-specific variables as the control variables with the intention of
enhancing the accuracy of predictions. Firm size (FSZ) and age (Age), which reflect firm
maturity, were calculated as the natural logarithm of total assets (Wijethilake et al., 2015;
Liao et al., 2015) and the natural logarithm of the number of listed years (Ling and Sultana,
2015), respectively. The profitability was measured in terms of return on equity (ROE) (Hafsi
and Turgut, 2013), whereas growth of the firm was calculated as the market to book (MB)
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ratio (Shamil et al., 2014; Frias-Aceituno et al., 2013; Kuzey and Uyar, 2017). Firm leverage
(LEV) was measured as a ratio of total debt to total assets (Ling and Sultana, 2015; Muttakin
et al., 2015), with the industry (IND) being measured as a binary variable (Hafsi and Turgut,
2013; Giannarakis, 2014), with “1” for environmentally sensitive sectors and “0” for other
sectors. If the main operating activity of the firm is sensitive to the environment, then the firm
was categorized as belonging to the sensitive sector (1), otherwise belonging to the non-
sensitive sector (0). Accordingly, chemicals, manufacturing, plantations, beverage, food
and tobacco, construction, real estate and energy sectors were identified as sensitive
sectors, whereas financial services, healthcare, hospitality, information technology, trading
and other miscellaneous services sectors were identified as non-sensitive sectors. The
selection of variables was performed after a thorough study of the available literature.
Table I provides a detailed operationalization of the variables.

Table I Operationalization of the variables

Variables Operationalization

Sustainability reporting (SR) 0 = Firm does not issue a sustainability report

1 = Firm issues a sustainability report
Board size (BSZ) Natural logarithm of number of directors
Board independence (BIND) Proportion of independent directors to total directors
Board leadership duality (BLD) 0 = Chairman and CEO roles are combined
1 = Chairman and CEO roles are separated
Board with female directors (BFD) 0 = Board without female directors
1 = Board with female directors
Board ethnicity (BE) 0 = Homogeneous board
1= Heterogeneous board
Board ownership (BO) Percentage of shares owned by the directors out of the
firm’s total issued shares
Profitability (ROE) Net earnings/equity
Firm size (FSZ) Natural logarithm of total assets
Firm age (Age) Natural logarithm of the number of listed years
Industry (IND) 0 = Environmentally non-sensitive sectors
1 = Environmentally sensitive sectors
Leverage (LEV) Total debt scaled by total assets
Firm growth (MB) Market-to-book equity ratio, measured as MVE/BVE, where
BVE is the book value of equity

j CORPORATE GOVERNANCE j
 3.4 Method of analysis
The nature of the dependent variable was dichotomous and therefore binary logistic
regression was chosen as the method of analysis; the hypotheses were tested on the basis
of the logistic regression results. Initially, both control and independent variables were
entered separately and tested to obtain the results. At the end, full logistic regression was
performed by including two of the variables into the third model. Accordingly, the three
logistic regression models listed below were tested.
Model 1:


Logit ½P ðSRÞ ¼ In P ðSRÞ= ½1  P ðSRÞ ¼ ß0 þ ß1 ROE þ ß2 FSZ
þ ß3 AGE þ ß4 IND þ ß5 LEV þ ß6 MB þ « 1 (1)

Model 2:


Logit ½P ðSRÞ ¼ In P ðSRÞ= ½1  P ðSRÞ ¼ ß0 þ ß7 BSZ þ ß8 BIND
þ ß9 BLD þ ß10 BFD þ ß11 BE þ ß12 BO þ « 2 (2)

Model 3:
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Logit ½P ðSRÞ ¼ In P ðSRÞ= ½1  P ðSRÞ ¼ ß0 þ ß1 ROE þ ß2 FSZ þ ß3 AGE
þ ß4 IND þ ß5 LEV þ ß6 MB þ ß7 BSZ þ ß8 BIND
þ ß9 BLD þ ß10 BFD þ ß11 BE þ ß12 BO þ « 3 (3)

where « i’s are random errors and ßj’s are coefficients of models; i = 1, 2, 3 and j = 1, 2, . . . 12.

