Corporate Governance Factors Affecting Donation: Evidence from Charitable Organizations in Malaysia

Abstract

Charitable organizations are involved in activities of common concern to members and donors, but which normally benefit people beyond that membership. The survival of these organizations depends on donors and funders. The main objective of this study is to identify governance factors that affect donation. We posit that there are five governance factors related to donation. The governance factors are the board size, board members having professional qualification, board members with political connections, frequency of meeting, and website availability. Based on a sample of 98 charitable organizations, we found that the governance factors such as board members having professional affiliation and board members with political connections are significantly associated to donation received by the charitable organizations.

Full text

International Journal of Economics and Financial Issues | Vol 6 • Special Issue (S6) • 2016 149
International Journal of Economics and Financial
Issues
ISSN: 2146-4138
available at http: www.econjournals.com
International Journal of Economics and Financial Issues, 2016, 6(S6) 149-153.
Special Issue for "IPN Conferences, May 2016"
Corporate Governance Factors Affecting Donation: Evidence
from Charitable Organizations in Malaysia
Suhaily Hasnan1*, Maslinawati Mohamad2, Zairul Nurshazana Zainuddin3, Zubaidah Zainal Abidin4
1Faculty of Accountancy, Universiti Teknologi MARA, Shah Alam, Selangor, Malaysia, 2Faculty of Accountancy, Universiti
Teknologi MARA, Shah Alam, Selangor, Malaysia, 3Faculty of Accountancy, Universiti Teknologi MARA, Shah Alam, Selangor,
Malaysia, 4Faculty of Accountancy, Universiti Teknologi MARA, Shah Alam, Selangor, Malaysia. *Email: suhaily77@gmail.com
ABSTRACT
Charitable organizations are involved in activities of common concern to members and donors, but which normally benet people beyond
that membership. The survival of these organizations depends on donors and funders. The main objective of this study is to identify
governance factors that affect donation. We posit that there are ve governance factors related to donation. The governance factors are
the board size, board members having professional qualication, board members with political connections, frequency of meeting, and
website availability. Based on a sample of 98 charitable organizations, we found that the governance factors such as board members having
professional afliation and board members with political connections are signicantly associated to donation received by the charitable
organizations.
Keywords: Corporate Governance, Donation, Charitable, Non-prot Organizations
JEL Classications: C21, M41, M15IT
1. INTRODUCTION
Charities exist in virtually all societies and the rise of charities as
an economic force in today’s society is well documented (Brower
and Shrader, 2000). However, unlike prot-oriented entities,
which are subject to securities market regulation and required
to produce nancial reports in compliance with the International
Financial Reporting Standards, most industrialized countries
impose minimal charity regulation and operate “underdeveloped”
nancial reporting standards (Wilke, 2003). Typically, charitable
organizations are involved in activities that are of common
concern to members and donors, but which normally benet
people beyond that membership (Saxon-Harold, 1990). Hence,
the survival of these charitable organizations depends on donors
and funders. The competition among charitable organizations
and the desire to cultivate multiple revenue streams to resist
donor capture requires these organizations to be transparent
and accountable in their accounting disclosure (Cordery and
Baskerville, 2007).
The purpose of this paper is to identify the governance factors that
have an impact on donations in emerging countries, such as Malaysia.
We identify ve governance factors that affect donations - board size,
board professionalism, board members with political connections,
frequency of board meetings, and website availability. The results of
this study can provide guidance to regulators in enhancing the level
of corporate governance of the non-prot organizations in Malaysia.
This paper is organized as follows. Section 2 summarizes the
common predictor variables of governance in prior research. The
empirical results will be discussed in Sections 3 and 4 presents
the discussion and conclusion.
2. GOVERNANCE FACTORS RELATED TO
DONATIONS
Studies have found a positive relationship between the quality
of board governance and non-prot organizational effectiveness

