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INTRODUCTION

Corporate Governance:

Corporate governance is the broad term desribes the processes, customs, policies, laws and
institutions that directs the organizations and corporations in the way they act, administer
and controll their operations.It works to achieve the goal of the organization and manages
the relationship among the stakeholders including the board of directors and the
shareholders.It also deals with the accountability of the individuals through a mechanism
which reduces the principal-agent problem in the organization. (Berle & Means 1932)

Corporate social responsibility (CSR):

Investopedia define Corporate social responsibility (CSR) as, it is a self-regulating business

model that helps a company be socially accountable — to itself, its stakeholders, and the
public.

According to Horrigan (2010) there is no widespread definition of CSR due to the high
levels of ambiguity and controversy associated with the topic.

It has to be noted that “virtually all definitions of CSR include the notion that business
firms (i.e., corporations) have obligations toward society beyond their economic
obligations to shareholders” (Schwartz, 2011,)

CSR shows the relationship between company and society. In management it’s a growing
area for activities. CSR is basically the engagements by a company to facilitate the society
beyond its obligation of the regulation and the key objective of corporation which is to
perform for the benefits of its shareholders. So are the expectations of consumers,
investors, shareholders. A corporation is expected to operate not only for profit, but also
for the interest of all society members (Majeed, Aziz, &Saleem,2015).

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Many organizations or institutions worldwide strongly emphasize that firms must take into
consideration the economic, social and environmental effects of their
Activities(European Commission 2002; World Business Council for Sustainable
Development 2000; World Bank 2004). Corporate Social Responsibility disclosure is a
process of providing information about interactions between companies with regard to
environment, employees, society and consumer issues (Gray et al., 2001). Corporate Social
Responsibility disclosure is also a process of providing financial and non -financial
information in the social and environment context (Hackston & Milne, 1996).

According to Adams & Shavit in 2011, corporate social responsibility disclosure (CSRD)
is an extension of the financial disclosure system, which reflects the wider anticipation of
society concerning the role of the business community in the economy. CSRD is also define
as all information reported to stakeholders about social and environmental effects of a
company’s actions. As such, it involves extending the accountability of company beyond
the traditional role of providing a financial account to the owners of capital. This
information could be of qualitative or quantitative nature or both and it may be reported in
annual reports, a specific report, a media release or other form as a means of
achieving company’s objectives(Adams &Shavit, 2011).

Most of the previous studies have generally examined the impact of corporate
governance mechanisms including board of directors’ characteristics on voluntary
disclosure (Akhtaruddin et al., 2009 ;Li et al.,2008). Other studies have investigated the
association between the board of directors’ structure and CSRD in non-financial industry
(AbdurRouf, 2011; Said, zainuddin,&haron, 2009). However, very few studies have
examined the influence of the board of directors’ attributes on CSRD in the financial sector,
This study contributes to the literature by addressing this issue in the relationships
of PSX100 Index companies to society are of great importance because many small
companies are following the lead of these large companies. Lack of research in this regard
is the main motivation of this study.

1.1. Problem Statement

The concept of Corporate Social Responsibility disclosure (CSRD) is new for the emerging
economies like Pakistan. Only a small number of firms have a CSRD strategy and these

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are mostly the multinationals that have their own standards regarding CSRD. Corporations
and the general public are less aware of their rights and responsibilities and firms are taking
CSRD as a liability instead of a source for long term benefits for the firms and general
public. Local industry is not aware of the benefits brought by CSR and they think that there
is no danger even if they do not adopt such policies. It is suggested that corporate
governance (CG) and corporate social responsibility disclosure (CSRD) are two sides of
the same coin as both CSRD and CG motivate firms to perform their role towards the
goodness of society. This study emphasizes on corporate governance since the people
who are involved in the company might influence the CSR decisions. The aim of this
study is to look at the effect of corporate governance on corporate social responsibility
disclosure (CSRD). Since there have been just a few research carried out on corporate
governance and CSRD, it will be interesting to examine the relationship between corporate
governance and corporate social responsibility disclosure (CSRD) in Pakistan. The
previous studies by (Haniffa& Cooke, 2002 ; Nazli, 2007; Said, Roshima, Yuserrie
Hj Zainuddin, Hasnah Haro 2009) also shows the relationship between corporate
governance determinant and corporate social responsibility disclosure (CSRD).

1.2. Research Objectives

To study the effect of corporate governance on corporate social responsibility listed firm
on Pakistan stock exchange PSX. To enhance research study about corporate governance
and corporate social responsibility.

1.3. Research Question

 What is the impact of corporate governance on corporate social responsibility?

 What is the relationship between corporate governance and corporate social

responsibility, positive or negative?

