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Amity University, Noida, India.

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Suan Dusit Rajabhat University,

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Dongbei University of Finance and

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Techological Institute of West Macedonia,

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Work,Azad University of Khomeinishahr,

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Ala`a Abukhalifeh

School of Housing, Building, and Planning,

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Studies, University of Brunei Darussalam,

Negara Brunei Darussalam, Pakistan.

Subhan Bande

Annamacharya Institute of Technology and

Sciences, Rajampet, Andhra Pradesh, India.

Viral Nagori

GLS Institute of computer Technology,

Ahmedabad, India.

Sukumarl Koednok

Vongchavalitkul University,

Thailand.

M.Shunmuga Sundaram

PSN College of Engineering and

Technology, Malathediyoor,

Tirunelveli, India.

Ik Muo

Department of Business Administration,

Olabisi Onabanjo University,

Ago-Iwoye, Ogun State, Nigeria.

Kalandi Charan Pradhan

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Dept. of Humanities and Social Sciences

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Anamitra Palit

People's Friendship University of Russia,

Moscow, Russia.

Professor Nawab Ali Khan

Department of Human Resource

Management

College of Business Administration,

Salman Bin Abdulaziz University,

Kingdom of Saudi Arabia.

Dr.Nigama.K

Management Consultant,

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Dr.Rashmi

Assistant Professor,

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Contents

S.No. Title & Name of the Author(s) Page No.

1. Service Quality toward Patient Satisfaction the Moderating Role of

Time and Efforts in Public Hospitals in Tripoli, Libya

Yousf Ibrahim Aljoudimi, Ismail B. Rejab, Zulkifflee Bin Mohamed

97-116

2. Performance Appraisal in the Ghana Education Service, the Case of

Basic School Teachers in Ho Municipality

Lydia Sylvia Danku, Newell Yao Soglo, Francis Dordor, Marian Josephine

Bokor

117-133

3. Phenomenon of Socio-Economic Inequalities of Unprivileged Groups in

the Labor Market. The Case of the Slovak Republic

Rene Pawera, Zuzana Smehylova

134-139

4. Financial Management, Savings of the Life Cycles in Everyday Life

Horvathne Kokeny Annamaria (PhD), Brlás Georgina

140-145

5. Supervision, Leadership, and Working Motivation to Teachers’

Performance

Jaja Sudarjat, Thamrin Abdullah, Widodo Sunaryo

146-152

6. The Impact of the Applicability of Social Media and Social Networking

Sites on Business Firms’ Effectiveness and Profit Field Study:

Telecommunication Sector in Jordan

Shaima Abukhater, Dr.Basem Lozi, Dr.Mashhoor Maharmah

153-164

7. The Effect of Organizational Culture, Personality, Work Moti-vation to

Teachers’ Organizational Commitment

Supramono, Soewarto Hardhienata, Widodo Sunaryo

165-170

8. The Relationship between Voluntary Disclosure and Financial

Performance of Companies Quoted At the Nairobi Securities Exchange

Jane Mmbone Mutiva, Dr.Anwar Hood Ahmed, Dr. Jane Wambui Muiruri-

Ndirangu

171-195

9. Social Reporting in European Ethical Banks: A Comparative Study

Luisa Pulejo, Carmelo Marisca, Nicola Rappazzo

196-202

International Journal of Managerial Studies and Research (IJMSR) Volume 3, Issue 6, June 2015, PP 97-116 ISSN 2349-0330 (Print) & ISSN 2349-0349 (Online) www.arcjournals.org

©ARC Page 97

Service Quality toward Patient Satisfaction the Moderating Role of Time and Efforts in Public Hospitals in Tripoli, Libya

Yousf Ibrahim Aljoudimi Graduate School of Business

Universiti Tun Abdul Razak (UNIRAZAK) Kuala Lumpur, Malaysia

[email protected] Ismail B. Rejab

Graduate School of Business Al-Medinah International University

Shah Alam, Malaysia [email protected]

Zulkifflee Bin Mohamed Bank Rakyat School of Business and

Entrepreneurship (BRSBE) Universiti Tun Abdul Razak (UNIRAZAK)

Kuala Lumpur, Malaysia [email protected]

Abstract: This quantitative study aimed to examine the moderating effect of the non-monetary perceived value (time and effort) on the relationship between five dimensions of service quality (environment and technology, convenience of care process, responsiveness, trust and security, and respect and caring) and patient satisfaction in the health care environment in general, non-specialist public hospitals in Tripoli, Libya (GPHT). Research questions were formulated to investigate the following research objectives: (1) to examine the relationship between service quality dimensions and patient satisfaction; and (2) to examine the moderating effect of time and efforts on the relationship between dimensions of service quality and patient satisfaction. In order to measure quality of service, patient’s perceptions of service quality were investigated and data on patient were collected using an adapted instrument based on (1) SERVPERF, which was developed as an alternative to the disconfirmation-based SERVQUAL; (2) past research related to hospitals service quality; and (3) interviews with patients, physicians and medical staff in GPHT. Final sample size for analysis was 353. Exploratory and confirmatory factor analyses were conducted. Hypotheses were tested using multiple regression analysis and hierarchical multiple regression through SPSS and SEM. The findings revealed that the time and effort did not moderate the relationship between service quality dimensions and patient satisfaction. The findings of this research could potentially provide an important contribution and inputs which may be useful in the process of decision making within the management, doctors and nurses working in Libya hospitals. Hence the study contributes to the further development of studies in service quality, perceived value and patient satisfaction in healthcare environment. Finally, the implications and limitations were also discussed.

Keywords: Service Quality Dimensions, Time and Effort, Perceived Value, Patient Satisfaction, Public Hospitals, Libya.

1. INTRODUCTION Meeting customer’s needs and expectations is a great challenge facing service organizations. Nowadays satisfaction is influenced by the developments surrounding, including the massive, rapid and intense competition in the various activities, which is why organizations are always looking for solutions to satisfy its customers in light of these variables. The key to continue competitive advantage lies in delivering high quality services that will in turn lead in satisfied customers (Shemwell et al, 1998). The main goal of this research was examined the moderating role of non-price dimensions of perceived value (time and efforts) on the relationship between service quality dimensions and patient satisfaction in general public hospital in Tripoli, Libya. Another objective was examined if patient’s satisfaction is influenced by service quality dimensions. These dimensions are listed as follows: environment and technology, convenience of care process, responsiveness, trust and security, and respect and caring. The relationship between service quality and satisfaction of customers has been studied by numerous authors, scholars and researchers within various contexts spanning many years (Cronin & Taylor, 1992; Dabholkar 1995; Gronroos, 1984; Lehtinen & Lehtinen, 1991; Oliver 1980, 1993; Parasuraman et al., 1985; Ribbink et.al, 2004; Spreng & Mackoy,

Yousf Ibrahim Aljoudimi et al.

International Journal of Managerial Studies and Research (IJMSR) Page | 98

1996; Sureshchandar et al, 2003; Taylor & Baker, 1994; Zeithaml et al., 1990). Savage, Campbell, Ford, and van der Reis (2004) recommended exploring the struggle of developing countries to maximize health care access, cost, and quality.

In the health care context, many studies have also examined the relationship between service quality and satisfaction. There have been some studies on public hospitals that have empirically addressed this relationship (Arasli et al, 2008; Berendes et al, 2011; Camilleri & O’Callaghan, 1998; Cong et al, 2014; Jabnoun and Chaker 2003; Taner & Antony 2006; Yousapronpaiboon & William, 2013). Furthermore, most of these published public health care studies are focused on health care in North America, Europe, and relatively fewer in Asia. Very few studies have actually been done in North African Arab countries which have tested the relationship between service quality and patient satisfaction in public general hospitals (Al-Hawary, 2012; Diab, 2012; Mostafa, 2005; Zamil et al, 2012).

Perceived value is an antecedent of customer satisfaction (Eggert & Ulaga, 2002; Kuo, Wub, & Deng, 2009; Paul & Geoffrey N., 2009). Researchers indicate that customer satisfaction is influenced by relational benefits and perceived value (Dagger & O’ Brien, 2010; Han & Ryu, 2009). Further, the relationship between service quality, perceived value, and customer satisfaction are crucial to the service industry (Hu, Kandampully, & Juwahee, 2009). Utility theory, which is resulting from the modern microeconomic theory, indicates the existence of a relationship between quality and value. Quality offers utility to the customer, who, in turn, must forgo the disutility inherent in price. Deruyter et al. (1997) find that an increase in service quality leads to an increase in satisfaction. However, such increase in the quality of service may not be indicative of increased levels of service satisfaction if the price is high.

Literature indicated that the direct effect of either service quality or perceived value on satisfaction separately explained lower of the variance in satisfaction than the interaction between service quality and perceived value. researchers such as Caruana et al, (2000) and Zeithaml (1988) agree that value is highly related to cost customers assess and pay for quality, whereas the utility of a service is depend on customer perceptions of what is got (i.e. some may want volume, others high quality, still others convenience) and what is given (i.e. some are concerned only with money expended, others with time or effort). Therefore, monetary of perceived value such as time costs, search costs and psychological costs (Zeithaml, 1988).

Prior studies have examined perceived value in mediating the relationship between service quality and customer satisfaction (Cronin, Brady, and Hult 2000; Korda & Snoj, 2010; Lin and Shih 2005; Lai, Griffin, and Babin 2009). However there is virtually no empirical study to date examining the role of time and efforts of perceived value in moderating the relationship between service quality dimensions and patient satisfaction in healthcare services. Although research on hospital services satisfaction is vital to ensure a high quality of care and patient satisfaction and to maximize the benefits in community. Given that the possible role of value as a moderating variable has received less academic attention, little is known about the moderating effect of perceived value in service quality models (Ismail et al., 2009). Others have examined the impact of value on satisfaction (McDougall and Levesque, 2000) the moderating role of perceived value in the quality of service and satisfaction relationship (Caruana et al., 2000). They found that perceived value has a significant moderating role between service quality and satisfaction. Thus, the understanding of the moderating effect of time and efforts value still remains key issues. This study will contribute to a conceptual model that, reflecting the moderating role of patient perceived time and efforts of service value on the relationship between service quality dimensions and patient satisfaction cross different cultures when previous studies have done.

Although efforts have been made to facilitate the exchange of technological knowledge among developed, emerging, and developing countries, the management of health care remains a challenging issue in developing countries, such as Libya. Even though medical care is provided to all Libyan citizens, Libyans are increasingly interested in purchasing private medical care to receive what is perceived to be a higher level of service and quality ("Health system profile: Libya," 2007). Focusing service quality and understanding what are the patient needs and the health care system should be an objective of general public hospital. Given the importance of patient satisfaction, this study examined to what extent the patient is satisfied with the public hospitals service quality. Due to advances in technology, patient satisfaction and service quality have become critical objectives in the strategic



planning processes of organizations. Patients today are more informed than ever and will not hesitate to switch to an alternative health care professional if they don’t obtain satisfaction (Ramsaran‐Fowdar, 2008).

Based on the foregoing, the effect of quality on satisfaction may not just be direct but may also be moderated by value. Perceived value is likely to play a more important role than service quality to satisfy patients. Therefore, it is the task and the challenge of this study to determine if perceived value can change/increase the relationship between service quality and patient satisfaction in Libya, a non-western or Asian nation. In the sense that, to what extent do perceived of time and efforts will be able to influence the relationship between service quality and patient satisfaction levels in public hospitals in Libya? However, the study will explore which particular service quality dimension is more directly related to patients’ perceived value; which in turn affects patient satisfaction in the health care context.

1.1. Research Questions

Q1. Is there a significant relationship between service quality dimensions (environment and medical technology, convenience of care process, responsiveness, trust and security to medical staff, and medical staff respect and caring) and patient satisfaction?

Q2. Does time and effort of non-monetary perceived value moderate the relationship between service quality dimensions (environment and medical technology, convenience of care process, responsiveness, trust and security to medical staff, and medical staff respect and caring) and patient satisfaction?

1.2. Research Objectives

• To examine the relationship between service quality dimensions and patient satisfaction.

• To examine the moderating effect of time and effort on the relationship between service quality dimensions and patient satisfaction.

1.3. Research Hypotheses

H1: There is a positive relationship between environment and technology and patient satisfaction

H2: There is a positive relationship between convenience of care process and patient satisfaction

H3: There is a positive relationship between responsiveness and patient satisfaction

H4: There is a positive relationship between trust and security and patient satisfaction

H5: There is a positive relationship between respect and caring and patient satisfaction

H6: Time and efforts of perceived value moderates the relationship between service quality dimensions and patient satisfaction

2. LITERATURE REVIEW With increasing awareness, the patients, as customers expect quality in healthcare service. Lynch and Schuler (1990) observed that quality has been shown to be an important element to the customer’s choice of hospitals. In 2007, Jackie L.M. Tam focused on patient satisfaction with a medical service encounter rather than on the efficacy of treatment, the study suggested that using patient feedback as an input for quality improvement improves performance on both dimensions. The study also suggested that quality medical encounters improve patient satisfaction. Moreover, Carman (2000) indicated that perception of service quality is an attitude, which in turn is related to the function of some combination of attributes that a patient considers to be contents of quality. These attributes can be classified into two sets, functional, which include measures such as ambiance and provider attentiveness; and technical, such as outcome that describe how the service is delivered. Thus, there exist an association between perceived service quality and patient satisfaction.

Owusu-Frimpong, et al (2010) suggested that healthcare consumers’ assessments of the various tangible elements associated with a particular healthcare service include both the physical environment and physical facilities in which the service occurs, as well as the billing procedures and other amenities such as food and parking facilities associated with each institution’s delivery system.



In the healthcare area, quality service strategies may be targeted at rationing and augmenting capacity through new hospitals, extensions and new service lines such as public health service direct (Redwood, 2000).

Technical quality in the healthcare environment referred to as quality in fact, is defined primarily on the basis of the technical accuracy of the diagnoses and procedures. In healthcare organizations, several techniques for measuring technical quality have been proposed and are nowadays in use (Joint Commission for Accreditation of Healthcare Organizations 1987). Consequently, acknowledging that perceived quality is the most important variable influencing consumers' value perceptions seems reasonable. These value perceptions, in turn, affect customers' intentions to purchase products or services (Bopp, 1999; Bolton & Drew, 1988; Zeithaml, 1988).

2.1. The Service Quality Dimensions

Service quality has been approached as SERVQUAL, a multi-item scale first suggested by Parasuraman, Zeithaml, and Berry (1985). It has been utilized for measuring customer perceptions of service quality across a wide variety of service environments including healthcare in the US. The SERVQUAL scale was developed by Parasuraman and colleagues (1988) first applied SERVQUAL to quantitatively measure service quality in several sectors. In particular, the scale was used to measure the difference between customer expectations and perceptions. Parasuraman et al. (1985), had at first identified ten dimensions of service quality which were, at a latter step and after extensive exploratory research and empirical examining, operationalized in five dimensions that comprise 22-items. The instrument distinguishes between different dimensions of services from the consumer’s point of view (Parasuraman et al 1988).

In the health care service environment, Babakus and Mangold (1992) was the first to adopt the SERVQUAL instrument for evaluating healthcare services. In particular, some scholars analyzed and confirmed the scale’s practical suitability for health care facilities, as well as its reliability and validity for evaluating hospital services (Devebakan, 2005; Buttle, 1996; Dursun & Cerci, 2004). They came out with validated results that are replicable after passing through the rigour of robust research. The investigators of the scale emphasize that while each service industry has different cases with other aspects, there are five dimensions or constructs of service quality which identified for applicability in service-providing organizations in general. These dimensions are tangibles, responsiveness, assurance, reliability and empathy (Parasuraman et al, 1988)

Despite the controversies regarding the validity and reliability of SERVQUAL, this model (both with and without modification) have been applied in the health care sector (Teas, 1994; Newman, 2001). Moreover, SERVQUAL has been widely used in other service industries, including hotels, travel, higher education, real estates, accountancy, architecture, construction services, dentistry, call centers, and hospitals (Foster, 2001; Foster & Thomas, 2001; Nelson, 1995).

Tangibles are defined as the appearance of physical facilities, equipment, personal, and communication materials (Zeithaml & Bitner 2006). All of these provide physical representations or images of the service that customers, particularly new customers, will use to evaluate quality. In this regard, Sewell (1997) asked The National Health Service (NHS) patients to identity the quality dimensions they considered to be important. Tangible was found out to be the least important in their assessment.

Reliability is defined as the ability to perform the promised service dependably and accurately (Zeithaml & Bitner 2006). Reliability has been consistently shown to be the most important determinant of perceptions of service quality among U.S customers (Parasuraman et al 1988). In their study in Taiwan aimed sat constructing an instrument to evaluate service quality of mobile value added services and extend the discussion of the relationships among service quality, perceived value and customer satisfaction. Kuo et al., (2009) found out that reliability was most influential on perceived value and customer satisfaction. Responsiveness is the willingness to help customers and to provide prompt service. This dimension emphasizes attentiveness and promptness in dealing with customer requests, questions, complaints, and problems (Zeithaml & Bitner 2006). They also added responsiveness as communicated to the customer by the length of time they have to wait for assistance, to have their questions answered, or their problems attended to. Responsiveness also captures the notion of flexibility and ability to customize the service to customer needs. De Jager et al (2010) in their study “Delivering quality



service to in- and out-patients in a South African public hospital” that focused only on Responsiveness. They found that all patients demand excellent responsive levels but none of these were met, resulting in dissatisfaction; they also found that overall patients were least satisfied with reasonable waiting time for receiving medicine as well as reasonable waiting time for treatment. But Al-Alak and Alnaser, (2012) found that there is no significant relationship between responsiveness and students’ satisfaction. On the other hand, Ismail and Abdullah (2009) conducted an exploratory study to examine perceived value as a moderator between service quality and academic staff’s satisfaction in higher institutions in Malaysia. They found that perceived value about the use of responsiveness and has not increased customer satisfaction. To truly distinguish themselves on responsiveness, companies need well-staffed customer service departments as well as responsive frontline people in all the contact positions of the organization (Zeithaml & Bitner, 2006). Assurance is defined as employees’ knowledge and courtesy and the ability of the firm and its employees to inspire trust and confidence (Zeithaml & Bitner 2006). It is the view of these scholars that this dimension is likely to be particularly important for services that customers perceived as involving high risk and/or about which they feel uncertain about their ability to evaluate outcomes, for example medical, banking, insurance, brokerage and legal service. Anderson (1995) also addressed the quality of services provided by a public university health clinic by using SERVQUAL in which he utilized 15-items of the instrument representing the five dimensions of SERVQUAL. The findings indicated that all the five dimensions measured negatively, assurance being most negatively measured. It was based on these outcomes that Anderson made some recommendations for budgeting future quality improvement projects. Empathy is depicted in the way and manner the organization engages in caring, and providing individualized attention to its customers and clients. The essence of respect and caring is convening, through personalized or customized service which invariably emphasizes that customers are unique and special (Zeithaml & Bitner 2006). Empathy means caring and understanding, which a company provides and/or offers its customers in terms of its individualized and personalized attention (Parasuraman et al., 1988). In the NHS hospitals Sewell (1997) found that empathy was shown to be of equal importance. Al-alak (2012) found that empathy had the strongest influence on customer satisfaction and behavioral intention in a spa setting in Malaysia. Based on the above discussion this current study will use all five dimensions of service quality as independent variables. 2.2. Patient Satisfaction

A widely accepted description of satisfaction would have been the process leading to the consumer’s fulfillment response. In other words, “it is a judgment that a product or service feature, or the product of service itself, provided (or is providing) a pleasurable level of consumption-related fulfillment, including levels of under-or over-fulfillment…” (Oliver, 1997). While, Rust and Oliver (1994) described the dominant model of customer satisfaction in the services review as: In brief, customer satisfaction is a summary cognitive and affective reaction to a service incident (or sometimes to a long-term service relationship). Satisfaction (or dissatisfaction) results from experiencing a service quality encounter and comparing that encounter with what was expected (Rust & Oliver, 1994, p. 2).

For healthcare providers, researchers pointed out that customer satisfaction leads to profitable and advantageous results (Peyrot et al., 1993; Zeithaml, 2000). Others reported that Patient satisfaction also affects the rate of patient compliance with physician advice and requests (Calnan, 1988; Pascoe, 1983).Therefore, satisfaction actually influences the outcome of medical usage. For these causes, patient satisfaction estimation has become an integral part of healthcare organizations’ strategic processes (Reidenbach and McClung, 1999). Conway and Willcocks (1997) indicated treatment is a basic health service expectation as patient satisfaction is known as an evaluation of distinct healthcare dimensions (Linder-Pelz, 1982). However, Turner and Pol (1995) considered that patient satisfaction as one of the desired results of care and so patient satisfaction information is very important to quality assessments for managing healthcare. Patient satisfaction also enhances the image of a hospital and that can be translated into increased service use and market share (Andaleeb, 1998). Patient satisfaction is frequently used as an efficient proxy measure of quality of care. A considerable body of evidence exists regarding how patient satisfaction influences patient return and increased referrals (Corviano, 2005; Garman& Hargreaves, 2004; Jackie, 2007; Otani & Harris, 2004). Ruggeri defined patient satisfaction as ‘‘the extent to which services satisfy wishes, wants or desires for treatment’ (Ruggeri, 1994).



2.3. Patient Perceived Value

The concept of perceived value has become of increasing interest to marketing researchers as it has a mediating relationship with the perceptions of customer satisfaction (McDougall and Levesque, 2000). The perceived value variable was found out to be a mediating variable between perceived quality and customer satisfaction (Cronin, Brady, and Hult 2000; Korda & Snoj , 2010; Lin, and Shih 2005; Lai, Griffin, and Babin 2009). On the other hand studies suggest that perceived value is moderating the relationship between service quality and customer satisfaction (e.g. Caruana et al 2000; Chen, 2008; Ismail et al 2009). Value may be viewed as the evaluation of what is received compared with what is given in a service encounter. McDougall and Levesque (2000) defined value as “benefits received relative to costs” (p. 393). Similarly, Zeithaml (1988) defined value as a consumer’s overall assessment of product (or service) utility, based on perceptions of what was received and what was given in the exchange. Hence, perceived value is the difference between what a customer gives and what he/she gets.

By interesting qualitative study Zeithaml (1988) has investigated the concept of value and reports findings which identified four consumer definitions of product value for supporting literature, these components are centered around reducing price, how reasonable the price is compared to quality as the customer need. These definitions are (1) value is low price (2) value is whatever I want in a product (3) value is the quality I get for the price I pay and (4) value is what I get for what I give. Utility theory (Lancaster, 1971) provided the theoretical based upon for the value construct. This approach emphasizes that very often customers do not buy services for their own benefit. The customers buy set of attributes that together reflect a certain level of service quality which firms are offered at a certain price level. This theory emphasizes the linking between quality and value. The common method of perceived value dimensions is SERV-PERVAL scale which proposed by Petrick and Backman (2002). This method includes five dimensions: i.e. quality, monetary price, non-monetary price, reputation, and emotional response. In this study, perceived value is a result of patient’s evaluation of the service received against their perceptions of the non-price costs such as time and efforts which have not been studied as moderator before. 2.4. Linking Between Service Quality, Perceived Value and Satisfaction The link between variables as service quality, perceived value and customer satisfaction has been addressed in a variety of industries. Some studies argue that perceived value is an intervening variable that mediates the relationship between service quality and customer satisfaction (e.g. (Cronin, Brady, and Hult 2000; Korda & Snoj, 2010; Lin, Sher, and Shih 2005; Lai, Griffin, and Babin 2009). Some other studies suggest that perceived value is moderating the relationship between service quality and customer satisfaction (e.g. Caruana et al 2000; Chen, 2008; Ismail et al 2009). Caruana et al (2000) examined the moderating role of perceived value on the relationship between service quality and customer satisfaction. They found that the moderating influence supports such a role for value in an audit firm, but not in the health care industry. Chen (2008) found that perceived performance has an indirect effect on overall satisfaction moderated by perceived value. Hence he mentioned that without taking perceived value into account, the predictive power of service quality on overall satisfaction is questionable. This result also supports the debate of the importance of the measurement of perceived value in conjunction with the measurement of satisfaction by Oh (2000) and Woodruff (1997). However, Ismail et al (2009) addressed the perceived value as a moderating variable on the relationship between service quality features and customer satisfaction in one public institution of higher learning in East Malaysia. But they examined only three dimensions of service quality named responsiveness, assurance and respect and caring, the study found that perceived value has increased the effect of respect and caring on customer satisfaction, but perceived value has not increased the effect of responsiveness and assurance on customer satisfaction. Thus, the finding showed that perceived value does act only as a partial moderator in the overall relationship between service quality features and customer satisfaction. Authors recommended that the organizational features (e.g., ownership and type) are a potential variable that can influence perceive value about service quality and this needs to be further explored. (Ownership and type). And they added that using organizational ownership and type may provide meaningful perspectives for understanding of how individual likeness and differences affect service quality policies within an organization. The present research proposes that perceived value has a moderating effect on the link between service quality and satisfaction. Therefore, this research seeks to explore whether the relationship between service quality dimensions and patient satisfaction is fully or partially moderated by value.



