TABLE OF CONTENT

ABSTRACT

CHAPTER 1 INTRODUCTION

1.1 OBJECTIVE OF THE STUDY

1.2 GENERAL CONTRIBUTION

1.2.1 ACADEMICS

1.2.2 CORPORATIONS

1.3 DEFINITIONS

1.3.1 COMPENSATION

1.3.2 CORPORATE SOCIAL RESPONSIBILITY (CSR)

1.4 STRUCTURE OF THESIS

CHAPTER 2 LITERATURE REVIEW

2.1 INTRODUCTION

2.2 THEORITICAL LITERATURE

2.2.1 AGENCY THEORY AND CSR

2.2.2 AGENCY THEORY AND COMPENSATION

2.2.3 STAKEHOLDER THEORY AND CSR

2.2.4 STAKEHOLDER THEORY AND COMPENSATION

2.3 EMPIRICAL THEORY

2.3.1 RESEARCH GAP

2.4 BENEFIT OF CEO COMPENSATION AND CSR

2.4.1 WHY COMPENSATION AND CSR IS IMPORTANT?

2.5 OTHER LITERATURE

2.6 HYPOTHESIS DEVELOPMENT

CHAPTER 3 RESEARCH METHODOLOGY

3.1 INTRODUCTION

3.2 SAMPLE

3.3 MEASUREMENT

3.3.1 DEPENDENT VARIABLE

3.3.2 INDEPENDENT VARIABLE

3.4 CONTROL VARIABLES

3.5 FIRM CHARACTERISTICS

3.5.1 FIRM SIZE

3.5.2 TOBIN’S Q LEVERAGE

3.5.3 RETURN ON ASSETS

3.6 CORPORATE GOVERNANCE CHARACTERISTICS

3.6.1 CEO OWNERSHIP

3.6.2 BOARD SIZE

3.6.3 BOARD INDEPENDENT

3.7 MODEL DEVELOPMENT

BIBLIOGRAPHY
 ABTRACT

In this paper we examine the relation between corporate socialresponsibility (CSR) and CEO

compensation as in Malaysia perspective. Both CSR and CEO compensation are disaggregated

into various sub-components. The elements that underlying on CSR are environment,

community, product and employees. While compensation is measured base on salary and

bonus. In this paper there is an additional element based on earning management included.

Out of 369 only 188 companies are selected after excluding financial companies from year

2016 until 2018. Type of sample technique that we use is simple random technique as it

removes bias from the selection procedure and should result in representative samples.
 CHAPTER 1

INTRODUCTION

1.1 Objective of the study

This paper is consist of two main issues. The first issue is to examine the relationship between corporate

social responsibility (CSR) and executive compensation. Previous literature disclosed about the relation

between executive compensation and CSR (e.g. Rekker, Benson, & Faff, 2014;Cai, Jo, & Pan, 2011;

Francoeur, Melis, Gaia, & Aresu, 2017; Sapp, 2006). In addition, the first issue also examines how

strong the impact of CSR on executive compensation.

1.2 General Contributions

The present research may be of benefit to several group of societies:

1.2.1 Academics

The findings from this research can be used to give an exposure and to educate accounting

students about the relationship between executive compensation and CSR. The impact of CSR

on executive salary, bonus or any other benefits incentives provided as well as firms

profitability. This research could be beneficial to the future researchers since there is very little

research in this area, especially from the Malaysia perspective. The study provides empirical

evidence on the relationship between executive compensation and CSR based on agency

theory. The impact of CSR on executive compensation it is either positively or negatively will

be disclosed and discussed and the study identifies the factors that contribute to the hypothesis

tested

1.2.2 Corporations

This research could provide an exposure on how will the firms’ CSR performance effect the

executive compensation especially in Malaysia perspective. This study would be a beneficial

to Malaysian companies to improve their corporate governance procedures. Hence,

corporations could enhance a creative strategies, existing business practices and environmental

issues in the market.

1.3 Definitions
1.3.1 Compensation

Compensation is a remuneration received by someone in return for his or her contribution to

the organization (Patnaik, 2014). According to the Cambridge Dictionary, compensation is

defined as reward that is paid to someone in exchange for service that has been done it is either

in terms of monetary or non-monetary pay. Although these two definitions are common and

general, there are few arguments defining compensation in different aspects. Pearce (2010)

ague that compensation expresses that it is some sort of structure in which the employees who

perform better are paid more than the average performing employees, executives or

shareholders. This definition clarify that employees, executives or shareholders are paid more

or paid with other benefits based on their performance contribution to the company. If their

performance lead to a raise of the company’s profit, they will be rewarded with bonus,

incentives or shares in the company.

According to Bob (2011), compensation is not only measured based on money. It is also

concerned with non-monetary or non-financial compensation which will lead to motivate

someone to enhance their performance and it will automatically enhance the company’s

performance as well. Under the same circumstances, Hewitt (2009) implies that a management

that having a compensation structure in which a person who performs better is paid more as

this practice will encourage top-performers to work harder and build a positive competition

vibes in the organization.