1.4. Significance of the Study

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This study emphasizes on corporate governance since the people who are involved
in the company might influence the CSR decisions. The aim of this study is to look at the
effect of corporate governance on corporate social responsibility disclosure (CSRD). Since
there havebeen just a few research carried out on corporate governance and CSR, it will be
interesting to examine the relationship between corporate governance and CSRD in
Pakistan. The previous study by (Nazli, 2007;Haniffa& Cooke, 2002 ; Said, et al., 2009)
also shows the relationship between corporate governance determinant and CSRD. Along
with this the study will also be very helpful for the academia prospective in having
consciousness about the relationship of corporate governance and corporate social
responsibility disclosure. In facts, this study will find it more informative to get awareness
in the depth about the current topic.

LITERATURE REVIEW

Corporate governance has traditionally specified the rules of business decision making that
apply to the internal mechanisms of companies. This set of norms and laws has, first and
foremost, served to shape the relations among boards of directors, shareholders, and
managers as well as to resolve agency conflicts. Corporate governance has emphasized
issues that go beyond this traditional focus to touch on corporate ethics, accountability,
disclosure, and reporting. As companies seek to assure regulators and investors that they
are fully transparent and accountable, corporations have increasingly pledged their
commitment to honest and fair corporate governance principles on a wide spectrum of
business practices (Gill, 2008).

The role of business in society is an ancient concern. However, until now this concern has
not been conclusively determined; business communities and international civil societies

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have not yet been able to reach to an overall agreement when defining the responsibilities
of companies to society. Indeed, defining CSR is complex and contingent on situational
factors. Moreover, there are an enormous number of varied definitions for CSR. One of the
reasons behind the inconclusiveness of the definitions of CSR is rooted in its
interchangeable and overlapping characteristics with other terminologies (Nazli, 2007).

Another reason may also lie in the fact that the contemporary CSRD agenda essentially
involves the concept of stakeholders and development as an integral issue of business
operations. Another reason is related to the ever-changing and dynamic character of CSRD
and its expansion of practices aligned with the increased demands from society and from
development issues. Despite the inconclusive definitions, different approaches and many
dimensions of CSRD, the principal notions of this paradigm are almost established.
Although these notions are not conclusive, they are consistent and have converged on
common characteristics and similar elements. These are related to the economic, social and
environmental impacts of business operations and their responses to customers’
expectations, employees, shareholders and stakeholders in the context of these impacts.
CSRD is no longer confined to corporate philanthropy; rather, it has been established that
accepting social responsibilities has a positive effect on companies’ financial
performances. Thus, CSRD has established the core principles for furthering appropriate
strategies for incorporating its different notions into business practice (Rahim, 2013).

The board of directors is very important regarding CG practices of any corporation.

Sometimes, the board size informs about the level of disclosure and transparency in
corporation. In examining the linkage between board size and CSR reporting (Aktaruddin,
Hossain& Yao, 2009) report that a large board size means higher CSR disclosure.Whereas
(Said, Yuserrie, &Hasnah 2009) examine a weak relationship between board size and the
CSR disclosure.

Similarly, Giannarakis, (2014), investigate the effect of corporate governance and financial
characteristics on the extent of corporate social responsibility disclosures. A sample of
(100) companies listed in the US were studied for the year 2011. The variables used are
CEO duality, board meeting, boards' average age, board composition and women on board
and board size as proxy for independent variable, while board commitment to CSR,

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profitability and financial leverage was used as dependent variable. The study employed a
Multiple Linear Regression using the statistical package of E-views to test the effect of a
dependent variable on the independent variable. The result of the study indicated that board
commitment to CSR and profitability were found to be positively related with the extent
of CSR disclosure, while financial leverage was negatively related to the extent of CSR
disclosure. The study was conducted outside Nigeria and time period covered was one year
which is seen inadequate to give a valid result.

In the same vein, Bouaziz, (2014) studies the relationship between corporate
governance and voluntary financial disclosure of Canadian listed firms for the years
2003. Samples of 84 companies across 14 industries listed in the Canadian Stock
Exchange were studied. The study employed Regression Analysis to test the relationship
between the variables. The independent variables used were CEO duality, board size,
ownership structure, board independence and audit committee. Also, the study introduced
some control variables; leverage, size and quotation of foreign exchange. The findings
showed that CEO duality and board size had a negative association with the level of firms’
voluntary disclosure, while ownership structure was not a determinant of the level of
voluntary financial disclosure in Canada. Also, (Giannarakis et al., 2014) studies the
financial, governance and environmental determinants of corporate social responsibility
disclosure on 100 top companies listed in the US Stock Exchange for the period
2009 -2012. A descriptive statistic and Correlation Matrix were used to measure the
relationship. CEO duality and presence of women on board were used as a proxy of the
independent variable, while social responsibility disclosure index was used as a measure
of the dependent variable. The results showed that CEO duality was not a determinant of
the extent of CSR disclosure.