Even though many studies have been done, little is known about the moderating effect of perceived value in service quality models (Ismail et al 2009). Thus, the understanding of the moderating effect of perceived service value still remains key issues. The current study contributes to a conceptual model that, reflecting the moderating role of customer-perceived service value on the relationship between service quality dimensions and patient satisfaction cross different culture called Libya. However, the majority of these studies were conducted in the Western and Asian region. In Arab and North Africa as the researcher knows very few studies have been conducted (Mokhtar, 2010). He examined the relative importance of service quality, relational benefits, and customer perceived value to customer loyalty in the context of family doctors in Egypt non-western context. He found service quality has an effect on perceived customer value. On the other hand there is no study as the researcher’s knowledge addressed the relationship between three variables in public hospitals. Additionally, the research did not find any study examining this relation moderating by perceived value in public hospitals. In this aspect, there is a need to better ascertain the nature of quality relationships with satisfaction moderated by patient perceived value in healthcare subject. 3. METHODOLOGY The purpose of this research was to determine the non-monetary of perceived value (time and efforts) that patient spend to get the treatment and healthcare services in GPHT and its influence on the relationship between service quality dimensions and patient satisfaction. Thus, the study favors a quantitative research perspective in approach. This study is going to provide answers to the research questions, which will ultimately identify factors that contribute to the development of service quality, perceived value and patient satisfaction at GPHT in Libya and marketing services in general. Patients at the GPHT were asked about the service quality provided in those hospitals, their opinions and their levels of satisfaction towards the quality of services provided. In addition patients were also asked about how they perceived the value of time and efforts towards service quality. It is instructive to state that quantitative research needs a structured instrument to measure and document data. The SERVQUAL scale is considered to be one of the most adaptable in providing a valid instrument for measuring health service quality (e.g. Andaleeb, 2001; Tomes & Ng,1995; Babakus and Mangold, 1992; O’Connor et al., 1994; Parasuraman et al., 1985, 1988; Reidenbach and Sandifer-Smallwood, 1990; Taner and Antony, 2006; Taylor and Cronin, 1994; Woodside et al., 1989). Based on these studies some developments were made consistent with the research setting set forth in this research, thirty two items representing the most widely acknowledged and empirically tested five dimensions of service quality (i.e. Environment and technology, Convenience of care process, Responsiveness, Assurance, and Respect and caring), and only service of performance approach - perceptions of patients, SERVPERF model ( Cronin & Taylor, 1992) - based instrument measuring service quality, developed as an alternative to the disconfirmation based SERVQUAL (Parasuraman et al, 1985, 1988) were measured in order to determine the level of service quality. Time and affords of perceived value was measured by four items adapted from previous studies (Dodds et al., 1991; Keith Lee & Lee, 2004; Sweeney & Soutar, 2001; Zeithaml, 1988). Patient satisfaction was measured by five items adopted from Oliver (1997). A five- point Likert scale ranging from 5 (strongly agree) to 1 (strongly disagree) was utilized for all items. The demographic factors of the patients selected as participants such as age, education level, gender and income will also be taken into consideration in the data gathering process in the study. The target population of this study consisted of the patients in public hospitals in Tripoli. A total of 580 questionnaires were distributed. Of these 139 questionnaires were lost. A total of 441 were completed and returned. The response rate of 76 % was above the adequate level (50%) recommended by Rubin and Babbie (2005). Of the 441 completed questionnaires in this study, 78 questionnaires were returned unfilled, 10 questionnaires were excluded due to filling completely the same answer. Three hundred and fifty three of questionnaires found to be completed and usable to entered into SPSS.

4. DATA ANALYSIS AND FINDINGS 4.1. Respondents’ Profile

This part presents the statistical responses to the demographic questions. The four demographic questions addressed the variables of, gender, education, income, and age. As presented in Table 1, 51.6% (n=182) of respondents were male compared to 48.4% (n=171) of respondents were female.



Regarding to education level of the respondents, the majority of respondents (29.5%; n=107) had a primary school, followed by 23.2% (n= 82) of respondents had Bachelor’s degree, whereas (21.2%) and (19.8%) of participants had secondary school and do not have education respectively. Only 10 of respondent (2.9) had postgraduate degree. In addition, around (3%) of respondents had diploma level. The majority of patients 32.6 (n=115) were 50 years and above, followed by (24.6%) of respondents were within the age ranged of 30-39, few of respondents were young who ages were between 18 to 20 years which represented only (6.5%) of the total patients. This is logical and not surprising because the young people less vulnerable to disease and vice versa in the case of the elderly. A substantial percentage 46.5 (n=164) of respondents reported that their monthly income is less than LYD 200 hundred. It is not surprising for patients who are taking treatment in public hospitals. Followed by (26.3%) of respondents were had monthly income between LYD 400 and LYD 600. While (11.3%) of sample their monthly income is within (LYD 600 and LYD 800). About (9.6) of respondents had a monthly income between LYD 200 and LYD 400, and approximately (6%) of respondents were had monthly income more than LYD 800. Table1. Frequencies of demographic respondents and accommodation information attributes of Tripoli public hospitals

Demographic Attributes Frequency % Gender Male 182 51.6 Female 171 48.4 Total 353 100.0 Age 18 – 20 years 23 6.5 21 – 29 years 73 20.7 30 – 39 years 87 24.6 40 – 49 years 55 15.6 over 50 years 115 32.6 Total 353 100.0 Educational Levels No education 70 19.8 Primary 104 29.5 Secondary 75 21.2 Diploma 12 3.4 Bachelor graduate 82 23.2 Post graduate 10 2.9 Total 353 100.0 Monthly Income Less than LYD200 164 46.5 LYD 200 less than LYD 400 34 9.6 LYD 400 less than LYD 600 93 26.3 LYD 600 less than LYD 800 40 11.3 LYD 800 or above 22 6.2 Total 353 100.0

4.2. Reliability and Validity Analysis

According to Sekaran and Bougie (2010, pp. 161,327) Exploratory factor analysis (EFA) was used to assess the validity of the instrument. EFA is used to determine the number of factors and which observed items are indicators of each latent variable. EFA was first used to assess the validity of each variable. These variables include the dimensions of service quality: trust, caring, convenience, responsiveness, and environment. Other variables include patient perceived value non-monetary (time and efforts) and patient satisfaction. A Principle Component Analysis (PCA) with Varimax method was run for seven variables which include service quality dimensions (32 items), the moderator variable which represented by perceived value of time and efforts (4 items) as moderator and patient satisfaction (5 items) as dependent variable. With 353 respondents (patients) the suitability of PCA was assessed prior to analysis. Inspection of the correlation matrix showed almost of all of variables had at least one correlation coefficients greater than 0.3. The overall KMO measure was .885 with individual KMO measures all greater than 0.5 classifications of “acceptable” to “meritorious” according to the Kaiser (1974). Bartlett’s Test of Sphericity was statistically significant (p < 0.0005) indicating data was likely factorable. The final solution of PCA revealed seven components that had eigenvalues greater than one and which explained 76.922 of the total variance which are closely similar to the factor structure hypothesized in the context of this study. These factors are caring



(MSRC-4items); Convenience (COCP-5items); Responsiveness (RESP-4items); trust (MSTS-4items) and Environment (ENMT–3 items) related to independent variable, whereas one component for each moderator of perceived value of time and efforts (PVTE-4items) and dependent variable of patient satisfaction (PSAT-4items). For details (see Table 2 and Appendix A). Table2. Measurement model evaluation

Latent Construct Observed Indicators

Factor Loadings CR�� AVEb αc

Environment & Technology ENMT 1 .888 .900 .752 .868 ENMT 2 .968 ENMT 3 .728

Convenience COCP 1 .746 .896 .690 .886 COCP 2 excluded COCP 3 .628 COCP 4 0.91 COCP 5 0.991

Responsiveness RESP 1 0.999 .882 .657 .867 RESP 2 0.719 RESP 3 0.737 RESP 4 0.742

Trust & security TSMS 1 0.968 .898 .690 .884 TSMS 2 0.825 TSMS 3 0.804 TSMS 4 0.705

Respect & Caring MSRC 1 0.946 .939 .793 .921 MSRC 2 0.857 MSRC 3 0.889 MSRC 4 0.868

Patient Satisfaction PSAT 1 0.613 .835 .568 .852 PSAT 2 0.616 PSAT 3 0.955 PSAT 4 excluded PSAT 5 0.778

Percieved Value PVTE1 0.829 .847 .584 .843 PVTE2 0.653 PVTE3 0.719 PVTE4 0.839

a is Composite reliability,

b is Average Variance Extracted and c is Cronbach α

After determining the EFA results, a confirmatory factor analysis (CFA) was also conducted to confirm EFA and to evaluate the measurement model for modeled constructs, which are service quality dimensions, time and efforts of perceived value and patient satisfaction. One item on convenience dimension was problematic in fitting the model and was dropped from further analysis.

The revised model showed good fit to the data ² = 841.040, with 300 df. (2. 80) is less than the cutoff point of 3, as suggested by Bagozzi and Yi (1988) at p value 0.000. Moreover, the goodness-of-fit index (GFI = 0.85) that is close to the cut-off point of 0.90 whereas comparative-fit index (CFI of .93) are greater than the recommended value of 0.9. The root-mean-square error of approximation (RMSEA) is .07, which is less than 0.10 (Hair, Black, Babin, Anderson, & Tatham, 2006). Hence, the model fits the data reasonably well overall. The reliability, convergent validity, and discriminant validity of the constructs were assessed as the next step to examine the quality of the final measurement model (see Fig 1 and Table 1). Reliability falls in the range of Cronbach’s alpha (1951) scale for each latent construct (87 to .98) which in turn evidence of internal consistency for each latent construct. Convergent validity was evaluated by the factor loadings of each observe of the latent constructs (Anderson and Gerbing, 1988). Every item loaded significantly on the construct at the p value. Moreover, the composite reliabilities of each construct in this study ranged from ranged from .83 to .94. That are well above the recommended value of 0.7 (Hair et al., 2006). Average variance



extracted was calculated for assessing discriminant validity (Baumgartner and Homburg, 1996; Steenkamp and Van Trijp, 1991). The average variance extracted ranged from .57 to .79 which is more than 50% of the variance as suggested by Bagozzi and Yi (1988)Therefore, all the scales met the requirements for testing the hypothesized structural model.

Fig1. Confirmatory factor analysis

4.3. Structural Model and Test of Hypotheses

Fig2. SEM of relationship between service quality dimensions and patient satisfaction

The simultaneous maximum-likelihood-estimation procedures are utilized to test the hypothesized relationships among latent construct. Fig. 2 shows the results of the coefficients and goodness-of-fit statistics of the final estimated structural model. The result shown that 2 statistic is significant ( 2 = 603.008), and, the ratio of the 2 value to degrees of freedom ( 2/df = 3.207) is close to 3. Other fit indices, including GFI (0.872) and RMSEA (0.079). This result implies that the model has a good explanation of the observed covariance among the constructs. Relating to the hypothesis tests, only four of five hypothesized relationships were support the estimated structural model. As shown in Fig. 3 based on regression coefficient result, all of the exogenous variables are making statistically



significant at (p < 0.01) contribution to the patient satisfaction. However, dimension of responsiveness came out as an insignificant determinant of patient satisfaction. Convenience of care process has the most important significantly positive effects on patient satisfaction (β = 0.38) followed by respect and caring (β= 0.36), trust (β= 0.26), and finally environment and technology (β= 0.16). Thus, H1, H2, H4, and H5 were supported. On the other hand, the effect of responsiveness on patient satisfaction is not significant (β = -.18). Hence, H3 was not supported. More details about regression coefficients result (see appendix B and C).

In sum, the structural model confirmed the relationship between dimensions of service quality, environment, convenience, trust and caring with patient satisfaction, while the hypothesized path of responsiveness – satisfaction is not supported. The results in current research revealed that the five factors structures suggested by Parasuraman et al. (1988) for the SERVQUAL and Cronin and Taylor (1994) for the SERVPERF scales were almost supported. This is more in line with Lonial et al. (2010) who suggested that the dimensions of service quality are reliable and valid across cultural and economic environments in the context of healthcare/hospital. It is also in line with Taner and Antony (2006) found SERVQUAL, as a standard instrument for measuring functional service quality, which was found to be reliable and valid in a hospital environment. However, the result is not in line with Mostafa (2005) who studied public and private hospitals in Egyptian context, conforming three dimensions of service quality. Our finding is also not in line with a study conducted in Japan (Amira, 2008).

Among five dimensions of service quality, respect and caring, convenience of care process, trust and environment have a highest impact on patient satisfaction respectively. This result is almost consistent with Lonial et al. (2010). However, responsiveness has not influents on patient satisfaction. This result is not in line with Cong & Mai (2014) who found that the dimension tangible (environment & equipment) was found to have strongest influence on the Vietnamese patient satisfaction in public hospitals. Therefore, this present research also supports the significant and positive effect of service quality dimensions on patient satisfaction. This result implies that superior service quality dimensions increases patients’ satisfaction to public hospitals.

β = 0.38

β = -.18

β= 0.16

β= 0.26

β = 0.36

Insignificant

Significant

Convenience

Environment

Responsiveness

Caring

Patient Satisfaction

Satisfaction

Trust

Fig3. Standardized of coefficients of service quality dimensions and patients satisfaction

To examine the moderation effect of time and efforts on the relationship between service quality dimensions and patient satisfaction, such relationships can be tested with a Hierarchical regression



analysis (HMR) as recommended by Cohen & Cohen (1983).Three important service quality dimensions and its relationship with patient satisfaction as resulted by regression coefficient, these are respect and caring, convenience of care process and assurance will be tested in the next step. Moderating effect is an interaction that shows the degree of relationship between the independent variables and dependent variables will change if other variables exist in the relationship (Cohen & Cohen, 1983; Jaccard et al., 1990). Results of an interaction are evident when the relationship between interacting terms and the dependent variable is significant. Such interactions are included as the product of two variables in a regression model” (Sekaran & Bougie, 2010, p.354). HMR was used to analyze this hypothesis. As recommended in the literature of multivariate analysis literature (Hair et al, 2006). Preliminary analyses were conducted to ensure no violation of the assumptions of normality, linearity, multicollinearity and homoscedasticity. Tolerance and VIF ranged from .35 to .77 and from 1.30 to 2.83, respectively which is fall in the cut-off (tolerance value of less than .10, or a VIF value of above 10). Multicollinearity exists when the independent variables are highly correlated is .9 and above (Tabachnick & Fidell, 2007). The correlations between each of independent variables in this research less than .67.

Table 3 provides an overview of all three models and the respective regression results. The results of Model 1 show that the patients’ gender (β = -.321, p < .05) is negative and positive significantly effected on the patient satisfaction. However, other three control variables age, monthly income and education level are not significantly has impact on patient satisfaction. The results from Model 2, which includes the main effects variables of service quality dimensions such as convenience of care process, assurance and respect and caring, and time and efforts of perceived value (PVTE) show strong, positive, and significant effects on patient satisfaction except PVTE was not significant. For convenience of care process (β = .323, p < .05), assurance (β = .307, p < .05) and respect and caring (β = .234, p < .05). The PVTE shows no significant effect on patient satisfaction (β = -.002, p > .05. Finally with respect to model 3 which includes all three interaction terms in the regression analysis. The first set of interaction terms in Model 3 tests the moderating effects of the PVTE. The regression coefficients show that there is no significant regression coefficients for all three interaction terms, convenience of care process x PVTE (β = -.010, p > .05), assurance x PVTE (β = -.010, p > .05) and respect and caring (β = .052, p > .05), in reject of H6.

HMR determines the change in R2 that results during a hierarchical test of three regression equations. In the first regression the dependent variable of patient satisfaction is regressed on all demographic variables. Findings show a significant of .107. Findings also indicate that provides a significant

of .528 (Table 3 column 6), followed by a second regression of satisfaction with both the independent variables of quality and the moderator variable PVTE. The results shown in Table 3 column 6 indicate a high increasing from .107 to .528 is significant (p < .05). In the third regression, the cross-product term of the independent variables and the moderator (interactions variables) are entered. The cross-product terms or the interactions variables were used in literature review to analysis the role of effect of moderator variable (Caruana et al, 2000; Engelen et al, 2013; Ismail & Abdullah, 2009; Leonidou et al, 2013). Model 3 analyze moderating relationship of PVTE. Overall model has a good fit but no variable is significance in this model .This results improved to 0.529 (Table 3, column 9). The increase from .528 to .529 is statistically insignificant F = 34.887; p >0.05.

Contrary to the research results, the literature revealed that monetary of perceived value did have a moderating impact on relationship between service quality dimensions such as (convenience of care process, responsiveness and respect and caring, and assurance) and satisfaction (Caruana, 2000). However, perceived value can also be a moderator on the relationship between only respect and caring service quality dimensions and satisfaction (Ismail and Abdullah, 2009). The results in current research revealed that, patients think that the service hospitals provide high levels of service quality; it does necessarily results high satisfaction. If, time and efforts are perceived to be high this may not effect on satisfaction. Patient satisfaction does depend on service quality alone and higher levels of time and efforts of perceived value are not effect on or change the relationship between service quality dimensions such as convenience of care process, respect and caring and assurance with patient satisfaction.



Table3. HMR of predicting patient satisfaction from service quality dimensions interacting with perceived value Variables Model 1 Model 2 Model 3 B β Sig B β Sig B β Sig Gender -.584 -.321* .000 -.293 -.161* .000 -.289 -.159* .000 Educational -.055 -.092 .113 -.047 -.079 .065 -.046 -.077 .073 Age -.026 -.037 .523 .006 .009 .840 .005 .007 .869 Income -.007 -.010 .865 .040 .057 .182 .039 .056 .193 IV Convenience .319 .323* .000 .317 .321* .000 Trust .358 .307* .000 .362 .309* .000 Caring .244 .234* .000 .254 .244* .000 PVTE -.002 -.002 .967 -.002 -.002 .967 Interaction CCOP X PVTE -.002 -.010 .816 TSMS X PVTE -.016 -.010 .831 MSRC X PVTE -.017 .052 .296

.107* .528 .529 Adjusted .097* .517 .514

10.4 48.1 34.9 Change .107 .421 .002

Sig. Change .000 .000 .738 Note: * p < 0.001

5. CONCLUSIONS AND IMPLICATIONS The study examined the relationship between service quality dimensions and patient satisfaction through the time and efforts as non-price dimension of perceived value as the moderator effect. The research examined service quality dimensions such as environment and technology, convenience of care process, responsiveness, assurance and respect and caring in public hospitals. Quantitative research was conducted with a sample of 353 patients at the public hospitals in Tripoli, Libya. The aim of the study was to examine if a particular monetary such as time and efforts of perceived value change or strengthens the relationship between service quality dimensions correlate more strongly or more positively with the determinants of patient satisfaction. The main objectives in this research were: 1) to examine the relationship between service quality dimensions such as environment and technology, convenience of care process, responsiveness, assurance and respect and caring with patient satisfaction, and 2) to examine the moderating effect of perceived value on the relationship of service quality dimensions such as environment and technology, convenience of care process, responsiveness, assurance and respect and caring with patient satisfaction. For achieve the objective 1 several hypotheses were conducted, testing the hypotheses were conducted. Findings accepted all the hypotheses except for the effect of responsiveness on patient satisfaction (H3). Regression showed that responsiveness service quality dimension does not influence on patient satisfaction, whereas each of other service quality dimensions such as assurance, respect and caring, convenience of care process and environment and technology (H4, H5, H2 and H1) were found to be has influence on patient satisfaction. The most important dimension predicting patient satisfaction in public hospitals analysis was dimension of respect and caring. Regarding to achieving the objective 2 several hypotheses were tested, HMR was conducted. Hypotheses tests 6 was rejected all sub-hypotheses which related to time and efforts of perceived value moderates the relationship between the three important service quality dimensions such as respect and caring, convenience of care process and assurance. Moreover, perceived value such as time and efforts dimension does not moderate the relationship between each of remained service quality dimension such as convenience of care process, trust and respect and caring with patient satisfaction. Therefore, time and efforts dimension of perceived value may be antecedent variable for patient satisfaction. Based on research objectives and followed by the research findings, this study contribute to better understanding of the service quality dimensions and their impact on patient satisfaction in the context of the public hospitals in Tripoli, Libya. This research is meaningful since the ability to deliver quality services and provide patient satisfaction, especially in the public hospitals units in developing countries like Libya is limited.



The important implications and contributions of the research findings comprise managerial and theoretical implications. This work provides significant impacts on some major aspects: practical contribution, and theoretical contribution. In team of practical contribution, the findings of this research can be employed as a guideline by maker’s decision to develop the design and department of service quality program in hospitals. With respect to theoretical contribution, this study provides several important findings time and efforts of perceive value about the use of service quality dimensions such as convenience of care process; respect and caring and trust in delivery healthcare services have not increased patient satisfaction. This finding is not in line with studies conducted of Caruana et al. (2000), Eggert and Ulaga (2002) and Monroe (1990) and this result is consistent with studies by Eggert and Ulaga (2002) and Varki & Colgate (2001). The findings of the investigation hold important implications for future planning and improvement in Libyan hospitals industry and more specifically, public hospitals.

5.1. Limitations and Future Research

The conclusion drawn from the results of this study should consider the following limitations. Firstly, this research was a cross-sectional design. Longitudinal method may achieve a better understanding of the effective behavior of the variables analyzed. Secondly, this research only examines the relationships between latent variables (i.e., responsiveness, assurance, respect and caring, time and efforts, and patient satisfaction) and the conclusion drawn from this study does not specify the relationship between specific indicators and observes for the independent variable, moderating variable, and dependent variable. Future research may expand in this regard. Thirdly, this research conducted the sample which only represents inpatient in hospitals in a single city and they were chosen by using a convenient sampling technique. It is acknowledged that if it included outpatient it would have been more inclusive. The study was conducted in Tripoli city, but if it was conducted to all cities in Libya it would have been more inclusive. Fourthly, the study was conducted in a part of sector which is General public hospitals; further research may examine differences of sectors such as private and specialization of hospital, Primary health care units. Although the study is one of the first studies in the Libya which clarified the concept of quality from the patients view in Libya hospitals, it is limited as it did not study the concept of quality from other customer viewpoints as mentioned in limitation of the research. Therefore, perhaps further studies are needed on this issue.

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Appendix A: Exploratory Factor Analysis Component

1 2 3 4 5 6 7 ENMT1 .247 .117 .139 .007 .062 .080 .888 ENMT2 .258 .177 .104 .113 .105 .069 .831 ENMT3 .113 -.016 .018 .148 .106 .065 .807 CCOP1 .893 .128 .077 .043 .141 .141 .140 CCOP2 .770 .086 -.028 -.057 .113 -.020 .142 CCOP3 .822 -.021 .053 .001 .173 .048 .144 CCOP4 .689 .180 .193 .338 .071 .316 .174 CCOP5 .726 .210 .203 .351 .087 .298 .202 RESP1 .126 .243 .321 .802 .058 .237 .091 RESP2 .030 .332 .134 .753 .058 .021 .147 RESP3 .051 .357 .265 .681 .115 .059 .110 RESP4 .095 .030 .256 .761 .066 .234 .018 TSMS1 .109 .250 .822 .255 .096 .252 .114 TSMS2 .054 .143 .806 .240 .128 .123 .012 TSMS3 .113 .191 .780 .157 .066 .177 .111 TSMS4 .034 .276 .656 .272 .071 .207 .090 MSRC1 .149 .874 .200 .226 .105 .135 .102 MSRC2 .084 .852 .155 .104 .057 .180 .048 MSRC3 .091 .724 .262 .362 .115 .132 .086 MSRC4 .176 .710 .355 .318 .118 .228 .105 PVTE1 .121 .054 .095 .095 .844 .054 .043 PVTE2 .050 .085 .086 .101 .743 .066 .024 PVTE3 .123 .036 .006 -.012 .787 .031 .185 PVTE4 .167 .091 .091 .036 .841 .071 .022 PSAT1 .103 .078 .179 .089 .084 .872 .082 PSAT2 .064 .173 .183 .178 .103 .797 -.005 PSAT3 .305 .394 .264 .143 .082 .646 .297 PSAT5 .310 .277 .312 .210 .023 .549 .076 Extraction Method: Principal Component Analysis. Rotation Method: Varimax with Kaiser Normalization. a. Rotation converged in 6 iterations.

Appendix B: Regression Weights: (Unstandardized) Estimate S.E. C.R. P Label F6 <--- F1 .172 .048 3.604 *** par_20 F6 <--- F2 .403 .067 6.030 *** par_21 F6 <--- F3 -.258 .170 -1.516 .129 par_22 F6 <--- F4 .301 .074 4.068 *** par_23 F6 <--- F5 .394 .088 4.498 *** par_24 ENMT1 <--- F1 1.000 ENMT2 <--- F1 .953 .040 23.807 *** par_1 ENMT3 <--- F1 .502 .034 14.971 *** par_2 CCOP1 <--- F2 1.000 CCOP3 <--- F2 1.009 .056 18.168 *** par_3 CCOP4 <--- F2 .844 .046 18.456 *** par_4 CCOP5 <--- F2 .933 .047 19.748 *** par_5 RESP2 <--- F3 .889 .062 14.306 *** par_6 RESP3 <--- F3 1.000 RESP4 <--- F3 1.064 .098 10.815 *** par_7 TSMS1 <--- F4 1.000 TSMS2 <--- F4 .933 .041 22.828 *** par_8 TSMS3 <--- F4 .911 .042 21.591 *** par_9 TSMS4 <--- F4 .832 .049 17.109 *** par_10 MSRC1 <--- F5 1.000 MSRC2 <--- F5 1.043 .043 24.137 *** par_11 MSRC3 <--- F5 1.044 .042 25.082 *** par_12 MSRC4 <--- F5 .885 .034 25.796 *** par_13 PSAT1 <--- F6 1.000 PSAT2 <--- F6 .725 .047 15.301 *** par_14 PSAT3 <--- F6 .920 .056 16.458 *** par_15 PSAT5 <--- F6 1.030 .075 13.817 *** par_16

F1 is environment, F2 convenience, F3 responsiveness, F4 trust, F5 caring, F6 patient satisfaction



Appendix C: Standardized Regression Weights Estimate F6 <--- F1 .159 F6 <--- F2 .376 F6 <--- F3 -.181 F6 <--- F4 .267 F6 <--- F5 .365 ENMT1 <--- F1 .964 ENMT2 <--- F1 .888 ENMT3 <--- F1 .668 CCOP1 <--- F2 .744 CCOP3 <--- F2 .626 CCOP4 <--- F2 .907 CCOP5 <--- F2 .994 RESP2 <--- F3 .675 RESP3 <--- F3 .728 RESP4 <--- F3 .660 TSMS1 <--- F4 .970 TSMS2 <--- F4 .822 TSMS3 <--- F4 .802 TSMS4 <--- F4 .703 MSRC1 <--- F5 .904 MSRC2 <--- F5 .771 MSRC3 <--- F5 .893 MSRC4 <--- F5 .904 PSAT1 <--- F6 .698 PSAT2 <--- F6 .602 PSAT3 <--- F6 .986 PSAT5 <--- F6 .758

F1 environment, F2 convenience, F3 responsiveness, F4 trust, F5 caring, F6 patient satisfaction

AUTHORS’ BIOGRAPHY Yousf was born in April 3, 1972 in Zliten, Libya. He holds a Master of Marketing degree from the Academy of Graduate Studies, Tripoli, Libya. He is currently a PhD (Management) student at Universiti Tun Abdul Razak, Kuala Lumpur, Malaysia. Postal Address: U1, 13A-02, AmpangDamai Condo, Jln, wawasan, Bandar BaruAmpang, 68000, Selangor, Malaysia.