1.3.2 Corporate Social Responsibility (CSR)

The first and earliest definition of CSR is given by Howard Bowen who is called as the father

of CSR (Carroll, 1999). According to Bowen (1953, as cited in Ahmadu, Haron, & Azlan, 2015,

p. 84) explains that “the obligations of businessmen to pursue those policies, to make those

decisions, or to follow those lines of action which are desirable in terms of the objectives and

values of our society”. Prior studies and authors defined CSR in their own way. Schwartz

(2011, p. 19), notes that “virtually all definitions of CSR include the notion that business firms

(corporations) have obligations toward society beyond their economic obligations to

shareholders”. The current study accept this definition as it is in the line based on the agency

theory that CSR is the solution of agency problems within the firm and it is one of the reason

why firms invest in CSR to recover from any problems occur (Jensen & Meckling, 1976;

Jensen, 1986).

However, there is an argument from Horrigan (2010), explains there is no general definition of

CSR due to the high levels of being open to more than one interpretation. On the other hand,

Carroll (1979, cited in Top, 2017, p. 3), defined CSR as “corporate integrated responsibilities

encompassing the economic, legal, ethical, and discretionary (or philanthropic) expectations

that the society has of organizations”. Apparently, various definitions of CSR have been

adopted and defined by different authors, specific to their own interests and purposes. A

responsibility of organisations not only focus on fulfilling legal expectation but also being

responsible and more socialise into human capital, to the environment and relations with

stakeholders (Vuontisjärvi, 2004).

According to Isa (2012, p. 329) “they viewed CSR as ethics-driven, economics-driven,

involving stakeholder obligation and social obligation”. For instance, Steiner (1971, cited in

Isa, 2012, p. 329) “assumed that social responsibilities are more of an attitude, as an

organisation is helping society to achieve its basic goals”. “Thus, CSR is not only enhancing

the economy, but its movement represents a broader concern with the role of business, as well

as improving the social obligation” (Eells and Walton, 1974 cited Isa, 2012, p. 329). Other

authors defined CSR as more than profit-making (Davis, 1960; Backman, 1975) as going

beyond economic and legal requirements (McGuire, 1963); as a voluntary activity (Manne and

Wallich, 1972); as concern for the social system (Eells and Walton, 1961); and as an approach

to social responsiveness (Sethi, 1975; Ackerman and Bauer, 1976). Subsequently, in the early

days of CSR research, many scholars in this field were concerned with economic issues and

the interest group pressures of governments (Marens, 2008).

1.4 Structure of the thesis

The remainder of the thesis is organised as follows:

Chapter Two of this study presents the theoretical concept used in literature on relationship

between executive compensation and CSR. The chapter discusses a little bit about agency

theory and stakeholder theory that emphasized on the issue. Other relevant issues to executive

compensation, CSR and earnings management are presented as well in this chapter. Hypothesis

development will be included in this chapter. Chapter Three focuses on the methodology and

model will be elaborated more details. Chapter Four will be discussed more about the findings

and the results from the statistical analysis.

The conclusions together with discussions of the limitations of the current research are

presented in Chapter Five. Contributions to the research and suggestions for future study are

elaborated in this chapter as well. Additional information related to the current research, tests

evidence that conducted with statistical information will be presenting on appendix.

 CHAPTER 2

LITERATURE REVIEW

2.1 Introduction

This chapter focuses on the empirical theory theoretical literature for (i) agency theory and (ii)

stakeholder theory. The purpose for this study is to issue evidence and develop a disclosure on

the impact of Corporate Social Responsibility (CSR) on Executive Compensation that has done

in previous research as well as to contemplate the differences between previous research and

this study. In addition, there is a purpose to see whether firms that are more socially responsible

pay their CEOs less, as there is few studies investigated on how the US firms’ CSR has affected

CEO compensation. This CSR-compensation issue has occurred an additional light on the issue

of how CSR of firms behave differently from socially irresponsible firms in determining their

executive compensation.
 Jensen and Meckling (1976) introduced a classic agency theory, which they argue that

CEOs prefer to persue their own interest rather than maximize shareholders’ wealth. For

example, Hemingway & Maclagan, (2004) argue that those CEOs that trying to hide their

wrongdoing, incline to invest in CSR to cover up the fraud they done. “Hence, given the

growing importance of stakeholder theory in CSR literature, it is particularly acute to determine

the relative importance of agency and stakeholder theories regarding the causal impact of CSR

on executive compensation”(Cai, Jo, & Pan, 2011, pg 160).

2.2 Theoritical Literature

2.2.1 Agency Theory and CSR

Basically, Jenson and Meckling, (1976) hold the view that agency theory involved between the

relation of managers and stakeholders. According to Ross (1973), manager acts as an agent

while stakeholder act as a principal. Therefore, managers should be more concern of

maximizing stakeholders’ wealth. There is a statement by Ross presumes "that an agency

relationship has arisen between two (or more) parties when one, designated as the agent, acts

for, on behalf of, or as representative for the other, designated the principal, in a particular

domain of decision problems" (Ross, 1973, p. 134).

CSR in context of agency theory means improper spending of organization resources,

which at the same time give benefits to the implementation of internal projects or return to

shareholders. There is a view from Friedman (1970) mention on agency theory in his criticism

of CSR, explaining that managers as the agents of an organisation are responsible to increase

and maximize company’s profits as well as stakeholders’ wealth, however, spending money on

something else is an abuse of the relationship. The existence of an organisation is to generate

profits and to optimize the outcome for the managers, stakeholders, employees, etc, and not for

the community. There is a statement from Friedman said, "There is one and only one social

responsibility of business - to use its resources and engage in activities designed to increase its

profits so long as it stays within the rules of the game, which is to say, engages in open and

free competition without deception or fraud" (Friedman,1970, p.176).

