Does sharia governance influence corporate social responsibility disclosure in Indonesia Islamic banks?

ABSTRACT

Purpose: This study aims to investigate the effect of sharia governance to corporate social responsibility disclosure in Indonesia Islamic banks.

Design/methodology/approach: The data in this study are taken from the annual reports of ten Islamic banks in Indonesia in the period 2011–2018. The data analysis method used in this study is multiple linear regression analysis.

Findings: This study finds that the effectiveness of the board of directors plays a vital role in enforcing corporate social responsibility disclosure. Whereas, the audit committee and sharia supervisory board are found to have no significant effect on corporate social responsibility disclosure in Islamic banks.

Research implications: Results of this study reveal that sharia supervisory board in Indonesia Islamic banks only still focuses on the compliance of Islamic banks with the sharia principles regarding the products and operations.

Originality/value: The novelty of this study lies in highlighting the effect of sharia supervisory board as a unique characteristic of sharia governance.

KEYWORDS:

• Shariah governance
• Corporate social responsibility
• Islamic banks

1. Introduction

Corporate social responsibility (CSR) is an approach that has been used for the two decades by companies to demonstrate corporate responsibility in sustainable development. CSR was found to have a significant positive relationship with the company’s financial performance (Platonova et al. 2018). However, previous studies revealed that CSR activities carried out by companies were not pure intentions. But CSR was used as competitive strategies of the companies to build a good reputation, to maintain business continuity, and to maximize profit (Shim, Chung, and Kim 2017). These relationships are in line with the stakeholder theory, which states that if the organization wants to achieve the goals effectively, then the organization must pay attention to all stakeholder interests.

In addition to the above studies, other studies revealed that the level of CSR disclosure among industry sectors are different, especially banking sector which is still low (Ali, Frynas, and Mahmood 2017). Business activities in the banking sector were considered to have the least impact on social and environment directly. But currently, the banking sector is seen as an industrial sector that has the most crucial role in promoting sustainable development through adequate funding for economic growth. Besides, the banking sector has more stakeholder groups than the non-banking industry. Therefore, the demand to disclose CSR activities is increasing for the banking sector, including Islamic banks.

Islamic banks operate based on Islamic law (sharia) which indeed has the primary purpose of creating socio-economic justice and the distribution of wealth and income evenly in the society (al-Falah) (Aribi and Gao 2010). CSR disclosure is one of the primary obligations of Islamic banks as a form of Islamic banks accountability to God and human beings. However, (Nobanee and Ellili 2016) revealed that the level of CSR disclosure in annual reports of Islamic banks registered in the UAE is lower than conventional banks.

The role of corporate governance, especially the board of directors and audit committees, in CSR disclosure, has become a hot topic at this time (Fernández-Gago, Cabeza-García, and Nieto 2016). CSR disclosures are part of the duties of the board of directors and audit committees, which play a significant role in ensuring the company’s disclosure and transparency in annual reports (Ibrahim and Hanefah 2016). Besides, this study discusses not the only board of directors and the audit committee but also the sharia supervisory board as a unique of sharia governance, whose role in encouraging CSR disclosure. The discussion about the sharia supervisory board, which is rarely investigated, is a novelty of this study. As a result, the investigation regarding sharia governance, including sharia supervisory board, can enforce the government to empower and expand the function of the sharia supervisory board. Moreover, the difference among research results makes the relationship between sharia supervisory board and CSR disclosure has not concluded yet. Therefore, this study aims to investigate the effect of sharia governance on CSR disclosure in Islamic banks, especially in Indonesia.

This study includes five sections. The first section presents the background of the research topic. Next, previous researches and related theories are shown in the second section. The next chapter discusses the research method and the results. The study is concluded in the last part.

2. Literature review

2.1. Stakeholder theory

There are several theories, such as agency and stewardship theories, which can be used as a basis for the relationship between corporate governance and corporate social responsibility, but the most aplicable theory is stakeholder theory (Rodriguez-Fernandez 2016). The basic concept of corporate governance is the separation of roles in company management, that is, between agents and principals. Agency theory views that there is asymmetry information in the relationship between shareholders and management, which can trigger management to act opportunistically. In contrast to agency theory, stewardship theory looks that there are ethical values and professionalism in the relationship of shareholders and management, that is upheld so that conflicts of interest between shareholders and management are minimized. Agency theory and stewardship theory both view management as an agent of shareholders as principals. Meanwhile, stakeholder theory views that the agent and principal relationships widely, which is not only between management and shareholders but also with all company stakeholders beyond shareholders (Mitchell, Agle, and Wood 1997).