Prof Dr Ismail Rejab holds a D.B.A degree from the University of Kentucky, Lexington, Kentucky, USA – 1979. Currently he teaches at Al-Medinah International University Shah Alam, Malaysia. His main research area is marketing and strategic management. He is also conducting research in the area of political marketing.

Assoc. Prof. Dr. Zulkifflee Mohamed currently is a Dean at Bank Rakyat School of Business & Entrepreneurship (BRSBE), Universiti Tun Abdul Razak (UNIRAZAK) Malaysia. He has been with Pricewaterhoosecooper Malaysia as external auditor before joining academic arena. In addition, Dr. Zulkifflee is a Fellow member of CPA Australia as Certified Practicing Accountant, Fellow member of Institute Financial Accountant (UK), member of Malaysian Institute of Accountants (MIA) as Chartered Accountant, member of The Malaysian Institute of Certificate Public Accountants (MICPA) as Certified Financial Accountant

(CFiA) and member of Institute of Internal Auditors Malaysia (IIAM) as Chartered & Professional Internal Auditors. His primary research areas of interest include corporate governance, auditing, financial accounting and reporting, corporate social responsibility (CSR), service quality and accounting education.

International Journal of Managerial Studies and Research (IJMSR)

Volume 3, Issue 6, June 2015, PP 117-133

ISSN 2349-0330 (Print) & ISSN 2349-0349 (Online)

www.arcjournals.org

©ARC Page 117

Performance Appraisal in the Ghana Education Service, the Case

of Basic School Teachers in Ho Municipality

Lydia Sylvia Danku Lecturer, Department of Secretary ship and

Management Studies, Ho Polytechnic, Ghana

[email protected]

Newell Yao Soglo

Registrar‟s Department

Evangelical Presbyterian University College

Ho, Ghana

Francis Dordor

Registrar‟s Department University of Allied

Health Sciences, Hohoe, Ghana

Marian Josephine Bokor

Assistant Lecturer, Department of Secretary ship

and Management Studies, Ho Polytechnic, Ghana

Abstract: Formal performance appraisal (PA) is one of the most important human resource management

practices in organisations. It is worth noting that extensive frustration and dissatisfaction with performance

appraisal have challenged practitioners and researchers to appraise the efficiency of performance appraisal

quality. In this paper, we focus on the reaction of employees to these performance assessments. In particular, we

examine the performance appraisal process and tools used in basic schools, examine the perception of teachers

regarding performance appraisal systems (PAS) and identified the challenges (barriers) of performance

appraisal in Ghana Education Service (GES).Respondents sampled for the study were drawn from teaching staff

of basic schools in the HoMunicipality made up of 200 teachers from 10 schools. Concerning the process of

Appraisal, there was an indication that at the basic schools performance criteria do not take into consideration

the opinion of staff. On the challenges to appraisal process in the sector, respondents identified certain factors

as challenges to an effective appraisal process. These included the unavailability of the needed resources to

enhance the appraisal process, insufficient funding and failure by authorities to act upon results.

Keywords: Performance Appraisal, Ghana Education Service, Basic Schools, Ghana.

1. INTRODUCTION

Historically, higher educational institutions (HEIs) have been independent institutions, backed by an

ideology that led staff to expect and enjoy high levels of independence and autonomy, relatively free

from any sense of management, commercial responsibility and accountability. This is however not the

case with regards to Basic Education (BE). In recent times, BE in Ghana has been subject to

increasing levels of scrutiny and regulation spurred on by central government initiatives related to

standards and quality, and ever increasing expectations from students. These developments have

heralded changes in human resources policy reflected in teaching staff appraisal systems in the Ghana

Education Service. This study examines the issue of performance appraisal in selected basic schools

as a way of understanding the generality of performance appraisal in the Ghana Education Service

(GES).

Basic education in Ghana has seen tremendous efforts from the government and International

Agencies. After independence in 1957, basic education has become a high priority on the government

of Ghana‟s agenda. There have been policies of free compulsory basic education, free textbooks for

all students and the creation of local education authorities with responsibilities for buildings,

equipment and maintenance grants for primary schools. The 1992 constitution of Ghana makes basic

education a right for all Ghanaians. The constitution also makes basic education free and compulsory.

The Free Compulsory Universal Basic Education (FCUBE) program of 1996 has contributed

immensely to the structure of basic education that exists today in Ghana.

Basic education in Ghana consists of 2 years of kindergarten, 6 years of primary education followed

by 3 years of junior secondary school (now Junior high School). Pupils spend a total of 11 years at

this level of education. As outlined in the United Nation‟s Millennium Development goals, Ghana

wants to achieve universal basic education by the end of 2015.

In order to increase access to basic education, the government introduced the Capitation grant. This

initiative took care of tuition fees and made basic education free. There was a 10% increase in primary

mailto:[email protected]

Lydia Sylvia Danku et al.


school enrolment in 2005 after the introduction of the program. The school feeding program was also

introduced to attract more children to go to school. Despite the gains, progress is not evenly

distributed in the country and the quality of basic education has only improved marginally.

Performance appraisals are one of the most important requirements for successful institutional and

human resource policy (Kressler, 2003). According to Pulakos (2003), rewarding and promoting

effective performance in institutions, as well as identifying ineffective performers for developmental

programs or other personnel actions are essential to effective human resource management. London

(2003) states that performance appraisals can be conducted effectively if there is a fair and accurate

assessment of an employee‟s performance. London (2003) views the evaluation of an employee‟s

performance as a difficult task and opines that once the supervisor understands the nature of the job

and the sources of information, the information needs to be collected in a systematic way, provided as

feedback, and integrated into the institution‟s performance management process for use in making

compensation, job placement, and training decisions and assignments.

Historically, formal employee performance evaluation programme is thought to have originated in the

United States military establishment shortly after the birth of the republic (Lopez, 1968). In Ghana,

this history has not been documented, or was not encountered in the literature, which strengthens the

need for this study.

The measurement of an employee‟s performance allows for rational administrative decisions at the

individual employee level. It also provides for the raw data for the evaluation of the effectiveness of

such personnel- system components and processes as recruiting policies, training programs, selection

rules, promotional strategies, and reward allocations (Landy, Zedeck, Cleveland, 1983). In addition, it

provides the foundation for behaviorally based employee counseling. In the counseling setting,

performance information provides the vehicle for increasing satisfaction, commitment, and motivation

of the employee. In the education sector this will provide the impetus for enhanced performance of

staff. Thus, according to Thurston, McNall, (2010), performance appraisal and its outcome play a key

role in employees‟ job activities and the organization.

As the need for talented workforce is growing worldwide, so is the need for GES staff with requisite

skills in the educational institutions to produce the base for generating such a work force. Businesses

are continuously demanding fresh talent which can meet challenges of twenty-first century through

innovative and out-of-the box thinking. Business leaders are counting on educational institutions for

infusing well-qualified fresh talent into industry. Given these facts, it is important for GES to have a

solid performance appraisal management skill. In this study, the researchers made an intense

investigation on performance appraisal management perspective in GES. Emphasis was placed on

what the situation was in performance appraisal in GES and how it should be handled in the future.

The quality of institutional outcomes depends fundamentally on the work of staff, individually and

collectively. Systematic staff appraisal or performance management procedures are generally assumed

to comprise an important part of quality management and development in educational institutions, for

the purpose of this study the basic schools. Past approaches to such appraisal and performance

management in basic educational institutions have had limited and confused purposes and their

contribution to enhanced institutional performance and quality has been minimal. In some cases, the

impact has been negative, as reflected in the falling standards in education especially in the basic

educational institutions. For example, a report from the West Africa Examination Council (WAEC)

on the 2011 Basic Education Certificate Examination (BECE) results revealed that, most of the

students performed badly, leading to most students not being able to obtain admission into the Senior

High Schools (SHS).

According to them the performance for the Basic Education Certificate Examination (BECE)

nationwide was poor, with most schools scoring below 50%.

2. LITERATURE REVIEW

2.1. The Concept of Performance Appraisal

To understand the definition of performance appraisal would enable us lay a solid foundation to

capture what the concept of performance appraisal is all about.

Different experts have defined performance appraisal concept in different points of views; among the

popular definitions:

Performance Appraisal in the Ghana Education Service, the Case of Basic School Teachers in Ho

Municipality


Performance appraisal more broadly defines as “activities through which organizations seek to assess

employees and develop their competence, enhance performance and distribute rewards Fletcher

(2001).

Performance appraisal is a system of review and evaluation of an individual‟s (or team‟s) performance

Mondy et al., (2002).

Performance appraisal can be defined as the process of evaluating how well employees do their jobs

compared with a set of standards and communicating that information to those employees (Robert L.

Mathis & John H. Jackson, 1997).

Alo (1999) defines performance appraisal as a process involving deliberate stock taking of the

success, which an individual or organization has achieved in performing assigned tasks or meeting set

goals over a period of time.

Atiomo (2000) agrees with literature that performance appraisal is a system which provides

organizations with a means of identifying not only what people‟s performance levels are but which

areas those levels need to be improved if maximum use is to be made of human resource. According

to Atiomo, every organization should ensure that the individual is clearly aware of what his functions

and responsibilities are to make performance appraisal effective.

Performance appraisal is defined as evaluating an employee‟s current or past performance relative to

his or her performance standards. The appraisal process therefore involves:

Setting work standards,

Assessing the employee‟s actual performance relative to these standards,

Providing feedback to the employee with the aim of motivating that person to eliminate

performance deficiencies or to continue to perform above par (Dessler, 2000).

According to Dessler (2011), Performance Appraisal (PA) has been synonymous with performance

review, performance evaluation, and other terms and combinations of terms. PA has, over time,

referred to 1) an instrument or form to assess an employee's job performance, 2) an interview where

an employee's job performance is assessed and feedback is given to the employee, 3) a system of

setting employee job expectations/ employee actual job performance/assessing that performance/

feedback to the employee on the performance assessment and how to improve it in the future/setting

new goals and expectations for another period, or 4) performance management with job performance

appraisal a part of it

Performance appraisal is “the process of identifying, evaluating and developing the work performance

of employees in the organization, so that the organizational goals and objectives are more effectively

achieved, while at the same time benefiting employees in terms of recognition, receiving feedback,

catering for work and offering career guidance” (Lansbury, 1988).

Performance appraisal has been described as the process of identifying, observing, measuring, and

developing human performance in organization (Carrol & Scheider, 1982).

Analyzing the definitions of performance appraisal, Alo (1999) opines that performance appraisal

practices should be deliberate and not by accident and that, it calls for serious approach to knowing

how the individual is doing in performing his or her tasks.

2.2. Objective of Performance Appraisal

Cumming (1972) states that the overall objective of performance appraisal is to improve the

efficiency of an enterprise by attempting to mobilize the best possible efforts from individuals

employed in it. Such appraisals achieve four objectives including salary reviews, development and

training of individuals, planning job rotation and assisting in promotions. Mamoria (1995) and

Atiomo (2000) agree that although performance appraisal is usually thought of in relation to one

specific purpose, which is pay. It can in fact serve for a wider range of objectives which are;

identifying training needs, improving present performance of employees, improving potentials,

improving communication, improving motivation and aids in pay determination.

Performance appraisal has been considered as a most significant and indispensable tool for an

organization, for the information it provides is highly useful in making decisions regarding various



personnel aspects such as promotions and merit increases. Performance measures also link

information gathering and decision-making processes, which provide a basis for judging the

effectiveness of personnel sub-divisions such as recruiting, selection, training and compensation. If

valid performance data are available, timely, accurate, objective, standardized and relevant

management can maintain consistent promotion and compensation policies throughout the total

system, Burack, Elmer and Smith (1977).

All companies pay a lot of attention on their employees to gain the competitive advantage and HR

practices play an important role in gaining that competitive advantage through employees. Among

many HR practices and functions, an important function of HR is keeping the track of employees‟

performance within the organization which is generally known as the performance appraisal of the

employees.An advantage of PA is that, the provided feedback and communication may signal

employees that they are being valued by their supervisors and the firms, which make them to feel

more as part of the organization. The incidence of an individual being covered by a PA system is also

of economic relevance, as it has been shown that employee participation, feedback, and clarity of

goals are positively related to job satisfaction, a predictor of productivity and performance (Nathan et

al., 1991; Fletcher & Williams, 1996; Judge et al., 2001; Patterson et al., 2004; Whitman et al., 2010).

We contribute to the literature by addressing three main research questions. What are performance

appraisal process and tools used in basic schools? What is the perception of teachers regarding

performance appraisal systems (PAS)? And What are the challenges (barriers) of performance

appraisal? These are critical questions that were addressed.

Previous research by Levy & Williams, (2004); Pichler, (2012) has broadly analyzed the impact of the

social context of performance appraisals on employee reactions to these appraisals. One dimension

focuses on the rater-ratee relationship comprising topics such as supervisor support, trust, rating

accuracy, and reliability as a precondition for the acceptance and usefulness of formal appraisal

systems. Rating distortions, which are very prominent in organizations according to (Kane et al.,

1995; Moers, 2005), lead to less acceptance among employees and decrease the economic incentives

to provide effort (Prendergast &Topel, 1996). These rating distortions may have very different

reasons including strategic incentives of the raters such as favoritism or punishment (Poon, 2004) or

interpersonal motives as opine by Murphy and Cleveland, 1995). Furthermore, it has been shown that

raters‟ personality traits influence overall rating decisions (Krzystofiak et al., 1988).

Employees‟ satisfaction with the PA process as a whole, the performance appraisal feedback, or

employees‟ evaluations of the perceived quality, justice, and fairness of the performance appraisal

regime are other contextual factors highlighted by (Greenberg, 1986; Nathan et al. 1991; Blau, 1999;

Pettijohn et al., 2001; Jawahar, 2006; Kuvaas, 2006; Lau et al., 2008; Sommer & Kulkarni, 2012:

Gupta & Kumar, 2013). Furthermore, employee participation in the PA process is positively related to

the satisfaction with the PA system, perceived fairness, and acceptance of such a practice (Cawley et

al., 1998).

Brown et al. (2010) analyzed the relationship between PA quality measured by clarity,

communication, trust, and fairness of the PA process and job satisfaction and commitment based on a

sample of more than 2,300 Australian non-managerial employees of a large public sector organization

and found that employees who report a low PA quality (lowest levels of trust in supervisor, poor

communication, lack of clarity about expectations, perception of a less fair PA process) also report

lower levels of job satisfaction and commitment.

2.3. The Process of Performance Appraisal

Studies show that there are many approaches for evaluating employee behaviour and performance

with respect to job tasks and/or organisational culture. As a result, various applications of PA have

left many managers in a state of confusion and frustration with the employee evaluation process

(Gurbuz & Dikmenli, 2007). This situation seems to negatively impact the popularity of appraisal

systems in many organisations. Most people support the concept and purpose of PA, in spite of their

concerns about the process and application of appraisal outcomes by managers (Grote, 1996). The

biggest complaint from managers is that they are not given sufficient guidelines to assess people; and

the biggest complaint from employees is that the process is not equitable and fair. PA concentrates

much in assessing past behaviours of employees, a situation some managers‟ exploit to victimize

unfavoured employees (Bersin, 2008).


Municipality


The appraisal process has been categorised into: (1) Establishing job criteria and appraisal standards;

(2) Timing of appraisal; (3) Selection of appraisers and (4) Providing feedback (Scullen et al., 2003).

Early PA processes were fairly simple, and involved ranking and comparing individuals with other

people (Milkovich & Boudreau 1997). However, these early person-based appraisal systems were

fraught with problems. As a result, a transition to job-related performance assessments continues to

occur. Thus, PA is being modified from being person-focused to behaviour-oriented, with emphasis

on those tasks or behaviours associated with the performance of a particular job (Wellbourne et al.,

1998).

2.4. Fairness of Performance Appraisal System

Employees want fair dealing in PAS, which is a vital component of organization‟s HRM. According

to Latham & Wexley (1994), literature reveals that fairness perceptions about various components of

PAS have very serious implications not only for employees, but also for an organization.(Martin &

Bartol, 2003) state that due to the importance of PAS‟s fairness, it is a significant topic of

investigation among researchers in the field of organizational psychology. According to Boyd &

Kyle(2004), discussion continues among the scholars about unjust nature of PASs. In the context of

performance appraisal, variables pertaining to fairness are: knowledgeable supervisor, chance given to

employee for expressing his/her appraisal related feelings and appraisal frequency in a rating year

(Landy, Barnes, & Murphy, 1978). If employees have an opportunity to change their ratings or given

simple rights to raise their voice against ratings which they perceive unfair (Gabris & Ihrke, 2001;

Taylor et al., 1995) then this will result in fair perceptions of PAS. Blau (1999) also argues that

employees‟ satisfaction with various aspects of PAS, like, performance targets setting and

performance feedback are related to fairness of appraisal system. Gilliland and Langdon (1998) claim

that employees‟ fairness perceptions of PAS have significant effect on the performance appraisal

rating‟s acceptance, ratees‟ satisfaction with performance appraisal process and organizational

commitment. Many organizational researchers (Greenberg, 1986, Landy et al., 1978) have expressed

fairness of performance appraisal in terms of Organizational Justice (OJ). Cropanzano & Greenberg

(1997) opine that organizational justice deals with employees‟ fairness perceptions of various

organizational procedures or outcomes in work settings. The study of fairness or organizational justice

came out from Adam‟s equity theory in the social-psychology literature (Adams, 1965). Employees‟

perceptions of fairness depend on one or more of their perceptions concerning the various

organizational outcomes which they receive from the organization (distributive justice), procedures

used to make those decisions (procedural justice) and the treatment which they receive from

organization (interpersonal justice) and all the required information related to various outcomes is

provided within an organization (informational justice).

Distributive justice deals with outcomes fairness and in performance appraisal context, appraisal

ratings are outcomes (Erdogan, 2002; Jawahar, 2007). Greenberg (1996) gives the second factor as

procedural justice which is associated with the fairness perceptions of the standards followed,

methods and processes used for appraising performance of employees, and the third factor called

interpersonal justice, deals with appraisees‟ perceptions about the treatment of supervisor. Fourth

factor in PAS related to fairness is called informational justice, it means providing appraisees all the

information relevant to decisions or appraisal process. Employees always anticipate that organization

will appraise and reward their performance fairly without concealed purposes (Cawley et al., 1998).

Likewise, it is also important that management should give full attention to employees‟ fairness

perceptions of PAS (Roberson & Stewart, 2006) to get users view about the system. Ultimately, this

will help management to design and implement the appraisal system according to desires of its users.

Once organization has established a fair PAS, then responsibility for its operation just and consistent

manner, lies on the shoulders of people who conduct appraisal (Cook & Crossman, 2004).

Dulebohn and Ferris (1999) affirmed that organizational researchers emphasized a lot on the

investigation of performance appraisal as a key element of human resource management. There is no

doubt that all the organizations want their employees‟ to perform well on their jobs and they carry out

performance appraisal to judge how well their employees are performing.

In this regard, the organizations must assure that the performance appraisal process is fair and it

concludes the fair results about the performance of the employees. The performance appraisal can be

used as an effective managerial decision tool if its results are providing the accurate information about



the performance of employees (Poon, 2004). The accuracy of the information provided by the

appraiser or rater remains doubtful in the presence of politics involved in giving ratings during the

performance appraisal process. The appraisers intentionally alter the appraisal results for their own

interests and according to Longenecker et al., (1987) the ratings and results of the appraisal are

changed for political reasons.

Reviewing the performance appraisals, many decision and actions are taken by the management such

as giving rewards to the employees such as promotions for having good performance ratings or may

be punishing employees having bad performance ratings. Furthermore, the biased ratings either

positive or negative by the appraisers i.e. the politics involved in the performance appraisal will affect

the management decisions about punishing or rewarding an employee.

The employees‟ satisfaction with performance appraisal is sometimes quite complicated and hard to

predict due to its behavioral aspect of employee perception. Previous studies revealed that many

employees are not happy with their appraisal scores and effects on their compensations. This may be

due to different reasons from personal expectations to the economic factors.

Leventhal (1980) expanded the attributes of the fair procedures of performance appraisal to six items

as follows.

Consistency: maintaining consistency in performance standards over time and among employees.

Bias-suppression: constraining self-interest by discussing performance expectations and

discrepancies.

Accuracy: training managers and employees to record performance accurately throughout the

period and use this record to prepare and justify performance evaluations.

Correct ability: instructing managers to listen to the employees opinions and change the evaluation

if appropriate.

Representativeness: discussing concerns of the employee and manager throughout each stage of

the process.

Ethicality: using procedures that are compatible with existing moral and ethical standards.

2.5. Performance Review Discussion

Performance review discussion is the key in performance appraisal. It requires managers reviewing

employees‟ responsibilities and performance, exploring what have to do to improve their

performance, and providing feedbacks to them. Generally, performance review discussion is

conducted by interviews. (Stone, 2005) Before the interviews with employees, managers should make

a sufficient preparation for the interview. They must review employees‟ job description, goal, and

performance, consult with other managers who also know the employees, and list important points

that will be discussed in the interview.

In the interview, managers should encourage employees to talk about what problems they have and

their ideas about the future work. Furthermore, managers should give a feedback to them. This helps

employees identify what skills and knowledge have to be developed (Ubeda, Santos, 2007). In this

process, managers must avoid utilizing their authority. In other words, the interview should be freely

and neutral. (Stone, 2005).

2.6. Errors /Challenges in Performance Appraisal

Many researches pointed to the errors that supervisors often make during performance appraisal

which could be the main source of dissatisfaction. Such errors are very likely to affect employees‟

appraisal results by which the performance scores received by people may be inaccurate (Suhaimi,

2011, Kavanagh et al, 2007 and Latham et al, 2005).

In the study of Hannay, (2010) which quoted Nickols, (2007), specified number of perceived

problems with performance appraisals such as:

Reduction of performance as employees set “easily achievable” goals

Creation of emotional negative feelings

Against the need for team working


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Emphasis on task rather than overall process results

Foster a short-term view

Foster political game-playing

Costly practice requires for designing, preparing and conducting appraisals including training costs

and handling appraisal appeals and potential problems.

As opine by Kuvaas (2007), there are difference of opinions between researchers and practitioners of

performance appraisal. The practitioners are much more concerned with the impacts of appraisal on

the superior-subordinated relations. The researchers on the other hand, tried to emphasize more on

refining the rating procedures and the processes to make them more accurate and beneficial for the

organization and the individuals. The effectiveness of the performance appraisal process can only be

made possible if the ratings of the appraisal are accurate.

In practice, there are many possible errors or biases in the PA process. Raters are usually blamed for

most of these errors. They affect the objectivity of the appraisal negatively. The most common errors

in appraisal are discussed. One of the most common errors in PA is the halo effect. It is the influence

of a rater‟s general impression on ratings of specific ratee qualities (Solomonson & Lance, 1997). The

rater gives subordinates good grades although their performances are not worthy. Sometimes one

prominent characteristic of the subordinate may colour the supervisor‟s perception of other qualities

of the subordinate.

This occurs because raters sometimes fail to evaluate the employee‟s other characteristics separately.

From his review of several studies, Lefkowitz (2000) concludes that positive regard for subordinates

is often associated with greater halo effect and better interpersonal relationship. Horn effect is the

opposite of halo effect. It means that the rater might give poor grade even though the ratee‟s

performance is commendable. Some raters have tendencies to view negatively all behaviours or

actions of a subordinate because the superior dislikes a particular behaviour or action of the

subordinate (Lefkowitz, 2000).

The leniency error is perhaps the second most common appraisal error (Tziner & Kopelman, 2002).

Some managers are concerned about damaging a good working relationship with a subordinate by

giving poor or negative ratings. For this reason, they have the tendency to give ratees higher ratings

than they truly deserve. Lenient raters have the tendency to rate subordinates higher just because they

do not want to adversely impact the future of the subordinate or risk being perceived as a harsh

superior. Management psychologists claim that PA ratings obtained for administrative purposes (such

as pay raises or promotions) would be more lenient than ratings meant for feedback or employee

development purposes (Jawahar& Williams, 1997).

The error of strictness error occurs when raters give unfavourable or poor appraisal regardless of the

actual performance level of the ratee. The tight raters set very high evaluation standards. And they

might score subordinates‟ performance below maximum level of the scale. In the view of Tziner and

Kopeman (2002), the main reason for this error is that the rater may be uncomfortable that successful

ratees may replace them in the future. It is also due to the fact that some raters want to create the

impression that they are hard and perfectly placed, and are unwilling to give high ratings even if the

ratee‟s performance is very commendable.

Rather than give extremely poor or good ratings, there is a tendency on the part of some raters to

evaluate all ratees as average performers even if actual performances of employees vary. Some raters

want to rate employees in the middle of the scale rather than the extremes. According to Dessler

(2000), this error (the central tendency error) is mostly committed for two main reasons: when the

rater lacks adequate information and knowledge of the employee and, therefore, attempts to reduce the

risk of wrong judgment; and when the rater is of the view that appraisal is a waste of time and, as a

result, provides average ratings regardless of employee‟s actual performance value.