2.2.2 Agency Theory and Compensation

Berle and Means (1933, p.139) observe, “directors, while in office, have almost complete

discretion in management”. Therefore, a substantial degree of power might exist among

managers in a corporation if ownership and management are separated. Jensen and Meckling

(1976) believe that, in the world of modern finance, the trouble source of managerial power

and discretion have been analyzed as an agency problem.

There is an alternative approach classified by Bebchuk & Fried, (2003, in order to

understanding executive compensation focuses on a different link between the agency problem

and executive compensation, which we label as “managerial power approach” and to sum up,

under this approach, executive compensation is viewed as part of agency problem as well as a

potential instrument for addressing agency problems. As a number of researchers have

recognized, some features of pay arrangements seem to reflect managerial rent seeking rather

than the provision of efficient incentives (e.g., Blanchard, Lopez-deSilanes, and Shleifer,

(1994), Yermack (1997), and Bertrand and Mullainathan (2001).

2.2.3 Stakeholder Theory and CSR

Freeman (1984), define stakeholder as those group or individual who can affect or affected by

the achievement or action of the organization’s objectives. In the last two decades the

stakeholder approach to understanding the firm in its environment has been a powerful tool,

intended to broaden management’s vision of its role and responsibilities beyond the profit

maximization function to include interests and claims of non-stockholding groups which is

concluded that the stakeholder theory of the firm is used as a basis to analyze those groups to

whom the firm should be responsible (Antonio, 2007, p. 112).

Freeman (1984) draws another distinction definition of stakeholder theory as

the mirror image of corporate social responsibility where instead of commencing with a

business and looking out into the world to see what ethical obligations are there, stakeholder

theory starts in the world. For instance, when a factory produces industrial waste, a CSR

perspective will automatically attaches a responsibility to the factory owners to dispose of the

waste safely without causing a harm to the society and the environment. However, there is a

different perspective from a stakeholder theorist where it begins with those people who living

in the community who may find their environment poisoned, and begins to talk about business

ethics by insisting that they have a right to clean air and water. Therefore, they are stakeholders

in the company and their voices are important as well as contribute to corporate decisions.

According to Freeman (1984), firms could use CSR as a solution to resolve the conflict

between managers, shareholders, and other non-investing stakeholders. Donaldson and Preston

(1995) argue that the value of a firm depends on the interests of all stakeholders, and firms that

practice stakeholder management will, other things being equal, outperform others that do not.

The reason is that CSR activities are included few components such as employee relations,
community, environment, and diversity of the workforce, it has received huge consciousness

for its potential role in resolving conflicts among stakeholders (e.g., Jensen 2002; Calton and

Payne 2003; Scherer et al. 2006; Cespa and Cestone 2007; Harjoto and Jo 2011; Jo and Harjoto

2011a, b).

Under this circumstances, we expect the relation between CSR and CEO compensation

to be negative for the following reasons. First, CEOs incentive will take relatively lower pay

than those of socially irresponsible firms to reduce potential conflicts of interests among

managers and other stakeholders such as employees, NGOs, social activists, government and

to improve the fairness concern of a wealth distribution issue. Second, according to Potts

(2006), in spite of the fairness of the recent debate over excessive executive compensation,

virtue ethics would suggest that a more modest pay is desirable for a CEO with high social and

ethical standards. Third, firms that actively undertake CSR activities will also face a lower level

of firm risk due to a smaller degree of conflict of interest between top management and

stakeholders than socially irresponsible firms, resulting in lower CEO pay.

Freeman (1984) argues that managers must satisfy different groups (e.g. workers,

customers, suppliers, local community organizations) who can influence firm outcomes.

According to this view, managers are not allowed to exclusively focus on the needs of

shareholders or the corporate owners. The stakeholder theory suggests that it can be beneficial

for the firm to engage in certain CSR initiatives that non-financial stakeholders see as

important, because otherwise these groups might withdraw their support for the firm.
2.2.4 Stakeholder Theory and Compensation

Gray, Owen and Adams (1996) classify that stakeholder engagement in an organization can be

interpreted as a positive practices to solve a positive manner in organisational activities.

Kuratczyk and Estey (2007) qoute that stakeholders as well as academics have targeted

executive compensation for criticism over the past several years and the purpose of the

incentives is to align the objectives of executives and stakeholders. Although theory

encourages a positive behaviour, many a time executives take advantage of their governing

position and engage to an unhealthy activity to increase their personal wealth at the expense of

the corporations’ shareholders, according to Kuratczyk and Estey (2007).

. For theoretical perception into CEO compensation, the economics, finance and

management literature has inclined to generally rely on the principal-agent contracting model

pioneered by Mirrlees (1976), Holmstrom (1979) and Grossman & Hart (1983). This

perception views CEO compensation to be a smaller system where the aim is to align

managerial interests with those of shareholders by providing incentives that encourage

managers to increase the profit-maximizing level of unobservable or hidden action. Dittmann

& Maug (2007) introduce that the standard principal agent model cannot offer the

compensation contracts for U.S. CEOs. The key factor is because CEO compensation with

smaller base salaries and no stock options reduce compensation costs by 20% while cost the

same incentives and utility to CEOs. Dittmann & Maug (2007) also show that CEO pay in

principal-agent must be lower than the value of outside opportunities (in utility terms) due to

the agent participation constraint and yet if the an organization generates income by renting

part of the building and the CEO had bargaining power over the firm’s resource rents, then,

internal compensation will likely higher than the CEO’s outside reservation wage.
 Rampling, (2012 p.13), “under the shareholders theory, non-shareholders has come to

be used to refer as “means” to the “ends” of profitability while under the stakeholders’ theory,

the interests of many non-shareholders are also referred as “ends”. To a better understand,

Rampling, (2012, p.13) “claim that companies may provide one, or the other, but not both or

one only at the expense of the other, in a zero sum game which conclude that the workers can

get paid more, or the shareholders can have a dividend”.