4. Empirical results
The descriptive statistics and correlation results are presented in Tables III and IV,
respectively. The descriptive statistics table presents four types of statistics, namely,
minimum, maximum, mean and standard deviation. The average value of SR is 0.75,
indicating that 75 per cent of the selected firms are publishing sustainability reports, which
is considerably high. The mean values of SR over the four years were 0.72, 0.73, 0.76 and
0.78, respectively (Table II). Thus, it shows an upward trend in the adoption of sustainability
disclosure among listed companies in Sri Lanka over that period (the trend stands at 8.33
per cent). The key reason behind this high prevalence of sustainability disclosure might be
due to the uniqueness of the country, in which the national ethos is closely knit with
Buddhist philosophy. Buddhist teachings promote the concepts of environmental
preservation and appreciation of ecological values (Thoradeniya et al., 2015), which
contribute toward achieving sustainable goals. This argument was further reinforced by

Table II Summary statistics per year

Year
Variables 2012 2013 2014 2015

SR 0.72 0.73 0.76 0.78

Board size (Ln) 2.058 2.063 2.064 2.072
Board independence 0.4139 0.4148 0.4181 0.4219
Board leadership duality 0.84 0.83 0.80 0.84
Boards with female directors 0.46 0.47 0.48 0.49
Board ethnicity 0.80 0.80 0.79 0.77
Board ownership (%) 9.639 9.714 9.477 9.401

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 Kim and Daniel (2016, p. 281), who declared “social norms, especially religion, have a
strong effect on corporate governance practices.”
Moreover, Table II presents a summary of mean values of the dependent variables over the
four-year study period. Over the study period, there is an increase in the number of board of
directors (BSZ), proportion of independent directors (BIND) and the presence of female
directors on the board (BFD). These results indicate the increasingly important role of the
board toward sustainability disclosure in firms listed on the CSE.
As per Table III, the mean value of board size is 8.135 directors and it ranges from 3 to 13.
The average board independence is 0.42, whereas leadership duality is 0.83.
Approximately half (48 per cent) of the sample firms are having at least one female director
among the board members, whereas majority of corporate boards are heterogeneous. The
mean proportion of female directors indicates that the total number of female directors in the
boardrooms of the sample companies is 8 per cent of the total. Although the mean value of
directors’ shareholdings was 9.56 per cent, it showed very wide variation, ranging from 0 to
95.53 per cent. The average profitability of sample firms is 13 per cent and average level of
firm size is 22.70. The mean listing age of sample firms is 27 years, whereas the reported
mean leverage and firm growth are 0.53 and 2.33, respectively.
Table IV displays the results of the Spearman correlation analysis. The results show that
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sustainability disclosure positively and significantly correlates with board size, board
independence, board female directorship, profitability, firm size and leverage (p < 0.01).
The association between industry profile and sustainability disclosure is negative and
statistically significant (p < 0.01). Spearman correlation coefficients of variables do not
show any issue of serious multicollinearity, which ranges from 0.001 to 0.459, thus not
exceeding 0.80 or 0.90. Therefore, multicollinearity is not an issue (Field, 2009) in
interpreting the logistic regression results.
Prior to running the logistic regression, model robustness was checked by conducting a
series of tests that are essential to meet the assumptions of logistic regression. Initially,
multicollinearity was checked by examining the tolerance and the variance inflation factor
(VIF) values of explanatory variables. All VIF values were less than 2, whereas tolerance
values were greater than 0.5 (ranging from 0.507 to 0.900), thereby indicating that logistic
regression results were free from multicollinearity (Field, 2009). Outliers and influential
cases that might affect the full logistic regression model were tested by performing Cook’s
distance and Studentized residuals tests. The results revealed that none of the values

Table III Descriptive statistics

Dichotomous variables
Variables Minimum Maximum Mean SD 0 1

Sustainability reporting 0 1 0.75 0.43 299 (75%) 101 (25%)

Board size 3 13 8.135 2.05
Board size (Ln) 1.10 2.56 2.06 0.26
Board independence 0.00 0.78 0.42 0.14
Board leadership duality 0 1 0.83 0.38 69 (17%) 331 (83%)
Board female directorship 0 1 0.48 0.50 210 (52%) 190 (48%)
No. of female directors 0 3 0.64 0.77
Proportion of female directors 0 0.40 0.08 0.10
Board ethnicity 0 1 0.79 0.41 84 (21%) 316 (79%)
Board ownership (%) 0.00 95.53 9.56 19.63
ROE 0.56 0.94 0.13 0.17
Firm size (Ln) 18.48 27.50 22.70 1.66
Firm listing age 1.00 69 26.53 16.22
Industry 0 1 0.32 0.47 272 (68%) 128 (32%)
Leverage 0.00 1.54 0.53 0.32
Firm growth 1.30 28.47 2.33 2.91

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 Table IV Spearman correlation coefficients
Variables 1 2 3 4 5 6 7 8 9 10 11 12 13