Generally, appraisal is conducted once or twice a year in most organisations (Bersin, 2008). The

period between one appraisal and the next might be very long for the rater to remember detail

information of all relevant performance key points achieved by employees. As a result, some raters

only consider the ratee‟s recent noticeable behaviours or actions on the job regardless of actual



performance overall. This is the recency error. Moreover, the ratings may even become more

misleading as some ratees attempt to score high ratings by working very hard and demonstrating good

performance when appraisal time is approaching (Bersin, 2008).

The contrast error occurs when an employee‟s evaluation is biased either upward or downward

because of another employee‟s performance, evaluated just previously. Contrast errors are most likely

when raters are required to rank employees in order from the best to the poorest. The probability for

this error to occur is higher if the rater appraises many employees within a short period (Tziner &

Kopelman, 2002). In other words, an appraisal grade of a ratee may be affected by the grade of

another ratee who gets appraised just before him or her.

The similarity effect occurs when raters succumb to the tendency to give better rating to those

subordinates similar to themselves in terms of behaviour, personality, or background (Pulakos &

Wexley, 1983). Employees might also contribute to this error when they make efforts to demonstrate

that their behaviours, tastes and tendencies match those of the superior, or hide those not matching

with the superior‟s, with the intent to please the superior for more favourable ratings. The effects of

“similar to me” error can be powerful, and when the similarity is based on race, religion, or gender, it

may result in discrimination (Pulakos & Wexley, 1983).

Although training for raters may provide solutions to rater errors in some cases, it is ineffective in

other instances due to a myriad of factors that distort ratings (Gilbert, 1994). Roberts (2003) argues

that four out of ten supervisors believe that employees are to blame for poor performance, when in

reality it is poor management practices. To minimize these errors, raters must be fully knowledgeable

of the system, and the organization should provide rater training for managers (Roch & O‟Sullivan,

2003).

3. METHODOLOGY

This research design was primarily descriptive. A descriptive research is a study that seeks to portray

an accurate profile of persons, events or situations (Saunders et al 2007). It involves formalizing the

study with definite structures in order to better describe or present facts about a phenomenon as it is

perceived or as it is in reality. According to Malhotra (2007), descriptive research is a type of

conclusive research that has as its major objective to give the description of something. Accordingly,

the study is justified to be descriptive because the researchers‟ intention was to portray an accurate

profile of the activity of performance appraisal in GES.

3.1. Population and Sample Size

The target population for the study was composed of 109 schools in Ho Municipality out of which

respondents in the category of teaching staff of the selected basic schools were used. The simple

random sampling techniques were used in selecting the various schools. In all, ten schools (both

primary and JHS were chosen.

Out of the sample frame, a sample size of two hundred (200) respondents was selected. This was

considered as being representative enough of all the three categories of respondents selected.

3.2. Sampling Technique

The convenience sampling was used in the selection of the sample. This technique was chosen

because the researchers considered the schedule of respondents (teachers) used and believed that

selecting them at random was not possible hence through convenience means would suit the purpose

whiles ensuring balanced representation. The simple sampling technique was however used in

selecting the various schools.

3.3. Research Instrument

The researchers used structured questionnaires as the main instrument in collecting the necessary

primary data for this study. Questionnaire was used because it is clear and uniformly workable. It will

permit wide coverage for minimum expense both in terms of money and effort. The researchers

believed that a questionnaire will elicit more candid and objective response since it does not require

any means of identification

The questionnaire comprises of four sections. Section A solicits general information from the

respondents namely gender, age, marital status, years of service. Section B consists of 12 statements


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concerning the performance appraisal process and tools used in basic schools. Section C contains 6

statements about the perception of teachers regarding performance appraisal systems (PAS) and its

fairness and Section D allowed respondents to identify the challenges (barriers) of performance

appraisal in GES. Respondents were required to indicate their degree of agreement or disagreement

with each of a series of statements or questions on a five (5) item Likert scale rating questionnaires

(1= strongly agreed; 2= agreed; 3= normal; 4= disagreed; 5=strongly disagreed), which helps to

obtain an objective data.

3.4. Method of Data Analysis

The data was coded for used by scientific package for social sciences (SPSS) version 22.0 for analysis

and Microsoft Excel. It was analyzed descriptively by computing frequencies and percentages for

identifiable variables.

4. RESULT AND DISCUSSION

4.1. Reliability Test

Cronbach‟s alpha reliability test (α) was carried out to measure the correlation among the variables of

the scale of item of the questionnaire. It is the most common measure of reliability (consistency) of a

scale. The higher the Cronbach alpha value, the more consistent the research instrument is. In general,

the accepted Cronbach alpha value is 0.7 and above, whiles a reliability coefficient of 0.6 is

acceptable for exploratory research. In this study, the value of the Cronbach alpha test was 0.782.

4.2. Sample and Response Rate

Two hundred (200) questionnaires in total were distributed to the respondents, being the sample size

selected for the study. Out of the distributed questionnaires one hundred and eighty were returned,

implying a 90% response rate.

4.3. Demographic Classification of Respondents

Respondents sampled for the study were drawn from GES staff in basic schools in the Ho

Municipality. This comprised only the teaching staff of the selected area. Discussions are not school

based, but generalized for all respondents used. Accordingly, the empirical analysis reflected

responses across the basic schools used in the study from the municipality. General trends are drawn

and appropriate comments made. Variable of gender, age and educational qualification were inquired

in the questionnaire to know demographic and social features of the respondents.

Gender of Respondents

Gender Respondents Percentage

Male 110 61.1%

Female 70 38.9%

Total 180 100 %

Source: Field survey, 2014

Professionalism of Respondents

Teachers Respondents Percentage (%)

Professional 99 55

Non-professional 81 45

Total 180 100


Qualification of Respondents

Qualification Respondents Percentage (%)

Degree 18 10

Post Diploma 27 15

Diploma 36 20

Cert „A‟ 63 35

SSCE/GCE 36 20

Total 180 100




From the table above, 18 of the respondents representing 10% were Degree holders, 27 or 15% were

Post Diploma holders, 36 of them or 20% were Diploma holders, while35% and 20% were Cert „A‟

holders and WAEC/GCE holders respectively. It reveals that in the basic schools, most teaches are

likely to be Cert „A‟ holders.

4.4. What Constitutes the Appraisal Process and how Consistent is it to Standards?

This question sought to assess the process and consistency of appraisal process to known standards.

Respondent’s perception of the consistency of PA in basic schools

Consistency of objectives with PAS Respondents Percentage (%)

Consistent 117 65

Inconsistent 63 35

Total 180 100


Most respondents representing about 65% indicated that in their opinion appraisal programmes in the

basic schools follow standards and adopt the appropriate methodologies. The remaining 63

respondents representing 35% however disagreed and suggested that appraisal programs are

inconsistent to standards. 35% is significant enough to suggest a certain level of inefficiency in the

appraisal programme in the basic schools. Another explanation could be the irregular nature of the

process as identified earlier in the study. It is important therefore that authorities ensure an improved

reliability of PA programmes in the basic schools.

As part of the investigation into the appraisal process, respondents were asked if in their opinion

appraisal programmes identify key performance criteria. 152 of the respondents representing 84.4%

believed that appraisal programmes at the basic schools identify key performance criteria, 18 of them

representing 10% disagreed while the remaining 10 respondents representing 5.6% could neither

agree nor disagree.

Assessment tools are structured

Assessment tools Respondents Percentage (%)

Agree 161 89.4

Disagree 19 10.6

Total 180 100


On the question of whether appraisal criteria are developed in consultation with staff, most

respondents disagreed. The breakdown revealed that165 respondents representing 91.7% disagreed

whiles only 15 respondents representing 8.3% agreed. It is an indication that at the basic schools

performance criteria do not take into consideration the opinion of staff.

4.5. Respondent’s Perception of the Appraisal Process

The perception of respondents was again sought on the general orientation of performance appraisal

programmes in the basic schools. Criteria used included fairness, constructiveness, involvement of

workers, and feedback. Findings revealed that most staff did not consider appraisal process at the

basic school to be fair. A breakdown revealed that only 20 respondents or 11.1% believed that

performance appraisal process is undertaken in fairness, the remaining 88.9% disagreed. This suggests

that most people feel that the process is used to victimize some staff members.

Employees’ Perception of the Appraisal Process

Scale 1 2 3 4 5

Employees do not show cooperation in the appraisal process 40% 30% 5% 15% 10%

Employees do not believe that feedback reflects their performance 60% 22% 3% 6% 9%

Employees consider the appraisal process as waste of time 10% 57% 8% 15% 10%

Employees cannot relate the appraisal process to their personal

development.

47% 21% 10% 16% 6%

Employees believe the appraisal process is only used as a tool for

victimizing some workers

30% 33% 7% 14% 16%


Key: 1-strongly agree, 2-agree, 3-not sure, 4-disagree, 5-strongly disagree


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The study found most respondents representing75% indicating that they are given feedback after

appraisal programmes although they conceded that this was not regular. The remaining 25%

suggested otherwise indicating that they are not provided any feedback at all. It was again found that

most respondents did not find the feedback they receive to be constructive.

Generally, the study gathered certain concerns from respondents which sums up the perception of

staff of the appraisal process. Largely, the perception of employees on the appraisal process was

mixed. 70% of respondents did not believe that feedback reflects their performance and questioned

the need for the appraisal process. It came to light that over 50% of respondents consider the appraisal

process as a waste of time as they could not relate the appraisal process to their personal development.

This was in response to the statement “Employees considered the appraisal process a waste of time”

as indicated in the table above.

In the light of these discussions it was observed that there is mistrust between the appraiser and the

appraisee in instances where there is communication gap. The appraisee in such instances attributes

his /her failure to other issues rather than his /her performance on the job. It is thus, important that

teachers in the Ghana Education Service are well informed on the appraisal procedures in the Ghana

Education Service and the periods in which appraisal will be performed. It would also be prudent for

the appraiser to be appraised by the appraisee and both outcomes utilized for fairness. In the GES the

head teacher appraises the teachers and the teachers should appraise the head teacher.

4.6. What are the Challenges of Performance Appraisal in Basic Schools in the Ho

Municipality?

The study also identified some challenges to the PAS in basic schools in the Ho Municipality. These

challenges largely bordered on the process, the parties involved, and the resources involved. Most

respondents (about 60%) believed that the performance appraisal exercise is not given the seriousness

it deserves by both appraisers and appraisees. This undermines the integrity of the whole process.

Again, most respondents were not educated enough and encouraged to understand and participate

effectively in the appraisal process as alluded to in earlier discussions. They obviously will show lack

of interest and may not derive the intended benefits of performance appraisal.

Also, some employees have a negative attitude towards the appraisal process. This might stem from

their perception of the process as unfair or an opportunity for superiors to victimize some

subordinates. These perceptions will have to be worked on to get workers to develop the necessary

attitude to performance appraisal at the sector. Further, failure to act on appraisal results is one of the

many challenges suggested by most respondents. This described the lack of commitment by

authorities to the PAS.

Challenges to the Appraisal Process

Perceived challenges of PAS 1 2 3 4 5

The exercise of an appraisal is taken seriously by appraisers and

appraises

15% 15% 10% 40% 20%

Workers are encouraged to participate in discussions 6% 10% 14% 44% 26%

Employees have a negative attitude towards the appraisal process 40% 29% 5% 15% 11%

Workers have misconceptions about the efficiency of the appraisal

system

75% 10% 5% 6% 4%

Misconceptions held by workers negatively affect the appraisal

process

70% 10% 11% 4% 5%

Appraisal results are acted upon? 5% 11% 2% 49% 33%

The needed resources are unavailable to carry out an effective

appraisal.

50% 28% 10% 5% 7%

Supervisors do not display the right attitude to help the process. 20% 51% 16% 6% 7%


Key: 1-strongly agree, 2-agree, 3-not sure, 4-disagree, 5-strongly disagree

As depicted by the table above, another challenge identified was the lack of competence on the part of

some raters and supervisors. Top management should choose the raters or the evaluators carefully.

They should have the required expertise and the knowledge to decide the criteria accurately. They

should have the experience and the necessary training to carry out the appraisal process objectively. It



was found that the appraisal process has sometimes encountered resistance from the employees based

on fear of victimization and negative ratings. Therefore, the process ofappraisal and its purpose

should be clearly explained and communicated to employees by the authorities responsible.

The attitude of some supervisors was also mentioned by about 71% of respondents as a challenge to

the appraisal process. In their opinion some supervisors only saw it as an opportunity to victimize

some workers and usually wouldn‟t give a true picture of the performance of some workers. About

78% of respondents suggested that usually resources were not available to enhance the process.

Effectively this affects the organisation of performance appraisal in the education service.

The study also examined the perception of respondents on the appraisal programme. 152 of the

respondents representing 84.4% believed that appraisal programmes at the basic schools identify key

performance criteria. Most respondents however, did not consider the appraisal process as fair. It was

found that respondents are largely encouraged to participate in discussions. Also, 75% of respondents

said that they are provided with feedback as is expected, although not regular. The remaining 25%

suggested that they are not provided any feedback at all.

Again, of the percentage that suggested that they are given feedback, 70% stated that feedback is

usually not constructive but largely general comments that in their opinion made no impact or

difference. 30% however felt that feedback is usually constructive, raising pertinent issues that made

significant difference in the performance subsequently. Finally, evidence suggests that review of

progress is largely absent in the basic schools in general.

The study found that most respondents did not believe that previous appraisal results were a true

reflection of their ability and so discounted the pertinence of the performance appraisal system in their

particular instance in identifying employee strengths and weaknesses; although there was the general

believe that that should have been the case. Respondents could not relate change in employee attitude

to PAS but rather suggested that employee attitude was more influenced by motivational policies and

packages. Again, there was no evidence to suggest the existence of effective structures that address

weaknesses and reward performance. Respondents had largely answered in the negative to this

question.

On the relevance of the appraisal system, the study gathered that the appraisal process had effectively

not promoted the professional development of workers. As respondents indicated, feedback is not

usually constructive. Consequently, the process is unable to effectively identify strengths and

weaknesses that would determine the strategies to help in the professional development of the worker.

Again, respondents suggested that because it is usually carried out as, in the opinion of respondents, a

mere formality, no measures are put in place although the appraisal process is able to identify

systemic factors that are barriers to effective performance.

Further, respondents largely believed that the appraisal process had no bearing on the development of

reward systems. In their opinion over the years, nothing had changed; they therefore could not relate

the appraisal process to the development of a reward system. Respondents believed that the appraisal

process have had some link to certain administrative decisions. Especially, they mentioned promotion

as one administrative decision that is usually linked to appraisal process.

The study gathered certain concerns from respondents which sums up the perception of staff of the

appraisal process. Findings are discussed below: Largely, the perception of employees on the

appraisal process was mixed. 70% of respondents did not believe that feedback reflects their

performance and questioned the need for the appraisal process. It came to light that over 50% of

respondents consider the appraisal process as a waste of time as they could not relate the appraisal

process to their personal development.

Finally, respondents suggested that over the years training had been suggested as recommendations to

some appraisals conducted. However, they hardly could point to one instance where the training had

actually been carried out. It suggests therefore that although the appraisal process is able to determine

organisational training and development needs, the recommendation is usually not followed through.

On the challenges to appraisal process in the sector, respondents identified certain factors as

challenges to an effective appraisal process. These included the unavailability of the needed resources

to enhance the appraisal process, insufficient funding and failure by authorities to act upon results.

This is in addition to other challenges such as the lack of interest by staff.


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Most respondents believe that the performance appraisal exercise is not given the seriousness it

deserved by both appraisers and appraisees. This undermines the integrity of the whole process.

Again, most respondents were not educated enough and encouraged to understand and participate

effectively in the appraisal process. Also, some employees displayed a negative attitude towards the

appraisal process. This stemmed from their perception of the process as unfair or an opportunity for

superiors to victimize some subordinates. These perceptions will have to be worked on to get workers

to develop the necessary attitude to performance appraisal in the basic schools. Further, failure to act

on appraisal results is another of the many challenges suggested by most respondents. This describes

the lack of commitment by authorities to the PAS.

5. CONCLUSION

In conclusion, the fairness of a performance appraisal system has been recognized as an important

effect on the success of any organization because perceived fairness was connected to the acceptance

of this system and eventually, the performance of employees and organization. Employees create

conclusions about the appraisal systems fairness based on the system‟s results, outcomes and

procedures and how supervisors treat employees when applying those procedures.

6. LIMITATIONS AND SUGGESTIONS FOR FURTHER RESEARCH

The study result has an internal validity meaning it cannot be generalized because the data was

collected from only one region in Ghana.

For the collection of data, survey questionnaire was used only as the data collection method. Other

methods like interviews and observations are not used in this study which could be more accurate data

collection method regarding such studies. The nature of this study was description and the numbers of

respondents were few with perception based data. The study ideally should have covered all the ten

regions of Ghana and not just a Municipality within a region in order to get a large sample size and

respondents. The researchers suggest that future research should cover the entire country.

ACKNOWLEDGEMENT

Authors wish to acknowledge the Ghana Education Service, especially Teachers in basic schools, Ho

Municipality and all who in diverse ways contributed to the success of this study. Further Research

Assistants who helped in data collection are all acknowledged not forgetting Madam Happy Eddico.

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AUTHORS’ BIOGRAPHY

Lydia Sylvia Danku is a Ghanaian by birth, a full time Lecturer in the department

of Secretaryship and Management studies in Ho Polytechnic, Ghana and also a

part time Lecturer at Evangelical Presbyterian University College, Ho. She holds

Bachelor of Arts Degrees in Management and Psychology and a Master of Arts in

Human Resource Development. Currently, she is a Doctoral student in the Open

University of the Netherlands. Her research interest is in the following areas:

Employee Engagement, HRM Practices, Stress Management, Human Resource

Development and Strategic Management.

Newell Yao Soglo is a product of Aberdeen Business School of the Robert

Gordon University, Aberdeen, Scotland. He is a Chartered Human Resource

Management practitioner with over fifteen years‟ experience. He currently serves

at the Registrar‟s Department of the Evangelical Presbyterian University College,

Ho, Ghana and also a Lecturer in Human Resource Management at the same

institution. His research interests are in the following areas; Training and

Development, Leadership, Health and Safety and Organisation Development.

Francis Dordor holds Master of Technical Education Degree from Kwame

Nkrumah University of Science and Technology, Bachelor of Arts

(Secretaryship) and Diploma in Education from the University of Cape Coast,

Cape Coast. He has fifteen years working experience in Tertiary Administration

in Ghana. Currently, he is a Senior Assistant Registrar of the University of

Health and Allied Sciences, Hohoe campus. His research interest is in

Management related issues.

Marian Josephine Bokor holds Master of Arts in Human Resource

Development and Bachelor of Arts Degree in French. She is an Assistant

Lecturer at the department of Secretaryship and Management studies in Ho

Polytechnic, Ghana and Married with three children.




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©ARC Page 134

Phenomenon of Socio-Economic Inequalities of Unprivileged

Groups in the Labor Market. The Case of the Slovak Republic

Rene Pawera

Faculty of Management

Comenius University, Bratislava, Slovakia

[email protected]

Zuzana Smehylova

Faculty of Management

Comenius University, Bratislava, Slovakia

[email protected]

Abstract: More than seventy years of shared statehood with the Czech Republic and a quarter century of

post‐communist transformation in independent state of Slovakia has shaped inequalities and its impacts in the

republic. This article reviews the major socio-economic developments and factors that have resulted in different

patterns of inequality. The current Slovak labor market showed signs of recovery in 2014, but unemployment

remains high. Disincentives in the social-benefit system have been reduced and some positive results have been

obtained in reducing youth unemployment, but long-term unemployment remains a major challenge.

Employment among the most disadvantaged groups such as Roma, disabled, older people, the youth is still low.

What is more, Slovakia has one of the highest gender pay gap in the EU-28.

Keywords: labor market, equal opportunity, gender, diversity, discrimination.

1. INTRODUCTION

Slovakia is considered to belong to the group of countries where inequalities grew significantly during

the 1990s (OECD, 2014), especially in the labor market. Currently, the unemployment rate decreased

slightly in 2014 but remains above the EU average (12.5 % vs 9.9 % in the EU-28 in December 2014)

and is mostly structural and long-term in nature.

Weak labor demand and a low number of vacancies, in conjunction with one of the lowest labor

turnovers in the EU, give rise to one of the highest long-term unemployment rates in the EU (10 % vs

5.1 % in the EU-28 in 2013). The principal reasons for the poor labor market outcome are the low

employment of certain groups including Roma, the existence of work disincentives coming from the

tax and benefit systems, the weak capacity of the public employment services to assist the most

disadvantaged jobseekers, and a relatively low internal geographical labor mobility (European

Commission).

Youth unemployment declined slightly to 28.9 % in December 2014 (to the lowest level since 2009)

but Slovakia still has one of eight the highest rates in the EU. Long-term unemployment is a persistent

problem in Slovakia. Over two thirds of the unemployed have been jobless for more than a year, while

around half have been jobless for more than two years. Despite some recent improvements, the youth

unemployment rate is among the highest in the EU. Low labor mobility reinforces the geographical

segmentation of the labor market as reflected by the high regional differences in employment (OECD,

2014)

The employment rate for women (20-64) remains well below the EU average (53.4 % vs 58.8 % in

2013). Estimates show that increasing women’s labor force participation to the EU-15 average could

increase Slovakia’s GDP by 1.6 percentage points (26).The gender employment gap for young women

(20-29) remains high and the impact of parenthood on female employment increased in 2013 and is

among the highest in the EU. The employment rate for women (25-49) with children below six years

of age is under 40 %, while it is 83 % for men of the same age and marriage status, reflecting the

insufficient provision of good quality and affordable childcare services and relatively lengthy parental

leaves (Eurostat, 2013).

2. METHODS

In addressing this complex question, we first referred to the statistics published by Eurostat on the

basis of the Labor Force Survey (LFS) data, from which it is possible to determine the main



Rene Pawera & Zuzana Smehylova


characteristics such as participation, employment and unemployment rates of the low educated labor

force. Other characteristics were gathered according to the available literature sources.

For calculating average salaries, we used a website www.mojplat.sk which conducted a labor survey

in Slovakia. Data collection was conducted between 2012 and 2014, data were evaluated on a sample

of 1 659 observations for a population of 17 to 69 years.

3. RESULTS AND DISCUSSION

The labor market is a major weakness of Slovakia, and growth is hampered by poor employment

prospects. Unemployment in general, for the young and the share of long term unemployed are high

(Table 1) (Kahanec, 2013).

Table1. Labor Market Performance in Slovakia

Slovakia OECD (average)

Total (15-64) 14.0 8.1

Long term 8.9 2.7

Youth (15-24) 34 16.1

Women 14.6 8.2

Old (55-64) 11.2 5.7

Source: OECD, 2014.

Slovakia has the highest long term unemployment rate among the OECD countries. This may have

long lasting effects and raise concerns about the prospects of job-searchers. School-to-job transition is

not working well and the segmented school system does hinder more youngsters to acquire

employable skills. (OECD, 2014)

3.1. Inequalities in the Slovak Labor Market

Discrimination is a negative social phenomenon undermining fundamental equality and freedom of

individuals. It is firmly rooted in society and often fails to reach those at risk of discrimination, to one

who discriminates, refrain from such conduct.

Inequality of opportunity in the labor market and discrimination in pay for women and other

disadvantaged groups are not present only in some countries, such as developing economies, it is a

global problem which is present even in the most developed countries of the world.

The goal is to eliminate discrimination on the basis of these characters and avoid it. While promoting

equal opportunities not only ensure equal access opportunities for disadvantaged people in the labor

market, but above all to create conditions that take into account the specific needs and experiences

these various disadvantaged groups (Ministry of Social Affairs, 2008)

Since the individual disadvantaged groups in the Slovak labor market are characterized by certain

specificities will be in the following subsections individually analyzed.

3.1.1. The Gender Inequality

According to the Council of Europe, the equality between women and men means "equal visibility,

equal power and equal participation of men and women in all spheres of public and private life

(Council of Europe, 1998).

This phenomenon of income inequalities between men and women is continuing, even though

women’s employment rates, job opportunities and levels of education have increased in all States, and

despite the fact that girls do better than boys at school and make up the majority of those completing

higher education (European Commission, 2010).

The pay gap issue is complex, and has many causes. The aim of this report is to highlight the factors

explaining the pay gap in the European Union. Those factors mainly reflect inequalities between men

and women on the labor market.

Eliminating the pay gap, and consequently eliminating professional inequalities between men and

women, remains a major challenge, not only in order to achieve the objective of equality between men

and women, but also to ensure smart, sustainable and inclusive growth and to attain the European

Union’s objectives of economic and social cohesion and a high level of employment (Štefancová,

2014).

http://www.mojplat.sk/

Phenomenon of Socio-Economic Inequalities of Unprivileged Groups in the Labor Market. The Case of

the Slovak Republic


Discrimination against women is evident when we look at the statistics and analysis of gender

differences. The most common indicator which measures the difference in wages between men and

women in the EU is called "Gender pay gap". The gender pay gap is the difference between men’s

and women’s pay, based on the average difference in gross hourly earnings of all employees.

On average, women in the EU earn around 16% less per hour than men. The gender pay gap varies

across Europe. It is below 10 % in Slovenia, Malta, Poland, Italy, Luxembourg and Romania, but

wider than 20 % in Hungary, Slovakia, Czech Republic, Germany, Austria and Estonia (EUROSTAT,

2012).

Although the overall gender pay gap has narrowed in the last decade, in some countries the national

gender pay gap has actually been widening (Hungary, Portugal). The gender pay gap exists even

though women do better at school and university than men (EUROSTAT, 2012).

On average, in 2012, 83 % of young women reach at least upper secondary school education in the

EU, compared to 77.6 % of men. Women also represent 60% of university graduates in the EU

(EUROSTAT, 2012).