Stakeholder theory explains all contractual relationships, both explicitly and implicitly, among all stakeholders (Hill and Jones 1992). Stakeholders are constituent groups that have legitimate claims against companies, including shareholders, creditors, management, employees, suppliers, customers, the local community, and the general public (Freeman 1983). Every stakeholder has a contribution to the company, so in return, the company should pay attention to all interests.

Based on the perspective of stakeholder theory, a company's success depends on management's success in accommodating all stakeholders’ interests (Elijido-Ten 2007). Management should not only focus on efforts to maximize shareholders’ wealth but also pay attention to the other stakeholders. A company can not maximize its value if the company ignores the interests of all stakeholders because every activity of the company has an impact on stakeholders (Jensen 2010). If the company's actions have a positive impact on stakeholder interests, the stakeholders will support the company's operations. Conversely, if the company's activities harm stakeholders, the company's operational activities can be disrupted.

Corporate social responsibility is one of the concepts based on stakeholder theory. Corporate social responsibility is a form of fulfilling the company's moral and ethical obligations towards society and the environment (Schwartz and Carroll 2003). The community and the environment as stakeholders have contributed to the company in providing the company's location and resources (Hill and Jones 1992). In return, the company has a moral and ethical obligation to pay attention to the interests of society and the environment through community empowerment and environmental preservation. Implementation of corporate social responsibility by companies benefits the company itself because corporate social responsibility is found to reduce costs and risks for the company, build competitive advantage, improve reputation and legitimacy of the company, and build synergy (Salazar and Husted 2008).

2.2. Islamic banks in Indonesia

The beginning of the development of Islamic banks in Indonesia began in 1991, which was marked by the operation of Bank Muamalat. This incident is inseparable from the concern of the Indonesian ulama regarding the development of the capitalist economy and riba. Therefore, the MUI, in collaboration with the Indonesian government, established Bank Muamalat as the first bank in Indonesia to be operated based on Islamic law. Since then, the development of Islamic banks in Indonesia is increasingly rapid.

Based on Law No. 21 of 2008 concerning Sharia Banking, Islamic banks are banks that run business activities based on sharia principles, or the principles of Islamic law. Islamic banks operate based on the principles of justice, balance, benefit, and universalism. Transactions that are processed in Islamic banks are transactions that must not contain gharar, maysir, riba, dhzalim, and unlawful objects. Also, all sharia transactions are processed based on fiqh muammalah contracts based on the Qur’an, hadits, and ijtima’.

Islamic banks have more varied business activities than conventional banks. Because Islamic banks are run based on fiqh muammalah contracts that enable Islamic banks to operate in a variety of business activities compared to conventional banks. Islamic banks carry out a variety of business activities including deposits and savings based on wadiah and mudharabah contracts, loans based on qardh and qardh al-hasan contracts, leasing based on ijarah contract, factoring based on hawalah contract, financing based on murabahah, salam, and istishna’ contracts, venture capital based on musyarakah contract, pawnshop based on rahn contract and others. Some business activities carried out by Islamic banks cannot be run by conventional banks under applicable regulations.

The diversity of products and services offered by Islamic banks in Indonesia encourages the MUI to form a council that is in charge of supervising Islamic bank products and services to remain under Islamic law (Suzuki, Uddin, and Sigit 2019). The commission is called the Dewan Syariah Nasional-MUI (DSN-MUI). The DSN-MUI is tasked explicitly with establishing fatwas on systems, activities, products, and services of sharia financial institutions, including Islamic banks. If the business activities of Islamic banks deviate from the fatwas issued by the DSN-MUI, the DSN-MUI has the authority to give a warning to the Islamic bank (Rudianto and Rahmiati 2014).

Islamic banking business activities also remain overseen by regulators which include the Financial Services Authority (Otoritas Jasa Keuangan/OJK), Bank Indonesia, and the Indonesia Stock Exchange (Bursa Efek Indonesia) like other financial institutions and conventional companies in Indonesia. Islamic banks in Indonesia are also inseparable from all the rules relating to companies in Indonesia, including regulations regarding the implementation of CSR. Law No. 40 of 2007 concerning Limited Liability Companies states that CSR is the company’s commitment to participate in sustainable economic development to improve the quality of life and the environment that is beneficial, both for the company itself, the local community, and society in general. Even Law No. 25 of 2007 concerning Investment stipulates that every investor is obliged to implement CSR. This rule is the reaffirmed in the Regulation Kep-431/BL/2012 regulated by the OJK that all companies must report their CSR activities in their annual reports. Table 1.

Table 1. The development of sharia commercial banks in Indonesia in 2016–2019.

Indicator	2016	2017	2018	Sep 2019
Total Assets (in billion IDR)	254,184	288,027	316,691	325,030
Number of Banks	13	13	14	14
Number of Offices	1,869	1,825	1,875	1,903
ATMs	3,127	2,585	2,791	2,805
Number of Employees	51,110	51,086	49,516	50,000

Source: Sharia Banking Statistics by Financial Services Authority, Republic of Indonesia, 2019.