Hasnan, et al.: Corporate Governance Factors Affecting Donation: Evidence from Charitable Organizations in Malaysia
International Journal of Economics and Financial Issues | Vol 6 • Special Issue (S6) • 2016
150
(Preston and Brown, 2004). The authors conjecture that charitable
organizations that have a better quality of governance will be better
in gaining public trust, and, hence, will be in a better position to
secure donations from the public. A summary of the measurement
of variables that will be used in this study is depicted in Table 1.
a. Board size
Some literature related to board size for prot organizations
argues that a smaller sized board is better than a larger
board size. A board membership exceeding seven or eight
would be difcult to monitor (Lipton and Lorch, 1992);
a smaller board size leads to cutting and downsizing
(Jensen, 1993), and is more effective than a larger board
size (Hermalin and Weisbach, 2003). Moreover, Owusu
and Ganguli (2010) nd that a smaller board size increases
the likelihood of a company voluntarily reporting about
its internal control.
In contrast, the literature concerning non-prot organizations indicates
that board members may inuence the efciency of the organizations.
Olson (2000) suggests that non-prot organizations with a larger
board size are more efcient in gaining funds. In addition, a larger
board size has a greater amount of information, which will help the
organizations in terms of their advisory function and capacity to
provide better monitoring. However, these are not the only elements
needed by charitable organizations to obtain more donations.
b. Board professionalism
Board professionalism, qualication, knowledge, and
experience are essential in making crucial decisions.
According to Carpenter and Westphal (2001), a board of
directors that has a mix of competencies and capabilities
will have the tendency to increase the value of the role of
the board execution. A study by Yermack (2006) regarding
share prices states that directors with professional
qualication can have a positive impact on the performance
of the share price, particularly in accounting and nance.
The same application can be applied to this study in the
context of whether or not board professionalism can affect
the ability of a charitable organization to attract the public
to make donations to its organization.
There are a few studies pertaining to private organizations that
show that the professional board members can enhance rm
performance (Haniffa and Cooke, 2002; Vafeas, 2005). In general,
organizations having a higher number of professional board
members will perform better than rms having a lower number
of professional board members.
c. Board members with political connections
Political connection is a relational wealth inasmuch as the
personal connections of managers with the government not
only affects the rm’s performance but also decisions such as
charitable contributions. Previous studies dene a politically
connected board director as a member of parliament, a
minister, military ofcial, a head of state, a close relative of a
top ofcer of a state, or a current or former ofcer of a central
government (Faccio, 2006; Fan and Wong, 2006).
Previous literature shows that a politically connected board can
increase the value of the rm; for instance, Agrawal and Knoeber
(2001) nd that directors with political experience are more
prevalent in rms that have a stronger business relationship with
the government. Claessens et al. (2006) posit that politically
connected firms receive preferential treatment from the
government in the form of capital investment and subsidy; thus,
leading them to better performance. Goldman et al. (2009) show
that the announcement of the nomination of a politically connected
individual to a company’s board of directors in the United States
would lead to a positive stock return. The central assumption here
is that owners or directors of rms have an incentive to intervene
in politics if doing so can maximize their economic interests.
Therefore, our hypothesis is that a board with political connections
will have a greater tendency of experiencing substantially higher
donations than those without.
d. Frequency of board meetings
Research concerning corporate boards has found that
the board process is the central driver of effective
governance rather than the board structure or composition
(Finkelstein and Mooney, 2003). The frequency of board
meetings reects the process in governance. Vafeas (2005)
suggests that board activity, which is measured by board
meeting frequency, is an important dimension of the
board operations. The results indicate that the frequency
of board meetings and rm value are inversely related,
ceteris paribus, in that a higher frequency of board
meetings follow poor corporate performance. Therefore,
the hypothesized negative association between meeting
frequency and past performance is likely to be non-linear,
being more pronounced for poor performance than for
good performance (Vafeas, 1999).
e. Website availabilty
The use of the Internet in marketing and promoting
one organization can be benecial. Websites manage
to emotionally engage potential donors. It has been
suggested that online donations signicantly reduce the
fundraising costs for non-prot organizations (Epner,
2004). Some charity organizations have earned a
substantial income, for instance, recycling organizations;
however, most depend on contributions from individuals
who are convinced that the organization’s programmes
make a difference (Straughan and Pollak, 2008).
3. RESEARCH METHODOLOGY
This study aims to examine the relationship of the governance
factors with donations received by charitable organizations. The
dependent variable of this study is the donations received by charitable
organizations measured by the natural log of the total income of
charitable organizations. The independent variables comprise the
governance factors; ve variables are used to study the relationship,
i.e., board size, board professionalism, board members with political
connections, frequency of board meetings, and the website availability
(Table 2). Our sample consists of 98 charitable organizations from