The impact of the gender pay gap means that women earn less over their lifetimes; this result in lower

pensions and a risk of poverty in old age. In 2012, 21.7 % of women aged 65 and over were at risk of

poverty, compared to 16.3 % of men. (Vojtech, 2013)

The overall employment rate for women in Europe is around 63 %, compared to around 75 % for men

aged 20-64. Women are the majority of part-time workers in the EU, with 34.9 % of women working

part-time against only 8.6 % of men 5.

This has a negative impact on career progression, training opportunities, pension rights and

unemployment benefits, all of which affect the gender pay gap (EUROSTAT, 2012)

The gender pay gap in Slovakia is above the EU average despite the higher educational attainment of

women compared to men in Slovakia and is linked to gender inequalities in the labor market and

longer career breaks.

According to a survey (mojplat.sk, 2014), women in Slovakia would have to work two hours a day

more to make the same amount of money as Slovakian men.

Fig1. Average monthly salary by age groups, source: mojplat.sk, 2014

According to the survey mojplat.sk, the average gross monthly salary in Slovakia was € 846 in

2014. Men earned € 946, women 18% less (€ 775).

Women lag behind in each age group (Fig. 1). The smallest pay gap between men and women is in the

group of fresh graduates with 10.5 %. The major differences are in the age categories 25-54

years. The biggest difference in gross wages between the sexes is in their forties, up to 24 % with 231

euros difference per month.

Even if Slovak women are well-educated, the difference does not stop growing. Women earn less

despite good education. With increasing education, wage differences even increase (Fig. 2). They are

highest for people completing their tertiary education (PhD), where the difference is up to 21 % (235

euros). The smallest difference between women and men, 9.8 % (€ 58) are among the Slovaks with

basic education. (mojplat.sk, 2014)



The pay gap between men and women exists despite the high proportion of women with higher

education. The labor market does not provide women the same opportunities as men.

The differences between men and women also rise because of the longer working hours for men. They

work an average 42.5 hours per week, while women about 1.8 hours less. However, even if we take

into account this difference, hourly wage for women is lower by 14.5 %.

Fig2. Average monthly salary by completed education, source: mojplat.sk, 2014

According to the survey mojPlat.sk, women are discriminated as mothers with children, the average

wage of „mothers“, is 723 euros, while childless women have a wage of 80 euros higher.

Women are becoming a particularly disadvantaged group in connection with pregnancy and

maternity. Employers in women involves higher costs associated with less time flexibility and

mobility in childcare.

Women-mothers during maternity or parental leave lose contact with their work. It affects the lower

setting of wages, but also reduced the chances career, or selecting employees by the employer to

further education or training.

The principle of equal pay for equal work is necessary, but by itself is not enough. For real equality of

opportunity, it is necessary to ensure an equal distribution of tasks between men and women in the

care of the family and household. Only then will women be able to fulfill their career plans as men do.

3.1.2. The Youth and the Older

In terms of age structure, nearly one third of all unemployed in 2012 were young people up to the age

of 24 (32.2 %). Potential employers are not interested in this group. One of the main causes is the

persistent mismatch between skills and labor market requirements (Vagac, 20122).

One of the most serious categories facing the long-term unemployment is the Roma youth in Slovakia

currently experiencing unemployed status without the minimum work experience.

The aim of the Europe 2020 Strategy is to achieve an overall average employment rate of working-

age population to 75 %. The strategy emphases increasing the employment rate among disadvantaged

groups, which include older workers as well (European Commission, 2010)

But the average employment rate of older people (50 -64 years) in the EU, according to Eurostat is

only 50%, the highest was in Sweden (73.6%) and lowest in Croatia (36.5%). Slovakia has 44%

employment of older people (Eurostat, 2014).

One of the main disadvantages of older people in the Slovak labor market is the lack of adaptation to

the new technologies because of the lack of lifelong learning. Older workers have high labor costs, as

they are on top of their careers, but at the same time they are declining productivity, innovation

potential, and adaptability, or even health problems.

The necessary gradual increase in the retirement age has its limits. Although we are living longer, not

always it means that we are able to work longer. For the application of older people labor market is

therefore also necessary to fundamentally improve healthcare and also the possibility of greater

recovery for older workers.

Phenomenon of Socio-Economic Inequalities of Unprivileged Groups in the Labor Market. The Case of

the Slovak Republic


3.1.3. Minorities – Roma minority

Low education is a strong predictor of poverty, as it is often associated with low levels of income and

a higher risk of unemployment. A recent World Bank study estimates a population of 320,000 Roma

living in Slovakia. But actually, there is more than half a million of Roma in Slovakia. A World Bank

survey shows that the vast majority of Roma in Slovakia – 87 % of those households interviewed –

live in poverty; Slovak Roma rank among the poorest communities in the EU (World Bank, 2011).

Davidová reports that more than 60 % of the Roma minority attain only primary education. From

interviews with members in Roma communities, the authors draw a conclusion that the motivation to

pursue education is extremely low because of anticipated labour market discrimination. The number

of Roma living in unbearable conditions in rural communities and devastated central city zones

represents a potentially very serious social and economic problem in both republics. Interracial

tensions between the majority population and this significant minority have caused many problems in

the past.

The social exclusion of Roma people is a lamentable phenomenon that remains largely side-lined by

the political elites. Integration of the Roma is a moral and economic imperative.

Social expenditures have in general a very significant potential to reduce inequalities. Both the Czech

Republic and Slovakia impose high social security contributions on labour. Instruments of

redistribution play an important role in lowering income inequalities in both countries. These

significantly increase labour costs and may result in unemployment. The problem appears to be more

severe in Slovakia, which suffers from some of the highest long‐term unemployment rates in Europe

(Kahanec, 2014).

If Roma is employed, it is very often in the secondary labor market. Although the Roma minority is

not a homogeneous group, the main cause of their bad status is generally considered inadequate

qualifications without vocational or general secondary education (Juraskova, 2004).

Culture of unemployment, poverty and social dependence reinforces the perception of the majority of

Roma as people who caused this situation yourself and not trying to improve it.

This perception is transferred to the area of employment, where assessing an individual Roma using

group characteristics. Their discrimination is difficult to prove, even though according to the

Eurobarometer 2012, discrimination based on ethnic origin (56%) is the most widespread form of

discrimination in Slovakia (Eurobarometer, 2012)

The costs of Roma exclusion are high. Slovakia is proving to Roma provides relatively high social

security contributions, which is one of the main causes of Roma zero motivation to look for work.

4. CONCLUSION

Greater equality of unprivileged groups would bring benefits to the economy and to society in

general. Closing the gender pay gap can help to reduce levels of poverty and increase women’s

earnings during their lifetimes. This not only avoids the risk of women falling into poverty during

their working lives, but also reduces the danger of poverty in retirement.

What is more, companies that build equality plans and strategies into their workplaces create the best

workplaces for everyone, male or female, to work in diversity. Having a positive working

environment helps a business to attract customers, improve performance and boost competitiveness.

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European Commission, Country Report Slovakia 2015, Brussels: 2015, pp. 10-12.

European Commission, Stratégia 2020, Stratégia rastu EÚ.

Eurostat, Gender pay gap 2012, Brussels: EC, 2012.

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AUTHORS‘ BIOGRAPHY

Associate professor Rene Pawera, PhD.

Professor Pawera is associate professor at the Comenius University, Faculty of

Management in the Department of Economics and Finance. His main research

focus is the Equal Opportunity Management in the EU in the context of the

European Regional Policy with many projects under EQUAL programme. He is

leader of the Master’s programme “International Management”. Professor is also

active as the member of the editorial board of the journal of Siberian State Aerospace University in

Krasnoyarsk, Russia.

PhDr. Zuzana Smehylova

Zuzana is doctoral student at the Comenius University, Faculty of Management, in

the Department of Economics and Finance. Her dissertation is centered on the

Equal Opportunity Management in the Labor Market with focus on specificities of

the Slovak republic.




www.arcjournals.org

©ARC Page | 140

Financial Management, Savings of the Life Cycles in Everyday

Life

Horvathne Kokeny Annamaria (PhD), Brlás Georgina

College of Szolnok, Hungary

[email protected] – [email protected]

1. INTRODUCTION

‘Money rules the world’ (BALYÓ, 2004, p. 3.) – it is an often used slogan which really determines

our life. From the early ages we realize how essential money is for us. It accompanies all our life. The

quality of our life depends on how we can deal with our budget to be able to put aside as well. We can

buy all the necessary items for everyday life but we have to manage in order to reach our ambitions

too. During our life our individual and the common goals are also determining. The right and

appropriate decisions have a great share in using our money. There is an outstanding consequence of

being conscious, sober-minded, and precise and to be up-to-date during planning. We have to take

into consideration the opinion of all the family members. Decisions need to be made together if

possible. In this study we would like to emphasize the role of self-care in different life cycles as well

as show the result of our related primary research.

2. SELF-CARE

Self-care is indispensable nowadays. By planning our finances, our goal is to face the certain or

uncertain future events with an appropriate efficiency. It is important to know how big amount of

money can we set aside and how to do that. We need to find the most proper saving products: in case

of certain events a bank deposit can be suitable; for unwaited events there are various insurances.

Nowadays, it is not easy to retain savings, since people can get to different financial situations during

their career. Our opinion is that financial self-care can be divided into three parts. The first one is

earning, the second is spending – consuming, and then finally the investment of the unspent money.

During consumption we have to differentiate between goods or services for everyday life (like

foodstuff, housing), also some products which are considered average but not vital, and finally the

luxury goods like gold jewellery or a world tour. However, these can be different in households or

between people depending on the level of income and different needs. Decisions in connection with

expenses can be made based on this. In evolving the process of self-care, the length of time is also

determining: short (not longer than 1 year), middle-length or long period. It is important what kind of

goal or goals are considered of if we have concrete goals at all. Besides this we have to care for the

expected share: the sum I get for my money being used and also for the risk that is how uncertain the

investment is for me and what is the rate of loss and profit.

Nowadays the importance of saving is not in question since we can find our place in the world by it:

we can get a house, a car, we can finance our holiday, and we can prepare for unexpected events too.

Moreover, we can ensure peaceful aging for us and our family members. For this we need to think

over some questions: why we set aside, how long we plan to invest our money, in what conditions and

how much we are able to mark out for it monthly (PSZÁF – 2014).

3. CHANGING OBJECTIVES OF DIFFERENT AGE CYCLES

However, it cannot be confined strictly since it differs individually when the person becomes

employed or when he finishes his studies, what kind of employment he can establish, in other words

where he takes place in the hierarchy of life. Except that it not an adaptable scheme for everyone, we

need to have these steps in life.

Horvathne Kokeny Annamaria (PhD) & Brlás Georgina


Fig1. The biggest stages of the human life (NEMZETKÖZI BANKÁRKÉPZŐ KÖZPONT – 2011, p. 7-8.)

4. SAVINGS IN CHILDHOOD

We can consider the saving possibilities of children being between the age of 0 and 18 from three

different views, from the view of the state, the banks and the insurance companies.

4.1. Form of Savings Offered by the State

The BABY BONDS or life-starting support which is controlled by the Act CLXXIV. of 2005. It is a

form of deposit which is handled by the Hungarian State Treasury. It can be opened anytime below

the age of 18. The start securities account consists of two parts: there is a client account which is for

the register of the invested amount and also there is the securities account which ensures the register

of the securities stock coming from investments. The subsidy and the sum of the transferred payment

is put on an account where it does not yield interest. To earn some interest, an order has to be given

for buying or subscribing marketable securities dealt by the treasury. This is a subsidy by the state

which consists of the personal payments and the yield. Initially it was allowed to be taken out for

children born after 31 December 2005, who have Hungarian nationality and reported residence. Later

it was changed and now an account can be opened for those who were born before the 1 January 2006

but they do not get the life-starting support given by the state. In the rate of the payment some state

subsidy can be available but it is maximum 10 percent per year or 6000 forint except in case of

regular child protection allowance when it can be 20 percent or 12000 forint. The sum of the subsidy

and the yield can be kept in government security which ensures a long term possibility because of the

state guarantee. Just because of the state guarantee it is a long term and safe investment. Keeping and

using the account and also the payment is free of charge. There is no commitment to pay any tax, duty

or contribution after the yield and savings. The amount of money collected on the account can be

taken out by the account owner after reaching the age of 18 for some purposes defined by the law:

studies, starting on a career, housing, creating the conditions of having a baby and some other defined

goals.

4.2. Offers by Insurance Companies

Each parent has a dream to ensure his child a carefree adulthood without financial problems. To reach

this, they can take advantage of the right insurance which can increase the invested sum of money

with the help of regular savings and the acceptable yield. Several insurance companies offer many

options. It is the parent’s task to find the most appropriate one to his child.

4.3. The Role of Financial Institutions in Savings

Nowadays most of the banks offer services even for children. This can be a great opportunity for these

financial institutions since there is a big probability that the adult children will stay at their chosen

banks later as well. Establishing the first contact with the bank can be mentioned at that time. Young

people can open a so called junior account (NEMZETKÖZI BANKÁRKÉPZŐ KÖZPONT – 2011),

which is a current account. The current account is created by a bank account contract which deals

with the contractor’s cash flow. Besides this one can claim for a bank card with which the owner can

dispose of his account. These accounts are excessively suitable for financing future goals since the

sum on the account can be increased by regular payment any time and it also bears interest. On top of

this, account management is free of charge at most of the banks. The main goal is to save and to

introduce children to the world of finance. This is a liquid kind of savings, so it can be used freely any

time.

Financial Management, Savings of the Life Cycles in Everyday Life


5. SAVING POSSIBILITIES OF THE YOUTH

Part of those being between the age of 19 and 25 probably do not have regular payment but they can

get some income from summer or student jobs, from jobs at weekends or nights as well as from

student fees. However, their personal expenses are not typically higher than their earned income since

most of them still live with their parents so they get some financial support from them. So they do not

spend on overhead costs and food either. The spare money can be invested in smaller savings with

which they can reach the smaller goals they have set on their own. Since the income of this age group

does not represent a significant sum of money like in adulthood, they seek after freedom from risk and

thereby smaller yield. That is the reason why the simple saving forms come into view more often at

this age, for example opening a bank account, savings account management or deposit. These

financial products are useful for objectives to be achieved in the near future like financing studies or

housing (PSZÁF – 2003).

6. SAVINGS FROM ACTIVE ADULTS

With having a budget, we can make it clear what the family members’ income enough for or what to

spend money on at all events. We have to measure what is not so necessary for daily living.

Fig2. Family budget (PSZÁF - 2012)

Later it also turns out how much is the sum that can be saved after consumption, or is there any left at

all. It should be thought over in details and plan ahead since it can make our future goals easier to

achieve. We can differentiate between daily, weekly or monthly as well as yearly planning depending

on who is the person and how long he can plan ahead. We have to measure all our expenses and

incomes for the planned period – for this we have to consider all the family members one by one –

and we have to plan in a way that our incomes need to be more than our expenses. Finally with the

help of the saved sum we can have different savings depending on our future plans (YOUR BUDGET

– 2014). The rate of savings can be increased if we use the options and discounts offered by the laws

(tax and contribution benefit).

Fig3. Contrasting of savings and investments

Source: Pestiest különszám (2010)



To encourage the self-care of households a program called „Családi Kasszasikerek” was created by

the Provident Ltd. Its goal is to raise the tendency for self-care with joining families. This program

came to being in June 2008 and it has had several members so far. It was thought that a program like

this is needed to be created since the saving ability of Hungarian people is quite low according to

some recent studies. The basic principles of this campaign are responsibility, prevision, growth, safety

and problem solving (CSALÁDI KASSZASIKEREK PROGRAM – 2008).

However, it is important to understand that investments and savings are not the same in meaning,

apart from using them as synonyms in everyday life.

6.1. The Thought of Making Home

Among adults, advance-saving for housing has a great emphasis nowadays. Buying a flat or a house

has an extremely big importance since this is the basis of family formation. This process requires high

costs, so a solid financial background is needed for it. So it can be a great help if the family has any

kinds of savings. Building and Loan Associations appearing at different financial institutions are

specifically intended for this purpose (Act CLXXXVII. of 2005). This form of service can be

dissolved into four parts: it contains all the bank deposits, the monthly savings, the support from the

state, the credited interest for the state support and also the joined mortgage. Consequently, collecting

bank deposits and granting of credit are considered the main activity. Its advantage is that there is no

need for capital to start with. This is a construction supported by the government. Besides we can

personally choose the period of savings depending on how much can be saved monthly. However, it is

not compulsory to have a mortgage, but the state provides the possibility for it. It can be used for

many purposes: building, modernizing, renovating, enlarging, reconstructing a house/flat, or buying a

site, etc., according to Act CXIII., paragraph 8. Taking advantage of it can offer a great possibility to

satisfy the housing needs in the future.

6.2. The Importance of Developing Security

From the view of founding the future, many people choose the possibilities offered by the insurance

companies, since such events can occur any time which will have high costs that one may not be able

to finance in that moment. Different insurances can help with it. Generally, we can make a difference

between life- or not life insurances (for flats, cars, travelling, etc.) from which everybody can choose

the best one considering their needs since many kinds of insurance products have appeared till this

time: life-, accident-, and illness insurances which can make easier to finance the cost of death or

illness; property management – in case of damage it is paid by it; insurances that should finance the

damages we made. Some advantages are that the risk is taken by the insurance company; so when

such an event occurs on which the signed contract refers to, the insurance company is bound to pay

for it. The insurance itself can be considered as a kind of savings, however, the insurance has a regular

fee which needs to be paid carefully to be allowed to use for damages in the future. Besides this,

choosing an insurance company can happen in different ways considering the contract details, fees

and responsibilities, as well. The main point is that we need to think over thoroughly for what it is

(not) worth signing an insurance. It is important that the value of the insurance be proportional to the

extent of the arising risks. (CSALÁDI KASSZASIKEREK PROGRAM – 2008).

7. THE FINANCIAL BACKGROUND OF THE OLD

From the moment of retirement, the depletion of the previous savings start to emerge and to keep the

previous life standard, more savings are needed. There are several options to the old for saving in case

there is some money to save. Bank accounts have already been created for this age group, besides this

making a deposit or some other forms of investment is also available for anyone, and in addition, the

insurance companies offer a wide range of constructions. The main point in this case is that everybody

should find the best way of savings for himself. It is necessary to be up-to-date even when we are

pensioners since these decisions in connection with savings demand profound planning.

8. THE RESULT OF OUR STUDY

We had a primer study with the help of a questionnaire which was filled out by 620 people from

Hungary. We analysed the opinion of children (0-18), young adults (19-25), active adults (26-62) as

well as the old (63 or older) about the possible savings in Hungary. The most answers were given by

young adults (312) and by active adults (274). Only 24 children and 10 old people filled in our form.

Financial Management, Savings of the Life Cycles in Everyday Life


The questioned households consist of 3 or more members. 10 percent of households consist of only

one person, 26 percent consist of 2 members. Most households get their main income by their regular

payment, however, many of them undertake some extra or temporary jobs besides their full-time jobs.

On the basis of questions asked from the households about their finance it turned out that most people

think it totally important to save, although 12 out of 620 said that it is not important at all. The

majority of families living today – 71 percent – plan their finances in advance, some even make a

family budget (39 percent). Usually it is not common to ask a financial expert for help.

Among those who filled in the form there were some who had no savings at all, so they lived from

one day to another. Besides this an order can be set depending on the aims people start saving their

money they has not been spent yet. Many people mostly collect money to maintain the financial

security of their families. However, there are several things we should put some money aside for and I

would like to highlight some of these with the help of figure 4.

Fig4. The distribution of objectives in savings

Source: my own study, N = 620

Those who want to save for their children or grandchildren mostly choose from the options offered by

financial institutions, 33 percent choose from the offers of insurance companies, however, the

assistance offered by the state – the baby bond – is chosen only by few people. (only 16 percent).

Unfortunately, sometimes problems can occur because the amount and quality of information is not

suitable. Only 57 percent of the responders think that they have enough information. According to our

view, this big lack of information can be noticed on the habits of savings since a lot of people are

puzzled in connection with their finances. We think that the financial literacy of Hungarian residents

is quite underdeveloped so this field is needed to be improved. Plentiful understandable and useful

information is needed even for everyday people to be able to deal with the finances of their families

more consciously for easy living.

9. SUMMARY

As the saying goes, ‘Everyone is the blacksmith of his own fortune.’ – Although nowadays fortune is

not enough any longer to gain your subsistence and create financial stability for you and your family.

It is important to shape your mind to be able to make a conscious plan in advance. If you are prepared

for your own and your children’s future, your life will be better.

It is useful to examine the savings and insurance methods in the different life cycles. It is the parent’s

duty and obligation to smooth the way of their children’s future and to create a secure financial status

for them. The government as well as different financial institutions and insurance companies are

available to provide some kind of help so that parents can fulfil these tasks. As you are growing up

and getting older, there are more and more opportunities provided to have savings and make

investments. When you are in your early adulthood, you may receive your first income. If you manage

your finance wisely – revenues are higher than expenses – you will have a good chance to reach your

desires like a car or a high-tech machine. When you are at the peak of your adulthood, you should



think about having children and, on the other hand, you have to create a solid financial status to be

able to purchase a house of your own beforehand. Because of this, you should be aware of the

methods of savings: how much income you have, and how much of this is available to invest with no

risk and with the highest possible yield. Of course, there are a lot of factors influencing your

decisions, especially the economic situation and social conditions. You should be prepared for your

own retirement as well. You should look for a form of savings method which will maintain your

standard of living and support you when you have retired. The purpose is to find less risky financial

solutions to achieve these goals. There are a lot of possibilities to choose from e.g.: government

bonds, shares, deposit accounts etc. Everybody should decide - on their own or with the help of a

financial advisor – which product i.e. savings method would be the most suitable for them.

To summarize all of this, it can be established that it is a must to prepare a good financial plan and

start saving from your early childhood. In addition to this, it is important for the family to set a good

example. This is the way how young people can become conscious and deliberate adults who are able

to take care of their finance.

REFERENCES

BALYÓ L. (2004) – A háztartás pénzügyei – Banki szolgáltatások igénybevétele háztartások által

https://felugyelet.mnb.hu/data/cms1571956/fv_tanul_haztart.pdf (2014.05.17.)

Családi Kasszasikerek – Pénzügyi Öngondoskodás program (Nyugdíjrendszer) (2014.07.09.)

Családi Kasszasikerek – Pénzügyi öngondoskodás program (Nyugdíjrendszer) (2014.07.09.)

HORVÁTHNÉ KÖKÉNY A. (2014): Az állami szabályozás hatása a lakosság hosszú távú

megtakarításaira, Doktori értekezés,

https://szie.hu//file/tti/archivum/Horvathne_Annamaria_ertekezes.pdf (2014. 09.26.)

MATITS Á. (2005): Az önkéntes pénztárak helyzete és jelentősége, Hitelintézeti szemle, 2005. évi

különszám

Nemzetközi Bankárképző Központ (2011): Az életciklus pénzügyei - avagy a háztartások

pénzgazdálkodásához szükséges alapismeretek

http://www.ejam.hu/sites/default/files/kepek/pdf/fv_tanul_eletcikl.pdf (2014. 07.26.)

Pestiest különszám (2010), XIV. évfolyam 93. különszám: Megtakarítások, https://felugyelet.

mnb.hu/data/cms2255509/PE_Megtakaritasok_2010.pdf (2014.06.17.)

Pénzügyi Szervezetek Állami Felügyelete (2012): Megtakarítás a mindennapokban, 3. p.

https://felugyelet.mnb.hu/data/cms2373704/Takarekossagi_vilagnap_20121031.pdf (2014.08.12.)

1993. évi XCVI. törvény az Önkéntes Kölcsönös Biztosító Pénztárakról

2005. évi CLXXIV. törvény a fiatalok életkezdési támogatásáról

2005. évi CLXXXVII. törvény a lakás-takarékpénztárakról szóló 1996. évi CXIII. törvény

módosításáról

http://www.pszaf.hu/fogyasztoknak/megtakaritasok/megtakaritasvalasztas/miertjo.html (2014.07.02.)

Your budget – Take control of your financies

http://www.cba.ca/contents/files/misc/cba_budgetworksheet_en.pdf (2014.09.30.)


Annamária Kökény Horváthné is an economist too and a Doctor of Philosophy

(PhD) in Management and Business Administration Sciences. She teaches as a

college professor in Szolnok College, she is specialized in macroeconomics, savings

and saving habits.

Georgina Brlás is a student of Szolnok College. She has been studying there for

three years. Her major is finance and accounting and she is specialized in controlling.

She will be graduated in January 2016.

https://szie.hu/file/tti/archivum/Horvathne_Annamaria_ertekezes.pdf

http://www.ejam.hu/sites/default/files/kepek/pdf/fv_tanul_eletcikl.pdf

https://felugyelet.mnb.hu/data/cms2373704/Takarekossagi_vilagnap_20121031.pdf

http://www.pszaf.hu/fogyasztoknak/megtakaritasok/megtakaritasvalasztas/miertjo.html

http://193.225.111.116/exchweb/bin/redir.asp?URL=http://www.cba.ca/contents/files/misc/cba_budgetworksheet_en.pdf




www.arcjournals.org

©ARC Page 146

Supervision, Leadership, and Working Motivation to Teachers’

Performance

Jaja Sudarjat1, Thamrin Abdullah

2, Widodo Sunaryo

3

Post Graduate Program, Universitas Pakuan Bogor, Indonesia [email protected],

[email protected],

[email protected]

Abstract: This study aims at determining the effect of supervision, leadership and working motivation to

teachers’ performance. The research was conducted on junior high schools in the city of Bogor, West Java,

Indonesia. Survey and data analysis by using regression and correlation analysis are used to test the effect of

three independent variables of supervision, leadership and working motivation to one dependent variable of

teachers’ performance. Tested on the level of confidence of 0.05 to 289 teachers by using proportional random

sampling, the result reveals that there is a positive relation found among all variables. By observing coefficient

of determination, it is concluded that supervision can boost the performance up to 72.4%, leadership reaches

72% and working motivation contributes 77.2 %.