2.2. Sharia governance

Based on agency theory, the corporate governance is a mechanism built to oversee management to avoid agency conflicts. The traditional approach indeed views that corporate governance is an act only to protect shareholder value from acts of expropriation by managers (Safieddine 2009). However, nowadays corporate governance is no longer seen within the framework of the relationship between shareholders and management but in a broader context, namely the relationship between management, the board of directors, shareholders, and other corporate stakeholders. This modern view is in line with stakeholder theory, which states that building good relationships with all stakeholders is an essential thing in achieving organizational goals (Hill and Jones 1992).

The corporate governance mechanism is a company internal control mechanism that aims to ensure management applies the principles of good corporate governance. The principles of good corporate governance include the principles of accountability, transparency, responsibility, and fairness in the management of the company. The implementation and reporting CSR is one form of the realization of principles of good corporate governance. However, good corporate governance can only be realized through a good corporate governance structure (Stuebs and Sun 2015). Therefore, the structure of corporate governance is believed to influence the implementation and reporting of CSR (Choi, Lee, and Park 2013).

The corporate governance structure generally consists of General Meeting of Shareholders, the board of commissioners, the board of directors, and committees under the board of commissioners which include audit committee, risk monitoring committee, and nomination and remuneration committee. Previous studies revealed that the board of directors and audit committee were the most important parties in the corporate governance structure (Xie, Davidson, and DaDalt 2003; Bonazzi and Islam 2007; Andres and Vallelado 2008; Glinkowska and Kaczmarek 2015; Samaha, Khlif, and Hussainey 2015). In addition to the board of directors and audit committee, the structure of sharia governance has a uniqueness that is not owned by conventional companies that also play an important role in the structure of corporate governance, namely the sharia supervisory board (Hamza 2013; Srairi 2015).

Shariah governance views that companies must be managed based on the Islamic paradigm of the Qur'an and Sunnah. Shariah is not only concerning religious rituals but also includes social, political, economic, business, and legal dimensions (Hafeez 2016). Based on the Islamic perspective, there is no separation between religious and non-religious activities, so Muslims must always obey the things that have been prescribed by God. Therefore, sharia governance has a two-tier board, namely the board of directors and shariah supervisory board, which involve fugaha (jurists) and academics from different disciplines (Ngwu 2016).

2.2.1. Board of directors

An essential part of the corporate governance mechanism is the board of directors (Liang, Xu, and Jiraporn 2013). The board of directors plays a role in designing efficient control mechanisms for corporate governance (Bonazzi and Islam 2007; Said, Hj Zainuddin, and Haron 2009). The board of directors elected by shareholders makes the most critical decisions, such as yearly financial settlement, accepts strategies and business plans for the following year, and profit distribution (Glinkowska and Kaczmarek 2015). The board of directors generally has the duties and responsibilities in managing the company, implementing the principles of good corporate governance, preparing business plans, establishing and communicating strategic policies to all stakeholders, and preparing financial reporting. Besides, the board of directors is also responsible for reporting to stakeholders regarding nonfinancial matters such as products, human resources, information technology, and relationship with key stakeholders (Glinkowska and Kaczmarek 2015).

The characteristic of the board of directors is crucial to corporate transparency (Fuente, García-Sánchez, and Lozano 2017). The effectiveness of the board of directors’ performance is influenced by the size of the board of directors (Raheja 2005). The results of some previous studies revealed that the more members of the board of directors in a company, the less effective communication, and coordination between members of the board of directors (Jensen 1993; Eisenberg, Sundgren, and Wells 1998; Mak and Kusnadi 2005; Guest 2009). As a result, decision making is done slowly due to lack of unanimity. Therefore, previous studies revealed that the ineffective and inefficient performance of the board of directors had an impact on a decrease in the quality of disclosures (Said, Hj Zainuddin, and Haron 2009; Abduh and AlAgeely 2015). On the other hand, other studies revealed that the size of the board of directors has a positive effect on disclosure (Akhtaruddin et al. 2009; Abeysekera 2010; Allegrini and Greco 2013; Samaha, Khlif, and Hussainey 2015) and others found that board size is not associated with disclosure (Cheng and Courtenay 2006).

(Siregar and Bachtiar 2010; Kiliç, Kuzey, and Uyar 2015; Alotaibi and Hussainey 2016) found that the size of the board of directors has a positive effect on the CSR disclosure. But, (Kiliç, Kuzey, and Uyar 2015; Rao and Tilt 2016) found that there was no significance between the size of the board of directors and CSR disclosure.

H1: The size of the board of directors has a significant effect on CSR disclosure.

