The Effect of Corporate Governance On Sustainability Disclosure

J Manag Gov (2012) 16:477–509
DOI 10.1007/s10997-010-9160-3
The effect of corporate governance on sustainability

disclosure
Giovanna Michelon • Antonio Parbonetti
Published online: 14 September 2010

Springer Science+Business Media, LLC. 2010
Abstract Drawing on stakeholder theory, this paper examines the relationship of

board composition, leadership and structure on sustainability disclosure. We discuss
that good corporate governance and sustainability disclosure can be seen as com-
plementary mechanisms of legitimacy that companies may use to dialogue with
stakeholders. Specifically we claim that, as disclosure policies emanate from the
board of directors, sustainability disclosure may be a function of the board attri-
butes: we investigate the relationship between different characteristics of the board
and sustainability disclosures among US and European companies. Our results show
that in order to explain the effect of board composition on sustainability disclosure
we need to go beyond the narrow and traditional distinction between insider and
independent directors, focusing on the specific characteristics of each director.
Keywords Board composition Sustainability disclosure

Community influential Organizational legitimacy
1 Introduction
According to stakeholder theory, it is critical for companies to enact stakeholder

engagement processes in order to establish and enhance the firms’ legitimacy to
operate. Organizational legitimacy, besides guaranteeing the inflow of capital, labor
and customers necessary for the viability of the company (Pfeffer and Salancik
1978; Neu et al. 1998), is also able to reduce possible product boycotts and other
G. Michelon A. Parbonetti (&)

Department of Economics and Management, University of Padova,
Via del Santo 33, 35123 Padova, PD, Italy
e-mail: antonio.parbonetti@unipd.it
G. Michelon
e-mail: giovanna.michelon@unipd.it
123
478 G. Michelon, A. Parbonetti
disruptive actions (Elsbach 1994). In this way, it helps the top management because
it provides a degree of freedom about how and where the business is conducted.
According to stakeholder theory, the disclosure of financial, social and
environmental information (i.e., corporate sustainability disclosure—CSD) is part
of the dialogue between a company and its stakeholders and it provides information
on a company’s activities that legitimise its behaviour, educate and inform, and
change perceptions and expectations (Gray et al. 1995; Adams and Larrinaga-
González 2007; Adams and McNicholas 2007).
Previous literature has investigated possible determinants of financial, social and
environmental disclosure, in particular focusing on corporate characteristics (such
as size, industry grouping and financial performance) or general contextual factors
(such as the country of origin, the socio-political and cultural context). Indeed, there
is an emerging debate on the possibility that other complex and various internal
contextual factors influencing disclosure practices (Gray et al. 2001). Adams (2002)
highlights that academic research has been lagging behind developments in practice
with respect to the internal context factors that may drive corporate disclosure and
calls for studies aimed at identifying aspects of governance structures that may
influence reporting practices.
While the effects of corporate governance on financial disclosure have received
considerable attention (Klein 2002; Anderson et al. 2004; Beekes et al. 2004), we
have much to learn about the impact of governance on voluntary disclosure and
especially sustainability disclosure (Haniffa and Cooke 2005). Based on previous
studies that claim that disclosure policies emanate from the board (Ho and Wong
2001; Gul and Leung 2004; Haniffa and Cooke 2005; Cheng and Courtenay 2006;
Cerbioni and Parbonetti 2007), we expect that the characteristics of the corporate
governance model adopted by the company are fundamental determinants of
companies’ disclosures.
The aim of this paper is to examine the relationship of board composition,
leadership and structure with sustainability disclosure. We argue that good corporate
governance and sustainability disclosure can be seen as complementary mechanisms
used by companies to enhance relations with stakeholders. Specifically, we claim
that sustainability disclosure may be a function of board attributes and we
investigate the effects of good corporate governance, controlling for other company-
specific characteristics, on sustainability disclosures among US and European
companies. In a departure from previous studies, we focus on US and European
companies and we address if specific directors characteristics affect sustainability
disclosure. Along with the well known agency theory classification of board
members in independent and executive directors, following Hillman et al. (2000)
and Markarian and Parbonetti (2007), we classify independent directors as being
community influential when they are retired politicians, academics, members of
social and non profit organizations.
The study examines the disclosures of 57 Dow Jones Sustainability Index (DJSI)
companies and a control group of companies belonging to the Dow Jones Global
Index (World1). In order to gather as full a picture as possible, the disclosure index
is obtained performing content analysis not only on annual reports, but also on other
kinds of stand-alone reports such as social, environmental and sustainability reports.
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The effect of corporate governance on sustainability disclosure 479
We classify sustainability disclosure into four groups—strategic, financial, envi-

ronmental and social information. Strategic and financial information have
relevance to investors and shareholders, while environmental and social disclosures
are aimed at a broader group of stakeholders than just shareholders. Thus, the
governance variables affecting disclosure choices of a company may vary by type of
information as well. The paper also examines how corporate governance affects the
choice of reporting media. Results will show that board composition measured as
the proportion of community influential members positively affects sustainability,
environmental, and strategic disclosure and with the choice to disclose in stand
alone reports.
The paper contributes to previous literature by providing evidence that corporate
governance affects the range of sustainability disclosures. In particular, we provide
evidence that the traditional distinction between independent and non independent
directors does not fully depict the variety of roles served by directors sitting on the
board.
Moreover, it offers insights also for practice. Results from our empirical
evidence suggest that, contrarily to the expectations, more independent directors
do not imply better and increased disclosure (OECD 2004). Therefore, corpo-
rate governance standard setters should also consider the various competences
of directors when asserting possible benefits of corporate governance on the
company’s transparency.
The remainder of the paper is structured as follows. The next section reviews the
literature on corporate governance and disclosure and, according to the stakeholder
theory perspective, it discusses how corporate governance affects sustainability
disclosure. The development of hypotheses is presented in Sect. 3. Section 4
describes the research method, followed by the presentation of results in Sect. 5.
Concluding remarks and suggestions for further research are presented in Sect. 6.
The main limitations of the study are discussed in the last section.
2 Theoretical framework
2.1 Corporate governance and disclosure
Previous researches on the effects of corporate governance on disclosure are mainly

based on agency theory (Jensen and Meckling 1976). According to Lambert (2001: 4)
agency theory is attractive to accounting researchers because it ‘‘allows us to
explicitly incorporate conflicts of interest, incentive problems and mechanisms for
controlling incentives problems’’. In this vein, previous studies on governance and
disclosure analyse how and if board composition and incentives plans reduce
information asymmetries, thus protecting shareholders interests.
Empirical findings show, pretty constantly over countries and time, that board
structure and composition improve the quality of corporate disclosure.
Beasley (1996) argues that poorly governed firms with powerful insiders and
CEOs, are more likely to be associated with higher levels of financial statement
fraud. Dechow et al. (1996) report similar findings for companies under SEC
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accounting enforcement actions. Chen and Jaggi (2000), in a study considering