Keywords: Supervision, Leadership, Working motivation, Teachers, Performance.

1. INTRODUCTION

Education is a process of conscious effort made systematically, planned and organized to achieve the

goal. The goal is in an effort to mature learners in a certain period to enable them to live

independently without relying on anyone else. This may happen when all the components that have

the obligation to make the innovation process through the potential learners have done their part

proportionally.

Education aims to develop skills relating to changes in knowledge, attitudes, and skills besides

shaping the character and dignity civilization in the context of the intellectual life of the nation,

through the development of students' potentials to become religious and devoted to God Almighty in

addition to being democratic and responsible citizens. To realize the above expectations, a process of

careful planning and implementation involving considerable professional management and monitoring

is necessarily done continuously and sustainably. And this can only be done by a teacher who

possesses competence, excellent professionalism, pedagogic, socially and personally capable as the

main actor.

Teacher is one of components in the management of the school having a very strategic role in the

effort to develop the potential of learners forcing him to always play an active role in as a

professionals in are of learning.

Realizing the implementation of a good teacher performance requires some supporting factors both

internally and externally. Internal factor is the motivation of the teacher's own work, to possess desire

to do the work in accordance with the standards prescribed or expected.

Having good work motivation in performing duties and responsibilities, a teacher will be able to lift

and push the spirit to continue to complete the work. In addition to employee motivation, there are

some external factors that can support the performance of teachers including the leadership of

principal in conducting direction, guidance and provision of care that is done continuously and

sustainably. Principal is usually a teacher who is given additional duties and responsibilities for

managing the organization of the school. Principals should have the basic concept of right leadership

in managing the school that may affect all subordinates to carry out duties and responsibilities

properly.

Mostly, by visiting to the school, the supervision of the teachers is done only once a year. This

practice seems to have not touched the meaning of that supervision yet as teachers often assume that

all the planning is made in writing only as fulfillment of the work that is provided there because



Jaja Sudarjat et al.


sometimes process conducted by teachers in the classroom in the learning process often does not

reflect things that are contained in a plan made by the teachers themselves. Besides, the supervisors

who came to supervise is often assumed by teachers merely just for the sake of fulfilling obligation

since the supervisors are rarely willing or in high spirit step into the classroom where teaching-and-

learning process occurs.

Based on the background, as well as restrictions on problem identification, problems in this study is

then formulated as follows: 1) is there a positive effect on the performance of the regular supervision

of the teacher? 2) Is there a positive impact of school leadership on teacher performance? 3) Is there a

positive influence of teachers' work motivation on the performance?


Teacher is one of components in the management of the school that has a very strategic role in the

effort to develop the potential of learners as a teacher in carrying out their duties must have a clear

target to achieve and form the basis encouragement to work and to be applied for a certain period of

time. According Hadari Nawawi (2011), the performance is the result of execution of the work, both

physical / material and non-physical / non material. From here it is obvious that the teacher can be

observed when the performance has physical evidence of work planning and administering of the

activities that have been programmed, and possessing scheme of reporting the work process.

Many factors affect the performance of a teacher in an organization either human or nonhuman that

may hinder the teachers’ performance such as regular supervision, school leadership and motivation.

Thus, performance of a teacher in the school is the ability to show the results of the output of

activities carried out within a certain time.

2.1. Teachers’ Performance

Rue and Byars (2007) define performance as how well an employee meets the requirements of the

job. Basically the employee's performance is determined by three factors: effort, ability, and direction.

Effort refers to how hard a person works; ability is an effort that is related to one's ability, and

direction is the activity that refers to how well the person understands what is expected from work. It

means that the performance will be realized when in the process of achievement; it is supported by

three factors that cannot be separated. If one factor is not possessed by the teacher, then the

performance will be low. A teacher who has a high performance is the result of combination of how

much efforts in carrying out the work, how high competency to do the job as well as the extent to

which of the purpose of the work is well understood. The basic principles in performing well is to

uphold honesty highly, to conduct maximum learning process, to have a high sense of responsibility,

to have clear objectives, to concentrate on results and to cooperate, to have a pattern of continuous

work, and always to do continuous improvement. Further, Schermerhon, Hunt and Osborn (2010)

explain that the performance is much influenced directly by 1) the individual attributes such as the

ability and experience, 2) organizational support such as resources and technology, and 3) business or

a person's willingness to work hard at any job. The achievement of very highly performed teacher

cannot be separated from the influence of a leader, co-workers, stakeholders as well as a very strong

effort from individuals themselves.

Based on the above theory, it is concluded that teacher performance is a result, the view or the product

of the efforts and activities in order to meet the criteria of a job at a particular time span, with

indicators: 1). preparation of lesson plan, 2). fun teaching-and-learning environment, 3). Conducive

classroom, 4). Assessment management, 5) professional development. 6). administrating / archiving,

and 7). Reporting the results of the work.

2.2. Superintendent’ Supervision

According Syaeful Sagala (2006), supervision is assisted effort given to teachers in performing

professional duties so that teachers can help students to learn better than before. Thus, supervision can

also be interpreted as an aid in the development of better learning or an activity that is provided to

help teachers carry out their work to become more optimal. This way, supervision has a function to

direct, coordinate, develop, guide and organize others in achieving the objectives which are set out in

the school situation leading to the sense that supervision has a significant meaning to give help and

guidance.

Supervision, Leadership, and Working Motivation to Teachers’ Performance


Supervision is often translated as keeping an eyes on , but actually it has special meaning, namely to

help and to participate in efforts to improve the quality, to improve teaching and learning situations, to

foster creativity of teachers, to provide support in involving teachers in school activities, and to foster

a sense of responsibility of teachers in implementing duties. According to Abdul Hads and Nurhayati

(2010), supervision is the assistance given to subordinates (teachers) in order to grow both personally

and socially with emphasize on professional aspects. Thus, it can be interpreted that supervision is

systematic and well-planned effort undertaken by a supervisor (in this case the School Trustees) to

foster, to encourage and to direct the teachers to achieve educational goals effectively through better

learning process.

The process of supervision is part of the school superintendent’s task in implementing the views or

approaches that involve teachers to optimally apply their whole creativities. Besides, it is an effort of

school superintendent to guide teachers in improving learning process that includes planning the

program, presentation, method, and evaluation.

From a number of theories it is concluded that what is meant by the school superintendent is

coaching, direction, and guidance for the improvement and development of abilities and skills of

teachers in contributing to the aims of education. The indicators are: 1). Composing supervision

programs, 2). Assistance to teachers individually or in groups. 3) Teachers professional development.

4). Implementing monitoring or surveillance activities. 5). Teachers’ performance assessment. 6).

Reflection on the results of the assessment, 7). Using the findings of the assessment. 8). Reporting the

results of supervision.

The hypothesis formed to test for this purpose is:

H1: Regular supervision positively influences teacher’s performance within school organizations in

Bogor, Indonesia

2.3. Principal Leadership

According to Yukl (2009), leadership is a deliberate process of a person to emphasize a strong

influence on others to guide, create a structure, as well as facilitate activities and relationships within

a group or organization. Thus, leadership of a principal in a group should be able to exert influence,

capabilities and activities to influence others around them in order to implement responsibilities as a

member of the organization to achieve educational goals.

Several important things in leadership, among others, are: 1) behavior leading activities, 2) the

activity of power relationships with members, 3) the process of communication in directing an

activity, 4) personal interaction in achieving the goals, 5) taking the initiative in improving job

satisfaction, 6) the organization's activities to improve achievement.

The school principal as an educator when performing roles as teachers’ superintendent is to guide the

school teachers in teaching programs and guidance and counseling in terms of implementing teaching

programs, evaluating learning outcomes and counselling services as well as ability to give an example

of what good teaching is like. Furthermore, according to Rue and Byars (2007) leadership is the

ability to influence others so that the person is trying to reach the goal vigorously.

The principal as leader covers the aspects; 1) having a strong personality, in terms of honest,

confident, responsible, bold decision-making, high-minded, able to control emotions and serving as a

role model / exemplary, 2) understanding the conditions of teachers, employees, students, having a

program / efforts to improve welfare employees, to hear advice, suggestions, criticism of teachers /

employees / students through meetings, 3) having vision and understanding the school's mission,

capable of taking decision for internal affairs school , 4) the ability to communicate orally and

verbally to both t teachers and other education personnel, capable of expressing ideas in the form of

oral able to communicate verbally with the students and the community / parents.

Based on a number of the above theory, it is concluded that school leadership is an act or behavior of

principals in influencing and encouraging others (teachers) in order to make changes and achieve the

objectives. Indicators are: 1) mentoring and directing teacher’s activity, 2) giving reward and

punishment, 3) maintaining relationships with teachers and personnel, 4) attention to the needs and

welfare of teachers, 5) controlling working atmosphere, 6) attention to job performance of teachers, 7)

initiative in improving job satisfaction, 8) an assessment of the teachers and personnel.



Therefore, we hypothesized that:

H2: Principal school leadership positively influences teacher performance within school

organizations in Bogor Indonesia.

2.4. Working Motivation

According to Hasibuan (2012) motivation is the driving force provision that creates the excitement of

one's work so they want to cooperate, to work effectively and integrated with all its resources to

achieve satisfaction. It seems clear that the motivation serves as the driving, steering and driving

behavior to achieve a purpose. Motivation is one of the most important factors for improving the

performance of teachers in performing their duties so as to get maximum results and the achievement

of a goal expected. Colquitt (2009) gives the sense that motivation involves processes providing

energy, directing, and maintaining behavior or attitude. This views suggests that motivation is able to

provide energy or strength in determining direction, intensity and persistence as well as maintain

behavior to carry out the work.

Furthermore, the factors that work in the process of motivation according to Robbins (2009) can be

prefixed with an insatiable desire (unsatisfied). With the insatiable desire then appears tranquility

(tensions) within the individual, giving rise to a boost (drives) to search for how to realize something

not satisfied. Once the requirement is satisfied then the tension will decrease (reduction of tensions)

but it will reappear if unsatisfied needs are found again.

There are some characteristics of people who have high motivation such as: 1) doing things as well as

possible, 2) doing something to achieve success, 3) completing tasks that require effort and skills, 4)

desire to be famous or to master a particular field, 5) doing a difficult job with satisfactory results, 6)

doing something very meaningful, and 7) do something better than others.

Based on the above theory, it can be concluded that work motivation is power or energy from within

itself (intrinsic) or from outside (extrinsic) in maintaining, arousing and mobilizing efforts and

behaviors to achieve goals or job satisfaction. With the following indicators, intrinsic motivation

consists of: 1) a sense of responsibility in doing the job, 2) passion to achieve job satisfaction; 3) spirit

in improving livelihoods, 4) the behavior of self-development while extrinsic motivation consists of:

1) recognition, appreciation and confidence in doing the job, 2) communication with the personnel in

the work environment

Thus, we hypothesized that:

H3: Working motivation positively influences teacher performance within school organizations in

Bogor Indonesia.

3. DATA COLLECTION

This study applies mix method with direct observation to the field aimed at analyzing the

phenomenon occur when the research took place then confirm the finding by using direct depth

interview. This way, writers apply Sequential Explanatory Mixed Methods. Descriptive statistics and

quantitative analysis are used for finding initial solution to the problem encountered. The entity of this

study were 1700 public school teachers of junior highs in Bogor, West Java Indonesia. Sampling was

conducted in 40 districts in Bogor through proportional random sampling technique. By using formula

of Isaac and Michael (Sugiyono, 2010) 289 teachers were taken as sampling unit.

Techniques of data collection in this study is in the form of questionnaire. The normality assumption

is prerequisites to proceed to further test. Analysis is conducted with multiple linear regression and

hypothesis testing is performed at a significance level of 0.05. Normality test is calculated with

Lilliefors test while homogeneity is performed with Bartlett test.


The teachers of listed organizations were asked to participate in the survey by responding their

opinions for four different measures in supervision, principal’s leadership, working motivation and

performance. The normality and homogeneity are performed with Lilliefors test and Bartlett test. Data

are normally distributed and homogenous as the value of each variable is not exceeding the critical

value for Lilliefors test and above the critical value for Bartlett test.



4.1. The Effect of Supervision to Teacher’s Performance

In order to test whether supervision is crucial factor for influencing teachers’ performance, t-test has

been conducted. Since the t value as shown in table 1 is higher than the critical value of t table, we

accept the alternate hypothesis. Thus, it can be stated that supervision positively influences teacher

performance within school organizations in Bogor Indonesia. The strength of association of

supervision (X1) to teacher’s performance (Y) is observable from coefficient correlation ( ry1) = 0.851.

Tabel1. Significance test and coefficient of correlation of supervision (X1) to teacher’s performance(Y)

Observation R R2

t-test t-tabel α Conclusion

n ry1 r2

y1 toy1 0,05 0,01

289 0.851 0.724 27.464 1.658 2.326 Significant

Based on the calculation results as shown in Table 1, it is obtained that t test is > t table. This means

that the correlation coefficient of supervision to teacher performance is significant. The hypothesis

stating that regular supervision positively influences teacher’s performance within school

organizations in Bogor, Indonesia is acceptable, meaning the more regular supervision of the teacher,

the better the performance of the teachers. The coefficient of determination of 0.724 means regular

supervision factor contributes to the teacher’s performance as of 72.4% while 27.6 % is influenced by

other factors.

4.2. The Effect of Principal’s Leadership to Teacher’s Performance

Another t test is conducted to find out whether principal’s leadership is crucial factor for influencing

teachers’ performance. Since the t value as shown in table 2 is higher than the critical value of t table,

we accept the alternate hypothesis. The strength of association of principal’s leadership (X2) to

teacher’s performance (Y) is observable from coefficient correlation (ry1) = 0.849.

Tabel2. Significance test and coefficient of correlation of principal’s leadership (X2) to teacher’s

Performance(Y)

Observation R R2


n ry1 r2

y1 toy1 0,05 0,01

289 0.849 0.720 27.464 1.658 2.326 Significant


that the correlation coefficient of principal’s leadership to teacher performance is significant. The

hypothesis stating that principal school leadership positively influences teacher performance within

school organizations in Bogor Indonesia is acceptable, meaning the more effective the leadership’s

principal , the better the performance of the teachers. The coefficient of determination of 0.720 means

leadership’s principal factor contributes to the teacher’s performance as of 72.% while 28 % is

influenced by other factors.

4.3. The Effect of Work Motivation to Teacher’s Performance

Further t test is conducted to find out whether work motivation is contributing factor in determining

teachers’ performance. Since the t value as shown in table 3 is higher than the critical value of t table,

we accept the alternate hypothesis. The strength of association of work motivation (X3) to teacher’s

performance (Y) is observable from coefficient correlation (ry1) = 0.879.

Tabel3. Significance test and coefficient of correlation of work motivation (X3) to teacher’s performance(Y)

Observation R R2


n ry1 r2

y1 toy1 0,05 0,01

289 0.879 0.772 27.464 1.658 2.326 Significant


that the correlation coefficient of work motivation to teacher performance is significant. The

hypothesis stating that working motivation positively influences teacher performance within school

organizations in Bogor Indonesia is acceptable, meaning the higher the motivation , the better the

performance of the teachers. The coefficient of determination of 0.772 means working motivation

factor contributes to the teacher’s performance as of 77.2% while 22.8 % is influenced by other

factors.

Furthermore, result of qualitative research interviews, observation and documentation in three Junior

High School in the city of Bogor, confirms the tendency of the relationship between Supervision,



Leadership, and Working Motivation to Teachers’ Performance. This finding also strengthens the

quantitative research hypothesis results testing that there is a positive significant relationship among

observed variables.

4.4. Interaction of Supervision, Leadership, and Working Motivation to Teachers’ Performance

When tested together the model is specified as:

Ŷ = b0 + b1X1 + b2X2 + b3X3

Where:

Ŷ = Teacher’s Performance

b0 = constant

b1, b2 , b3 = regression coeficient

X1 = Supervision

X2 = Principal’s Leadership

X3 = Work Motivation

Tabel4. Multiple Regression Analysis Summary

Model B R R2

F-test F-tabel α Conclusion

0,05 0,01

485.57 3.874 6.724 Significant

Constant -4.3145

Supervision 0.305

Principal’s

Leadership

0.262 0.914 0.836

Work Motivation 0.425

Tables 4 show the results of multiple regression analysis. The table reports a significant F statistic,

indicating that the model has strong prediction strength (F = 485.57, p < 0.01). As further shown in

Table 4, the regression does a good fit on modeling teachers’ performance as 83.6% of the variation in

determination of teachers’ performance is explained by the model (R Square = 0.836). Only 16.4% of

teachers’ performance is influenced by factors not included in the model.

The model derives the following equation: Ŷ = -4.3145 + 0.305X1+ 0.262X2 + 0.425X3.

Observing the value of regression coefficient from the highest to the lowest, this model confirms that

Work Motivation (X3) as the most dominant variable in determining the teachers, performance,

followed by Supervision (X1) and Principal’s Leadership (X3).

5. CONCLUSION

Based on research results obtained through collecting data as well as analyzing the data both

quantitatively and qualitatively on variables of the regular supervision, principal’s leadership, and

work motivation to performance of teachers in Junior High Schools located in Bogor, West Java,

Indonesia, several conclusions are drawn:

There is a very significant positive effect of regular supervision on the performance of the teacher,

which means that the more effective and regular supervision of supervisors, the higher the level of

teacher performance that can be seen from the results of quantitative research demonstrated by the

coefficient of determination = 0.724 indicating supervision contributes 72.4% to the performance

of teachers. This result is also supported by the results of qualitative research conducted through

field observations, interviews with informants, and extracting documents showing when inspectors

giving guidance and coaching regularly and effectively there will always be improvement in the

performance of teachers.

There is a very significant positive effect of school leadership on teacher performance. It means

that the more effective the leadership of the principal, the better the level of teacher performance

that can be seen from the results of quantitative research demonstrated by the coefficient of

determination = 0.720 indicating leadership contributes as much of 72.0% to the teacher

performance of teachers. This result is also supported by the results of qualitative research



conducted through field observations, interviews with informants, and extracting documents

indicating if the principals exert leadership, the performance of teachers will continue to improve.

There is a very significant positive effect of work motivation on the performance of teachers' work

motivation meaning that the more motivated the teachers, the higher the level of teacher

performance observable from the results of quantitative research demonstrated by the coefficient of

determination = 0.772 indicating work motivation contributes as much of 77.2% to the

performance of teachers. This result is also supported the results of qualitative research conducted

through field observations, interviews with informants, and extracting documents indicate if the

teacher has the power or energy from within itself (intrinsic) or from outside (extrinsic) to maintain

it will improve teachers’ performance.

When tested jointly, there is a very significant positive effect of the regular supervision, school

leadership and motivation to teacher performance. Observing the coefficient of determination =

0.836, those three variables altogether contribute 83.6% to teacher performance while 16.4% of

teachers’ performance is influenced by factors not included in the model. This model confirms that

work motivation is the most dominant variable in determining the teachers’ performance, followed

by supervision and principal’s school leadership.

REFERENCES

Abdul Hads dan Nurhayati. “Mamajemen Mutu Pendidikan,” Bandung: Alfabeta, 2010, pp.67.

Colquitt, Jason A. Jeffery A. Lepine and Michael J.Wesson. “Organizational Behavior Improving

Performance and Commitment in the Workplace.” New York: McGraw – Hill. 2009. Pp.131.

Hadari Nawawi. “Manajemen SDM untuk bisnis kompotitif,” Yogyakarta: Gajah

Mada University, 2011, pp.86

Hasibuan, Malayu S.P. Organisasi dan Motivasi, Jakarta: PT Bumi Aksara. 2010, pp.23.

Robbins, S., Judge, T. A., Millett, B., & Boyle, M. “Organisational behaviour.” Pearson Higher

Education AU, 2013, pp. 67.

Rue, Leslie W. and Lioyd L Byars. “Supervision Key Link to Productivity”. New York: McGraw Hill,

2007, pp.123.

Schermerhorn, John R., JR, James G Hunt, Richard N. Osborn and Mary Uhl-Bien, Organization

Behavior. USA. John Wiley & Sonn, 2010, pp.145.

Sugiyono. “Metode Penelitian Pendidikan (Pendekatan Kuantitatif, Kualitatif, dan R&D). “Bandung:

Alfabeta, 2010.pp.67.

Syaiful, Sagala. "Manajemen Berbasis Sekolah dan Masyarakat." 2006, Jakarta: Nimas Multima, pp.

25.

Yukl, G. “Leading organizational learning: Reflections on theory and research.” The Leadership

Quarterly, no.20, vol, 1, 2009, pp. 49-53.




www.arcjournals.org

©ARC Page 153

The Impact of the Applicability of Social Media and Social

Networking Sites on Business Firms’ Effectiveness and Profit

Field Study: Telecommunication Sector in Jordan

Shaima Abukhater

Al-Balqa Applied University

MBA student

Dr.Basem Lozi


Dept. of Finance, Al-jubiha, Amman, Jordan

Dr.Mashhoor Maharmah


Dept. of Finance

Abstract: The purpose of this study was to investigate the impact of the Social Media and Social Networking

sites on Business Firms’ effectiveness and profit. In order to achieve the objectives of the study, a questionnaire

was developed and circulated by hand to the 37 employees of telecommunication sector which was the target

field of the study. The simple random sample was used in order to ensure a sound representation of population.

Different statistical tools were used to make analyses for the data collected. The study findings indicated that

there is a majority of opinions confirming that social media and social networking sites affect positively and

have a significant impact on the firms’ effectiveness and profit especially in the telecommunication sector. The

study also finds that there is an obvious and tangible difference between Social Media and Social Networking

sites conceptually and applicably. Based on the results a set of recommendations were proposed.

1. INTRODUCTION

Technology defined as the collection of tools, including machinery, modifications, arrangements and

procedures used by humans, has changed the face of the world and has become a crucial element in

the development process in all sectors; social, cultural, medical, agricultural, and industrial in addition

to the telecommunication sector. Based on what's mentioned above, these changes have led to create a

lot of either problems, opportunities or challenges for all kinds of businesses' owners in order to be a

part of the global or even local competition, to be more effective and of course to make and gain more

profit and get the biggest share of the " pie ".

According to this, business firms have started to look for what might distinguish them and help them

to enter the technological race and win the competition. So, at this point entrepreneurs and creative

people unique ideas have been always a good target and a good hunt for business owners as they

employ such remarkable ideas in their businesses the thing that can definitely add a great value to

them and make them more effective and efficient. Social media and social networking sites are two

important tools recently used in the market as a good example of the technological development in the

way people have started seeing things and dealing with them. These tools are supposedly created to be

beneficial but they can also be problematic. So, in this study we will find out whether using these

tools is right or wrong, good or bad and we will apply this to one of the sectors in Jordan; the

telecommunication sector and come up with some recommendations.

1.1. Research Problem and Questions

As challenges are increasing in the business world due to rapidly changing environment and growth of

global competition; the urge of using different and unique tools has become a necessity. In response,

many startups, firms, companies and enterprises have tended to use social media and social

networking sites to connect more with their clients and the world, be more effective and get more

profit, some others could not nail it and never reached to this target and other organizations never

used them from the very first place. This study will try to answer the following questions:

Is the social media and social networking enhancing the effectiveness and profit of the firms in the

telecommunication sector in Jordan. This question will be answered through multiple secondary

questions:

Shaima Abukhat


What aspects of social media and social networking exist in the telecommunication sector in

Jordan?

What is the nature of the relationship between social media and social networking in the

telecommunication sector in Jordan?

1.2. Objectives of the Study

The main objectives of this study were to show the impact social media and social networking on the

effectiveness and profit of the firms in the telecommunication sector in Jordan, more specifically:

studying and identifying the nature of the relationship between social media and social networking

and effectiveness and profit

Showing the level of social media and social networking that have been used in the

telecommunication sector in Jordan.

To recommend solutions to support, reinforce and facilitate the applicability of social media and

social networking sites in the telecommunication sector in Jordan and make it possible and easy to

be applied.

1.3. Research Design and Approach

This study examines the impact of social media and social networking on firms‟ effectiveness and

profit in the telecommunication sector in Jordan. A Likert scale survey was used to measure the

dependent variable firms‟ effectiveness and profit and the independent social media and social

networking. The participants were employees in telecommunication sector in Jordan.

Response choices on the questionnaire were coded as 1 (Highly Agree), 2 (Agree), 3 (Neutral), 4

(Disagree) and 5. (Highly Disagree).

1.4. Research Sample

The sample consists of employees who are working in the telecommunication sector in Jordan, in

order to make sure about the quality of collected data. The sample consists of 74 questionnaires,

which were handled to various employees with deferent level of education, positions and experiences.

The distributed questionnaires were 74 questionnaires and got 70 questioners back with percentage of

94.5%.

1.5. Data Collection Method

The data for this research are collected via primary and secondary sources. The primary data was

developed by questionnaire which was directed to the employees in the telecommunication sector in

Jordan in order to collect data for statistical analysis of the research in order to test the hypothesis.

Secondary Sources can be gained from book, specialized International Journals, Publications and the

World Wide Web; also the researcher can make use of what was written in the literature in similar

fields.

1.6. Theoretical Model

The model of this study consists of two types of variables; the independent variables (IV) (Social

media and social networking sites) and the dependent variable (DV) (Effectiveness and Profit) as

shown in figure (1) below.

Fig1. Theoretical Model of the study.

The Impact of the Applicability of Social Media and Social Networking Sites on Business Firms’

Effectiveness and Profit. Field Study: Telecommunication Sector in Jordan


1.7. Study Hypotheses

H0 (1): There is no significant impact to social networking sites upon business firms' effectiveness

and profit.

H0 (2): There is no significant impact to social media upon business firms' effectiveness and profit.

1.8. Operational Definitions

Social Media: is the media (content) that we upload; whether that's a blog, video, slideshow,

podcast, newsletter or an eBook. It's considered as a one-to-many communication method.