The measure of the effectiveness of the board of directors’ performance in corporate governance structures can also be proxied by the frequency of board meetings (Vafeas 1999). The board of directors fulfills its supervisory role through meetings that are carried out internally between members of the board of directors (Lin et al. 2016). (Laksmana 2008) provides empirical evidence that the frequency of the board of directors’ meetings benefits the stakeholders by delivering greater transparency in information disclosure. CSR, part of business operations, is also thought to be discussed at each board meeting. (Yusoff, Jamal, and Darus 2016) found that the board meeting had been found to have a significant positive influence on CSR disclosure. But, (Giannarakis 2014; Alotaibi and Hussainey 2016; Liao, Lin, and Zhang 2018) didn’t find a positive relationship between the frequency of the board of directors’ meetings and CSR.

H2: The frequency of the board of directors’ meeting has a significant effect on CSR disclosure.

2.2.2. Audit committee

An audit committee is one of the organs in corporate governance structure supporting the board of commissioners in implementing good corporate governance. The audit committee is tasked with ensuring the integrity of financial reporting through supervision and control over the implementation of internal and external audit functions, corporate governance implementation and compliance with applicable laws and regulations (Fama and Jensen 1983). The primary responsibility of the audit committee is to ensure that financial reporting delivered accurately and on time, so that information asymmetry between management and stakeholders is minimized. Therefore, the level of corporate disclosure in financial reporting, including CSR disclosure, is determined by the effectiveness of the audit committee’s performance (Carcello and Neal 2003; Samaha, Khlif, and Hussainey 2015).

The effectiveness of the audit committee’s performance in ensuring the level of corporate disclosure in financial reporting can be determined through the size and the independence of audit committee members (Mangena and Pike 2005). Previous studies revealed that the more members of the audit committee the more effective the performance of the audit committee in overseeing the company’s financial reporting, including disclosure (Bédard, Chtourou, and Courteau 2004; Li, Mangena, and Pike 2012; Othman et al. 2014). On the other hand, other studies suggested that audit committee that is too large can be ineffective because of coordination and communication problems (Hackman 1990; Jensen 1993; Jun Lin, Xiao, and Tang 2008). Empirical evidence regarding the relationship between the size of the audit committee and CSR disclosure is still minimal and mixed (Yekini and Jallow 2012; Appuhami and Tashakor 2017).

H3: The size of the audit committee has a significant effect on CSR disclosure.

The audit committee, which is dominated by independent parties, is believed to be able to increase the accountability and transparency of the company (Pucheta-Martínez and De Fuentes 2007). This is because independent parties should reduce the agency cost and improve the internal control that will lead to a higher quality of disclosure (Forker 1992). Also, independent audit committee members will work more objectively and not tolerate non-conformity and manipulation of financial reporting (Mangena and Pike 2005; Inaam and Khamoussi 2016). Some empirical evidences show that the higher the proportion of independent members on an audit committee, the higher the level of disclosure (Mangena and Tauringana 2007; Li, Mangena, and Pike 2012; Appuhami and Tashakor 2017). However, other studies show that the existence of independent members has no significant effect on disclosure (Yang and Krishnan 2005).

H4: The proportion of independent members in audit committee has a significant effect on CSR disclosure.

2.2.3. Sharia supervisory board

Sharia Supervisory Board is a uniqueness from shariah governance of Islamic banks, which is different from conventional banks (Waemustafa 2015). The sharia supervisory board is an independent board appointed by the DSN-MUI which is in charge of directing, consulting, advising, evaluating, and supervising bank activities to ensure that every activity carried out complies with sharia principle as determined by fatwas of the DSN-MUI, following Bank Indonesia regulations. The sharia supervisory board is also tasked to provide opinions regarding the purity of the implementation of sharia principles by Islamic banks, both on the overall operations of Islamic banks and the development of specific products and services following the DSN-MUI fatwas. Besides, the sharia supervisory board is responsible for providing the opinion of sharia aspects regarding findings or deviations found by the internal auditors of Islamic banks to be followed up. All results of the supervision of the sharia supervisory board must be reported by the sharia supervisory board to the DSN-MUI and Bank Indonesia every semester.

The sharia supervisory board plays a role in influencing and supervising Islamic banks. Previous studies have investigated that the high CSR disclosure in Islamic banks is more influenced by the existence of the sharia supervisory board (Rahman and Bukair 2013; Mallin, Farag, and Ow-Yong 2014; Musibah and Alfattani 2014). The existence of the sharia supervisory board places more significant pressure on Islamic banks to better disclose CSR activities (Haniffa and Hudaib 2007; Farook, Hassan, and Lanis 2011). Previous studies have formulated several characteristics which are associated to the effectiveness of the sharia supervisory board’s performance in carrying out their duties and responsibilities, including ensuring CSR disclosure by Islamic banks (Farook, Hassan, and Lanis 2011; Rahman and Bukair 2013).