companies listed in Hong Kong, find a positive association between the proportion
of non executive directors and the comprehensiveness of information in firms’
mandatory disclosure. Using a sample of US companies, Klein (2002) shows that
the presence of a majority of independent directors reduces the probability of
accounting frauds, while Peasnell et al. (2005), using a sample of UK companies,
show that the proportion of independent directors positively affect the quality of
earnings.
Summing up, previous researches have pointed out that board composition
affects the effectiveness of control on top management, thus reducing the
probability of frauds and earnings management, and increasing the quality of
mandatory disclosure. Nevertheless, results on voluntary disclosure are more
controversial.
Williamson (1984) provides a framework linking corporate governance and
disclosure quality. Based on that, Forker (1992) conducts a study on UK companies
and he finds that both the proportion of non-executives directors and the presence of
the audit committee do not affect the disclosure of share-option compensation in the
financial statement. Ho and Wong (2001), using an indirect measures of voluntary
disclosure based on analysts’ perceptions, are unable to confirm a significant
relation between the level of voluntary disclosure and board independence. Eng and
Mak (2003), examining the impact of board composition and ownership structure on
voluntary disclosure of 158 companies listed on the Singapore Stock Exchange,
show that board composition significantly and negatively affects voluntary
disclosure. In the same vein, Gul and Leung (2004) document a negative
relationship between board independence and voluntary disclosure.
Contrary to the above findings, Leung and Horwitz (2004) show that a positive
relationship exists between board independence and voluntary segment disclosure
for companies listed in Hong Kong. Cheng and Courtenay (2006), in a sample of
104 companies listed on the Singapore Stock Exchange, document a positive
relationship between board independence and voluntary disclosure. Moreover,
Cerbioni and Parbonetti (2007) point out that the proportion of independent
directors positively affects the level of voluntary disclosure for European biotech
companies.
These mixed and controversial empirical results could be explained by the
differences in the legal environments of companies, the differences in the disclosure
indexes used and the topics covered.
Although previous studies do not disentangle the issue of whether corporate
governance and disclosure act as complementary or substitute mechanisms of control,
they share the same agency-centred view according to which independent board
members should enhance corporate transparency in order to protect shareholders’
interests.
Adding up to previous literature, we analyse the relationship between corporate
governance and disclosure according to a broader view that encompasses a
stakeholders’ perspective rather than only the shareholders’ one. In this vein, we
aim at broadening corporate governance research by exploring how board
composition affects sustainability disclosure.
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2.2 Corporate governance and social and environmental disclosure
In this paper we merge two streams of research: one is on corporate governance, the
other one is on social and environmental disclosure. Both of them have been
extensively analyzed during past decades but just few studies (Haniffa and Cooke
2005) try to analyze the interplay between them. In doing so, we try to overcome the
‘‘inconclusive’’ and mixed results of the literature on the determinants of social and
environmental disclosure (Gray et al. 2001; Adams 2002).
Stakeholder theory1 provides a framework linking corporate governance and
sustainability disclosure (Huse and Rindova 2001; Driver and Thompson 2002;
Huse 2003), by suggesting that each enhances stakeholder engagement and thereby
organizational legitimacy (Unerman and Bennett 2004). According to Deegan
(2007) and Cho and Patten (2007), companies try to gain legitimacy by disclosing
social and environmental verifiable data and information. Pfeffer and Salancik
(1978) point out that outside non executive directors convey legitimacy to
corporations. In the same vein Hillman et al. (2000) suggest that each director
‘‘provides some type of legitimacy for the organization’’ (p. 241). Moreover, sound
systems of corporate governance have been addressed as sets of accountability
mechanisms that increase the level of legitimacy (Aguilera et al. 2006).
Organizational legitimacy is often constructed and maintained through the use of
symbolic actions (Dowling and Pfeffer 1975; Elsbach 1994; Neu et al. 1998) which
form part of the organization’s public image. Dowling and Pfeffer (1975: 127)
argue, for example, ‘‘the organization can attempt, through communication to
become identified with symbols, values, or institutions which have a strong base of
social legitimacy.’’ There exists anecdotic evidence that companies seek to appoint
as board members well distinguished directors in order to increase the social
legitimacy of the company.2
As noted by Mathews (1993: 69), ‘‘for an organization such as a corporation to
have the quality of legitimacy, it must demonstrate a value system which is
generally that shared by the wider community’’. In the same vein, Dowling and
Pfeffer (1975: 122) suggested that ‘‘organizations seek to establish congruence
between the social values associated with or implied by their activities and the
norms of acceptable behaviour in the larger social system of which they are a part.
Insofar as these two value systems are congruent we can speak of organizational
legitimacy. When an actual or potential disparity exists between the two value
systems, there will exist a threat to organizational legitimacy’’. Legitimacy theory
1
Social and environmental disclosure has been studied according to many theories: legitimacy theory;
political economy theory and stakeholder theory. Those theories share many similarities and overlap with
each other. In particular, according to legitimacy and stakeholder theories, a company is part of a broad
social system in which the company and the society influence each other. As suggested by Gray et al.
(1996), because of the overlap between stakeholder and legitimacy theory, to consider them as competing
theories would be wrong. Deegan and Blomquist (2006: 349–350) point out that the main difference
between the two theories is that ‘‘whilst legitimacy theory discusses the expectations of society in general,
stakeholder theory provides a more refined resolution by referring to particular groups within society’’.
Although such similarities, stakeholder theory fits particularly well in our analysis because community
influential board members serve as boundary spanners linking a company to specific stakeholders.
2
For example, an Italian listed company appointed as board member the past Pope’s spokesperson.
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points out that companies are operating in a constantly changing external

environment and they try to ensure that they behave within the bounds and norms
of the society (Brown and Deegan 1998). Organizational legitimacy can be
considered as a resource on which a company relies for survival (Dowling and
Pfeffer 1975). However, it is a resource that an organization can also impact or
manipulate (Woodward et al. 2001).
In this perspective, corporate disclosure policies are aimed at legitimizing the
company’s activities to stakeholders, given their diverse and various expectations.
Companies manage their legitimacy by signalling to stakeholders that their
behaviour is appropriate and desirable (Suchman 1995). Corporate sustainability
disclosure (CSD) represents a strategy companies can use to respond to the
expectations of society (Dowling and Pfeffer 1975; Guthrie and Parker 1989; Gray
et al. 1995). CSD is part of the dialogue between the company and its stakeholders
as it provides information to stakeholders on the social and environmental impacts
of corporate activities (Gray et al. 1995).
Recent literature recommends extending the theoretical paradigm behind corporate
governance to encompass a stakeholder and legitimacy perspective (Huse and
Rindova 2001; Tirole 2001; Huse 2003; OECD 2004; Webb 2004; Aguilera et al.
2006; Deakin and Whittaker 2007; Solomon 2007). In this vein Brennan and Solomon
(2008: 892) suggest that ‘‘one of the frontiers of corporate governance research is
represented by a gradual adoption and acceptance of theoretical frameworks which
seek to extend corporate accountability to non-shareholding stakeholder groups’’.
According to Unerman and Bennett (2004), stakeholder engagement is essential
to develop an understanding of stakeholders’ expectations and ‘‘good corporate
governance and accountability should focus on addressing these social, environ-
mental, economic and ethical expectations’’ (p. 685). Such a claim is based on the
assumptions that corporate boards act as boundary spanners (Pfeffer and Salancik
1978) and that corporate boards perform many roles at the same time (Zahra and
Pearce 1989). This permits them to manage external dependencies and to co-opt
important external resources (Hillman et al. 2000). Hillman and Dalziel (2003)
summarize four benefits provided by boards: advice and counselling (Mintzberg
1983; Lorsch and MacIver 1989), legitimacy (Selznick 1949), channels for
communicating information between external organizations and the company
(Hillman et al. 1999) and preferential access to commitments or support from
important stakeholders in the company’s environment (Hillman et al. 2001). As
such, directors play an important role in enhancing company reputation and
legitimacy by establishing relations with stakeholders. Thanks to their contacts and
connections with different stakeholder groups, directors can be viewed as resources
to companies’ management. By helping the organization in controlling resources
and choosing strategies, the board helps in reducing uncertainty. However, as stated
by Hillman et al. (2000), directors may do more than reduce uncertainty, as they
bring resources and legitimacy to the company (Gales and Kesener 1994). Within
this framework, the reputation of the members of the board in the community
enables the company to legitimate its actions and to mobilize external support and
resources, therefore enhancing organizational legitimacy (Provan 1980).
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Stakeholder theory
Stakeholder Engagement
Directors as source of Dialogue with
legitimacy stakeholders
Accountability
Corporate definition Sustainability
Governance D Disclosure
B C
A
Organizational Legitimacy
Fig. 1 The theoretical framework
With respect to organizational legitimacy and stakeholder engagement, we can

identify two different roles the board of directors may play with respect to corporate
governance. Besides being itself a mechanism of legitimacy and reputation, the
board also might enhance corporate disclosure towards stakeholders. Regarding
the former role, sound corporate governance can convey to the entire society the
information that the company is well managed, top managers properly oversee the
firm, and that stakeholders’ interests are taken into account. On the other hand,
corporate governance can play an important role in managing the provision of
information to stakeholders since it is the board of directors who enacts and
oversees disclosure strategies and policies in corporate reports (Gibbins et al. 1990;
Gul and Leung 2004; Haniffa and Cooke 2002, 2005).
Figure 1 depicts our theoretical framework. The stakeholder engagement process
enhances organizational legitimacy as it allows a correspondence between societal
expectations and company’s behavior (link A). Stakeholder engagement is a process
that can be carried out in different ways and with different modalities. Figure 1
depicts two of them; sustainability disclosure and corporate governance. Sustain-
ability disclosure indeed is part of the dialogue with stakeholders (1) through which
companies report on their economic, social and environmental disclosure. The
corporate governance model adopted by the company gives an indication about how
stakeholders’ interests are considered at the board level (2). As we have discussed
above, both governance and sustainability disclosure do have an impact on
organizational legitimacy (links B and C). Figure 1 highlights another important
linkage existing among the considered variables, i.e., the relationship between
corporate governance and sustainability disclosure (link D). Indeed, it is the board
of directors who decides the definition of the accountability of the company, thereby
affecting the sustainability disclosures reported to stakeholders. Following Gray
et al. (1996), we define accountability as the duty to provide an account or
reckoning of those actions for which one is held responsible. Such definition refers
to the wide range of responsibilities assigned to the corporate decision-makers and
the set of control systems to which they are subjected, beyond the traditional
financial accounts.
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The effects of boards’ attributes on sustainability disclosure, defined as the range