Hasnan, et al.: Corporate Governance Factors Affecting Donation: Evidence from Charitable Organizations in Malaysia
International Journal of Economics and Financial Issues | Vol 6 • Special Issue (S6) • 2016 151
ve different states - Kelantan, Kuala Lumpur, Sarawak, Selangor
and Terengganu that have a complete set of annual report data from
2010-2013.
The research model is summarized as follows:
DONi= α+β1BSIZEi+β2BPROFi+β3BPOLIi+β4BFEQi
+β5WEBi+β6FSIZEi+εX
a. Measurement of control variables
In this research, the control variable is the organization
size. The proxy used to measure the organization size is
the total revenue collected by the charitable organization.
This is consistent with the previous studies conducted by
Ostrower (2007), Rehli and Jager (2011), and Schmitz
et al. (2011).
4. RESULTS
This study aims to examine the relationship between governance
and the donations received by charitable organizations (proxy
for the total income of charitable organizations). The governance
factors include total number of board members (BSIZE),
board members with professional afliations (BPROF), board
members with political connections (BPOLI), total number of
board meetings conducted in the nancial year (BFREQ), and
the availability of the charitable organization’s website (WEB).
Ninety-eight charitable organizations from ve different states
were selected as the sample, as presented in Table 3.
The descriptive statistics of the independent and dependent
variables are presented in Table 4. The total number of valid cases
for donation is only 71 since the minimum value of log donation
is set at 1.00; thus, charitable organizations with a total income
of RM0.00 are not counted.
The analysis of skewness and kurtosis shows that board members
with professional afliation (BPROF), board members having
political connection (BPOLI), and number of board meetings
(BFREQ) are signicantly non-normally distributed. Thus, to
solve this problem, a transformation method proposed by Cooke
(1998) and Rahman and Ali (2006), which is referred to as the
Van der Waerden method, was used. Using this transformation
procedure, variables from the actual observation were transformed
to normal distributions by dividing the distribution into the number
of observations plus one region on the basis that each region has
equal probability (Cooke, 1998).
The correlation test was employed in order to determine the
linearity of the relationship and describe the strength and direction
of the linear relationship between the variables. The results shown
in Table 5 indicate two signicant positive correlations and two
signicant negative correlations. However, according to Cohen
(1988), the correlations are considered as “small” since they
range from 0.10 to 0.29. The threshold for the presence of severe
collinearity is 0.80 (Cooper and Schindler, 1998). Therefore, none
of the variables are excluded from the analysis.
Table 1: Variables and measurement for governance
factors
Variable Acronym Variable (proxy) Measurement
BSIZE Board size Total number of board
members
BPROF Board
professionalism
Percentage of board
members with
professional afliation
to total number of board
members. Professional
afliation refers
to members with
professions in areas
such as accounting,
management,
engineering,
architecture and
medical
BPOLI Board members
with political
connections
Percentage of board
members with political
connections to total
number of board
members. Political
connections refer
to members being
conferred awards by
the Government of
Malaysia
BFEQ Frequency of
board meetings
Total number of board
meetings conducted in
the nancial year
WEB Website
availability
Availability of
the website of the
organization
Table 2: Measurement for independent variables
Variable Acronym Variable (Proxy) Measurement
BSIZE Board size Total number of board
members
BPROF Board
professionalism
Percentage of board
members with
professional afliations
to total number of
board members.
BPOLI Board members
with political
connections
Percentage of board
members with political
connections to total
number of board
members.
BFREQ Frequency of
board meetings
Total number of board
meetings conducted in
the nancial year
WEB Website
availability
Availability of the
website. Charitable
organizations that have
a website will be coded
1 and 0 for not having
a website