2.3 Empirical Theory

2.3.1 Research Gap

This study contributes to the literature in a few ways. First, most of the previous studies are

concentrated on the USA (Cai et al., 2011) and Canada (Sapp, 2006), as this topic has not many

people do for research in Malaysia perspective, we provide evidence from the developing

country. This topic has done by several researchers from the developing country and there are

many of previous studies disclose more about this topic. (Sapp, 2006) point out that several

studies competing difference view on corporate governance and executive compensation.

Miles & Miles (2013) is one of the previous study to explore the relationships between

executive compensation and corporate social performance base on US perspective to determine

whether potential compensation and social performance links are coming at the expense of

company financial performance. The measurement of the variable for corporate social

performance firms are in each of eight categories Innovation, people management, use of

corporate assets, social responsibility and quality of management, financial soundness, long-

term investment, and quality of products or services. Sample collected are firms in the Fortune

1000. Results shows that companies identified as good corporate social performers do in fact
have lower levels of executive compensation and there is some support found for a positive

relationship between social and financial performance. This paper has big sample which is

1000 firm under fortune ranking from 2005-2007. Include financial performance as the

dependent variable. Basically, the hypothesis of this paper hypothesize a negative relationship

between CEO compensation and CSR Performance. This study points out that companies that

focus on growing a better CSR for the companies will spend less on ceo compensation. Because

it allows a company make a story statement of commitment to all of its stakeholders especially

in the face of economic challenge by reduce CEO pay.

Rekker, Benson, & Faff, (2014) examine the relation between corporate social

responsibility (CSR) and CEO compensation with sample collected 1988 firms. CSR measured

in three dimensions of CSR there are total CSR, CSR strength and CSR weaknesses CEO

compensation measured into various Salary, Bonus Cash and long-term. Compensation

whereas Cash Compensation is calculated as the sum of salary and bonus. While long-term

compensation is calculated based on stock granted, payouts from long term incentives,

contributions to benefits plans and severance payments. The result of the study showed that

CSR has a significant negative relationship with total compensation. The result shows an

increase in the CSR score of a firm by 1 unit is expected to decrease total CEO compensation

by 2.2%. The finding support the hypothesis. Regardless of this study, huge sample (1988

firms) from year 1996- 2010. This paper include the impact of gender in Ceo compensation

and CSR as one of the variable.

 Cai, Jo, & Pan, (2011) examine the impact of corporate social responsibility (CSR) on

CEO compensation with final sample of final sample 1,946 firms. The measurement used in

this study are ceo compensation total Compensation and Cash Compensation while CSR in

terms of community, diversity, employee relations, environment, and product quality. Finding

showed that the lag of CSR adversely affects both total compensation and cash compensation,

after controlling for various firm and board characteristics.

Francoeur, Melis, Gaia, & Aresu (2017) the relationship between CEO compensation

and firms’ environmental commitment with sample of 520 large listed firm by measuring

compensation as incentive and CSR as environmental Performance. Results show that CEOs

do not necessarily act opportunistically; rather some of them may be willing to act as stewards

of the natural environment and accept a lower, less incentive-based compensation from

environment friendly firm. Also provides evidence of the important influence of the

institutional context in setting-up CEO compensation as the relationship is stronger when

national environmental regulations are weaker.

Karim, Lee, & Suh (2018) examine how firms' corporate social responsibility (CSR)

performance affects CEO compensation structure with final sample of 4344 firms with

measurement of CEO compensation such as salary, bonus, restricted stocks, stock options,

pensions, and other annual compensation. CSR measures are based on six main categories:

community, diversity, employee relations, environment, human rights and product.

 Sapp (2006), investigates the relationship between different aspects of corporate

governance and the compensation of top executives in Canada. The hypothesis development

mention that there is an inverse relationship between CSR and CEO compensation. This article

finds that family-owned firms and firms with a controlling shareholder pay their CEOs less and

the gap created between CEO and NEOs is less. This paper points out that internal measures

of corporate governance based on the characteristics of the members of the board of directors

and compensation committee also appear to be related to differences in executive

compensation. We find that having more directors on the board of directors, more directors on

multiple boards and more directors who have sat on the board longer are related to an increase

in the level of CEO compensation. The presence of a representative of the controlling

shareholder and the board having a larger equity position in the firm are both related to lower

executive compensation. Large samples are analyzed in this paper and there are 400 canadian

companies.