of information companies disclose to their stakeholders within the process of
engagement, should be studied with reference to the boards’ and directors’ roles
(Zahra and Pearce 1989), considering that, by establishing external links with
stakeholders and organizations, directors attract valuable resources vital to the
companies’ viability. In essence, directors must ‘‘reflect changing societal values in
shaping corporate identity because boards lack requisite power to bring about
desired changes in the role of the corporation’’ (Zahra and Pearce 1989: 304).
Although corporate governance and disclosure both influence the level of
legitimacy, they have been separately analyzed. Based on the above considerations
and given the absence of significant corporate governance variables in sustainability
disclosure studies, our pivotal idea is that important linkages should exist among
different mechanisms of legitimacy. Therefore, the aim of this paper is to
empirically test whether corporate governance and sustainability disclosure act as
complementary mechanisms of legitimacy and if this relation changes according to
the institutional context.
3 Hypotheses development
Corporate governance refers to the way in which companies are governed and
managers are accountable to the stakeholders of the companies (Dahya et al. 1996).
Selznick (1992: 290) suggests that ‘‘governance takes account of all the interests
that affect the viability, competence and moral character of an enterprise’’.
Moreover, the corporate governance system is the result of a series of interrelated
attributes (Zahra and Pearce 1989), all of which are relevant in order to ensure
sound governance. Based on the idea that corporate governance refers to a series of
overlapping mechanisms, we analyze the impact of board composition, character-
istics, structure and leadership on sustainability disclosure.
3.1 Board composition: independent directors
Pfeffer and Salancik (1978) note that board composition reflects the characteristics
of the environment in which the company operates, helping the firm to attract the
resources vital to viability and growth. Certo et al. (2001), studying the underpricing
phenomenon during IPOs, provide evidence that the reputation of the board
members does indeed enhance the credibility and reputation of the company they
serve. Increasing the presence of independent directors on the board helps to
assuring board independence from management, the board’s objectivity, its ability
to represent multiple perspectives on the role of the company within its
environment, and the mediation among different stakeholders. Independent
directors are seen as accountability mechanisms as their role is to help ensuring
that companies are pursuing the interests not only of shareholders but also of
stakeholders (Haniffa and Cooke 2005). Furthermore, independent directors are
seen as more able to respect with honor the obligations of the company and are
generally more interested in developing and maintaining the social responsibility of
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the company (Zahra and Stanton 1988) since doing so may enhance their prestige
and honor in society.
Because independent directors are less aligned with management, they may be
more inclined to encourage firms to disclose a wider range of information to
stakeholders, thus potentially conveying information to a broad set of stakeholders.
Tricker (1984) and Haniffa and Cooke (2005) claim that independent directors
advise on the public presentation of companies’ activities and provide pressure on
companies to engage in sustainability disclosure in order to ensure congruence
between organizational decisions and actions and societal values and corporate
legitimacy. Hence, we present our first research hypothesis:
H1 All being equal, sustainability disclosure is positively associated to the
proportion of independent directors on the board.
3.2 Board characteristics: community influential members
Previous research on governance and voluntary disclosure mainly analyzes the role
played by independent directors (Chen and Jaggi 2000; Haniffa and Cooke 2005).
According to Pfeffer and Salancik (1978: 145 and 161) non executive board
members provide four benefits: (a) they bring specific expertise and ability; (b) they
represent channels for communicating information; (c) they aid in obtaining
commitments or support from important stakeholders; and (d) they provide
legitimacy to the company. Baysinger and Hoskisson (1990) suggest that
independent directors are not homogeneous in terms of specific skills, knowledge,
and expertise. Goodstein and Boeker (1991) argue that board composition will
motivate managers to adopt specific actions and strategies. In this vein we argue that
the unique individual characteristics of board members contribute differently to
board functioning.
In order to analyze the effect that the diversity in skills, expertise and background
of directors has on sustainability disclosure, we consider community influential
board members.
Community influential members are non-executive directors that provide service
to the firm in terms of networking and reputation. They supply linkages with society
beyond the competitive environment of the company. Typically, community
influential members are retired politicians, academics, members of social organi-
zations, etc. (Baysinger and Zardkoohi 1986; Hillman et al. 2000). Community
influentials do not provide expertise in the monitoring role of companies’ boards,
but rather bring to the boards experience and connections to community groups and
organizations (Baron 1995), like movements or social interest groups. As stated by
Hillman et al. (2000: 242), ‘‘these directors can provide valuable non-business
perspectives on proposed actions and strategies. Their expertise and influence with
the community forces can help the firm to avoid costly mis-steps when its actions
might inadvertently conflict with the interests of those groups’’.
Since community influential directors bring a non-business perspective in
board discussions and decisions, they ensure to the board a better knowledge
about stakeholders’ needs and expectations. Their role is twofold: (1) they ensure
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that considerations about stakeholders’ interests are taken into account during
corporate decision making processes (Selznick 1992), thus conveying the
message to the stakeholders that the organization is acting on collectively-
valued purposes in a proper and adequate manner (Meyer and Rowan 1977);
(2) by establishing relationships with social organizations and stakeholders,
community influential members enhance board awareness about stakeholders
interests and values.
Community influentials, for example, may help a company to detect and react to
a legitimacy gap. Such gap arises because a company acts or it is perceived as
having acted in a way not consistent with the expectations of stakeholders. Because
of their relation with social organizations, community influentials understand
stakeholders’ needs and expectations, thus playing a role in orienting the
company’s behavior. As a consequence, they might promote corporate sustainabil-
ity disclosure in order to ensure congruence between organizational decisions and
actions and societal values. This leads us to the formulation of the second
hypothesis:
proportion of community influential board members.
3.3 Board structure: presence of a corporate social responsibility (CSR)

committee
A company’s board structure, given that it defines its internal organization and
division of activities among committees, affects the directors’ involvement in
shaping the mission and the strategy of the company (Zahra and Pearce 1989). As
such, a company can implement various programs and activities at the board level in
order to better manage stakeholder engagement and manage sustainability and
social responsibility issues. For example, it can appoint a manager to be in charge of
social responsibility issues or establish a CSR committee. The presence of a CSR
committee or of a person responsible for sustainability issues at the board level
indicates the company has an active strategic posture with regards to stakeholders
(Ullman 1985). A CSR committee typically is in charge of reviewing policies and
conducts with respect to the company’s principles and commitment on sustainability
issues and it is involved in the reporting process of social and environmental
information (Post et al. 2002). Since the functions of a CSR committee include
ensuring the quality of the stakeholder engagement process and of the sustainability
reporting policies of the company, the establishment of a CSR committee can be
viewed as a means of dealing with stakeholders and facing the legitimacy gap
problem. The existence of such a committee may be seen as an effective monitoring
device for improving the range of disclosures provided to stakeholders. Therefore,
we can state the third hypothesis:
presence of a CSR committee.
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3.4 Board leadership: CEO duality
CEO duality means that the CEO of a company also holds the board chairperson
position. Forker (1992: 117) claims that ‘‘a dominant personality commanding a
company may be detrimental to the interest of shareholders’’. Combining the role of
CEO and chairman compromises the desired system of checks and balances and
represents a conflict of interests, thus reducing the level of accountability. Because
separating the two roles can mean that ‘‘the chairman has both the time and
inclination to create the conditions for other non-executives to be effective’’
(Roberts et al. 2005: 18), having CEO duality constrains board independence.
Further, CEO duality ‘‘signals the absence of separation between decision control
and decision management’’ (Fama and Jensen 1983: 314). Finally, duality makes a
frank and honest discussion of firm performance difficult (Carver 1990).
Empirical research on the impact of CEO duality on voluntary disclosure has
been inconclusive. Both Ho and Wong (2001) and Cheng and Courtenay (2006)
found no association between CEO duality and voluntary disclosure while Gul and
Leung (2004) documented a negative association between CEO duality and the
extent of voluntary disclosure. Based on Forker (1992), Gul and Leung (2004) and
Roberts et al. (2005), we argue that CEO duality reduces overall accountability, thus
making companies less transparent not only for shareholders but for all relevant
stakeholders. Hence we hypothesize that:
H4 All being equal, sustainability disclosure is negatively associated with CEO
duality
4 Research method
4.1 Sample design and data collection
Our study examines the disclosures of 57 Dow Jones Sustainability Index (DJSI)
companies and of a control group of companies matched on country, industry and
size belonging to the Dow Jones Global Index (World1) for year 2003. We use a
stratified random procedure to select our sample firms. First, we define as a level
stratum the regional index which assembles companies from homogenous countries:
Europe and USA, therefore we exclude companies quoted in other geographic areas.
Then, the sample is drawn using a two steps stratified procedure. Inside each of the
two groups, the listed companies are stratified according to economic sector and
market capitalization at 31-12-2003 (as a proxy for size). The Economic Sectors are
Basic Material, Consumer Cyclical, Consumer Non Cyclical, Energy, Financial,
Healthcare, Industrial, Technology, Telecommunications and Utilities. We adopt a
systematic stratified sampling procedure, where the initial amount of companies is
238, and then we select one company every 3 commencing with 1.
The companies for the control group are searched into Dow Jones Global Index,
with reference only to European and American companies, since the DJSI
companies are also included in this index. The companies that for size, industry and
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Table 1 Sample composition

Industries Number of companies
Panel A: Companies by industries

Basic material 8
Consumer 28
Consumer cyclical 22
Energy 4
Health care 16
Industrial 20
Technology 8
Telecommunications 2
Utilities 6
Total 114
Country Number of companies
Panel B: Companies by country of origin