SR 1
BSZ (Ln) 0.331** 1
BIND 0.157** 0.068 1
BLD 0.070 0.154** 0.096 1
BE 0.035 0.064 0.027 0.090 1
BFD 0.181** 0.266** 0.072 0.090 0.001 1
BO 0.055 0.183** 0.027 0.118* 0.053 0.018 1
ROE 0.231** 0.050 0.093 0.153** 0.040 0.025 0.124* 1
FSZ (Ln) 0.456** 0.428** 0.094 0.032 130** 0.319** 0.069 0.260** 1
AGE (Ln) 0.045 0.069 0.079 0.013 0.247** 0.129** 0.127* 0.088 0.044 1
IND 0.156** 0.135** 0.151** 0.001 0.159** 0.015 0.206** 0.136** 0.343** 0.340** 1
LEV 0.242** 0.070 0.053 0.264** 0.139** 0.017 0.038 0.212** 0.459** 0.187** 0.437** 1
MB 0.006 0.071 0.096 0.023 0.106* 0.040 0.047 0.310** 0.068 0.279** 0.017 0.114* 1
Notes: n = 400; *, **significant at 0.05 and 0.01 levels (two-tailed), respectively

related to the Studentized residuals and deviance exceeded 6 3, suggesting that the
model was not affected by extreme outliers (Menard, 2002). Furthermore, values of Cook’s
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distance were less than 1, leading to the conclusion that the model was not affected by any
influential observations (Field, 2009). Along with these findings, it was concluded that the
logistic regression model results were a good fit for interpretation.
Table V provides the summary statistics about the logistic regression model fit. It shows the
omnibus tests of model coefficient ( x 2 = 108.075) of Model 1, of which only the control
variables are included as significant (p < 0.01). This implies that the variables included in
Model 1 are significantly better than the constant only model. The log likelihood statistic
(2LL) in Model 1 has a lower value compared to the null model (343.977 < 452.052),
indicating that the proposed model is better than the original model. Moreover, both the Cox
and Snell R2 (0.237) and Nagelkerke R2 (0.350) values suggest that control variables (firm’s
characteristics) are vital to describe whether firms are publishing sustainability reports. The
Hosmer and Lemeshow test x 2 ( x 2 = 12.585) is insignificant (p = 0.127), indicating that
Model 1 fits the data and is better than the null model.
Model 2 which includes only the board attributes produces a x 2 coefficient of 70.018 and is
significant at 0.01, hence indicating that the board’s attributes can significantly discriminate
between the dependent variables. The 2LL and Pseudo R2 measures also suggest that
Model 2 is better than the constant only model. However, the Hosmer and Lemeshow test
x 2 (p = 0.070) is significant and that indicates the proposed model alone is not a good

Table V Logistic regression model fit statistics

Statistics Null model Model 1 Model 2 Model 3

Model coefficient x 2 108.075 70.018 144.001

Significance 0.000 0.000 0.000
2 Log likelihood 452.052 343.977 382.034 308.051
Cox and Snell R2 0.237 0.161 0.302
Nagelkerke R2 0.350 0.237 0.447
Hosmer and Lemeshow x 2 12.585 14.502 6.346
Hosmer and Lemeshow significance 0.127 0.070 0.609
Predictive accuracy 74.8 80.5 79.8 83.3
AIC 454.052 357.977 373.568 334.051
Notes: The null model is a constant only model. Model 1 includes only the control variables, Model 2
includes only the independent variables and Model 3 includes all the independent and control
variables