Heron (2016), research done base on US perspective, examine the relationship between

CEO Compensation and CSR dislcosure type and quality. The construct of CSR comprised of

three components, there are environmental, social and Corporate Governance. In order to get

a better undersatnding, the researcher consider how each of the three underlying CSR

components is associated with CEO compensation. The study uses a sample of 9306 firms from

2007 untill 2014. The study finds out that there is no significant association between CSR and

CEO compensation. This lead the researcher to explore the relationship between each of the

three underlying CSR components with CEO Components. The study hypothesized three

underlying CSR components that associated with CEO Compensation, there are;

i. Relationship between corporate governance and CEO compensation

ii. Relationship between social and CEO compensation

iii. Relationship between environmental and CEO compensation

My study is differs from certain ways compared to the previous studies. First, my

sample period, 2014-2018 with specific reason that occure during that timing. The prior studies

that meet to any part of this period are Rekker, Benson, & Faff, (2014); Heron , (2016);

Francoeur, Melis, Gaia, & Aresu, (2017); Buiten, (2017) & Karim, Lee, & Suh, (2018). Second,

the sample of data, is smaller than the data sample for the previous studies. Previous studies

conducted the research based on the developed countries which have its own advance system

to collect the data. For example a prior study from Cai, Jo, & Pan, (2011) use a database

provided called Kinder, Lydenberg, and Domini’s (KLD’s) Stats database. According to Cai,

Jo, & Pan, (2011, p. 163) “in particular, KLD’s information social rating criteria contain

strength ratings and concern ratings for community, diversity, employee relations,

environment, and product quality”. When all these informations are well provided, it will be

less limitation and become easier for the researcher to complete the data collection process.

While my data collection process is based on the annual report because Malaysia does not have

a database for outsiders to reveiew or collect information on companies’ CSR and that will be

a barrier to involve long-term compensation in the measurement as there is a difficulties on

data collection.

Third, my research is conducted base on Malaysia perspective. The advantage that I

found from this gap is that this study has not been conducted base on context of Malaysian

companies. This context can be a guidance and source to the other academics in account and

ethics field and also to the Malaysian corporate companies. Fourth, this study relies on annual

report from Bursa Malaysia as the main tool of data collection. This is why limitation has

occurred where we need to exclude long-term compensation in the measurement of

compensation as the data for long-term compensation cannot be provided base on the annual

report of the companies in Malaysia.

Fifth, my research focuses on companies’ CSR disclosure in Malaysia. One prior study

has done based on CSR disclosure but the samples are based on Canadian companies. In

addition, Canada is a very well developed country as we all know and there is one perspective

of CSR activities we could see. On the other hand, my research is conducted in a developing

country and this is another prespective of CSR activities that I could provide to the country.

Lastly, the measurement that makes my research is different is there are four uderlying

components of CSR while compensation there are two components involve. Components that

involve under CSR are employee relation, community involvement product quality and

environment while compensation are salary and bonus. There is one prior study I am aware

that the measurement use is almost similar to my measurement that is Heron (2016). The study

conducted by Heron involves three underlying components of CSR. There are corporate

governance , social and environment.

2.4 Benefit of CEO Compensation and CSR

2.4.1 Why Compensation and CSR is Important?

The board of directors is responsible in order to determine CEO compensation value before it

is approved by shareholders (Kazan, 2016). CEO who is being paid highly will have the

trustworthy of the Investors and also prove his worth (Tariq, 2010). Conventionally the

executive compensation had been connected with the performance of a company and it was

deemed that the high pay for a CEO was justified. Countries like Britain have developed new

legislations like „say on pay‟ to control the pays of the chief executive officer and influence it
through the voice of the shareholders (Ferri and Maber, 2014). The influence of Board of

directors on the compensation of the CEO caused a major function of the Board of directors

which is to mitigate agency cost and reduce the conflict between the management and

shareholders (Fama and Jensen 1983). To view the history of executive compensation as one

of ever increasing pay. In fact, executive pay levels in the U.S. fell during World War II and

did not change much from the 1940s to the mid-1970s, when they started their meteoric rise

(Edmans & Jenter, 2017). Randoy & Nielsen (2002) mentions that the CEO compensation in

the highly egalitarian Scandinavian countries are small compared to the compensation in other

European countries.

Gorski, Fuciu & Croitor (2014) pointed out that there is no fix definition of CSR even

this has been used by many people. During the twentieth century, in order to build a healthy

society, CSR was connected with the market performance (Gorski, Fuciu & Croitor, 2014).

Essays, UK (2017) mentioned that CSR is very important for every business all over the world

and this concept has continued to grow over the decades. CSR is an action and it is an action

that must be followed as it is a requirement by the law (Caroll, 1999). Davis (1990) argued that

CSR is not a good idea to practice but it should be performed in a management, as this concept

could be the reason of having a good opportunity and long-run economic gain to the firm. Tilt

(2016) highlighted that there are more companies all over the world are involved in CSR, and

therefore there are providing spare social & environment information to the public. Most

corporations are willing to invest more in CSR to gain long-term profitability (Kane, 2002).
2.5 Other Literature

Corporate social responsibility (CSR) basically introduce to a wide range of actions taken by

companies to cut less their negative and improve their positive impacts on society on both

terms social and environment (Carroll 1999). Stakeholder concerns and ethical issues such as

employess wellbeing, conditions of labour in the production area, quality of products as well

as economic aspects like cost incurred and revenue generated, represent an integral part of the

CSR concept (Dahlsrud 2008). Hence, the disclosure of reliable and timely financial

information is probably an important component of CSR. It provides a basis of trust and

confidence regarding the firm’s claims, operations and future viability in its relationships with

financial and non-financial stakeholders (Yip et al. 2011; Kim et al. 2012).

However, firms have been reported to engage in earnings management (EM) to unclear

the financial information rather than reveal their true financial characteristics (Gaver et al.,

1995; Burgstahler and Dichev 1997; Vinten et al. 2005). Earning Management only occurs

when managers use judgment in financial reporting and in structuring transactions to modified

financial reports, either to mislead stakeholders about the underlying economic performance of

the firm or to influence contractual outcomes that depend on reported accounting numbers

(Healy and Wahlen 1999). Earning Management essentially has a negative influence on the

quality of financial information as it portrays a false image towards different stakeholders of

the firm’s earnings (Prior et al. 2008).