Denmark 4
Finland 4
France 8
Germany 14
Netherlands 10
Sweden 4
Spain 2
Switzerland 4
United Kingdom 30
United States 34
Total 114
stock exchange, match with one in the DJSI build up the control sample. Out of this
sample of 78 companies of the DJSI and 78 companies of the DJGI, 21 companies
whose financial year-end is not December 31st are deleted from the analysis to
assure comparability of the results, leaving a final sample of 57 DJSI companies and
57 match companies. Table 1 shows the distribution of the companies in the sample
among industries and countries.
We purposefully choose the year 2003 for our research. Recent papers show that
mimicking policies have to be considered among the determinants of corporate
disclosure. In particular, corporate disclosure behavior is affected by the disclosure
practices of the biggest companies and the leaders in disclosure in the same industry
(Menini 2009). Moreover, Aerts et al. (2006: 323) suggest that there is ‘‘substantive
evidence that imitation plays a significant role in corporate environmental
reporting’’. As a consequence, in order to analyze the relationship between board
of directors and disclosure, we select a year soon after the release of the Global
Reporting Initiative (GRI) guidelines, thus isolating such relationship from other
confounding events as mimicking behaviors. We thus perform a ‘‘quasi’’ natural
experiment where the issuance of the GRI guidelines can be considered as an
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external shock and we measure if corporate reaction to this shock in terms of

disclosure is driven or not by board composition.
Because of that, testing our hypotheses using 2003 data is useful in order to better
understand the role of corporate governance on sustainability disclosure. By
including more years we would be unable to disentangle the proper and specific
contribution of corporate governance, since other confounding events and factors
would play a role in determining corporate disclosure practices.
4.2 Measurement of variables
4.2.1 Dependent variable: corporate sustainability disclosure
Sustainability disclosure (CSD) is determined using the content analysis method-

ology, a line of research widely adopted in order to enable reliability and valid
inference from narrative data in compliance with their context. Content analysis is a
method of codifying the text (or content) of a piece of writing into various groups or
categories depending on the selected criteria. Following coding, quantitative scales
are derived to permit further analysis. In one form or another, this method has been
widely adopted in previous social and environmental disclosure studies (Abbott and
Monsen 1979; Guthrie and Mathews 1985; Guthrie and Parker 1990; Hackston and
Milne 1996).
The content analysis is performed over the annual, social, environmental and
sustainability reports of the companies (of year 2003). The notes to the financial
statements are not included in the analysis because they are mandatory and we are
interested in analyzing voluntary disclosure. Research on disclosure has primarily
focused on disclosure in annual reports because they are the official public
information documents and are considered the most important source of a
company’s information by external users (Lang and Lundholm 1993). Nevertheless,
social and environmental reports are voluntary reports dedicated to the disclosure of
social and environmental information and therefore they may contain both
qualitative and quantitative information on the relationships with all stakeholders3
(Mathews 1993; Zadek et al. 1997; Adams 2004).
The reporting framework for the content analysis integrates the Global Reporting
Initiative approach (2002) and that of Epstein and Birchard (2000).
The sentence is chosen as the recording unit to overcome problems related to the
use of words or portions of pages that add unreliability. Thus, each sentence is
matched with all the 178 sustainability disclosure indicators and it is coded as
follows: with a score of 0, if providing no information; with a score of 1 if
disclosing information. Disclosure is measured by counting the frequency of
sustainability indicators: the same sentence can disclose more than one indicator,
while if the same information is repeated in the report, this information is only
considered once. Our measure of disclosure permits to capture the variety of the
information provided instead of the pure quantity. The method used to gather
3
We did not consider disclosure on the website because the content analysis cannot be performed
reliably and consistently given that we cannot track when the web-pages are published or updated.
123
the information has many weaknesses,4 but it seems particularly adequate to capture
the range of coverage of a determined set of information which could be quite
important when it comes to measure sustainability disclosure. Sustainability
disclosure should indeed address a wide variety of stakeholders with different
informational needs. By counting the number of sentences rather than the range of
coverage we would capture a situation in which the company fully satisfy a category
of stakeholders while leaving all others probably upset. As a consequence we decide
to use a disclosure measure which weights more the variety of the information than
the pure quantity.5 Moreover, having 178 different items permits to capture at least
partially the quantity of disclosure provided.6
One of the authors performed all the coding activity.7 In order to ensure
reliability and validity of the data collected, the same author repeated the coding
procedure over a sub-sample 3 months later than the first coding. This generated a
Cronbach’s alpha of 0.96 (Krippendorf 1980), indicating internal consistency in the
coding procedure.
The framework is structured as a set of indicators and elements belonging to four
categories of information: strategic, financial, environmental and social. The
strategic dimension contains the description of the reporting company’s strategy
with regard to sustainability, including a statement from the CEO, overview of the
reporting structure and operations and of the scope of the report, description of
organizational structure, policies, and management systems, including stakeholder
engagement efforts. The financial dimension is structured as an integration between
the indicators suggested by Epstein and Birchard (2000) and by the Global
Reporting Initiative (2002), considering both economic and operational indicators.
The environmental and social dimensions follow the GRI guidelines.
4
Haniffa and Cooke (2005) note that the use of dichotomous procedure is considered a limitation,
because it treats disclosure of one item as equal to a company that makes 50 disclosures and does not
indicate how much emphasis is given to a particular content category. Nevertheless the advantage is that
it gives coders less choice, thus being more reliable (Hackston and Milne 1996; Raffounier 1995).
Moreover, the dichotomous coding allows us to gather the variety of information disclosed and it does not
depend on how the sentence is constructed—which may be relevant for an international comparison.
Examples of our items are: ‘‘Percentage of materials used that are wastes (processed or unprocessed) from
sources external to the reporting organization’’; ‘‘Total recycling and reuse of water’’; ‘‘Greenhouse gas
emissions’’; ‘‘Employee benefits beyond those legally mandated’’; ‘‘Standard injury, lost day, and
absentee rates and number of work-related fatalities’’, ‘‘Awards received relevant to social, ethical, and
environmental performance’’, etc. We will discuss further limitations of our disclosure index in the last
paragraph.
5
Assume that company A presents along with some good practices some bad practices. The company
could provide a great number of pieces of information on good practices avoiding completely to mention
the bad practices, thus satisfying a specific group of stakeholders. Assume now that the company B
provides a lower number of pieces of information but at the same time it covers all the topics. It is not
clear which is the best disclosure behavior.
6
As the number of items increases the difference between a dichotomous procedure and the count of the
number of sentences decrease. This explains why we include in the list of items also some suggested by
Epstein and Birchard (2000).
7
The coding activity may suffer from two different consistency problems: i) across coders, ii) over time.
Therefore, by having only one coder we are able to avoid the first problem, thus improving the overall
reliability of the disclosure index.
123
Table 2 Disclosure indexes

Disclosure Type of Description of items
index information
STRINF Strategic Background information of the company, management’s objectives,

business strategy and governance model, competitive environment
and principal products and markets served
ECINF Economic Financial and operational information and data
ENVINF Environmental Environmental impacts of companies’ activities, with focus on:
materials, energy, water, biodiversity, emissions
SOINF Social Labor practices, human rights, health and safety, product
responsibility
CSD Sustainability Sum of the above disclosure indexes
REPINF Sustainability Range of sustainability disclosures in social, environmental,
and sustainability reports
ARINF Sustainability Range of sustainability disclosure in the annual report
We employ different measures of sustainability disclosure. CSD is the total

disclosure index; STRINF is the disclosure index on background information of the
company, such as management’s objectives, business strategy and governance
model, the competitive environment and the principal products and markets served;
ECINF is the disclosure index on financial and operational information; ENVINF is
the disclosure index regarding information on environmental impacts of companies’
activities; SOINF is the disclosure index on social aspects of the company’s
activities such as labor practices, human rights, and product responsibility. REPINF
is the disclosure index for information reported in stand-alone reports while ARINF
is the disclosure index for information reported in annual reports (Table 2).
4.2.2 Governance related variables
Data on board composition are collected from the firms’ annual reports. These
annual reports provided the name and the title of directors (i.e., executive or
independent directors), a description of their role within the board (i.e.,
membership in a committee) and, in general, a brief biography. The presence of
CEO duality (CEO) is measured by a dummy variable that takes the value of 1 if
the CEO is also the chairman of the board and 0 otherwise. The board composition
(IND) is measured by the proportion of independent directors and by the
proportion of community influential members (CI). CI members are identified
using the brief biographical note that is reported in the annual report of the
company or, in the cases of US companies, in the proxy statement. Community
influential members can be classified as: academicians, politicians (including
retired politicians), army officers (including retired army officers) and members or
directors of social/non profit organizations. Table 3 shows some examples of the
biographical information reported by companies and the corresponding classifi-
cation assigned.
123
Table 3 Community influential (CI) directors—examples

Director’s biography Coded as
ALCOA Non profit/Social

Kathryin S. Fuller, 57, […] President of the World Wildlife Fund US (WWF), organization CI
an indipendent organization dedicated to the conservation of nature
ALCOA Politician CI
Ernesto Zedillo 52, […] Former president of Mexico, elected in 1994
and served until 2000; held various positions in the Mexican
Federal Government from late 1987 to his elections
EASTMAN KODAK Academician CI
Laura D’andrea Tyson, 56 is Dean of London Business School, a position she
accepted in January 2002. She was formerly the Dean of the Walter A. Haas School
of Business at the University of California, Berkeley, a position she held since July
1998. Previously she was professor of and holder of the Class of 1939 Chair in
Economics and Business Administration at the University of California, Berkeley a
position she held from January 1997 to July 1998. […]
GLAXOSMITHKLINE Academician CI
Dr. Lucy Shapiro, aged 63. […] She is Ludwig Professor of Cancer research in the
Department of Developmental Biology and Director of the Beckman Center for
Molecular and Genetic Medicine at the Stanford University School of Medicine
IBM Non profit/Social
Joan E. Spero, President of Doris Duke Charitable Foundation organization CI
MERRILL LYNCH Army CI
Joseph W. Prueher, US Ambassador to the People’s Republic of China from 1999 to
2001; Consulting professor to the Stanford-Harvard Preventive Defense Project;
US Navy Admiral (Retired), Commander-in-Chief of US Pacific Command from
1996 to 1999
SKYPHARMA Army CI
Air Chief Marshal Sir Michael Beavis—aged 74 […] Sir Michael entered the Royal
Air Force in 1947 and retired in 1987, his last appointment being Deputy
Commander-in-Chief Allied Forces Central Europe, NATO
UNILEVER Politician CI
The Rt Hon The Lord Brittan of Spennithorn QC, DL Nationality: British. Aged 64.
Appointed 2000 […] Member of the European Commission and Vice President 89/
99. Home Secretary 83/85 and Secretary of State for Trade and Industry 85/86
UNILEVER Politician CI
Baroness Claker of Wallasey. Nationality: British. Aged 61. Appointed 1998 […]
UK Minister of State at the Foreign and Commonwealth Office 86/97. Created Life
Peer in 1992. Member of the Parliament for Wallasey 74/92
Table 4 provides the classification and distribution of CI in the sample

companies. The board structure is measured by two dummies, the first dummy
variable equals to 1 if the company has identified a director in charge of social
responsibility issues, 0 otherwise (CS_Res), the second variable measures
whether boards have a committee in charge of sustainability matters: it takes
the value of 1 if the company has a social responsibility committee, 0 otherwise
(CS_Et).
123
Table 4 Classification and

Classification Total %
distribution of CI
Academicians 54 28.13
Politicians 38 19.79
Army officers 4 2.08
Non profit/social organization 96 50.00
Total CI 192 100
The independent variables representing the constructs are given in Table 5.
4.2.3 Control variables
We select control variables on the basis of prior studies of corporate disclosure.