As with the board of directors and audit committee, the effectiveness of the sharia supervisory board’s performance can also be determined by the size of the sharia supervisory board. Based on Bank Indonesia Regulation No. 11/3/PBI/2009 dated 29 January 2009, the sharia supervisory board members for Islamic banks in Indonesia are at least two people and a maximum of 50% of the total directors. Some studies suggest that the more members of the sharia supervisory board, the better the ability of the sharia supervisory board to control and monitor the performance of the management’s company and ensure compliance with regulation and sharia principles (Akhtaruddin et al. 2009; Rahman and Bukair 2013). As a result, the level of CSR disclosure will be even higher as one form of compliance with regulations and sharia principles (Farook, Hassan, and Lanis 2011). However, the large board is prone to communication and coordination problems, which can have an impact on the effectiveness of the board performance (Jensen 1993).

Some empirical evidences show that the size of the sharia supervisory board has a significant positive effect on CSR disclosure (Farook, Hassan, and Lanis 2011; Rahman and Bukair 2013; Mallin, Farag, and Ow-Yong 2014). Some others did not find a significant relationship between the size of the sharia supervisory board and CSR disclosure (Khoirudin 2013; Rahayu and Cahyati 2014).

H5: The size of the sharia supervisory board has a significant effect on CSR disclosure.

The effectiveness of the sharia supervisory board’s performance is also related to the educational background of the sharia supervisory board (Hambrick and Mason 1984; Ibrahim, Yahya, and Abdalla 2015). The educational background of the sharia supervisory board represents the breadth of knowledge and the level of professionalism of the sharia supervisory board related not only to sharia principles issues but also economic, financial, and accounting practices issues (Nathan and Ribière 2007; Charles and Chariri 2013). Therefore, the sharia supervisory board with doctoral education background is suggested to not only focus on the compliance of Islamic banks towards sharia principles but also the attitude of Islamic banks to current issues, such as CSR disclosure (Farook, Hassan, and Lanis 2011; Hawani Wan Abd Rahman, Mohamed Zain, and Hanim Yaakop Yahaya Al-Haj 2011; Amalina Wan Abdullah, Percy, and Stewart 2013; Ibrahim and Hanefah 2016). The studies of the effect of the educational background of the sharia supervisory board on CSR disclosure are still rare. However, some empirical evidences show that the doctoral educational background of the sharia supervisory board can encourage the level of CSR disclosure in Islamic banks (Charles and Chariri 2013; Rahman and Bukair 2013).

H6: The educational background of the sharia supervisory board has a significant effect on CSR disclosure.

The breadth of knowledge of the sharia supervisory board is not only represented through formal education that has been taken but also tacit knowledge about the sharia principles obtained through experience and recognition (Ibrahim, Yahya, and Abdalla 2015). High and low levels of tacit knowledge are reflected through the reputation of the members of the sharia supervisory board in public, primarily through positions that have been or are being administered to organizations or bodies related to Islamic banks (Rahman and Bukair 2013). Previous studies have revealed that reputable members in the sharia supervisory board tend to better understand the current implications of Islamic banks (El-Halaby and Hussainey 2016; Safiullah and Shamsuddin 2018). Hence, it is thought to encourage CSR disclosure in Islamic banks (Farook, Hassan, and Lanis 2011; Rahman and Bukair 2013; Ibrahim, Yahya, and Abdalla 2015). However, empirical evidences regarding the relationship between reputable members in the sharia supervisory board and CSR disclosure are still rare.

H7: The reputable sharia supervisory board has a significant effect on CSR disclosure.

3. Research methodology

3.1. Population and sample

The population of this study includes all Islamic banks in Indonesia. Indonesia is one of the countries with the largest Muslim population in the world. Thus, the development of Islamic banks is quite rapid in Indonesia. Therefore, a study in Indonesia Islamic banks is expected to represent a general picture of the development of Islamic banks in the world, particularly about CSR disclosure. This study period covers 2011–2018. The reason for the period of the study starting in 2011 is because in 2009 and 2010 many Islamic banks in Indonesia were just operating. In 2011 11 Islamic banks were operating in Indonesia. However, there is one Islamic bank that does not have complete annual report data in the 2011–2018 period. Thus, the total sample of this study is 10 Islamic banks, and the number of data observations is 80 observations data.

