By DR. Tarus B. Kipchumba
This study investigated the impact of board governance on sustainability reporting in Kenya, focusing on industrial companies listed on the Nairobi Securities Exchange. Data from 45 firm observations (2018-2022) were collected from annual reports, sustainability reports, and websites. Using content analysis and a fixed effects regression model, the study found that board independence significantly enhances voluntary sustainability reporting (β = 0.113, p < 0.05). The findings suggest that establishing standards for board composition and independent directors’ roles can improve reporting. Managers should integrate sustainability into performance indicators, while policymakers should strengthen legislation on board independence to improve corporate accountability.
The growing impacts of climate change have spurred companies to address climate resilience, but integrating sustainability into business operations remains a significant challenge. Sustainable business models help firms align their economic goals with sustainability objectives, benefiting all stakeholders. Companies are under increasing pressure from various stakeholders, such as consumers, governments, investors, and non-governmental organizations, to assess, reduce, and disclose their greenhouse gas (GHG) emissions. Corporate activities contribute significantly to global GHG emissions, both directly and indirectly. In response, many international corporations are taking steps to reduce their carbon footprint and disclose GHG emissions through multiple communication channels. Governments, including those in the U.S., the UK, and Australia, have introduced voluntary or mandatory reporting programs requiring GHG disclosure.
Despite these advancements, many nations, including Kenya, have not made GHG disclosure mandatory. As a result, firms are employing various strategies for voluntarily disclosing their emissions, with some opting for transparency while others withhold information. Businesses face the challenge of deciding what information to disclose regarding their GHG emissions as global stakeholders demand greater transparency. Investors and public interest groups are calling for standardized practices and more detailed reporting.
Prior research has examined the relationship between corporate governance (CG) and GHG emissions disclosure, focusing on mechanisms such as ownership structure, CEO duality, board effectiveness, board size, and board independence. However, studies on the indirect connection between board characteristics and GHG emissions disclosure are limited. Without proper governance, managers may selectively release information to conceal their behaviour. The board of directors is crucial in internal governance, overseeing top management. Fama and Jensen (1983) suggest that boards monitor management actions. Independent directors, in particular, are believed to promote transparency and improve the quality of environmental information disclosed (Rupley et al., 2012). Research by Chau & Gray (2010) and Huafang & Jianguo (2007) has shown a positive relationship between board independence and voluntary disclosure. However, other studies (Eng & Mak, 2003) have found a negative relationship or no correlation.
The increasing concern over climate change has increased pressure on companies to disclose their environmental impact and sustainability strategies (Alsaifi et al., 2020). Corporate governance mechanisms influence the extent and nature of this disclosure (Agyei-Mensah, 2016). Research on corporate governance often focuses on financial disclosures, but the relationship between governance and GHG emission disclosures has been less explored. Most research has been conducted in developed countries, where disclosures aim to reduce information asymmetry and improve stock liquidity.
However, disclosing sensitive environmental data may expose firms to competitive risks. The relationship between governance mechanisms and environmental performance is still debated, with mixed results (Kassinis et al., 2016; Liu, 2018; Lu & Herremans, 2019).
This paper explores the link between board independence and voluntary sustainability reporting in listed manufacturing firms in Kenya. It contributes to corporate governance and voluntary disclosure literature, particularly in emerging markets. The findings may offer insights into best practices for governance and reporting strategies, influencing management practices and guiding policymakers. The research underscores the value of independent oversight in decision-making, promoting sustainable practices and enhancing corporate integrity. These contributions can support stronger governance frameworks and greater transparency in Kenya and beyond.
Literature Review
Sustainability is increasingly essential for businesses, especially in light of climate change. A sustainable business operates ethically, with environmental and social responsibility, while ensuring long-term profitability. Sustainability involves reducing environmental harm through recycling, using renewable resources, and minimizing carbon footprints. It also requires businesses to consider social welfare, ensuring fair labour practices and community engagement. Sustainable businesses aim to innovate, improve efficiency, and create new markets, all while ensuring economic viability without compromising the ability of future generations to meet their needs. An independent director is a board member without financial or personal ties to the company aside from receiving sitting allowances. Board independence ensures decisions and oversight are not influenced by management or external parties, which is crucial for good corporate governance and shareholder protection. Independent directors, typically in a majority, oversee key committees such as audit, compensation, and nomination. Their role promotes objective decision-making, effective oversight, and accountability.
From the agency theory perspective, board independence protects shareholders’ interests and regulates top management to prioritize these interests (Fama & Jensen, 1983). Independent directors help ensure effective board operation and accountability, influencing decisions such as corporate sustainability reporting (Kim & Cheong, 2015). Research supports the positive correlation between independent directors and sustainability reporting
Voluntary disclosure provides information beyond mandatory requirements, enhancing transparency and representing a company’s operations, financial performance, and governance. It is linked to favourable financial outcomes, such as reduced debt costs and improved liquidity. Disclosure improves accountability and reduces information asymmetry. Regulations like IFRS promote financial transparency, benefiting stakeholders and investors. The study is guided by agency, stakeholder, and legitimacy theories.
Top of Form
HO1: Board Independence has no significant effect on voluntary disclosure of sustainability reporting among listed firms in Kenya.