Corporate size has persistently been found to be significantly and positively
associated with disclosure, suggesting that larger companies follow higher
disclosures (Kelly 1981; Trotman and Bradley 1981; Cowen et al. 1987; Belkaoui
and Karpik 1989; Patten 1991, 1992; Hackston and Milne 1996). We measure size
as the logarithm of total sales (SIZE). We measure profitability (ROE) as the return
on equity. Following Ahmed and Courtis (1999), we control for leverage (LEV)
measured as the ratio of total debt to shareholders equity. Literature states that high
systematic risk companies use social disclosure as means of risk reduction, so that
the association is negative (Richardson et al. 1999; Trotman and Bradley 1981;
Roberts 1992). We measure risk (BETA) using the beta coefficient. Another factor
that has been identified as possibly influencing social disclosure is the age (AGE) of
the company (Roberts 1992; Haniffa and Cooke 2002). Companies listed
internationally face additional pressures for the disclosure of information (Cooke
1989; Meek et al. 1995; Haniffa and Cooke 2005). We measure the listing status
(LISTING) as a dummy variable equal to 1 if the companies are listed in more than
one stock exchange and 0 otherwise. Following Lipton and Lorsch (1992) and
Jensen (1993), we control for board size (NBOD). The companies belonging to the
DJSI are selected on the basis of their financial, social and environmental
performances. Since reputation can be conceived as the relative standing of a
company among its counterparts (Deephouse and Carter 2005), the process through
which companies are included in the index provides a reasonable assurance of their
higher reputation with respect to their peers, allowing for a comparison of CSD
practices. Therefore, we measure reputation (DJSI) as a dummy variable equal to 1
if the company belongs to the DJSI, and 0 otherwise. Finally we control for the
impact of country and industry on disclosure.
4.3 Data analysis
We considered the OLS technique to be the most suitable for testing our hypotheses
and the following models are specified:
123
Table 5 Constructs of the independent and control variables

Explanatory variables Measurement
Independent directors (IND) Proportion of independent directors

CEO duality (CEO) Dummy variable equal to 1 if CEO is also chairman, 0 otherwise
Community influential Proportion of community influential members of board of directors
members (CI)
Corporate social responsibility Dummy variable equal to 1 if company has identified a person in
responsible (CS_Res) charge of social responsibility issues, 0 otherwise
Corporate social responsibility Dummy variable equal to 1 if company has a social responsibility
committee (CS_Et) committee, 0 otherwise
Board of directors (NBOD) Number of members
Reputation (DJSI) Dummy variable equal to 1 if company belongs to the DowJones
sustainability index, 0 otherwise
Profitability (ROE) Return on equity
Size (SIZE) Natural logarithm of net sales
Leverage (LEV) Total debt/shareholders equity
Market risk (BETA) Beta: systematic market risk
Age (AGE) Company age
Listing status (LISTING) Dummy variable equal to 1 if multiple listings, 0 if single listing
Country of origin (COUNTRY) 9 Dummies (Denmark, Finland, France, Germany, Netherlands,
Spain, Sweden, Switzerland, UK)
Industry type (INDUSTRY) 8 Dummies (basic material, consumer cyclical, energy, health care,
industrial, technology, telecommunication, utilities)
Disclosure Index ¼ a0 þ a1 IND þ a2 CEO þ a3 CI þ a4 CS Res þ a5 CS Et

þ a6 NBOD þ a7 DISJ þ a8 ROE þ a9 SIZE þ a10 LEV þ a11 BETA þ a12 AGE
þ a13 LISTING þ a14i COUNTRYi þ e15i INDUSTRYi þ e
We use as dependent variables the following seven indexes of disclosure:
CSD total disclosure index on sustainability disclosure
SOINF total social disclosure
ENVINF total environmental disclosure
ECINF total economic disclosure
STRINF total strategic disclosure
REPINF total sustainability disclosure in the social, environmental and
sustainability reports
ARINF total sustainability disclosure in the annual report
All other variables are defined as follows:
IND proportion of independent directors
CEO dummy variable equal to 1 if CEO is also chairman, 0 otherwise
CI proportion of community influential members of board of directors
CS_Res dummy variable equal to 1 if company has identified a director in
charge of social responsibility issues, 0 otherwise
123
CS_Et dummy variable equal to 1 if company has a social responsibility

committee, 0 otherwise
NBOD number of board members
DJSI dummy variable equals to 1 if company belongs to the DowJones
Sustainability Index, 0 otherwise
ROE return on equity for year 2003
SIZE company size, measured as Logarithm of sales
LEV leverage, measured as Total Debt/Shareholders Equity
BETA market risk as measured by b
AGE company age
LISTING dummy variable equals to 1 if company is listed internationally, 0
otherwise
COUNTRY 9 dummies (Denmark, Finland, France, Germany, Netherlands, Spain,
Sweden, Switzerland, UK)
INDUSTRY 8 dummies (basic material, consumer cyclical, energy, health care,
industrial, technology, telecommunication, utilities)
5 Empirical results
5.1 Descriptive statistics
Table 6 describes our sample of companies in terms of dependent, independent and

control variables. On average, companies disclose 49 items of sustainability
information (CSD). The highest total score is 128 (compared to the highest possible
score of 178) and is performed by an American company, which belongs to the
control sample, while the highest total disclosure index of the DJSI companies is
performed by a European company. On average companies disclose more items of
information relating to the general strategic background of the company (mean for
STRINF is 19.1) and to financial activities (mean for ECINF is 14.9) and only
marginally on social and environmental activities (means for SOINF and ENVINF
are 9.0 and 6.2, respectively). Moreover, the disclosure of information regarding the
strategic setting and the financial activities is a common practice across the
companies of the sample. With the exception of economic information, all means of
the disclosure indexes are significantly higher (t-test at 5% significance level) for the
DJSI companies. The mean of ARINF (the disclosures reported in the annual report)
is 19.5 and the mean for REPINF is 29.6. On average, companies disclose more
sustainability information in social, environmental, and sustainability reports than in
the annual report. However, the median values of the two variables show that the
higher average of REPINF refers to a smaller number of companies, indicating that
the use of stand-alone reports is not a common practice among the companies
included in the sample.
As regards the independent variables, in 32% of cases (36 companies) the CEO is
also the chairman of the board. The mean for the IND variable (proportion of
independent directors) is 61.7%, i.e., on average more than half of the board is made
123
Table 6 Descriptive statistics on selected variable

Variable Mean SD Min p25 Median p75 Max Observations
CSD 49.184 25.852 15.000 26.000 44.000 67.000 128.000 114

SOINF 9.000 8.505 0.000 2.000 7.000 14.000 40.000 114
ENVINF 6.246 6.721 0.000 0.000 4.500 11.000 29.000 114
ECINF 14.851 5.284 2.000 11.000 15.000 18.000 29.000 114
STRINF 19.088 8.662 2.000 12.000 18.000 26.000 40.000 114
REPINF 29.640 34.361 0.000 0.000 3.500 55.000 125.000 114
ARINF 19.544 12.699 0.000 11.000 19.000 28.000 59.000 114
IND 0.617 0.266 0.000 0.462 0.625 0.833 1.000 111
CEO 0.325 0.470 0.000 0.000 0.000 1.000 1.000 114
CI 0.142 0.159 0.000 0.000 0.111 0.222 0.818 114
CS_Res 0.202 0.464 0.000 0.000 0.000 0.000 3.000 114
CS_Et 0.061 0.241 0.000 0.000 0.000 0.000 1.000 114
NBOD 7.044 3.733 0.000 5.000 7.000 9.000 25.000 114
DJSI 0.500 0.502 0.000 0.000 0.500 1.000 1.000 114
ROE 18.982 60.237 -12.300 4.000 11.400 21.600 58.000 114
SIZE 22.588 1.712 16.100 21.500 22.700 23.800 26.000 114
LEV 1.841 0.394 0.815 0.350 0.700 1.540 22.830 114
BETA 1.051 0.597 0.040 0.620 1.020 1.270 3.710 114
AGE 97.605 62.643 5.000 42.000 93.500 133.000 292.000 114
LISTING 0.360 0.482 0.000 0.000 0.000 1.000 1.000 114
CSD total disclosure score on sustainability disclosure, SOINF total social disclosure, ENVINF total
environmental disclosure, ECINF total economic disclosure, STRINF total strategic disclosure, REPINF
total sustainability disclosure in the social, environmental and sustainability reports, ARINF total sus-
tainability disclosure in the annual report, IND proportion of independent directors, CEO dummy variable
equal to 1 if CEO is also chairman, 0 otherwise, CI proportion of community influential members of
board of directors, CS_Res dummy variable equal to 1 if company has identified a person in charge of
social responsibility issues, 0 otherwise, CS_Et dummy variable equal to 1 if company has a social
responsibility committee, 0 otherwise, NBOD number of board members, DJSI dummy variable equals to
1 if company belongs to the DowJones sustainability index, 0 otherwise, ROE return on equity for year
2003, SIZE company size, measured as Logarithm of sales, LEV leverage, measured as total debt/
shareholders equity, BETA market risk, AGE company age, LISTING dummy variable equals to 1 if
company is listed internationally, 0 otherwise
up of independent directors. The mean proportion of community influential (CI)