3.2. Variable measuring

The measurement of CSR disclosure index (CSRD) in this study is adopted from the study of (Platonova et al. 2018). The CSR disclosure index developed by Platonova divides CSR into six dimensions, namely vision and mission statements, products and services, zakah, charity, and benevolent funds, commitment to employees, commitment towards debtors, and commitment towards community. The six dimensions of CSR are divided to be 55 sub-dimensions. Meanwhile, the CSR disclosure index is measured using a content analysis method where 1 is given if the sub-dimension disclosed and 0 if not disclosed. The CSR disclosure index score is then calculated based on the weighted average ratio with the following formula:$CSRdisclosureindex={\displaystyle \frac{{\sum }_{i=1}^n{x}_{ijt}}{N}}$

1Where the CSR disclosure index_it is the CSR disclosure index of company i in period t; X_ijt is X variable for dimension j and period t; N is the number of variables which is 55.

The independent variables are measured as follows. The size of the board of directors (SBD) is measured based on the number of members of the board of directors. The frequency of the board of directors meetings (MBD) is measured based on the number of internal board meetings for a year. The size of the audit committee (SAC) is also measured based on the number of audit committee members. The proportion of independent members in the audit committee (IAC) is measured by the ratio of the number of independent members to the total members of the audit committee. The size of the shariah supervisory board (SSSB) is measured based on the number of members of the sharia supervisory board. The educational background of the sharia supervisory board (EDSSB) is proxied by a dummy variable in which 1 is given if the chairman of the sharia supervisory board has a doctoral degree, 2 if the chairman has a master degree, and 3 for others. The reputable sharia supervisory board (RSSB) is also proxied by a dummy variable in which 1 is given if the chairman of the sharia supervisory board were or is currently holding a position in the DSN-MUI and 0 if not.

Also, this study has control variables which are profitability and bank size. Profitability is measured by ROA and ROE. Bank size is measured by the natural logarithm of the total assets in period t. The control variables are expected to minimize the confounding effects on the empirical model developed.

3.2. Data analysis method

The data analysis method used to investigate the effect of the independent variables on the dependent variable in this study is multiple regression analysis. The multiple linear regression equation developed in this study is as follows:

$\begin{array}{rl}CSR{D}_{i,t}& =a+b_{1}SB{D}_{i,t}+b_{2}MB{D}_{i,t}+b_{3}SA{C}_{i,t}\\ & +b_{4}IA{C}_{i,t}+b_{5}SSS{B}_{i,t}+b_{6}EDSS{B}_{i,t}+b_{7}RSS{B}_{i,t}\\ & +b_{8}RO{A}_{i,t}+b_{9}RO{E}_{i,t}+b_{10}S{B}_{i,t}+\epsilon \end{array}$ 2

Where SBD is the size of the board of directors; MBD is the frequency of the board of directors’ meetings; SAC is the size of the audit committee; IAC is the proportion of the independent members of the audit committee; SSSB is the size of the sharia supervisory board; EDSSB is the educational background of the sharia supervisory board; RSSB is reputable of the sharia supervisory board; ROA is return of assets; ROE is return of equity; SB is the size of bank; CSRD is the CSR disclosure index.

4. Results and discussion

4.1. Descriptive analysis

Table 2 presents the descriptive statistics of all the variables tested in this study, which came from 80 observation data. Table 2 shows that the mean of CSR disclosure index of Islamic banks in Indonesia is 0.58 with the highest of 0.76 and the lowest of 0.27 of 1.00. These results indicate that the CSR disclosure of Islamic banks in Indonesia is quite good, although not very good. This condition is allegedly due to the absence of guidelines that regulate any items related to CSR activities that must be disclosed (Nugraheni and Khasanah 2019). Even so, several Islamic banks in Indonesia have been found to have started preparing sustainability reports based on GRI reporting standards voluntarily since 2016.

Table 2. Descriptive statistics.

	N	Range	Minimum	Maximum	Mean	Std. Deviation	Variance
SBD	80	4.00	3.00	7.00	4.2000	1.08383	1.175
MBD	80	96.00	12.00	108.00	35.7125	18.19041	330.891
SAC	80	5.00	2.00	7.00	3.6375	1.16101	1.348
IAC	80	1.00	.00	1.00	.9160	.19215	.037
SSSB	80	1.00	2.00	3.00	2.2750	.44933	.202
EDSSB	80	2.00	1.00	3.00	1.2250	.63595	.404
RSSB	80	1.00	.00	1.00	.7375	.44277	.196
ROA	80	.27	−.20	.07	.0049	.03338	.001
ROE	80	1.59	−.94	.65	.0519	.17441	.030
SB	80	5.03	27.19	32.22	29.7590	1.38533	1.919
CSRD	80	.49	.27	.76	.5829	.11838	.014
Valid N (listwise)	80

Amran et al. (2017) found that corporate social responsibility disclosure of Indonesia Islamic banks is insignificantly different than Malaysian Islamic banks. Based on the study, Islamic banks in Malaysia and Indonesia had a 69 and 58 percent increase rate, respectively, between 2007 and 2011. A similar result was obtained by Wardani and Sari (2019), who found that corporate social responsibility disclosure of Indonesia Islamic banks was not higher than Malaysia Islamic banks but still the same in the range of 60 percent.