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 enough fit to the data. Values of predictive accuracy also confirm that Model 2 is weaker
than Model 1 (79.8 < 80.5), though it is better than the null model (79.8 > 74.8). Therefore,
these results suggest that a combination of Model 1 and Model 2 would give a better result
than the individual models. Model 3, which includes both independent and control
variables, indicates the highest value of model coefficient x 2 with a significance at 0.01,
while it decreases the 2LL to 308.051 from 452.052 in the null model. This implies that the
variables in the full logistic regression model (Model 3) are able to significantly discriminate
between sustainability disclosure firms and non-disclosure firms compared to the other
three models (including the null model). The same conclusion can be drawn from the results
of the Hosmer and Lemeshow test ( x 2 = 6.346, p = 0.609) and the predictive accuracy
(83.3). The reported pseudo R2 measures of the full logistic regression model indicate a
moderate variance in the dependent variable (Cox and Snell R2 = 0.302 and Nagelkerke
R2 = 0.447). Moreover, Akaike Information Criterion (AIC) also validates the above findings
by showing the smallest value (334.051), which affirms that Model 3 is the best fitting model
for the given set of data.
Apart from above mentioned tests, the operating characteristic curve (ROC) was examined
and this further validates the results produced by logistic regression analysis. The result
reported that the area under the curve (AUC) in the ROC is 0.860 with 95 per cent
confidence interval (0.860-0.900). Also, AUC is significantly different from 0.5, as the
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p-value is 0.020, meaning that the full logistic regression model proposed in this study
classifies the two groups as sustainability disclosure firms and non-disclosure firms better
than by chance. The larger ROC values are indicative of a better fit, whereas 0.8  ROC <
0.9 is considered excellent discrimination (Hosmer et al., 2013).
The results of the logistic regression models are presented in Table VI and the results
generated in Model 3 are used to test the hypotheses formulated in the study. The Wald
statistic results of Model 3 report that board size, board independence and board with
female directors are positively significant at 0.01. Accordingly, the null hypotheses that the
coefficients of these independent variables are equal to zero (0) are rejected. However, the
Wald statistics of the other three independent variables, namely, dual leadership, board
ethnicity and board ownership, are insignificant, suggesting that there is no significant
impact of these three variables on SR. Thus, the results do not support the hypotheses
proposed in relation to these variables. Above finding on the impact of board size on SR is
compatible with the finding reported by previous researchers (Ntim and Soobaroyen, 2013;
Said et al., 2009; Giannarakis, 2014), whereas the findings on independent directors are
consistent with those reported by Muttakin et al. (2015). The positive association of female
directorship with corporate disclosure has been confirmed and widely acknowledged
(Glass et al., 2015; Hafsi and Turgut, 2013; Said et al., 2009; Barako and Brown, 2008). The
positive influence of board size and higher proportion of independent directors on
sustainability disclosure have been confirmed by De Villiers et al. (2011). A similar finding
on board’s dual leadership structure was reported by Said et al. (2009), whereas the finding
of Shamil et al. (2014) on board ethnicity is consistent with the present finding. The findings
of this study did not show any significant influence of ownership on SR; Said et al. (2009) too
recorded a similar insignificant association between managerial ownership and corporate
social disclosure.
Among the control variables, both profitability and firm size significantly and positively
affected SR at 0.05 and 0.01 significance levels, respectively. These results are in line with
the results reported by Muttakin and Khan (2014). The coefficient of number of listed years
reported a negative and significant influence on SR at 0.05. This association implies that
newly listed companies are more likely to publish sustainability reports than older listed
companies (Exp (B) <1). This evidence is consistent with the findings of Shamil et al. (2014)
and Narges et al. (2014). In contrast, none of the other control variables show any
significant impact on SR. Haniffa and Cooke (2005) too obtained similar results showing that

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 Table VI Results of logistic regression models
Variables B SE Wald Sig. Exp(B)

Model 1
ROE 2.084 0.887 5.525 0.019 8.040
FSZ (Ln) 0.937 0.126 55.508 0.000 2.551
Age (Ln) 0.155 0.139 1.233 0.267 0.857
Industry 0.226 0.326 0.480 0.488 0.798
Leverage 0.143 0.516 0.077 0.782 0.867
MB 0.005 0.053 0.010 0.922 1.005
Constant 19.329 2.642 53.537 0.000 0.000
Model 2
Board size (Ln) 3.345 0.558 35.940 0.000 28.350
Board independence 4.503 1.074 17.577 0.000 90.269
Board leadership duality 0.191 0.327 0.341 0.559 0.826
Boards with female directors 0.276 0.256 1.163 0.281 1.318
Board ethnicity 0.622 0.291 4.586 0.032 0.537
Board ownership (%) 0.006 0.006 1.158 0.282 0.994
Constant 7.350 1.307 31.628 0.000 0.001
Model 3
Board size (Ln) 2.535 0.702 13.018 0.000 12.612
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Board independence 4.085 1.231 11.010 0.001 59.454

Board leadership duality 0.238 0.381 0.392 0.531 0.788
Boards with female directors 0.973 0.312 9.740 0.002 2.646
Board ethnicity 0.428 0.352 1.476 0.224 0.652
Board ownership (%) 0.010 0.007 1.700 0.192 0.990
ROE 2.485 0.923 7.251 0.007 12.002
FSZ (Ln) 0.777 0.140 30.761 0.000 2.176
Age (Ln) 0.445 0.156 8.125 0.004 0.641
Industry 0.450 0.368 1.497 0.221 0.638
Leverage 0.630 0.598 1.107 0.293 1.877
MB 0.021 0.053 0.151 0.698 0.980
Constant 22.204 2.992 55.088 0.000 0.000
Notes: n = 400; B = estimated coefficient; SE = standard error; Exp(B) = odds