members is 14% and the 75th percentile is 22%. Only 20.2% have established a
corporate social responsibility committee (CS_Et), whereas 6% identify a person in
charge of such issues (CS_Res).
Table 7 presents the Pearson correlations matrix between the dependent and
independent variables. Community influential directors are positively correlated to the
total, environmental and strategic disclosure indexes. CEO duality is negatively
correlated to STRINF at the 5% significance level. The presence of a director in charge
of social and responsibility issues is positively correlated with disclosure in the annual
report. The other independent variables are not significantly correlated to the
123
Table 7 Pearson correlation
Variables CSD SOINF ENVINF ECINF STRINF REPINF ARINF IND CEO CI
SOINF 0.938* 1
ENVINF 0.889* 0.819* 1
ECINF 0.743* 0.619* 0.516* 1
STRINF 0.920* 0.805* 0.758* 0.600* 1
REPINF 0.950* 0.908* 0.883 0.646* 0.863* 1
ARINF -0.521* -0.536* -0.570* -0.224* -0.448* -0.761* 1
IND 0.033 0.020 0.076 0.033 -0.002 0.088 -0.170 1
CEO -0.130 -0.091 -0.076 -0.030 -0.222** -0.112 0.034 0.232** 1
COM_INFL 0.219** 0.152 0.320* 0.087 0.202** 0.234** -0.191** 0.219* 0.144 1
CS_Res -0.053 -0.104 -0.048 -0.048 0.010 -0.154 0.310* -0.034 -0.177 0.131
CS_Ethics 0.084 0.139 0.100 0.004 0.035 0.080 -0.044 0.191** 0.271** 0.185**
NBOD 0.233** 0.232** 0.217** 0.261* 0.140 0.181 -0.015 -0.321* -0.018 -0.055
DJSI 0.311* 0.269* 0.270* 0.178 0.346* 0.349* -0.309* 0.138 0.019 0.086
ROE -0.021 -0.014 -0.043 -0.017 -0.005 -0.006 -0.025 -0.087 0.137 0.048
The effect of corporate governance on sustainability disclosure
SIZE 0.321* 0.332* 0.230** 0.302* 0.270* 0.318* -0.201** 0.127 0.359* 0.138
LEV 0.179 0.154 0.065 0.256* 0.176 0.143 -0.020 0.153 -0.012 0.029
BETA 0.048 0.007 0.026 -0.003 0.119 0.040 -0.010 0.019 -0.102 -0.011
AGE 0.119 0.081 0.142 0.102 0.104 0.117 -0.074 0.091 -0.057 0.037
LISTING 0.144 0.119 0.093 0.052 0.211** 0.134 -0.068 -0.010 -0.207** 0.078
497
123
Table 7 continued
498
Variables CS_Res CS_Et NBOD DJSI ROE SIZE LEV BETA AGE
123
SOINF
ENVINF
ECINF
STRINF
REPINF
ARINF
IND
CEO
COM_INFL
CS_Res 1
CS_Ethics -0.118 1
NBOD 0.061 0.001 1
DJSI -0.183 -0.046 0.195** 1
ROE -0.068 -0.030 0.077 0.118 1
SIZE -0.323* 0.222** 0.335* 0.296* -0.009 1
LEV 0.159 0.160 0.220** 0.004 -0.137 0.247* 1
BETA 0.035 0.058 -0.026 0.094 -0.124 0.045 0.281* 1
AGE 0.119 0.056 0.180 0.175 0.097 0.156 0.180 0.019 1
LISTING 0.189** 0.039 -0.009 -0.018 -0.005 -0.025 0.129 0.123 0.148
CSD total disclosure score on sustainability disclosure, SOINF total social disclosure, ENVINF total environmental disclosure, ECINF total economic disclosure, STRINF total
strategic disclosure, REPINF total sustainability disclosure in the social, environmental and sustainability reports, ARINF total sustainability disclosure in the annual report, IND
proportion of independent directors, CEO dummy variable equal to 1 if CEO is also chairman, 0 otherwise, CI proportion of community influential members of board of directors,
CS_Res dummy variable equal to 1 if company has identified a person in charge of social responsibility issues, 0 otherwise, CS_Et dummy variable equal to 1 if company has a social
responsibility committee, 0 otherwise, NBOD number of board members, DJSI dummy variable equals to 1 if company belongs to the DowJones Sustainability Index, 0 otherwise,
ROE return on equity for year 2003, SIZE company size, measured as Logarithm of sales, LEV leverage, measured as total debt/shareholders equity, BETA market risk, AGE company
age, LISTING dummy variable equals to 1 if company is listed internationally, 0 otherwise
* Correlation is significant at the 0.01 level (2-tailed); ** correlation is significant at the 0.05 level (2-tailed)
G. Michelon, A. Parbonetti
disclosure indexes. It is worth noting the negative sign of the correlations between
disclosure in annual reports (ARINF) and the other disclosure indexes. This means that
when companies do make disclosure on sustainability issues they report it in stand
alone reports rather than in the annual report. Consistent with prior research, disclosure
(CSD) is also positively correlated with size (0.32) at the 1% significance level and
membership to the DJSI (0.31). CSD is also positively correlated with basic material
industry at the 1% significance level and with NBOD at the 5% level.
With respect to country of origin, the US is negatively related (at 5%) with the
total disclosure index (CSD), the strategic information measure, and the social
information scores. In contrast, France and Finland are positively correlated (at 5%)
with both the social and environmental disclosure measures. Size is positively
correlated with CEO duality, the presence of a CSR committee, and board size.
Finally, it is worth noting that membership in the DJSI is not correlated at
significant levels with any governance related variables.
5.2 Multivariate analysis
Table 8 provides the results for the multivariate regression models. Model 1
investigates the relationships between CSD (total disclosure index) and the variables
of interest. The R2 is 0.534 and the model appears highly significant (F = 3.05,
p = 0.000). As regards our variables of interest, only CI appears to have an effect
on disclosure. The estimated coefficient is positive and statistically significant
(at the 5%). The lack of significance for the other independent variables means we
cannot confirm a relationship between other corporate governance mechanisms and
disclosure. The regression coefficients for the control variables SIZE and DJSI are
significant and have the expected signs. Finally, untabulated results show that three
country indicators (Spain, France, and Netherland) are positively associated (at 5%)
with the disclosure index, while the basic material industry is the only industry
sector significantly related to disclosure (at 1%).8
Table 8 also reports regression results for each of the four information subgroups.
The results are statistically significant by information type. However, the amount of
explained variation in disclosure (R-square) ranges from 38% in the case of financial
information to 56% in the case of strategic general information, with environmental
and social information in between, respectively at 53 and 49%. As highlighted in
Table 8, different factors appear to be important in explaining the voluntary
disclosures of different types of information. As regards our variables of interest,
again only CI, the proportion of community influential members on the board,
appears to have substantial influence on disclosure. Indeed, this variable is
significant for both environmental (at 1% level) and strategic (at 5% level)
8
In order to test whether relevant multicollinearity is affecting the results, we performed the Variance
Inflator Factor (VIF). The largest value among all independent variables is often used as an indicator of
the severity of multicollinearity (Neter et al. 1996). A maximum VIF value in excess of 10 is frequently
taken as an indication that multicollinearity may be unduly influencing the least square estimate. In our
case, the largest VIF is equal to 4.22, so multicollinearity among the predictor variables is not a problem.
123
Table 8 OLS coefficient estimation considering the typology of disclosure

Dependent variables
(1) (2) (3) (4) (5)