Table 2 also shows that the minimum size of the board of directors consists of three members and a maximum of seven members. However, the average size of the board of directors in Islamic banks in Indonesia is four members. Based on the OJK Regulation No. 33/POJK.04/2014, the board of directors of the public company must consist of at least two members of the Board of Directors. Also, Table 2 shows that the average number of internal meetings of the board of directors held for a year is 35 times, of which at least once every month and a maximum of 108 times. This result is following the OJK regulation No. 33/POJK.04/2014 which states that the board of directors must hold the board of directors meeting periodically at least once every month.

Table 2 shows that the minimum size of the audit committee consists of three members and a maximum of seven members. The average number of the members of the audit committee is three members as per the OJK regulation No. 55/POJK.04/2015. As the OJK Regulation No. 55/POJK.04/2015, the audit committee consists of independent parties and is chaired by an independent commissioner. But, some Islamic banks in this study does not disclose the independence of the members of their audit committee in annual reports.

The average number of the sharia supervisory board members is two members, which is under the Bank Indonesia regulation No. 11/3/PBI/2009. But, some Islamic banks have three members of the sharia supervisory board. These results are similar to the findings of Wardani and Sari (2019) regarding the number of sharia supervisory board members in Indonesia. Even, the number of members of the shariah supervisory board in the Indonesian Islamic banks is significantly less than in Malaysia Islamic banks, which could reach nine members. The majority of the sharia supervisory board chairman in Indonesia Islamic banks are those who hold a doctoral degree. Besides, the majority of the sharia supervisory board chairman in Indonesia Islamic banks are reputable in Islamic law and have a position in the DSN-MUI currently.

4.2. Findings and discussions

The hypotheses testing in this study is carried out using multiple regression analysis methods. To maintain the validity of the results of this study, we ensure that the multiple regression model developed has fulfilled all classical assumptions. The results of the correlation analysis in Table 3 show that there are no independent variables in this study that are highly correlated. The independent variable RSSB achieved the highest correlation level with the independent variable SB, which was around 54%. This result is strengthened by the results of the VIF and Tolerance test values in Table 6, which show that there is no multicollinearity in this research model.

Table 3. Correlations.

Model			SB	ROA	EDSSB	IAC	MBD	RSSB	SSSB	ROE	SAC	SBD
1	Correlations	SB	1.000	.026	.008	.044	.105	−.544	−.387	−.057	−.389	−.364
		ROA	.026	1.000	.195	.035	.081	−.092	.003	−.694	−.133	.197
		EDSSB	.008	.195	1.000	.107	.128	.203	−.133	−.121	.016	.181
		IAC	.044	.035	.107	1.000	.150	.135	−.244	−.039	.285	.152
		MBD	.105	.081	.128	.150	1.000	−.370	−.246	−.194	−.259	.121
		RSSB	−.544	−.092	.203	.135	−.370	1.000	.210	.096	.420	.167
		SSSB	−.387	.003	−.133	−.244	−.246	.210	1.000	−.096	.245	−.364
		ROE	−.057	−.694	−.121	−.039	−.194	.096	−.096	1.000	.200	−.220
		SAC	−.389	−.133	.016	.285	−.259	.420	.245	.200	1.000	−.295
		SBD	−.364	.197	.181	.152	.121	.167	−.364	−.220	−.295	1.000

Table 4 shows that the correlation coefficient among the variables tested in this study, which is 0.87, means a very strong relationship among variables. Also, the determination coefficient, which is represented by the value of adjusted R square 0.72, states that 72% of CSR disclosure is influenced by all the independent variables tested in this study. The remaining 28% of CSR disclosure is influenced by other variables not examined in this study. Table 5 shows that the result of the F test has confirmed that the multiple regression model developed in this study is feasible. This interpretation is based on the significance value obtained of 0.000 is less than the probability significance of 0.05, and the calculated F value of 21.64 is higher than F table value of 1.91.

Table 4. Model summary.

Model	R	R Square	Adjusted R Square	Std. Error of the Estimate
1	.871^a	.758	.723	.06228

Table 5. F test results.

Model		Sum of Squares	Df	Mean Square	F	Sig.
1	Regression	.840	10	.084	21.646	.000^a
	Residual	.268	69	.004
	Total	1.107	79

Table 6 shows the results of the hypotheses testing in this study. Based on the Table 6, there are only two hypothesis (H1 and H2) supported statistically at the probability significance of 5% level. Others are not supported statistically.

Table 6. Regression results.