Although people can respond and comment, we own the content and have to produce

(write/record/create) the media ourselves.

Social Networking Sites: are sites like Facebook, Twitter, Instagram and Linked In that are all

about engagement, creating relationships, communicating with readers, building followers and

connecting with online audience.

Firms’ Effectiveness: is the extent to which an organization achieves specified levels of progress

toward its own goals and the degree to which objectives are achieved and the targeted problems are

solved. In contrast to efficiency, effectiveness is determined without reference to costs and,

whereas efficiency means "doing the thing right," effectiveness means "doing the right thing."

Profit: The surplus remaining after total costs are deducted from total revenue and the basis on

which tax is computed and dividend is paid. It is the best known measure of success in an

enterprise.

Profit is reflected in reduction in liabilities, increase in assets, and/or increase in owners' equity. It

furnishes resources for investing in future operations, and its absence may result in the extinction

of a company.


Hanafizadeh et al. (2012) Stated that Social network sites (SNSs) such as My Space, Facebook, and

YouTube have attracted millions of users, many of whom have integrated these sites into their daily

practices. There are hundreds of SNSs with various technological affordances, supporting a wide

range of interests and practices. However, the impact of SNSs is increasingly pervasive, with

activities ranging from economic and marketing to social and educational. Among the wide impacts of

social network sites, they are, becoming increasingly important in today‟s businesses. Thus, the

purpose of their study was to present a literature review of and classification scheme for research

works in business impacts of SNSs, with the aim of clarifying the ways SNSs impact businesses. The

review covered 28 journal articles published from2000 to 2011and a few months of 2012. The 28

articles classified SNS applications in businesses into six distinct categories: the “marketing and

advertising,”“knowledge management,” “social capital,” “relationship management,” “e-commerce,

“and “economic model. “The findings revealed that “marketing and advertising” were the most

frequently category has been considered in the literature. This review provided a source for

discovering business impacts of social network sites and would help to simulate further interest in the

area.

Rajasekera (2010) stated in his research that Social networking sites, such as Facebook and Twitter

have added new meaning to spreading news and information. While the traditional information

channels such as newspapers, radios, and TV, are one-way mediums. The presence of the Internet and

social media has made communication a two-way extravaganza, he added. And the lack of any

official control, supervision, or regulation has fueled a social media frenzy, which has proved to be a

very effective method of rallying around a mass on any significant or even not so significant issue. He

said that the recent banning of Facebook and other social networking sites by certain governments is

proof that social media cannot be ignored. Though authoritarian governments can resort to such

drastic methods, public corporations cannot afford to do so. Corporations have no other way than to

live with social media phenomenon -- either countering effectively, when a crisis starts brewing or

suffering the consequences when it grows out of proportions. Based on these thoughts Rajasekera

explored in his study how the recall-troubled Toyota has handled the social media and what options

are available for it in order to prevent the situation going out of control and harming the worldwide

Shaima Abukhat


reputation it has strongly and hardly built over the decades as a top quality auto maker. He affirmed

that Toyota‟s recall has exposed a bit of “digitization in automobile” industry as well as clarifying that

the digital technology in music and video industry, along with its exploitation by Apple using Internet

and social media, basically pushed the old industry heavyweight Sony to the sideline. Could the same

thing happen to Toyota? Can a new comer exploit the digitization in automobile, in conjunction with

Internet and social media, to dethrone an established giant such as Toyota? He kept his questions

open.

Kaplan and Haenlein (2009) found out in this research that the idea of social media is the top agenda

for many business executives at the moment. Businesses are exploring ways of exploiting social

media and social networking sites such as Facebook, YouTube, Twitter and blogs in their business

operations. But despite this confusion concerning the application of social media in business, there is

limited understanding regarding what social media is all about. Social media is collection of web-

based applications that utilize the technological and ideological foundations of web 2.0 technology

that facilitates the development and sharing of User Generated Content (UGC). Web 2.0 technologies

are a set of functionalities that are vital for the functioning of the web such as adobe flash. UGC refers

to the sum total of the ways in which individuals utilize social media. They Stated that social media

offers various opportunities to businesses. First, collaborative projects facilitate the joint and

simultaneous development of content by several end users. Collaborative projects comprise Wikipedia

and Delicious. Collaborative projects are the sources of information for many buyers and firms can

use it to update employees and to test ideas. Blogs are useful because they can be used to update

employees, customers and shareholder regarding any developments. Content communities such as

YouTube and Flickr are useful to firms as a channel of reaching its clients base and stakeholders.

Facebook and Twitter can be exploited by firms in their marketing initiatives. The concept, “social

marketing”, has already gained popularity and is offering companies endless opportunities in

marketing. Compared to other traditional channels, social marketing is cheap, can reach a wider

audience, and fast. In order to utilize social media effectively, firms must choose carefully, pick the

application, ensure active alignment, ensure access for all, and plan media integration.

Waters et al. (2009) Stated in their study that since social networking sites, such as MySpace and

Facebook, began allowing organizations to create profiles and become active members, organizations

have started incorporating these strategies into their public relations programming. As for profit

organizations, they have used these sites to help launch products and strengthen their existing brands;

however, little is known about how nonprofit organizations are taking advantage of the social

networking popularity. Through a content analysis of 275 nonprofit organization profiles on

Facebook, their study examined how these new social networking sites are being used by the

organizations to advance their organizations‟ missions and programs, and how nonprofit organizations

use Facebook to engage their stakeholders and foster relationship growth. They concluded that having

a profile only will not in itself increase awareness or trigger an inflow of participation. Instead careful

planning and research will greatly benefit nonprofits as they attempt to develop social networking

relationships with their stakeholders.

Xiang and Gretzel (2009) Stated that Social media are playing an increasingly important role as

information sources for travelers. The goal of their study was to investigate the extent to which social

media appear in search engine results in the context of travel-related searches. They employed a

research design that simulates a traveler's use of a search engine for travel planning by using a set of

pre-defined keywords in combination with nine U.S. tourist destination names. The analysis of the

search results showed that social media constitute a substantial part of the search results, indicating

that search engines likely direct travelers to social media sites. The study confirmed the growing

importance of social media in the online tourism domain. It also provided evidence for challenges

faced by traditional providers of travel-related information. Implications for tourism marketers in

terms of online marketing strategies were discussed.

3. THEORETICAL FRAMEWORK OF THE STUDY

3.1. Social Media and Social Networking Sites Overview

Social Media are computer-mediated tools that allow people to create, share or exchange information,

ideas, and pictures/videos in virtual communities and networks. It is defined as "a group of Internet-

based applications that build on the ideological and technological foundations of Web 2.0, and that

allow the creation and exchange of user-generated content."(Kaplan and Haenlein 2010) Furthermore,

http://en.wikipedia.org/wiki/Computer-mediated_communication

http://en.wikipedia.org/wiki/Virtual_community

http://en.wikipedia.org/wiki/Virtual_network

http://en.wikipedia.org/wiki/Web_2.0

http://en.wikipedia.org/wiki/User-generated_content




social media depend on mobile and web-based technologies to create highly interactive platforms

through which individuals and communities share, co-create, discuss, and modify user-generated

content. They introduce substantial and pervasive changes to communication between organizations,

communities, and individuals. (Kietzmann and Hermkens 2011) These changes are the focus of the

emerging field of techno-self studies. Social media are different from traditional or industrial media in

many ways, including quality, (Agichtein et al. 2008) reach, frequency, usability, immediacy, and

permanence. (Morgan, Jones and Hodges 2012) There are many effects that stem from internet usage.

According to Nielsen, internet users continue to spend more time with social media sites than any

other type of site. At the same time, the total time spent on social media in the U.S. across PC and

mobile devices increased by 99 percent to 121 billion minutes in July 2012 compared to 66 billion

minutes in July 2011. (Nielsen 2012) For content contributors, the benefits of participating in social

media have gone beyond simply social sharing to building reputation and bringing in career

opportunities and monetary income, as discussed in (Tang, Gu, and Whinston 2012).

Social media are methods of communication online with people outside the organization. These

methods offer various opportunities to businesses such as: Collaborative projects that facilitate the

joint and simultaneous development of content by several end users like Wikipedia, Blogs that can be

used to update employees, customers and shareholders regarding any developments and Content

communities like YouTube that are useful to firms as a channel of reaching its clients base and

stakeholders. (Kaplan and Haenlein 2010).

3.2. Definition of Social “Network” and Networking Sites

Social network sites are as web-based services that allow individuals to (1) construct a public or

semi-public profile within a bounded system, (2) articulate a list of other users with whom they share

a connection, and (3) view and traverse their list of connections and those made by others within the

system. The nature of these connections may vary from site to site.

While we use the term „„social network site‟‟ to describe this phenomenon, the term „„social

networking sites‟‟ also appears in public discourse, and the two terms are often used interchangeably.

We chose not to employ the term „„networking‟‟ for two reasons: emphasis and scope. „„Networking‟‟

emphasizes relationship initiation, often between strangers. While networking is possible on these

sites, it is not the primary practice on many of them, nor is it what differentiates them from other

forms of computer-mediated communication (CMC).What makes social network sites unique is not

that they allow individuals to meet strangers, but rather that they enable users to articulate and make

visible their social networks. This can result in connections between individuals that would not other-

wise be made, but that is often not the goal, and these meetings are frequently between „„latent ties‟‟

(Haythornthwaite, 2005) who share some offline connection. On many of the large SNSs, participants

are not necessarily „„networking‟‟ or looking to meet new people; instead, they are primarily

communicating with people who are already a part of their extended social network. To emphasize

this articulated social network as a critical organizing feature of these sites, we label them „„social

network sites.‟‟(Boyd and Ellison 2007).

In addition to this, Abbreviated as SNS a social networking site is the phrase used to describe any

Web site that enables users to create public profiles within that Web site and form relationships with

other users of the same Web site who access their profile. Social networking sites can be used to

describe community-based Web sites, online discussions forums, chat-rooms and other social spaces

online. (www.webopedia.com).

3.3. The Difference between Social Media and Social Networking

The differences between social media and social networking are just about as vast as night and

day. There are some key differences and knowing what they are can help gain a better understanding

on how to leverage them for brands and businesses.

Definition

Social media is a way to transmit, or share information with a broad audience. Everyone has the

opportunity to create and distribute. All what is really needed is an internet connection and businesses

are off to the races. On the other hand, social networking is an act of engagement. Groups of people

with common interests, or like-minds, associate together on social networking sites and build

relationships through community.

http://en.wikipedia.org/wiki/Technoself

http://en.wikipedia.org/wiki/Reach_%28advertising%29

http://www.webopedia.com/TERM/W/Web_site.html

http://www.webopedia.com/

Shaima Abukhat


Communication Style

Social media is more akin to a communication channel. It's a format that delivers a message. Like

television, radio or newspaper, social media isn't a location that we visit. It is simply a system that

disseminates information „to' others.

With social networking, communication is two-way. Depending on the topic, subject matter or

atmosphere, people congregate to join others with similar experiences and backgrounds.

Conversations are at the core of social networking and through them relationships are developed.

Return on Investment

It can be difficult to obtain precise numbers for determining the ROI from social media. How do we

put a numeric value on the buzz and excitement of online conversations about a certain brand, product

or service? This doesn't mean that ROI is null, it just means that the tactics used to measure are

different. For instance, influence, or the depth of conversation and what the conversations are about,

can be used to gauge ROI.

Social networking's ROI is a bit more obvious. If the overall traffic to a certain website is on the rise

and a social networking base is diligently increasing, it probably could attribute the rise in online

visitors due to the social efforts.

Timely Responses

Social media is hard work and it takes time. Individual conversations can‟t be automated and unless

it‟s a well-known and established brand, building a following doesn't happen overnight. Social media

is definitely a marathon and not a sprint.

Because social networking is direct communication between people and the ones that they choose to

connect with, conversations are richer, more purposeful and more personal. Networks exponentially

grow as people meet and get introduced to others.

Asking or Telling

A big no-no on with social media is skewing or manipulating comments, likes, digs, stumbles or

other data, for our own benefit (personal or business). Asking friends, family, co-workers or anyone

else to cast a vote just to cast it, doesn't do anyone much good for anyone and it can quickly become a

PR nightmare if word leaks out about dishonest practices.

With social networking, we can tell our peers about our new business or blog and discuss how to

make it a success. The conversations that we create can convert many people into loyal fans, so it's

worth investing the time.

Social media and social networking do have some overlap, but they really aren't the same thing.

Knowing that they're two separate marketing concepts can make a difference in how we position our

business going forward. (Hartshorn 2010.) (www.socialmediatoday.com)

3.4. Benefits of Social Media

Social media is becoming an indispensable part of the marketing mix for many businesses and one of

the best ways to reach customers and clients. Social media platforms, such as blogs, Podcasts, E-

Books and Videos have a number of benefits for companies and are fast overtaking traditional media

formats such as print and TV ads, brochures, flyers and email campaigns. Here are just a few of the

many advantages social media has over traditional media.

Low cost

Traditional media can be extremely expensive, especially for small businesses. In contrast, most

social media platforms are completely free to use, the only cost to businesses being the time spent on

updating profiles and interacting with contacts. This is one of the initial benefits of social media, in

that it is accessible to more business owners because of the low cost barrier of entry.

The low cost of entry to social media makes it particularly useful to small businesses who often find

the costs associated with traditional media prohibitive. Businesses can use social media to create and

distribute promotional material, such as articles, videos and audio for a fraction of the money it would

http://www.socialmediatoday.com/




cost for this content to appear in the press, on the radio or on TV. And distributing this content via

social media provides more opportunities to entice others to link to the content.

Unlimited access

In many ways, social media levels the playing field for businesses as it is accessible to anyone,

regardless of company size, turnover and contacts. Social media tools are open to anyone, whereas

reaching the traditional media often requires a lot of money and a good network of media industry

contacts.

Simplicity

A high level of skill, training and specialist equipment is involved in traditional media production. In

comparison, social media channels are extremely simple to use, even for people with basic IT

experience; all that is required is a computer and an internet connection.

Global reach

Traditional media can reach a global audience but this is usually very costly and time-consuming.

Through social media, businesses can communicate information in a flash, regardless of geographical

location. Social media platforms also allow to tailor content for each market segment and give

businesses the opportunity to get their messages across more widely than ever before. Indeed, once a

piece of content goes viral, there is no limit to the amount of people it could potentially reach, all at

no extra cost for the business.

Contact building

Social media channels offer unparalleled opportunities to interact with customers and build

relationships, largely due to their real-time, interactive nature. Companies can source feedback, test

ideas and manage customer services quickly and directly online in a way traditional media could not.

Flexibility

Social media‟s adaptability makes content management generally more flexible. Information can be

updated, altered, supplemented and discussed in a way completely unknown to a printed

advertisement, a newspaper article or magazine feature. What is more, information can be published

in seconds, making it possible for businesses to ensure that their content is always up to date – a

condition to a more prominent spot in the search engine rankings.

Measurability

Social media stats are immediately measurable, whereas traditional media figures often need to be

monitored over a long period of time. With social media, businesses can test marketing messages and

approaches, gauge user responses and tweak the message accordingly. This is done through the ever-

growing number of free, easy-to-use social media measurement tools. Although many businesses are

getting on board with social media, others are still a bit cautious of completely breaking away from

traditional media and embracing the social media. (http://www.organicseoconsultant.com/advantages-

of-using-social-media/)

3.5. Benefits of Social Networking

Sharing content with thousands of followers at once isn‟t the only benefit of social media and social

networking sites for business. Small businesses all over the world have been discovering the ways

social media can contribute to success and growth in all areas of their companies. However, there are

still skeptics who still don‟t see or understand the benefits of social media for their business. For this

reason, we will state some of the benefits acquired by social media and social networking sites to

businesses:

Social Networking is an easy way to learn about audiences

For businesses in any industry, the key to success is: knowing the audience. Social networking makes

this possible, and easier to accomplish than ever. With tools like Facebook Insights, the dominant

languages spoken can be learnt among the audience, as well as their age and gender. This knowledge

can help cater campaigns and product offers to target audience, which will provide a good profit and a

better return on investment.

http://www.organicseoconsultant.com/advantages-of-using-social-media/

http://www.organicseoconsultant.com/advantages-of-using-social-media/

Shaima Abukhat


Social Networking helps target audiences more effectively

Geo-targeting is an effective way to send a message out to a specific audience or demographic based

on their location. Social networks like Facebook and Twitter have tools that allow communicating the

right kind of content to the audience.

Social Networking helps find new customers and expand the audience

Social networks like Twitter allow small businesses to locate their current customers or seek out

potential customers. For example, if we open a new coffee shop in the neighborhood, we can create a

geo search to locate anyone tweeting about needing a morning cup of coffee within our area. After

locating those tweeting about coffee, we can start reaching out to them, and invite them to come try a

hot bevy at our new coffee shop.

Social Networking allows to receive instant feedback from the customers’ perspective

Social Networking for business gives instant access to positive or negative feedback, which provides

valuable insights on the customer perspective.

Improve market intelligence and get ahead of competitors with social Networking

Social Networking helps gaining key information on competitors, therefore improving market

intelligence. This kind of Intel allows making strategic business decisions in order to stay ahead of the

competition.

Social Networking can help increase website traffic and search ranking

One of the best benefits of social networking for business is using it to increase website traffic. Not

only does social networking help direct people to websites, but the more social networking shares are

received, the higher search ranking will be.

Share content easier and faster with Social Networking

In the past, marketers faced the challenge of ensuring their content reaches their customers in the

shortest possible time. With the help of social networking, sharing content got easier and faster. When

social networking is used for business, specifically for sharing content about the business, all what is

needed to do is simply share it on the brand‟s social network accounts. But getting the customers to

share certain content with their follower‟s means it is needed to make sure that social media content

aligns to the brand and interests the audience.

Social Networking helps generate leads for one third of the cost

Social networking is an easy way to generate leads. For example, one of the company‟s marketing

department was built around content and social platforms and Twitter ads has allowed it to scale,

increase reach, and fuel demand generation. This company promotes two types of content via Twitter

Ads: ungated content (free content requiring no email address for access) and gated content (free

content requiring an email). Sharing gated content on social media is a great way for any company to

generate leads.

Create meaningful relationships with customers through Social Networking

Social Networking is great for creating meaningful relationships with the customers. For example,

social networking allows tourism brands to create dialogue with travelers, therefore creating

relationships with customers before, during, and after they have booked a trip with the company. This

kind of social networking dialogue between brands and customers is something traditional advertising

will never achieve.

Social Networking helps in increasing brand awareness and reach with little to no budget

Social Networking for business has allowed companies to increase brand awareness and reach of their

brand at little to no cost. The costs associated with these strategies are a lot higher with traditional

advertising methods. Recently, marketing departments across companies started hiring community

managers to increase brand awareness and reach through social media. Community managers foster

relationships with online audiences in different regions. (Cisnero 2014). http://blog.hootsuite.com/

social-media-for-business/

http://blog.hootsuite.com/%20social-media-for-business/






In other words and In addition to what‟s mentioned above, free social networking sites like Twitter,

LinkedIn and Facebook are ideal for business networking. These sites will help businesses capture

sales by appealing to a wide range of potential customers.

They will:

Build customer base;

Connect with customers;

Enjoy 'Real Time' communication;

Learn what customers think about the company;

Find out what customers want;

Build a referral base; and

Sell products and services.

For Example:

Twitter

We‟ll lose customers fast if all we do is blast sales ads. Soft selling is the best way to sell on social

networking sites. However, Twitter is perfect for asking our customers about their interests, and

promoting our most recent blog post by adding the link. Add a few words about the link to peak their

interests so they will click through to our blog.

LinkedIn

LinkedIn is a must for business networking. It is a virtual Rolodex where we can keep up with our

contacts as they are promoted or move to different companies. We can identify prospects for our

products and services, make connections virtually that would be hard to make otherwise, and cultivate

referral sources. It is an ideal site for business to business connections: make a recommendation, start

a discussion or ask a question.

Facebook

Social networking for business is achieved easily with a Facebook fan page. Facebook is more

informal than LinkedIn, and this is a good place to share the human side of the companies. Promote

employees' outside interests, and post pictures and videos of the people that make the company great.

4. DATA ANALYSIS AND HYPOTHESES TESTING

4.1. Reliability and Validity of the Data

The criterion that was conducted to ensure the reliability of the measurement tool was the

computation of the coefficient of reliability and the calculations of Cronbach Alpha which was

(85.01%) and this ratio indicates a reliable measure, as the accepting limit is 60%.

Study Sample’s Demographic Characteristics:

Gender

Table1. Study Sample Distribution according to Gender

Gender Repetition Percentage

Male 18 48.6%

Female 19 51.4%

Total 37 100%

Social Status

Table2. Study Sample Distribution according to Social Status

Status Repetition Percentage

Single 23 62.2%

Married 14 37.8%

Total 37 100%

Shaima Abukhat


Educational Level

Table3. Study Sample Distribution according to Educational Level

Level Repetition Percentage

High School or less 6 16.2%

Faculty Diploma 1 2.7%

Bachelor Degree 16 43.2%

High Studies 14 37.8%

Total 37 100%

Age

Table4. Study Sample Distribution according to Age

Level Repetition Percentage

Less than 30 years 17 45.9%

From 30 to 40 years 19 51.4%

From 40 to 50 years 1 2.7%

More than 50 years - -

Total 37 100%

Table5. Means and Standard Deviations for the Sample’s questions

Question Mean Standard Deviation

SOCIAL NETWORKING SITES AND THEIR IMPACT ON THE ORGANIZATION

1 4.4054 0.89627

2 4.4865 0.69208

3 4.3514 0.82382

4 3.9189 0.89376

5 4.2703 0.76915

6 3.9730 0.95703

7 4.2703 0.73214

8 4.1892 0.73929

9 3.5676 0.98715

Total Indicator 4.159 0.5168

SOCIAL MEDIA AND THEIR IMPACT ON THE ORGANIZATION

1 3.5135 1.14556

2 4.0270 0.86559

3 3.2973 1.15145

4 3.3514 1.11096

5 3.9730 0.79884

6 3.6757 1.10690

7 4.2973 0.66101

8 4.2973 0.70178

Total Indicator 3.804 0.6176

4.2. Hypotheses Testing

Hypothesis (1):

H0 (1): There is no significant impact of social networking sites upon business firms' effectiveness

and profit.

Table6. Test of Hypothesis H0 (1)

T Calculated T Tabulated F Sig Result H0

13.641 2.0281 0.00 Reject

One sample T-Test was used to test our hypothesis and we found that (T Calculated=13.641) is

greater than T Tabulated, so the null hypothesis is rejected which means there is a significance impact

of social networking sites on business firms‟ effectiveness and profit.

Hypothesis (2):

H0 (2): There is no significant impact of social media on business firms' effectiveness and profit.




Table7. Test of Hypothesis H0 (2)

T Calculated T Tabulated F Sig Result H0

7.918 2.0281 0.00 Reject

One sample T-Test was used to test our hypothesis and we found that (T Calculated=7.918) is greater

than T Tabulated, so the null hypothesis is rejected which means that there is a significance impact of

social media on business firms‟ effectiveness and profit.

5. RESULTS AND CONCLUSIONS

5.1. Study Results Analysis

The hypotheses testing have arrived to the following results and conclusions and below are the

explanations of these results:

There is an impact to the independent variables “social media and social networking sites”

upon the Jordanian telecommunication sector’s effectiveness and profit.

This impact had been supported by many previous studies and reviews.

There is a positive impact of the independent variable” social networking sites” on the

dependent variable “business firms’ effectiveness and profit.”

Social networking websites are becoming an indispensable part of our larger society, with many

businesses using them as tools to enhance a better relational experience with their employees and

customers. A careful look at the various types of existing social networking sites suggests that

businesses could choose to adopt either an enterprise social networking or a consumer social

networking site, or both, depending on the level of integration desired for matching organizational

goals with marketing efforts, organizational learning, and public relations strategies. In this context,

enterprise social networking sites are internal website primarily developed to promote internal work

collaborations while consumer social networking sites are available in the public domain and

accessible to all. However, both types of social networking sites carry enormous benefits that could

increase business firms‟ effectiveness and profit. (Awolusi 2012).

There is a positive impact of the independent variable “social media” on the dependent

variable “business firms’ effectiveness and profit.

Research released by digital marketing agency EPi Server reveals that businesses are spending longer

on social media, and are seeing positive contributions to profits and customer loyalty. The new report

from EPi Server 'Tackling the social challenge' shows that over the past year, almost a third (29%) of

UK businesses have set up a new social media channel, and 17% reported an intent to set up more

social media channels in the coming year.

5.2. An Hour a Day on Social Media

Businesses are also reporting that they're spending longer managing their brand on social networking

sites like: Facebook, Twitter and LinkedIn. Marketers are now spending an average of an hour a day

managing social media. More than half (52%) say they have increased the amount of time dedicated

to managing social media, and 20% expect it to increase further in the next twelve months.

5.3. One in Five Sees Sales Rise from Social

Many companies said that they have seen tangible benefits from their social media work. A quarter of

businesses reported that they have seen an increase in website traffic, while one in five (21%) attribute

an increased sales turnover to the active use of social media. Just under a third (30%) also said they've

experienced increased customer loyalty, and 31% report heightened customer engagement. (Austin

2012). (http://www.techradar.com/news/world-of-tech/roundup/businesses-see-a-positive-effect-of-

social-media-1077749)

5.4. Study Recommendations

Due to this study we recommend the following in order to reinforce the usage of Social Media and

Social Networking sites in Business firms to increase their effectiveness and profit.

http://www.episerver.com/

http://www.episerver.com/socialchallenge

http://www.techradar.com/news/world-of-tech/roundup/businesses-see-a-positive-effect-of

Shaima Abukhat


Knowing the exact difference between Social Media and Social Networking Sites to use them

correctly and in a way that make the firms benefit from them right.

Providing the employees with training courses and sessions to introduce them to the benefits,

advantages and disadvantages of Social Media and Social networking sites so they would be up-to-

date with everything that increase their productivity and effectiveness,

Increasing the percentage of using Social Media and Social Networking sites in approximately all

the departments in the business firms to reinforce their effectiveness and increase their profit.