CSD SOINF ENVINF ECINF STRINF
Constant -60.329 (1.67) -28.576** (2.28) -9.711 (1.02) -2.023 (0.24) -20.020* (1.71)
IND -8.162 (0.74) -1.479 (-0.39) -1.683 (0.58) -1.112 (0.43) -3.888 (1.08)
CEO -2.634 (0.30) -0.378 (0.13) -1.091 (0.48) -0.998 (0.49) -0.167 (0.06)
CI 39.149** (2.27) 7.034 (1.18) 15.137*** (3.82) 4.086 (1.01) 12.891** (2.30)
CS_Res -3.701 (0.37) -2.144 (0.61) -2.330 (0.87) -0.303 (0.13) 1.075 (0.33)
CS_Et 6.655 (1.08) 4.020* (1.88) 1.622 (1.00) -0.499 (0.34) 1.512 (0.76)
NBOD 0.057 (0.07) 0.041 (0.15) 0.232 (1.12) -0.012 (0.06) -0.204 (0.80)
DJSI 12.385*** (2.71) 3.491** (2.20) 2.690** (2.22) 1.320 (1.23) 4.883*** (3.29)
ROE 0.004 (0.11) 0.003 (0.24) -0.006 (0.62) 0.001 (0.00) 0.007 (0.59)
SIZE 4.121** (2.47) 1.412** (2.45) 0.436 (0.99) 0.901** (2.30) 1.371** (2.54)
LEV 0.008 (1.20) 0.003 (1.24) 0.001 (0.18) 0.002 (1.28) 0.003 (1.30)
BETA 0.423 (0.09) -0.388 (0.24) -0.272 (0.22) -0.268 (0.24) 1.351 (0.90)
AGE -0.050 (1.32) -0.018 (1.41) -0.007 (0.76) -0.010 (1.19) -0.013 (1.09)
LISTING 1.475 (0.31) -0.034 (0.02) 0.632 (0.50) -0.237 (0.21) 1.115 (0.72)
Max VIF 4.22
R-squared 0.534 0.488 0.530 0.380 0.555
Observations 111 111 111 111 111
Absolute value of t statistics in parenthesis. Coefficients and t statistics are not reported for country and
industry controls
CSD total disclosure score on sustainability disclosure, SOINF total social disclosure, ENVINF total envi-
ronmental disclosure, ECINF total economic disclosure, STRINF total strategic disclosure, IND proportion
of independent directors, CEO dummy variable equal to 1 if CEO is also chairman, 0 otherwise, CI
proportion of community influential members of board of directors, CS_Res dummy variable equal to 1 if
company has identified a person in charge of social responsibility issues, 0 otherwise, CS_Et dummy variable
equal to 1 if company has a social responsibility committee, 0 otherwise, NBOD number of board members,
DJSI dummy variable equals to 1 if company belongs to the DowJones sustainability index, 0 otherwise, ROE
return on equity for year 2003, SIZE company size, measured as Logarithm of sales, LEV leverage, measured as
total debt/shareholders equity, BETA market risk, AGE company age, LISTING dummy variable equals to 1 if
company is listed internationally, 0 otherwise
* Statistically significant at the 0.10 level; ** statistically significant at the 0.05 level; *** statistically
significant at the 0.01 level
information disclosure. Surprisingly it is not significant for social information

disclosure (although it does have the expected sign). Results show that social
disclosure is positively associated to the presence of a corporate social responsibility
committee (at 10% level). Among the control variables, company size and industry
appear to be the two variables most consistently associated with differences in
disclosure across the information categories.9
9
Our results are robust to alternative statistical proxies. We measured size alternatively as the logarithm
of sales, market value and asset and we obtain the same results. Results do not change when employing
ROA as the performance measure. We have also run the regression using the number of community
influentials instead of the proportion of CI and we obtain the same results.
123
Untabulated results show that CI positively affects also the information contained
in stand-alone reports (REPINF), while it is not related to the information reported
in annual reports (ARINF).
5.3 Robustness analysis
In previous tables we have shown the results obtained by modelling governance

variables and sustainability disclosure as exogenous variables, however, this is not
necessarily the case. Community influential members, for example, can be chosen to
sit on the boards of firms with specific characteristics, including whether the firm
has a strong incentive to increase its legitimacy. Given this endogenous relationship
between governance variables and sustainability disclosure we perform a simulta-
neous equations approach where the first equation (1) is the same equation reported
on page 16 and the second equation (2) analyses the proportion of community
influentials as a function of the disclosure index and other controls. The two
equations are the following:
Disclosure Index ¼ a0 þ a1 IND þ a2 CEO þ a3 CI þ a4 CS Res þ a5 CS Res
þ a6 NBOD þ a7 DISJ þ a8 ROE þ a9 SIZE þ a10 LEV
þ a11 BETA þ a12 AGE þ a13 LISTING þ a14i COUNTRY
þ a15i INDUSTRYi þ e ð1Þ
CI ¼ a0 þ a1 IND þ a2 CEO þ a3 Disclosure Index
þ a4 NBOD þ a5 SIZE þ a6 LEV þ a7 AGE þ a8 LISTING ð2Þ
þ a9 RETURN þ a10 CAPITAL þ a11 US UK þ e
Equation 2 tests the effects of the disclosure indexes on the proportion of

community influential directors. Controls variables are selected on the basis of prior
studies. Particularly we control for board size (NBOD), composition, proxied by the
proportion of independent (IND), and leadership (CEO). Moreover, we control for
companies’ size (SIZE) measured by the natural logarithm of sales, leverage (LEV),
the capital intensity (CAPITAL) of the company, measured as fixed assets over sales,
and market performance (RETURN), measured as share price return. We also check
for institutional factors taking into consideration whether a company is listed in
more than a capital market (LISTING), and if the company is incorporated in the US
or UK or not (US_UK).
Using a system of simultaneous equations permits to disentangle the endogenous
nature of the relationship between community influential directors and disclosure.
Particularly, equation (1) shows the effect of community influentials over the
disclosure index while the second equation tests the effect of disclosure over
community influentials.
The results are presented in Table 9.10
10
Instead of presenting the results for all governance related variables, we show only the results about
community influentials given that the other governance variables are not significantly correlated with
corporate sustainability disclosure.
123
Table 9 Three stage least square using two simultaneous equations showing the effect of community
influential on different typology of disclosure
Dependent variables
(1a) (1b) (2) (3)

CSD CI ENVINF STRINF
Constant 14.126 (0.96) -0.546** (2.43) 1.614 (0.75) 4.359 (0.67)