2.1. Conceptual framework

Based on the above mention literature review the following theoretical model framework
has been developed.

Conceptual framework

Fig. 2.1

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 Corporate Governance Corporate Social
Responsibility
Board size
Education sector
Female directors
blesconcentration Health sector
Ownership
Contribution for natural disaster
Company size
Environmental issues
Profitability (ROE)
Activities for employees
Other donations

Independent variables Dependent variables

CHAPTER 3.

RESEARCH METHODOLOGY

3.1. Population
The secondary data will be used to analyze the Impact of corporate governance on
corporate social responsibility in context of Pakistan capital market (PSX).

3.2. Sample
The sample used in this studywill cover the top 25 companies of Pakistan stock exchange
(PSX) listed firms on PSX from 2010 to 2016. This data will be containing of seven years
of top 25 companies.

3.3. Data Collection

I have to study the articles, annual reports and different journals regarding to the top 25
companies of different sectors listed on the Pakistan stock exchange (PSX). The data will
be mainly collected from secondary data. The secondary data that is used in this research
are including the seven (7) year’s annual reports of each company listed in PSX from 2012
to 2018.

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3.4. Data Source
The secondary data will be used for this research which will be obtained from different
websites mainly from PSX and from central bank of the country i-e State Bank of Pakistan
(SBP), and from Opendoor.

3.5. Dependent Variable

3.5.1. Corporate social responsibility (CSRD)

Corporate Social Responsibility Disclosure is the dependent variable of this study and the
technique of content analysis is applied to examine the CSRD of the selected firms from
the annual reports.

3.6. Independent Variables-Hypothesis

3.6.1. Board Size

The board of directors is very important regarding CG practices of any corporation.

Sometimes, the board size informs about the level of disclosure and transparency in
corporation. In examining the linkage between board size and CSR reporting(Aktaruddin,
Hossain,& Yao, (2009) report that a large board size means higher CSR. Whereas (Said,
Yuserrie, &Hasnah,2009) examine a weak relationship between board size and the CSR.
Depending upon the literature, the hypothesis will be as follows:

All else being equal companies with larger board tend to have higher degree of CSR.

3.6.2. Independent Directors

Independent directors are defined as the directors who are neither employed by, nor
affiliated to the firm in any other way. In the CG perspective independent directors are
likely to carry out an observing function to ensure that the interests of stockholders are
taken into consideration while making the board decisions. Still, the association between
independent directors and the CSR is vague. A number of past researchers have reported a

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considerable positive relationship between independent directors and deliberate CSR.
While others observecontradictory results. Depending upon the literaturethe hypothesis
will be as follows:

All else being equal, companies with higher proportion of independent directors tend to
have lower degree of CSR.

3.6.3. Ownership Concentration

The previous study of (Said, Yuserrie, &Hasnah, 2009) reports a considerable positive
relationship of OC and CSR in Malaysian public listed companies. This particular work is
utilizing the percentage of shares held by the five major stockholders to calculate and posit
that concentration of ownership may have impact on CSR in Pakistan.

All else being equal, companies with higher ownership concentration tend to have higher
degree of CSR.

3.7. Controled Variables

3.7.1. Company Size

Large firms are supposed to have more activities and a greater impact on society. It is a
fact that big firms have more shareholders who may have concern about social programs
undertaken by the firm. Based on the outcomes of these previous studies, a constructive
relation is anticipated between company size measured in terms of sales and CSR.

All else being equal, companies with larger size tend to have higher degree of CSR.

3.7.2. Profitability

Socially responsible firms can be anticipated to be highly profitable as these firms have the
key success factors. These studies in more recently, the findings of (Ehsan&Kaleem, 2012)
about the nature of association between CSR and firm performance suggest a Positive
relationship. (Haniffa& Cooke, 2005 ;Said et al., 2009) a considerable and constructive
association between profitability and the levels of CSR. They argue that profitable firms
CSR information to portray their role in the welfare of the community and validate their
survival.

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All else being equal, companies with greater profitability tend to have higher degree of
CSR.

Model of the study

Model: CSR = β0 + β1BS + β4WD + β5OC + β7Size + β8ROE + ei

Where CSR stand for corporate social responsibility

BS: Board size

IND: Independent directors

FD: Foreign directors

WD: Women directors

OC: Ownership concentration

IO: Institutional ownership

SIZE: Company size

ROE: Return on equity (profitability)

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