Hasnan, et al.: Corporate Governance Factors Affecting Donation: Evidence from Charitable Organizations in Malaysia
International Journal of Economics and Financial Issues | Vol 6 • Special Issue (S6) • 2016
152
Standard multiple regressions were conducted to examine the
relationship of the variables since the dependent variable in
this study is a continuous data (log total income of charitable
organizations). Since multiple regressions are very sensitive
to outliers, extreme scores are excluded through the screening
process resulting in one sample being excluded. The results from
multiple regressions using the “Enter” method are presented in
Table 6.
As shown above, the R2 is 0.202, this indicates that 20.2% of
the variation in the total income (Log-donation) of charitable
organizations can be explained by the variation of the total number
of board members (BSIZE), board members with professional
afliations (BPROF), board members with political connections
(BPOLI), total number of board meetings conducted in the nancial
year (BFREQ), and the availability of the charitable organization’s
website (WEB). Among the five governance factors, board
members with political connections (BPOLI) show a signicant
positive relationship at 0.05 (0.014) and board members with
professional qualications (BPROF) show a signicant positive
relationship at 1.00 (0.076) with the total donation received by
the charitable organizations.
5. CONCLUSION
In this paper, we study the effect of the corporate governance
characteristics of the charitable organization (measured by board
size, board members with political connections, board members
having professional afliation, frequency of board meeting and
the availability of website) on its performance (measured by total
donation received). We test these predictions using the data from
annual report of 98 charitable organizations from ve different
states (i.e., Kelantan, Kuala Lumpur, Sarawak, Selangor and
Terengganu). Specically, we nd that board members having
professional afliation are positively associated with the total
donation received by a charitable organization. Our empirical
result is consistent with Haniffa and Cooke (2002) who nd that
board professionalism inuences the ability of organizations
in generating income. The results support the finding that
organizations having a higher number of professional board
members will perform better than rms having a lower number
of professional board members. Although the board members of
charitable organizations normally consist of volunteers rather
than paid professionals, the presence of professional members on
the board is important, as they are considered as an instrument in
dealing with the organization’s environment; their competencies
and capabilities are vital, especially in making significant
decisions (Brower and Shrader, 2000). Besides, we also nd that
board members with political connections inuence the donation
received by the charitable organization. Claessens et al. (2006),
claim that politically connected rms receive preferential treatment
from the government in the form of capital investment and subsidy,
which lead them to a better performance. Therefore, in this study,
the matching of the competencies and capabilities of the board
including the experiences and skills of the board members with
the support from having political connections influence the
performance of the charitable organizations.
6. ACKNOWLEDGMENTS
The authors would like to thank the Faculty of Accountancy
(Universiti Teknologi MARA), Accounting Research Institute
(Universiti Teknologi MARA) and Ministry of Higher Education
(MOHE) for providing facilities and nancial support. Part of
Table 3: Charitable organization according to states
State Frequency (%) Valid
percent
Cumulative
percent
Kelantan 9 (9.2) 9.2 9.2
Kuala Lumpur 13 (13.3) 13.3 22.4
Sarawak 20 (20.4) 20.4 42.9
Selangor 29 (29.6) 29.6 72.4
Terengganu 27 (27.6) 27.6 100
Total 98 (100) 100
Table 4: Descriptive statistics for independent and
dependent variables
Variable N Minimum Maximum Mean±SD
BSIZE 98 0.00 29.00 13.2143±6.28,736
BPROF 98 0.00 3.00 0.2143±0.67,732
BPOLI 98 0.00 5.00 0.2551±0.81,622
BFREQ 98 0.00 9.00 1.0000±1.14,873
WEB 98 0.00 1.00 0.2347±0.42,599
Log-donation 71 1.00 5.59 3.8864±0.96,484
Valid N 71
Table 5: Correlation analysis
Variable BSIZE WEB BPROF BPOLI BFREQ
Log-donation BSIZE 1.00
WEB −0.106 1.00
BPROF 0.112 −0.114 1.00
BPOLI 0.093 0.173 −0.011 1.00
BFREQ 0.067 0.068 0.050 0.062 1.00
Table 6: Multiple regression analysis
Variable B Standard error Beta t Signicant 95.0% C.I for B
Lower Upper
Constant 4.18 0.25 16.71 0.00 3.68 4.68
BSIZE −0.027 0.016 −0.18 −1.63 0.107 −0.060 0.006
WEB 0.248 0.248 0.115 1.000 0.321 −0.248 0.743
BPROF 0.338 0.187 0.204 1.804 0.076 −0.036 0.712
BPOLI 0.438 0.173 0.289 2.527 0.014 0.092 0.785
BFREQ 0.218 0.142 0.173 1.538 0.129 −0.065 0.502
R20.202
N 97

Hasnan, et al.: Corporate Governance Factors Affecting Donation: Evidence from Charitable Organizations in Malaysia
International Journal of Economics and Financial Issues | Vol 6 • Special Issue (S6) • 2016 153
this research is supported under MOHE Research Acculturation
Grant Scheme.
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