IND -12.373 (1.06) 0.060 (0.90) -10.027* (1.83) -13.485** (2.09)
CEO -2.628 (0.34) 0.002 (0.05) -2.953 (0.85) -2.068 (0.51)
CI 13.095** (2.05) 10.975*** (4.38) 14.703*** (4.26)
CSD 0.001 (0.74)
CS_Res -11.912 (0.82) -9.371* (1.75) -7.456 (1.18)
CS_Et 2.824 (0.41) -2.194 (0.87) -2.729 (-0.92)
NBOD -0.007 (0.01) 0.001 (0.18) 0.145 (0.43) -0.283 (0.72)
DJSI 4.346* (1.84) -0.867 (0.29) -0.915 (0.52)
ROE -0.002 (0.06) -0.014 (-1.12) -0.001 (0.09)
SIZE 2.741 (1.49) 0.017 (1.42) -0.776 (1.14) -0.293 (0.36)
LEV 0.006 (0.84) 0.02 (0.34) -0.002 (0.55) -0.002 (0.08)
BETA -0.505 (0.13) -0.727 (0.46) 1.445 (0.77)
AGE -0.039 (0.93) -0.01 (0.88) 0.017 (0.87) 0.017 (0.74)
LISTING -2.115 (0.41) 0.03 (0.93) -2.777 (1.12) -3.001 (1.03)
RETURN 0.024** (2.16)
CAPITAL 0.04 (0.80)
US_UK 0.006 (0.17)
Max VIF 5.11
R-squared 0.33 0.23 0.32 0.29
Observations 111 111 111 111
Absolute value of t statistics in parenthesis. Country and industry controls are not reported for models 1a,
2 and 3
CSD total disclosure score on sustainability disclosure, CI proportion of community influential members
of board of directors, ENVINF total environmental disclosure, STRINF total strategic disclosure, IND
proportion of independent directors, CEO dummy variable equal to 1 if CEO is also chairman, 0
otherwise, CS_Res dummy variable equal to 1 if company has identified a person in charge of social
responsibility issues, 0 otherwise, CS_Et dummy variable equal to 1 if company has a social responsi-
bility committee, 0 otherwise, NBOD number of board members, DJSI dummy variable equals to 1 if
company belongs to the DowJones sustainability index, 0 otherwise, ROE return on equity for year 2003,
SIZE company size, measured as Logarithm of sales, LEV leverage, measured as total debt/shareholders
equity, BETA market risk, AGE company age, LISTING dummy variable equals to 1 if company is listed
internationally, 0 otherwise, RETURN 1 year market return, CAPITAL capital intensity, UK_US dummy
variable taking the value of 1 if a company is located in UK or US, zero otherwise
* Statistically significant at the 0.10 level; ** statistically significant at the 0.05 level; *** statistically
significant at the 0.01 level
In columns (1a) and (1b) we report both equations of our model. The results
indicate that the proportion of community influentials is positive and significant for
CSD (t = 2.05), while the coefficient of CSD is not significant (t = 0.74) for CI,
thus confirming that community influentials play a role in orienting corporate
disclosure.
123
Models (2) and (3) show the first equation of our two-equations simultaneous
system.11 In particular, we show the results when the dependent variables are
ENVINF and STRINF. Community influentials continue to be positive and
significant for ENVINF (t = 4.38) and STRINF (t = 4.26), thus confirming the
results presented in Table 8.
6 Discussion and conclusions
In this study, we analyze the impact of board composition, structure, and CEO
duality on sustainability disclosure. We extend previous studies on sustainability
disclosure by considering corporate governance as an important internal contextual
factor that according to stakeholder theory may influence the heterogeneity of
sustainability disclosures (Adams 2002).
Our results show that corporate governance plays a role in orienting the
heterogeneity of sustainability disclosures provided by US and European compa-
nies. The empirical analysis does not reject the hypothesis regarding the role of a
specific category of directors: that of community influentials, who have been
previously identified as promoters of stakeholders engagement. We find a positive
association between community influentials and sustainability disclosure. Such a
positive association holds also for two of the sub-categories of information which
compose the total disclosure index: environmental and strategic information. Our
results are robust to alternative statistical proxies and a large number of covariates.
Empirical results provide also a weak evidence of the relationship between the
presence of a CSR committee or CSR director and disclosure of social information
(third hypothesis), where our results are moderately significant. There might be two
possible explanations for this result: we have not taken into consideration the age of the
CSR committee, therefore we do not know since when, on average, companies have
started considering sustainability issues at the board level. If the committee is relatively
‘‘new’’, its effectiveness may not be evident yet. On the other hand, as shown by the
descriptive statistics only 20.2% of companies have established a CSR committee, and
only 6% have declared to have a person responsible for CSR issues. Such small numbers
do not allow us to perform elaborate tests involving the various cuts of the data.
The first and fourth hypotheses of this paper examine the relationship between
board composition and sustainability disclosures, and the effects of CEO duality on
disclosure. The statistical tests reject the prediction of an association between these.
Therefore, the hypotheses developed in our study get partial support from our
empirical analysis. This is quite surprising, as it is expected that the board of
directors decides and implements firm level disclosure policies (Gul and Leung
2004; Cheng and Courtenay 2006), but with respect to these unexpected results, few
considerations need to be pointed out.
First of all, the traditional characteristics of board composition, i.e., proportion of
independent and CEO duality, could be unrelated to sustainability disclosures because
11
Since the results of the second equation are consistent over the different models, we do not report
them.
123
they may proxy for the oversight/monitoring function of the board. According to the
agency theory framework, the presence of independent directors and the separation of
the CEO and Chairman aim at protecting investors against managerial opportunism.
Indeed, the empirical evidence we obtain is counter intuitive, as sustainability
disclosure should also be considered as an indirect monitoring mechanism, that
companies implement to let stakeholders know about their actions.
It could also be argued that traditional proxies for board composition are not good
in depicting the service role of the board in terms of legitimacy and reputation. This
suggests that board composition should be measured going beyond the traditional
outsider/insider dichotomy, as different individual characteristics of directors, have
various impacts on the corporate processes. While independent directors appear to
impact the control and monitoring process, community influentials appear to impact
the stakeholder engagement process. Indeed, community influentials seem to have an
effect on the reporting media chosen by companies to communicate with stakehold-
ers. They appear to positively affect disclosure in stand alone reports while they seem
to play no role in affecting the disclosure in annual reports. The effect of community
influential directors on reporting media seems to have an impact on the results on the
types of disclosure: community influentials significantly enhance the disclosure of
environmental and strategic issues, exactly the kind of information that we would
expect to find in social and environmental reports. Collectively, our results show that
the effect of board composition goes beyond disclosure affecting the access and the
readability of information for stakeholders. The use of stand alone reports may signal
the company’s commitment to stakeholder engagement.
Summing up, our study indicates that the presence of independent directors on
the board is not per se positively associated with disclosure. Moreover, independent
directors become relevant in orienting sustainability disclosure strategy when they
are community influentials. As community influentials are independent directors,
they bring legitimacy to the company but they also require the company to disclose
to stakeholders on the social and environmental impacts of the corporate activities.
It is indeed their contribution that improves the company’s transparency.
This evidence has both theoretical and practical implication. From a theoretical
perspective, it shows that board composition need to be analysed with more detail,
beyond the distinction between dependent and independent board members.
Independent directors are not homogeneous in terms of backgrounds, competences,
and effects on how boards perform their tasks. As a consequence the effects of
boards composition need to be analysed on a more fine ground. Moreover, the
evidence provides to corporate governance standard setters and regulators a useful
insight of the important distinction among various directors’ competences.
7 Limitations of the study
Our research has a number of limitations. This study can be considered exploratory
in nature, and further work is needed to understand better the nuances of this
specific research question.
123
First of all, the endogeneity issue and the causality between the presence of
community influentials and sustainability disclosure, although partly addressed by
the use of additional statistical methods, may be further and deeper investigated by
undertaking different methodologies, such as the use of interviews or a more
ethnographically based case study.
More governance variables could be analyzed in order to better understand the
stakeholder engagement process, and the process of preparation of sustainability
reporting could be analyzed via case or field studies. The dimension of the sample
could be increased by analyzing more companies. Another issue relates to the
observation of disclosure behaviours for a longer period of time. Also, our
disclosure index can be object of criticism, as the dichotomous measurement of
disclosure we have adopted only enables us to make claims about the diversity and
heterogeneity of sustainability-related issues covered in corporate reports, rather
than enabling us to make any claims about the extent or amount of disclosure.
Finally, the background and culture of the top management team may affect the
disclosure policies emanating from the board. Further research will certainly shed
light on this important research area.
Acknowledgments The authors thank the participants of the 2008 European Accounting Association
Congress, the 6th International Conference on Corporate Governance of the Centre for Corporate
Governance Research, Birmingham University, the 2008 North American Congress on Social and
Environmental Accounting Research, Concordia University. The authors would like to express their
gratitude to Saverio Bozzolan, Michel Magnan, Christine Mallin, Garen Markarian, Den Patten and to
three anonymous referees for their helpful comments.
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Author Biographies
Giovanna Michelon is Assistant Professor in Accounting at the University of Padova, Padova, Italy. She
teaches Financial Accounting, Performance Management and Corporate Governance and Responsibility
at the School of Economics and Business Administration of the University of Padova. Her research
interests are in the area of social and environmental accounting, corporate governance and social
responsibility. She received the AIDEA 2008 Best Paper Award.
Antonio Parbonetti is Assistant Professor in Accounting at the University of Padova, Padova, Italy. He
teaches Financial Accounting, Advanced Financial Accounting and International Accounting at the
School of Economics and Business Administration of the University of Padova. His research interests
include board composition, corporate governance, and corporate disclosure. He received the AIDEA 2008
Best Paper Award.
123
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The Effect of Corporate Governance On Sustainability Disclosure

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The Effect of Corporate Governance On Sustainability Disclosure

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J Manag Gov (2012) 16:477–509

The effect of corporate governance on sustainability

Giovanna Michelon • Antonio Parbonetti

Published online: 14 September 2010

Abstract Drawing on stakeholder theory, this paper examines the relationship of

Keywords Board composition Sustainability disclosure

According to stakeholder theory, it is critical for companies to enact stakeholder

G. Michelon A. Parbonetti (&)

We classify sustainability disclosure into four groups—strategic, financial, envi-

2.1 Corporate governance and disclosure

Previous researches on the effects of corporate governance on disclosure are mainly

accounting enforcement actions. Chen and Jaggi (2000), in a study considering

2.2 Corporate governance and social and environmental disclosure

points out that companies are operating in a constantly changing external

Fig. 1 The theoretical framework

With respect to organizational legitimacy and stakeholder engagement, we can

The effects of boards’ attributes on sustainability disclosure, defined as the range

3.1 Board composition: independent directors

3.2 Board characteristics: community influential members

3.3 Board structure: presence of a corporate social responsibility (CSR)

3.4 Board leadership: CEO duality

4.1 Sample design and data collection

Table 1 Sample composition

Panel A: Companies by industries

Country Number of companies

Panel B: Companies by country of origin

external shock and we measure if corporate reaction to this shock in terms of

4.2 Measurement of variables

4.2.1 Dependent variable: corporate sustainability disclosure

Sustainability disclosure (CSD) is determined using the content analysis method-

Table 2 Disclosure indexes

STRINF Strategic Background information of the company, management’s objectives,

We employ different measures of sustainability disclosure. CSD is the total

4.2.2 Governance related variables

Table 3 Community influential (CI) directors—examples

ALCOA Non profit/Social

Table 4 provides the classification and distribution of CI in the sample

Table 4 Classification and

The independent variables representing the constructs are given in Table 5.

4.2.3 Control variables

We select control variables on the basis of prior studies of corporate disclosure.

4.3 Data analysis

Table 5 Constructs of the independent and control variables

Independent directors (IND) Proportion of independent directors

Disclosure Index ¼ a0 þ a1 IND þ a2 CEO þ a3 CI þ a4 CS Res þ a5 CS Et

CS_Et dummy variable equal to 1 if company has a social responsibility

5.1 Descriptive statistics

Table 6 describes our sample of companies in terms of dependent, independent and

Table 6 Descriptive statistics on selected variable

CSD 49.184 25.852 15.000 26.000 44.000 67.000 128.000 114

up of independent directors. The mean proportion of community influential (CI)

5.2 Multivariate analysis

Table 8 OLS coefficient estimation considering the typology of disclosure

(1) (2) (3) (4) (5)

information disclosure. Surprisingly it is not significant for social information

5.3 Robustness analysis

In previous tables we have shown the results obtained by modelling governance

Equation 2 tests the effects of the disclosure indexes on the proportion of

(1a) (1b) (2) (3)

Constant 14.126 (0.96) -0.546** (2.43) 1.614 (0.75) 4.359 (0.67)

6 Discussion and conclusions

7 Limitations of the study

Suchman, M. C. (1995). Managing legitimacy: Strategic and institutional approaches. Academy of