2.6 Hypothesis Development

Under this conflict-resolution hypothesis, this research predicts the CSR and Ceo compensation

to be positively associated for the following reasons. Barnea and Rubin (2010), view CSR

engagement as a principal-agent relation between managers and stakeholders as they qoute that

if the managers and stakeholders overinvest in CSR, it will lead them to a better reputation as

a good citizen. Graafland, Kaptein, & Marzereeuw (2010) propose that there is a certain level

of CSR activity that influence the ceo compensation.

Milbourn (2003), points out that there is a positive relationship between CEO

compensation under component of stock-based and CSR as the CEOs repution are improved,

they will enjoy a better reward and increasing their power. Unfortunately, the current study do

not include measurement of stock-based as for the existance of limitation of data collection

stock-based.

Heron (2016), finds that firms that disclose either two components (corporate

governance and social) or three components of CSR (corporate governance, social and

environment) earn higher compensation compared to the firms that only disclose one

components (corporate governance). Different patterns exist for the different underlying

components of CSR. In summary, this research expects the following:

H1 The CSR engagement positively affects Ceo Compensation

Under this conflict-resolution hypothesis, this study expects the engagement between CSR and

CEO compensation to be negative for the following reasons. Companies that grow a better CSR

will spend less on CEO compensation. Because it allows a company make a story statement of

commitment to all of its stakeholders especially in the face of economic challenge by reduce
CEO pay (Miles & Miles, 2013). Wade et al (2006) and Anderson Bateman (1997), quote that

the demotivating potential of large gaps between employee salary and executive salary usually

recognised when companies are concern and focus on the CSR Performance. They are likely

more interested in sharing value created by the company with all stakeholders. Rekker, Benson,

& Faff, (2014) suggest that Ceo Commpensation will decrease as their income will trade off

for CSR satisfaction. While Potts (2006) argue that CEOs that contribute more on CSR deserve

high compensation than CEOs than contribute less on CSR activities. There is also a different

perspective by (Potts, 2006; Reker, Benson & Faff, 2014), that CEOs will be proud to be

example by putting more effort and focus on Companies social performance and to be rewarded

by doing the right thing although this sacrifice will lead them a low compensation.

Cai et al. (2011), view, CEOs that give more responsible on firms’ CRS will have low

compensation than those CEOs that socially irresponsible to alleviate the potential conflicts of

interests among managers and stakeholders. Saphira (2013), points out that Ceo compensation

will decrease as their income will trade off for the satisfaction of CSR firms activities.

Another theory that is important to understand that CEO compensation is the principal-

agent problem. Shareholders have information asymmetry with CEOs and they cannot directly

control the actions of the CEO’s, arising moral hazard (Dechow & Sloan, 1991) & (Page jr,

1991). According to Dechow & Sloan (1991) found that CEOs cut expenditures on R&D in

their final years in office. They do this to cut costs, which positively affects the short-term

performance and their compensation (Dechow & Sloan, 1991). They also found that this

behavior does not occur when CEOs own stock themselves. This alignment with stockholders’
interest makes the CEO behave in a way that is best for the shareholder (Dechow & Sloan,

1991).

According to Cai et al. (2011) with a view on the other context which hypothesize that

there is negative relation between employee relation and CEO Compensation and this gap is

created because of employees feel unfairly treated as for the payment that received by the CEOs

are higher compared to them. Cai et al. (2011) also quote that negative relationship between

CSR and CEO Compensation occur because when CEO receive low compensation compared

to the employees this will reduce the gap created between CEOs and employees as well as

improved the relationship between them. In summary, this research expects the following:

H2 The CSR engagement negatively affects Ceo Compensation.

 CHAPTER 3

RESEARCH METHODOLOGY

3.1 Introduction

In this chapter focuses on the value of sample collected, method that will be applied, type of

sample technique, measurements that underlying on both CSR and compensation also

components that will be included under control variables in this paper. Model development

also will be provided as the guidance in order to test the hypothesis between CSR and CEO

compensation.
3.2 Sample

This research utilised a sample of non-financial companies that listed on the main market of

Bursa Malaysia where the observation during the period of 2014 to 2018. Utilities and financial

companies are excluded from the sample. “In general, companies in the finance sector are

subject to different regulatory and disclosure requirements and also material differences in their

types of operation” (Ju Ahmad, Ahmad, Rashid, & Gow, 2017, p.72).

Basically, there is no ‘standalone’ sustainability reported by Malaysian companies.

“Although a handful of companies make such disclosures in their web pages, these are

duplications of information disclosed in their annual reports” (Ju Ahmad, Ahmad, Rashid, &

Gow, 2017, p.72). According to Michelon and Parbonetti (2012), disclosure on the website is

not considerable because the content analysis may contain less information and cannot be

performed reliably and consistently given that we cannot track when the web-pages are

published or updated. For that reason, data collected will be based on annual report, as it was

the only source of financial and non-financial information of a company.

This research focuses on CSR and compensation the board of directors in the company

from 2014 to 2018. This leads to a population value of 799 that listed on the main Bursa

Malaysia from 2014 to 2018 including the financial companies. However, after excluded

financial companies, the result shows that the new population is 369 companies. Sample needed

based on the calculation from

http://www.abs.gov.au/websitedbs/D3310114.nsf/home/Sample+Size+Calculator, only 188

sample of companies needed in this paper.