industry and leverage had insignificant relationships with corporate social reporting. The
Wald statistic of MB ratio is also insignificant, suggesting that firm’s growth has no influence
on SR decision. Although this finding is in contrast with the findings reported by Frias-
Aceituno et al. (2013), a similar finding was reported by Kuzey and Uyar (2017).
To maintain the robustness of the results, one-period lag of all explanatory variables (with
the exception of dummy variables and firm age) was included in the models. This approach
has been used in previous studies (Dixon et al., 2015) to address the potential endogeneity
issue. To determine whether an endogeneity issue exists in the model, normality of the
residuals was also tested with the Kolmogorov–Smirnov (K–S) test. The result supports the
null hypothesis that the residuals are normally distributed (D, 400 = 0.106, p > 0.05).
Moreover, nonparametric correlation reveals an insignificant relationship between residuals
and the dependent variable (r = 0.200, p > 0.05). Thus, it is reasonable to conclude that
there is no endogeneity issue in the full logistic regression model. From all these analyses,
the robustness of the findings of the study is evident.

5. Conclusion
Drawing on the agency theory and resource dependence theory perspectives, this study
investigated the effect of board involvement in SR in 100 companies listed in the CSE, in Sri
Lanka. The results of binary logistic regression analysis revealed that board size, board
independence and representation of females on the board are positively and significantly

j CORPORATE GOVERNANCE j
 associated with sustainability disclosure. The findings of the present study are consistent
with previous findings and arguments put forward by the agency and resource dependence
theorists. The positive association between females on the board and sustainability
disclosure is compatible with the assumption made based on the resource dependence
theory. However, dual leadership structure, board ethnicity and board ownership were not
statistically significant with sustainability disclosure though they did show a slight negative
relationship with sustainability disclosure. These findings are contradictory with the notions
of existing theories, which did not support the hypotheses developed in the study. As in
other Asian countries, Sri Lankan companies enjoy a higher level of family ties and thereby
appointment of board members is often based on family relationships despite the lack of
adequate qualifications. This could discourage the contribution towards social works and
the sustainable development goal, while encouraging the profit maximization goal.
The board ethnicity also did not fall in line with the hypothesis, though a majority of the
sample boards manifested ethnic diversity. Sri Lanka being a multi-ethnic country,
heterogeneous boards are quite common. Thus, board ethnicity may not be a determinant
of sustainability disclosure choice in Sri Lankan firms as in other countries. Based on the
findings of this study, board involvement can be identified as a vital matter in determining
sustainability disclosure choice in the sample firms. Additional measures employed in this
study further validate this conclusion, suggesting there is a distinction between the
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sustainability disclosure firms and non-disclosure firms.

Apart from the above mentioned board related variables, three control variables have also
been identified as determinants of sustainability disclosure. In line with the views of agency
theorists, larger firms show a higher tendency to publish sustainability reports, most likely in
order to avoid agency problems and reduce the information asymmetry issue. Additionally,
firm profitability that measures the firm’s performance, reports a positive and significant
association with sustainability disclosure; at the same time a negative association between
listing age and sustainability disclosure was evident. The findings of this study draw
attention to management implications arising from board involvement, and this is of much
relevance to policy-makers in the Sri Lankan capital market and other capital markets in the
Asian region. The outcome of this study encourages firms to make a conscious attempt to
devise an effective internal governance mechanism that would inspire and persuade
policymakers to commit themselves to sustainability endeavors and reform their disclosure
practices accordingly. This study incorporated a great volume of company annual data,
which has been emphasized throughout the literature as a critical requirement for
generalizing the findings. Future researchers are encouraged to develop a sustainability
disclosure index that is good enough to capture all aspects of sustainability disclosure.
However, inclusion of firms that do not disclose sustainability-related information is essential
for the purpose of comparison and thus it is important to make sure not to exclude those
companies from the sample.

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About the author

Nayana Chandani Swarnapali Rathnayaka Mudiyanselage is Senior Lecturer attached to
the Department of Accountancy and Finance, Faculty of Management Studies, Rajarata
University of Sri Lanka, Mihintale, Sri Lanka. Currently, she is PhD Candidate at School of
Management, Huazhong University of Science and Technology, Wuhan, China. Her
background is mostly in teaching and research in financial accounting, cost accounting,
managerial accounting and management-related disciplines. Her research papers have
been published in various national and international conferences. Rathnayaka
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Mudiyanselage Nayana Chandanai Swarnapali can be contacted at: nayana_rjt@yahoo.

com

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