Independent Variables	Standardized Coefficients Beta	T	Sig.	Tolerance	VIF
Constant		−6.079	0.000*
SBD	−0.339	−3.069	0.003*	.287	3.482
MBD	0.242	3.248	0.002*	.633	1.581
SAC	0.105	1.110	0.271	.395	2.535
IAC	0.020	0.272	0.786	.661	1.514
SSSB	−0.014	−0.154	0.878	.409	2.447
EDSSB	−0.003	−0.041	0.967	.802	1.246
RSSB	0.122	1.438	0.155	.488	2.050
ROA	−0.073	−0.861	0.392	.482	2.076
ROE	0.055	0.598	0.552	.418	2.390
SB	0.849	7.143	0.000*	.248	4.035

Notes: *p < 0.05.

The result of this study shows that the size of board directors has a significant negative effect on CSR disclosure. This result means that the more members of the board of directors in Islamic banks, the lower the level of CSR disclosure. A large board of directors is susceptible to communication and coordination problems (Hackman 1990; Jensen 1993). As a result, the performance of board of director in Islamic banks become ineffective, and several important issues, such as CSR, were ignored. This result is in line with the previous study, which found too large a board will make the monitoring process ineffective (Siregar and Bachtiar 2010). But, this result contradicts the results of the previous studies which found that the size of the board of directors had a positive effect on CSR disclosure (Kiliç, Kuzey, and Uyar 2015; Alotaibi and Hussainey 2016).

This study also finds that the frequency of board of directors meetings in Islamic banks has a significant positive effect on CSR disclosure. CSR is discussed at each internal board meeting (Yusoff, Jamal, and Darus 2016). As a result, the board of directors is increasingly aware of CSR issues, including the disclosure in annual reports. This finding is consistent with the result of the previous studies (Laksmana 2008; Yusoff, Jamal, and Darus 2016)

The results of H3 and H4 testing reveals that the audit committee did not affect CSR disclosure. These results indicate that non-financial disclosures, such as CSR, have not received audit committee attention yet. These results are consistent with the results of the previous studies, which revealed that the effectiveness of the audit committee had an insignificant effect on CSR disclosure (Habbash 2015; Biçer and Feneir 2019).

The results of H5, H6, and H7 show that the characteristics of sharia supervisory board, which are size, education background, and reputation of the members, have no significant effect on CSR disclosure partially. These results are likely to occur because sharia supervisory board is still focused on its duties and responsibilities in the operational activities of Islamic banks, for example regarding the approval of new products, overseeing whether the contract is under the sharia principles, and reviewing Islamic bank financial statements. Also, the number of sharia supervisory board members in Islamic banks in Indonesia is not as many as in Islamic banks in other countries. These findings are consistent with the results of the previous studies by Hajawiyah, Siswantoro, and Kartika Dewi (2019), Nugraheni and Khasanah (2019), Qoyum, Mutmainah, and Setyono (2017), and Wardani and Sari (2019), which were also conducted in Indonesia Islamic banks. Whereas, these findings contradict the results of the previous studies, which found that the sharia supervisory board plays an essential role in CSR disclosure (Ibrahim, Yahya, and Abdalla 2015; El-Halaby and Hussainey 2016).

Table 6 also shows that only the size of the bank among control variables in this study has a significant effect on CSR disclosure. This study is consistent with previous studies (El-Halaby and Hussainey 2016; Appuhami and Tashakor 2017). The larger bank is more visible to the public so that they disclose more CSR activities in their annual report to avoid the potential political cost and retain their legitimacy in the Islamic community (Ibrahim, Yahya, and Abdalla 2015). However, the company profitability measured by ROA and ROE is found not to have a significant effect on CSR disclosure. These findings are also consistent with the previous studies (Charles and Chariri 2013; El-Halaby and Hussainey 2016).

5. Conclusion

This study presents empirical evidence that the board of directors plays a vital role in CSR disclosure. This is because the board of directors is responsible for financial reporting, including annual reports. On the other hand, this study reveals that the sharia supervisory board only still focuses on the compliance of Islamic banks with the sharia principles regarding the products and operations, not on CSR disclosure. This study contributes to the development of the concepts of the role of corporate governance mechanism, especially sharia supervisory board in Islamic banks governance structure, in encouraging CSR disclosure.

However, this study has a limitation because this study only covers Islamic banks in Indonesia. The interpretation of the results of this study must be made carefully. This study used small data which is restricted to only Indonesia Islamic banks. This study also used secondary data, which is the validity of data can not be ascertained. Besides, further studies can add other corporate governance mechanisms, such as the board of commissioner, and managerial and institutional ownership to CSR disclosure for more comprehensive analysis.

Disclosure statement

No potential conflict of interest was reported by the author(s).