 As for directors information were collected based on the annual reports available in

Bursa Malaysia. Simple random is the technique on how the companies will be selected.

According to Gravetter, F.J & Forzano, L.B (2011), this technique has been stated as the logic

behind simple random sampling because it removes bias from the selection procedure and

should result in representative samples.

3.3 Measurement

3.3.1 Dependent Variable

The dependent variables in this research are based on two different measures of CEO

Compensation which is total compensation and cash compensation. As discussed earlier, this

research emphasis is to examine the impact of CSR engagement on executive compensation.

3.3.2 Independent Variables

Independent variable in this context, is referring to McGuire et al. (2003) distinguish between

three dimensions of CSR, there are, total CSR, CSR strengths and CSR weaknesses. CSR

strengths and weaknesses represent the sum of strengths or weaknesses of all social metrics.

3.4 Control Variables

Control variables in this study include the following control variables. There are firm

characteristic: firm size, Tobin’s Q Leverage and ROA,and governance characteristics: CEO

ownership, board size and board independence. This choice of specification is generally based

on Cai et al. (2011).

3.5 Firm Characteristic

3.5.1 Firm Size
According to the previous research from (Baker et al. 1988; Murphy 1999 cited in Cai, Jo, &

Pan, 2011) there is a significantly positive relation between firm size and CEO compensation.

Quote from Bebchuk and Fried (2003) managers generally exploit firm size to justify their

compensation. But there is an argument that could also be explained by a “market-based view

that larger firms employ superior executives and they get paid better” (Rosen 1982 cited in Cai,

Jo, & Pan, 2011, p.164). In addition, firms with higher growth opportunities are likely to need

better executives, so the executive compensation would be higher (Cai, Jo, & Pan, 2011).

3.5.2 Tobin’s Q Leverage

Following Faleye (2007), Tobin's Q (TOBINQ) is included as one of the firm characteristic

measurement as a proxy for firm value. This is calculated as the market value of assets over

the book value of assets, where the market value is the sum of the book value of assets, the

market value of common stock, and deferred taxes minus the book value of common stock. For

explanatory variables, we include the proportions of cash- based compensation and their

interaction terms with total CSR score.

Morck et al. (1988) document that the relation between inside ownership and Tobin's

Q shows a positive figure when the insider ownership is between 0% and 5% or exceeds 25%,

while negative is appeared with the ownership of 5–25%. Karim et al (2017, p. 28), “find that

firm value, proxied by Tobin's Q, decreases with the proportion of cash-based compensation,

and this relation is reinforced by firms' low CSR performance”. These results emphasize the

negative role of firms' social performance.

3.5.3 Return On Assets

To control for prior firm performance, we include ROA in our regressions, which is the ratio

of operating income before depreciation scaled by book value of total assets. According to

(Buallay, 2017, p. 88) “the operational performance measure (ROA) was found to be higher

with companies with low corporate governance, in other words, companies with lower

implementation of corporate governance have more return on assets”.

3.6 Corporate Governance Characteristics

3.6.1 CEO Ownership

CEO ownership is the percentage of the company’s shares that are owned by the CEO. Cai et

al. (2013), find that CEO compensation decreases with CEO ownership where compensation

tends to be higher for CEOs in firms with better corporate governance, as measured by the

equity ownership of the CEO and the percentage of independent directors. According to Karim

et al (2017 p. 34), “CEO ownership leads CEOs to avoid risk-taking and be more entrenched,

which will reduce firm value”.

3.6.2 Board Size

Board size is the total number of directors on the board, and we define Board independence as

the fraction of independent directors on the board. The findings in Yermack (1996) suggests

that small size of boards are more effective monitors. The coefficient on board size is negative

for the proportion of cash-based compensation and positive for the proportion of equity-based

compensation, but they are not statistically significant.

3.6.3 Board Independent

Cai et al. (2013), define Board independence as the fraction of independent directors on the

board. Weisbach (1988) and Rosenstein and Wyatt (1990) suggest that firms with a high

percentage of independent outside directors perform better than the firms with a low percentage

of independent outside directors.

3.7 Model Development

We develop the following model in order to examine the impact of CSR on CEO

Compensation.

Compensation = CSR + LSIZE + TOBQ+ ROA+ CEOOwnership + BoardSIZE + BoardIND

Model above documented from (Core et al.,1999 and Hwang and Kim, 2009, cited in

Cai et al., 2013) where this research use lagged values of the economic determinants and

contemporaneous values of the governance variables.

As described in Chapter 2, I test two hypotheses on the association between the

relationship of CSR disclosure with CEO compensation components. CEO compensation is

measured only based on cash-based salary and bonus compensation. Cash-based compensation

is regarded as a short-term incentive based on prior studies of Cai et al (2013) and Karim et al

(2017). These two studies continue be the main reference for the other control variable of firm

characteristic and corporate governance characteristic. CSR is measured based on four

underlying components; employees, community, product quality and environment based on the

previous research from Heron (2016).

 However from the previous studies the measurement for ceo compensation include the

long term incentive, unfortunately, the measurement of compensation under component of

long-term incentive has been excluded from my study as the data is limit in Malaysia.