Methodology
This study adopted a longitudinal and explanatory methodology over a five-year period (2018–2022). The explanatory design was chosen to establish causal links between variables (Kassa, 2021). The sample included firms listed on the Nairobi Securities Exchange (NSE) between 2018 and 2022. The study used the Global Reporting Initiative (GRI). A disclosure index was developed for sustainability and its three dimensions (Healy & Palepu, 2001; Archambault & Archambault, 2003). Linear regression was employed to analyze the relationship between the variables. SR = β_0 + β_1(BI)_it + ε_it
SR is Sustainability Reporting, BI is Board Independence, β_0 is the constant, β_1 is the coefficients, and ε is the error term.
Findings and Discussion
Under descriptive statistics, the average sustainability reporting value was 0.181, with board independence averaging 0.151, while Pearson correlation analysis revealed (r = 0.421, p < 0.05) between board independence and voluntary sustainability reporting. Regression analysis
showed a significant effect (β = 0.113, p < 0.05) between board independence and voluntary disclosure of sustainability reporting. Further, the null hypothesis was rejected, confirming that increased board independence leads to higher voluntary disclosure of sustainability reporting.
Table 3: Regression Analysis
Fixed-effects (within) regression
Number of observations = 45
Group variable: FIRM, Number of groups = 9
R-squared: Within = 0.6942, Between = 0.3963, Overall = 0.5239
F(7,145) = 47.02, Prob > F = 0.0000
Corr(u_i, Xb) = -0.2028
| Variable | Coef. | St. Err. | t-value | p-value | [95% Conf. Interval] |
| SR | 0.113 | 0.052 | 2.16 | 0.033 | 0.009, 0.217 |
| Constant | 2.64 | 0.031 | 0.00 | 1 | -0.062, 0.062 |
Sigma_u = 0.5954, Sigma_e = 0.4322, Rho = 0.6549
Mean dependent var = 0.000, SD dependent var = 1.000
F-test: 47.02, Prob > F = 0.000, F-test for u_i = 7.80, Prob > F = 0.0000
Findings and Conclusion
The study found a positive, significant effect between board independence and voluntary sustainability reporting. This aligns with Rathnayaka Mudiyanselage (2018) and Shamil et al. (2014), which linked larger, more independent boards to higher sustainability disclosure. However, it contradicts Naciti (2019), who suggested that independent directors focus on shareholder value, viewing sustainability reporting as a cost.
The study concludes that board independence significantly influences voluntary sustainability reporting, supporting agency theory, which emphasizes the role of independent boards in mitigating agency problems and enhancing transparency. The findings highlight the importance of stakeholder engagement in sustainability reporting, aligning with stakeholder theory. Firms should reconsider board independence to improve sustainability reporting, benefiting both transparency and reputation. Policymakers could strengthen regulations promoting board independence, ensuring accountability in sustainability practices.
References
Alsaifi, K., Mollah, M., & Lipy, S. H. (2020). Corporate governance and firm performance: Evidence from the banking industry in emerging markets. Corporate Governance: The International Journal of Business in Society, 20(4), 641-661
Chau, G., & Gray, S. J. (2010). Corporate governance and the impact of the 2007-2008 global financial crisis. International Journal of Accounting, 45(4), 431-460
Eng, L. L., & Mak, Y. T. (2003). Corporate governance and voluntary disclosure. Journal of Accounting and Public Policy, 22(4), 325-345.
Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. Journal of Law and Economics, 26(2), 301-325. Bottom of Form
Huafang, L., & Jianguo, W. (2007). The role of ownership structure in corporate performance: Evidence from China. China Economic Review, 18(4), 313-330.
Kassinis, G., Panayiotou, N., & Papasolomou, I. (2016). Corporate governance, sustainability practices, and financial performance: A study of listed companies in Cyprus. Journal of Business Research, 69(5), 1754-1763
Kim, Y., & Cheong, Y. (2015). The relationship between corporate governance and financial performance: Evidence from Korea. Corporate Governance: The International Journal of Business in Society, 15(3), 289-305
Liu, Y. (2018). Corporate governance, environmental responsibility, and firm performance: Evidence from China. Journal of Business Ethics, 151(4), 1033-1047
Lu, J., & Herremans, I. M. (2019). Corporate governance and environmental sustainability: A comparison of developed and developing countries. Business & Society, 58(1), 35-69
Naciti, V. (2019). Corporate governance and board of directors: The effect of a board composition on firm sustainability performance. Journal of Cleaner Production, 237
Rathnayaka Mudiyanselage, N. C. S. (2018). Board involvement in corporate sustainability reporting: evidence from Sri Lanka. Corporate Governance: The International Journal of Business in Society, 18(6), 1042-1056.
Rupley, K. H., Brown, D. A., & O’Keefe, T. B. (2012). The role of corporate governance in the voluntary disclosure of financial information. Journal of Business Ethics, 107(3), 349-370.
FCS Dr. Tarus B. Kipchumba (PhD) is an expert in Strategic Management, Governance and Performance Management. He holds a PhD in Strategic Management, MSc in Human Resource Development from Moi University, MBA from JKUAT and a Bachelor of Business Management (Accounting) from Moi University. Dr. Tarus is also a Certified Public Accountant (CPA K), Certified Human Resource Practitioner (CHRP K), and Certified Public Secretary (CPS K) He works as a Senior Director Administration and Finance at Moi Teaching and Referral Hospital.
email: tarusbk@gmail.com