Bibliography
Ahmadu, A., Haron, H., & Azlan, A. (2015). Corporate Social Responsibility : A Review on

Definitions, Core Characteristics and Theoretical Perspectives, 6(4), 83–95.

https://doi.org/10.5901/mjss.2015.v6n4p83

Baker, Jensen, G. M., & Murphy, K. (1988). Compensation and incentives: Practice vs.

theory. Journal of Finance, 43, 593–616.

Bebchuk, L., & Fried, J. (2003). Executive compensation as an agency problem. Journal of

Economic Perspective, 17, 71–92.

Bob, N. (2011). Making employees suggestions Count. Journal of personnel Management

17;20 -41.

Bowen, H. (1953). Social Responsibilities of the Businessman, Harper, New York.

Buallay, A. (2017). Corporate Governance and Firm Performance : Evidence from Saudi

Arabia Corporate Governance and Firm Performance : Evidence from Saudi, 11(1), 78

98. https://doi.org/10.14453/aabfj.v11i1.6

Cai, Y., Jo, H., & Pan, C. (2011). Vice or Virtue? The Impact of Corporate Social

Responsibility on Executive Compensation. Journal of Business Ethics, 104(2), 159–

173. https://doi.org/10.1007/s10551-011-0909-7

Carroll, A.B. (1979). A three-dimensional conceptual model of corporate performance,

Academy of Management Review, Vol. 4, pp. 497-505.

Carroll, A.B. (1999). Corporate social responsibility: evolution of a definitional construct,

Business and Society, Vol. 38, pp. 268-95 Carroll, A.B. (1999) Corporate social

responsibility: evolution of a definitional construct, Business and Society, Vol. 38, pp.

268-95.

Core, J., Holthausen, R., & Larcker, D. (1999). Corporate governance, chief executive

officer compensation, and firm performance. Journal of Financial Economics, 51,

371–406.

Eells, R. & Walton, C. (1974). Conceptual Foundation of Business, 3rd Edition, Irwin, Burr

Ridge, IL.

Faleye, O. (2007). Classified boards, firm value, and managerial entrenchment. Journal of

Financial Economics, 83, 501–529.

Francoeur, C., Melis, A., Gaia, S., & Aresu, S. (2017). Green or Greed ? An Alternative Look

at CEO Compensation and Corporate Environmental Commitment. Journal of Business

Ethics, 140(3), 439–453. https://doi.org/10.1007/s10551-015-2674-5.

Gravetter, F.J & Forzano, L.B. (2011) “Research Methods for the Behavioural

Sciences” Cengage Learning p.146

Hewitt A.(2005). Managing performance with incentive pay. Journal of personnel

Management, 7(1): 20-31

Horrigan, B. (2010). Corporate Social Responsibility in the 21st Century: Debates, Models and

Practices Across Government, Law and Business. (1 ed.) Cheltenham, UK: Edward Elgar

Publishing.

Hwang, B., & Kim, S. (2009). It pays to have friends. Journal of Financial Economics, 93,

138–158.
Isa, S. M. (2012). Corporate Social Responsibility : What Can We Learn From The

Stakeholders ?, 65(ICIBSoS), 327–337. https://doi.org/10.1016/j.sbspro.2012.11.130

Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency

costs and ownership structure. Journal of Financial Economics, 3(4), 305-360

Ju Ahmad, N., Ahmad, J., Rashid, A., & Gow, J. (2017). CEO Duality and Corporate Social

Responsibility Reporting : Evidence from Malaysia, 14(2), 69–81.

https://doi.org/10.22495/cocv14i2art7

McGuire, J., Dow, S., & Argheyd, K. (2003). CEO incentives and corporate social

performance. Journal of Business Ethics, 45,341–359.

Michelon, G. and Parbonetti, A. (2012), The effect of corporate governance on sustainability

disclosure, Journal of Management and Governance, Vol. 16 No. 3, pp. 477-509.

Morck, R., Shleifer, A., & Vishny, R. (1988). Management ownership and market valuation:
An empirical analysis. Journal of Financial Economics, 20, 293–315.

Patnaik, C. (2014). Compensation Management : A theoretical preview- Compensation

Management : A Theoretical Preview.

Pearce, L.(2010). Managerial compensation based on organization performance, Journal of

industrial Relation, 52:3-28.

Rekker, S. A. C., Benson, K. L., & Faff, R. W. (2014). Journal of Economics and Business

Corporate social responsibility and CEO compensation revisited : Do disaggregation , market

stress , gender matter ? Journal of Economics and Business, 72, 84–103.

https://doi.org/10.1016/j.jeconbus.2013.11.001

Rosenstein, S., & Wyatt, J. (1990). Outside directors, board independence and shareholder
 wealth. Journal of Financial Economics, 26, 175–191.

Sapp, S. (2006). The Impact of Corporate Governance on.

Schwartz, M.S. (2011). Corporate Social Responsibility: An Ethical Approach. Broadview Press,

USA.

Steiner, G.A. (1971). Business and society. New York: Random House.

Top, D. (2017). Corporate social responsibility , agency problems and social pressure, 1–44.
Weisbach, M. (1988). Outside directors and CEO turnover. Journal of Financial Economics,

20, 431–460.

Yermack,D. (1996). Higher market valuation of companies with a small board of directors.

Journal of Financial Economics, 40, 185–211.

Vuontisjärvi, T. (2004). Modernisation of the European Social Model and Corporate Social

Responsibility: A Critical Analysis of Finnish Companies. Unpublished Ph.D Thesis,

University of Sunderland, UK.