REFERENCES

[1] Kaplan Andreas M., Haenlein Michael (2010). "Users of the world, unite! The challenges and

opportunities of social media”. Business Horizons Vol. 53, Iss.1, p. 61.

[2] H. Kietzmann, Jan; Hermkens, Kristopher, P. McCarthy, Ian, S. Silvestre, Bruno (2011). "Social

media? Get serious! Understanding the functional building blocks of social media". Business

Horizons, Vol. 54, Iss. 3, pp.241–251.

[3] Agichtein, Eugene; Carlos Castillo. Debora Donato; Aristides Gionis; GiladMishne (2008).

"Finding high-quality content in social media". WISDOM – Proceedings of the 2008

International Conference on Web Search and Data Mining: pp. 183–193.

[4] Nigel Morgan; Graham Jones; Ant Hodges. "Social Media". The Complete Guide to Social

Media from the Social Media Guys. Retrieved 12 December 2012.

[5] "State of the media: The social media report 2012". Featured Insights, Global, Media +

Entertainment. Nielsen. Retrieved 9 December 2012

[6] Tang, Qian; Gu, Bin; Whinston, Andrew B. (2012). "Content Contribution for Revenue

Sharing and Reputation in Social Media: A Dynamic Structural Model". Journal of

Management Information Systems. Vol.29, Iss. 2, pp. 41–75.

[7] M. boyd, danah, B. Ellison, Nicole (2007). “Social Network Sites: Definition, History, and

Scholarship”. Journal of computer-mediated communication. Vol.13, Iss. 1, P.2.

[8] Awolusi, Femi (2012). “The impacts of social networking sites on workplace productivity.” The

Journal of Technology, Management, and Applied Engineering. Vol. 28, Iss. 1, pp. 1-6.

[9] Austin, Marcus (2012). “Businesses see a positive Effect of Social Media”. From techradar.pro

[10] Rajasekera, Jay (2010). “Crisis Management in Social Media and Digital Age: Recall Problem

and Challenges to Toyota.”Social Science Research Network International University of Japan

Graduate School of International Management Working Paper No. IM-2010-02

[11] W. Friedman, Linda; H. Friedman, Hershey (2008). “The New Media Technologies: Overview

and Research Framework.”

[12] D. Waters, Richard; Burnett, Emily; Lamm, Anna; Lucas, Jessica (2009). “Engaging

Stakeholders through Social Networking: How non-profit organizations are using Facebook.”

Public Relations Review, Vol. 35, pp. 102-106.

[13] Haagerup, Ulrik (2006). “Media Convergence: 'Just Do It” Nieman Reports. Winter, Retrieved

March 18, 2008 from http://www.nieman.harvard.edu/reports/06- 4NRwinter/p16-0604-

haagerup.html

[14] Hanafizadeh, Payam; Ravasan, Ahad; Nabavi, Ali; Mehrabioun, Mohammad (2012). “A

Literature Review on the Business Impacts of Social Network Sites”. International Journal of

Virtual Communities and Social Networking. Vol. 4, Iss.1.

http://www.thesocialmediaguys.co.uk/wp-content/uploads/downloads/2011/03/CompleteGuidetoSocialMedia.pdf

http://blog.nielsen.com/nielsenwire/social/2012/




www.arcjournals.org

©ARC Page 165

The Effect of Organizational Culture, Personality, Work Moti-

vation to Teachers’ Organizational Commitment

Supramono1, Soewarto Hardhienata

2, Widodo Sunaryo

3

Post Graduate Program, Universitas Pakuan Bogor, Indonesia [email protected],

[email protected],

[email protected]

Abstract: The aim of this study is to examine the influence of organizational culture, personality and

motivation on Teachers’ Organizational Commitment either individually or jointly. Variables of Organizational

Culture, Personality and motivation serve as independent variables while the dependent variable is

Organizational Commitment. The study was conducted on randomly selected 92 teachers of Senior Islamic High

School in the city of Bogor, West Java. Using mix method, sequential explanatory design is applied where

quantitative come first. The study both quantitatively and qualitatively reveals that there is a positive significant

relationship among variables under the following distribution of coefficient of correlation: Organizational

Culture to Organizational Commitment= 0.052, Personality to Organizational Commitment = 0.172, Motivation

to Organizational Commitment=0.264 and when tested together it produces coefficient of correlation = 0.712,

indicating the existence of other 28.8% variables not including in the model affecting factors affecting

Organizational Commitment within the teachers’ working environment.

Keywords: Organizational Culture, Personality, Work Motivation, Organizational Commitment.

1. INTRODUCTION

Improving the quality of education should be supported for the human resources capable of carrying

out the duties and functional. Teachers have a strategic position in teaching and learning processes and

the quality of student learning outcomes ultimately determine the quality of the teaching staff. They

both theoretical knowledge and practical as well as a variety of skills possessed will continue and

become a means of developing scientific attitude in students.

An important and Development provides a variety of amenities as well as demanding attention and

treatment luminance determines the attainment of the objectives of education are students and

educators. Quality is a decisive factor for the quality of learning and educational outcomes in general

education institutions in accordance with the objectives stated in its vision and mission. Commitment

of teachers is a factor that determines the success of achieving the goal of a school organization.

Commitment to the organization can be reflected in the performance of their duties and functions in

the implementation of the program of the organization.

One form of implementation Commitment is the treatment of time in the form of its presence in the

project in order to provide excellent service. This is in line with the duties and functions of teachers in

educational organizations that follow. Where teachers have the professional resources in educational

organizations will showcase the results reflect the true state of performance.

According to preliminary survey data conducted on May 1, 2013 to August 20, indicates the level of

attendance as follows: 8.80% was late to start class, 9.95 % was absent, preparation of teaching

3.30 %, and surprisingly time was mostly allocated to attend meeting of the school committee is

90.25% which is not in balance with the standard of working requirement allocation. It can be

concluded that the condition of Organizational Commitment Islamic Senior High School in the city is

low and should be increased as they have not in compliance with job requirement.


Commitment has been the subject of several meta-analyses (Cooper-Hakim & Viswesvaran, 2005;

Meyer, Herscovitch, & Topolnytsky, 2002) largely because employees with low levels of

commitment are more likely to leave their organizations (Rajiani, 2012). Allen and Meyer (2000)

three-component model of commitment consists of affective, normative, and continuance components.



https://id-mg61.mail.yahoo.com/[email protected]

Supramono et al.


Affective commitment is values based, involving identification and enthusiasm. In contrast, normative

commitment is based on a sense of obligation, whereas continuance commitment reflects high

perceived costs of quitting. Meyer et al. (2006) generalized the three-component model to focus on

commitment to an occupation. There have been several studies of the three-component model of

organizational commitment to conform the model in Asian setting (Chen & Francesco, 2003; Cheng

and Stockdale, 2003). Many researches have been done on what makes committed employees, but not

many researchers conducted them in the setting of school teachers mainly in the setting of islamic

high school whose values and norms are totally different. This research then will highlight the effect

of Organizational Culture, Personality, and Work Motivation to Organizational Commitment within

the respective islamic high school.

2.1. Organizational Culture and Organizational Commitment

The role of organisational culture is crucial to understanding organisational behaviour. According to

Wagner (1995), organisational culture has a strong influence on employees’ behaviour and attitudes.

Organisational culture involves standards and norms that prescribe how employees should behave in

any given organisation (Manetje, & Martins, 2009). Managers and employees do not therefore

behave in a value-free vacuum; they are governed, directed and tempered by the organisation’s

culture (Brown & Starkey, 2000). Employees’ behaviour includes their commitment to their

respective organisations. Given the dynamics of culture and human behaviour, it is important to study

how employees commit themselves to their organisation.

According to Cohen (2006), organisational commitment “as a research topic is important regardless of

its setting because a better understanding of the phenomenon may help us to better understand the

nature of the psychological process through which people choose to identify with different objects in

their environment and how they find purpose in life”. Allen and Meyer (2000) identify organisational

culture as an antecedent of organizational commitment. This suggests the need for a research study

that will determine the relationship between organisational culture and organisational commitment.

Various authors have discussed a possible theoretical link between organizational commitment and

organisational culture. It appears as if organisational culture tends to influence employees’ work effort

and commitment directly through cultural values, and indirectly through human resources practices

(Manetje, & Martins, 2009). Findings by, Chatman, Caldwell and O’Reilly (1999) suggest that

individuals who fit the organisational culture are those who are committed at a normative or value-

based commitment dimension; while Nystrom (1993) states that a correlation between organisational

culture and organisational commitment indicates that people who work in a strong culture feel more

committed. It appears from the research that there is a link between organisational culture and

organisational commitment; however, no evidence was found to suggest that similar research studies

had been conducted among islamic high school teachers in Indonesia.


H1: Organizational culture positively influences teacher’s organizational commitment within islamic

high school organisations in Bogor, Indonesia.

2.2. Personality and Organizational Commitment

Research has investigated relationships between a personality and organizational commitment within

Indonesian setting (e.g., Rajiani, 2012). Research on this topic has clear practical implications, as it

can lead HR professionals and line managers to more effectively identify and select individuals who

will work productively in departmental and group projects, task forces, or cross-functional

workgroups. Indeed, it is collective work efforts where individuals who engage in high commitment

may instigate havoc. As Lord (2002) stated, “some [individuals] just seem to create problems

everywhere they go”. This claim and other personality-based research (e.g., Islam & Ismail, 2008,

Jaramillo, Mulki, & Marshall, 2005) logically intimate a role for enduring personality traits when

predicting certain employee behaviors. Thus, our aim was to determine further whether certain

personality profiles empirically predict commitment in the workplace.


H2: Personality positively influences teacher’s organizational commitment within islamic high school

organisations in Bogor, Indonesia

The Effect of Organizational Culture, Personality, Work Motivation to Teachers’ Organizational

Commitment


2.3. Work Motivation and Organizational Commitment

The concept of motivation is derived from a Latin word “movere” which means “to move”. Moti-

vation is what moves the employees from dullness to interest. It is just like the steering of the vehicles

that directs and shapes employees’ activities. Motivation has been defined as the “Drive or energy that

compels people to act with energy and persistence towards some goal” (Berman, Bowman, West, &

Wart, 2010). “Motivation is a goal-directed behavior which involves taking a course of action which

leads to the attainment of a goal or a specific valued reward” (Armstrong, 2006).

The level of employee motivation, commitment and job involvement could be gauged by the volume

of employees’ turn over during a certain period of time. Employees with high job involvement are

more focused towards their jobs (Hackett, Lapierre, & Hausdorf, 2001), likely to have less turnover

and leaving intensions and are more motivated to stay with the organization. They grow in expertise

and thus become even more valuable to their employer and the organization. Importance of

motivation, commitment and job involvement in the workplace is obvious as well motivated and

committed employees with high levels of job involvement affect both their own as well as

organizational outcomes (Rajiani, 2012). Employees with high levels of commitment and job

involvement go on work in time and are usually more motivated to put extra efforts, on the other hand,

employees having minor level of commitment and job involvement are least motivated and have more

excuses such as illness or transportation problems etc. as compared to highly committed employees.

Therefore, we hypothesized that:

H3: Motivation positively influences teacher’s organizational commitment within islamic high school

organisations in Bogor, Indonesia.

3. DATA COLLECTION

This study applies mix method with direct observation to the field aimed at analyzing the phe-

nomenon occur when the research took place then confirm the finding by using direct depth interview.

This way, writers apply Sequential Explanatory Mixed Methods. Descriptive statistics and quantitative

analysis are used for finding initial solution to the problem encountered. The sample of this study

were 92 islamic high school teachers located in 2 (two) islamic junior highs in Bogor, West Java

Indonesia.

Techniques of data collection in this study is in the form of questionnaire. The normality assumption

is prerequisites to proceed to further test. Analysis is conducted with multiple linear regression and

hypothesis testing is performed at a significance level of 0.05.

Depth interview with vice headmaster was perform to confirm the result of quantitative findings. The

implication of the research findings is then discussed.


The teachers of listed organisations were asked to participate in the survey by responding their

opinions for four different measures in Organizational Culture, Personality, Work Motivation and

Organizational Commitment. The normality is performed with Lilliefors test. Data are normally

distributed as the value of each variable is not exceeding the critical value for Lilliefors test. The

Lilliefors normality test values for Organizational Culture, Personality, Work Motivation to Teachers’

Organizational Commitment are 0.052, 0.061 and 0.063 respectively below the critical value of 0.093

for n = 92.

4.1. The Effect of Organizational Culture to Organizational Commitment

Hypothesis testing confirms that organizational culture positively affects organizational commitment

with correlation coefficient value of 0.228 and the coefficient of determination = 0.052. This means

that only 5.2% of organizational commitment is determined by organizational culture, while the other

94.8% is contributed by other variables. Similarly, result of qualitative research interviews,

observation and documentation in two islamic Junior High School in the city of Bogor, confirms the

tendency of the relationship between organizational cultures with organizational commitment. This

finding strengthens the quantitative research hypothesis results testing that there is a positive

significant relationship between organizational culture and organizational commitment.

Supramono et al.


This finding is in line with Kotter and Heskett, (2009) that defines organizational culture as a

collective social knowledge in organization related to rules, norms and values forming behavior of

organization members. Another supporting theory is from Gibson, et.al, (2012) postulating that

organizational culture is employees' point of view in creating mode of confidence, value and hope.

Previous study also has shown that organizational culture and organizational commitment has a

positive relationship, e.g., Boon and Arumugam (2006) with the coefficient of correlation of 0.59 with

Malaysian samples. Thus, the analysis of this study further supports the results of previous studies

regarding the existence of a positive relationship between organizational culture and organizational

commitment in Asia with particular reference to developing country of Indonesia.

4.2. The Effect of Personality to Organizational Commitment

Hypothesis testing confirms that personality positively affects organizational commitment with the

coefficient of determination = 0.1722. This means that 17.2% of organizational commitment is

determined by personality variable, while the other 82.78% is contributed by other variables.

Similarly, result of qualitative research interviews, observation and documentation in two islamic

Junior High School in the city of Bogor, confirms the tendency of the relationship between personality

with organizational commitment. This finding strengthens the quantitative research hypothesis results

testing that there is a positive significant relationship between personality and organizational

commitment.

This is consistent with McShane & Glinow (2008) stating that personality is form of relatively

consistent behavior justifying preference of somebody on certain act. Furthermore Schermerhorn et.al,

(2007) define that personality is combination of the whole characteristics capturing uniqueness of

somebody when reacting and interacting with others consisting of five big dimensions ; (a)

Extraversion (b) Agreeableness (c) Conscientiousness (d) Emotional Stability (e) Openness to

experience.

Previous study in Indonesia also has shown that personality and organizational commitment has a

positive relationship, e.g., Rajiani (2012).Thus, the analysis of this study further supports the results

of previous studies regarding the existence of a positive relationship between personality and

organizational commitment in Asia with particular reference to developing country of Indonesia. The

better the result of personality on those dimensions, the higher commitment will be displayed.

4.3. The Effect of Work Motivation to Organizational Commitment

Hypothesis testing confirms that work motivation positively affects organizational commitment with

the coefficient of correlation = 0.514 and coefficient of determination = 0.264. This means that 26.4 %

of organizational commitment is determined by work motivation variable, while the other 73.6 % is

contributed by other variables. Similarly, result of qualitative research interviews, observation and

documentation in two islamic Junior High School in the city of Bogor, confirms the tendency of the

relationship between work motivations with organizational commitment. This finding strengthens the

quantitative research hypothesis results testing that there is a positive significant relationship between

work motivation and organizational commitment.

This finding is in line with Mantis and Jackson (2008) defining motivation as inner decision making

to do something. Furthermore, Angelo and Brian (2008) confirm that work motivation is a drive to

perform something better or more efficient.

Previous study also has shown that work motivation and organizational commitment has a positive

relationship, e.g., Widyaningrum (2011) with the coefficient of correlation of 0.179 with Indonesian

samples. Thus, the analysis of this study further supports the results of previous studies regarding the

existence of a positive relationship between work motivation and organizational commitment in

Indonesia with particular samples to islamic junior high school samples.

4.4. Interaction of Organizational Culture, Personality and Work Motivation to Organizational

Commitment

When tested together, hypothesis testing results show that there is a significant relationship between

organizational culture, personality and work motivation to organizational commitment. The regression

equation generated is Ŷ = 249.54 + 0.916X1 + 0.058X2 + 0.698X3 with correlation of coefficient

values = 0.884 and the coefficient of determination=0.712. This means that 71.2% of organizational

The Effect of Organizational Culture, Personality, Work Motivation to Teachers’ Organizational

Commitment


commitment is caused by variables of organizational culture, personality and work motivation while

28.8% is contributed by other variables not included in the model. Result of qualitative research

interviews, observation and documentation in two islamic Junior High School in the city of Bogor,

confirms the relationship among organizational culture, personality and work motivation to

organizational commitment. This finding strengthens the quantitative research hypothesis results

testing that there is a positive significant relationship among those mentioned variables. Qualitative

research also reveals that other factors affecting organizational commitment in the respective school

are headmaster's leadership which is viewed as less optimal, limitation of school infrastructure and

facilities as well as poorly-planned HR development.

5. CONCLUSION

The findings reveal that there is a positive and significant direct effect between the organizational

culture, personality and work motivation to organizational commitment.

Based on the initial design of the constellation between variables, the results showed that the con-

tribution of organizational culture to organizational commitment is 0.052%, personality is 0.172 %,

and work motivation is 0.264 % indicating the highest individual contribution to the teachers’

organizational commitment is work motivation. When combined together, contribution of the three

variables of organizational culture, personality and work motivation reaches 71.2% indicating the

contribution of other variables not included in the model to predict organizational commitment are

28.8% confirming this model is of good-fit. Other researchers wishing to conduct similar studies may

include other variables such as; teacher professionalism, achievement motivation, work culture of

teachers, teachers’ resilience, creativity, work experience, training, principal’s management, decision-

making techniques and so forth. This confirms Manetje, & Martins (2009) comprehension that it is

necessary to conduct a comprehensive and critical analysis to identify the factors that enhance and

promote organizational commitment. Factors related to personal characteristics, organizational

environment, and leadership behaviors found to predict different types of organizational commitment

mainly within islamic primary high schools’ context which rarely explored.

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www.arcjournals.org

©ARC Page 171

The Relationship between Voluntary Disclosure and Financial

Performance of Companies Quoted At the Nairobi Securities

Exchange

Jane Mmbone Mutiva

Department of Accounting and Finance

Technical University of Mombasa

Mombasa, Kenya

[email protected] Dr.Anwar Hood Ahmed

Department of Management Science


Mombasa, Kenya

[email protected]

Dr. Jane Wambui Muiruri-Ndirangu

Department of Management Science


Mombasa, Kenya

[email protected]

Abstract: In the last few decades, the problem of voluntary disclosure of financial or non-financial

information has been in the attention of many researchers. Shareholders, investors and other stakeholders make

their investment and financial decisions on the basis of the information they get from annual reports. These

annual reports may contain both mandatory and voluntary information. These voluntary disclosures are done by

managers in the spirit of openness and transparency and may contain vital information that may assist all

interested parties to make wise decisions. This paper sought out to examine empirically the relationship between

voluntary disclosures and financial performance measure, Return on Investment (ROI), of companies quoted at

the Nairobi Securities Exchange. Annual reports of 10 listed companies from the NSE 20-share index were

investigated from the year 2011-2013. A disclosure checklist consisting of 49 voluntary disclosure items of

information was used. A regression analysis was conducted on the data set using Excel 2007. Findings revealed

that the individual predictor variables produced mixed results when regressed against ROI. However, the

multivariate regression analysis depicted a strong positive relationship between voluntary disclosure and

financial performance measure, as evidenced by a Pearson Product Moment Correlation Coefficient (𝑅) of

0.6235. As such, only 38.9% of the data points will appear on the linear plot. Since voluntary disclosure comes

with a cost, this study recommends that managers in organizations disclose more information voluntarily not

only for the purposes of obtaining cheaper capital but also it increases transparency and accountability in

annual reporting and this boosts the confidence of investors as they make investment and financial decisions.

Keywords: Voluntary disclosure; annual reports; financial performance; information asymmetry; cost of

capital; return on investment; Nairobi Securities Exchange.

1. INTRODUCTION

1.1. Background of the Study

One of the reasons why organizations are in existence is to create value to the consumer, often

referred to as external value creation, which subsequently translates to surplus revenue for the

shareholders (referred to as internal value addition). Stewart (1994) asserted that a firm that is able to

create value to the customer is rewarded by the market through generation of greater cash flows which

accrue to the shareholder.

Corporate voluntary disclosure is the additional information provided by managers over and above the

statutory requirements stipulated in the accounting standards. Li and McConomy (1999) found out

that firms in better financial conditions are more likely to voluntarily adopt new International

Financial Reporting Standards (IFRS) environmental disclosures and hence become more profitable

and reduce the cost of compliance.

Over the years researchers have developed a keen interest in the voluntary disclosure practices of

organizations the world over. A case example is that of Botosan (2000) who observed that firms




Jane Mmbone Mutiva et al.


which disclosed more information in their annual reports enjoyed the benefits of lower cost of capital.

As such, disclosure can be viewed as a tool that aids in communicating information to different

market players in an industry.

1.1.1. Concept of Voluntary Disclosure

The Business Reporting Research Project (BRRP) issued a steering committee report titled

“Improving Business Reporting: Insights into Enhancing Voluntary Disclosure”. According to this

report voluntary disclosure refers to information surplus to the mandatory financial statements

required by GAAP (FASB, 2001).Voluntary disclosure increases transparency and accountability in

annual financial reporting hence attracting prospective investors and enabling all other users of these

reports to make informed decisions. Companies that voluntarily disclose information enjoy the

benefits of cheaper funds from capital markets which in turn translate to better investment appraisals

by managers.

Disclosure plays a crucial role in mitigating capital market incentive problems (Healy & Palepu,

2001). Voluntary disclosure of financial information is also a vital component of the corporate

governance framework and is regarded as an important indicator of earnings quality and hence good

performance. Boesso and Kumar (2007) claimed that one of the determinants that led to the

emergence of voluntary disclosure was the inadequacy of financial reporting, as perceived by

investors and shareholders. Consequently, stockholders increasingly demanded openness and

voluntary disclosure of information relating to performance and long range strategies.

In the opinion of Ross (1997) companies that provided more information disclosures reduced the

occurrence of information asymmetry between the owners and managers and subsequently get to

enjoy low costs of capital. For purposes of this study, information considered to be voluntary

disclosures will be categorized as: General Corporate and strategic, Forward-looking, Financial and

finally Socio-Environmental and Board disclosures.

1.1.2. Concept of Financial Performance

Performance measures are either quantitative or qualitative ways to characterize and describe

performance. They are an apparatus used by organizations to manage progress towards achieving

preset goals and in the process identify the key indicators of organizational performance and customer

satisfaction. A good performance measure should be able to adequately describe the population to be

measured, the mode of the measurement, and the data source and time period for the measurement.

With increasing pressure on a firm‟s performance to deliver adequate returns on investment for

shareholders, managers have been devising ways of improving corporate financial performance to

increase shareholders wealth. This is a worldwide phenomena being practiced in U.S.A, U.K,

Australia, Canada, Brazil, Germany and closer home South Africa. It has trickled down the Kenyan

market to be practiced by Standard Chartered, Barclays Bank, Coca-Cola and Unilever (Dalborg,

1999).

A major economic objective to be achieved by managers in organizations is wealth maximization for

shareholders. This can be done through efficient allocation of resources. To achieve this goal,

shareholders wealth is substituted by profit or cash flows or financial statements ratios. Shareholders,

managers and other interested parties use the information provided by financial statements to forecast

performance (Worthington & Tracey, 2004).

Investors recognize the potentials of a company, both current and future, through its market valuation.

Thus, they always expect managers to increase the market value of the firm in anticipation of high

returns on their investments. This is because a rise in the market value of a company‟s shares is

considered an increase in wealth for the company. Poor growth prospects adversely affect firm value;

therefore, an effective performance measure is one that reflects the extent of the growth (Gikonyo,

2008).

Shareholder value has traditionally been measured by such indicators as return on equities (ROE),

return on investments (ROI) and net income. Subsequently, the introduction of Economic Value

Added (EVA) benchmarks a company‟s income against its cost of capital, which its promoters believe

is a better indicator of both year-after-year growth and the adequacy of capital replacement.

Accordingly, while the traditional measures are morally concerned with accounting returns, EVA

The Relationship between Voluntary Disclosure and Financial Performance of Companies Quoted At the

Nairobi Securities Exchange


leans towards economic returns to the extent that it deals with discounting the replacement cost of

capital to arrive at the returns. However, it is difficult to obtain the requisite data which is

indispensable to the calculation of the measure especially taking into consideration the privacy of

such data as interest on debts (Kariuki, 2008). Therefore, this study measured the financial

performance of a company by the use of ROI owing to its simplicity, comparability and that it is a

basic tool in measuring both profitability and performance.

1.1.3. Nairobi Securities Exchange

The Nairobi Securities Exchange (NSE) came into existence in the early 1920‟s when Kenya was

under British colony. It was an informal market for local securities. By 1954, a true stock exchange

was created after the NSE had officially been recognized by the London Stock Exchange (LSE) as an

overseas stock exchange (NSE, 2011). After Kenya gained independence, the stock exchange

continued to grow and became a major financial institution. In 2006, the facilities restructured from

the original "handshake over coffee" mode of trading to an automated trading system.

The NSE is the fourth largest stock exchange in Africa when it comes to trading volumes. The

Exchange has a memorandum of understanding with East African Securities Exchanges in Uganda

and Tanzania. When the NSE became operational in 1954, a self-regulatory framework was adopted

whose main responsibility was to develop the stock market. The self-regulatory framework, which

borrows heavily from the LSE, is embodied in the Rules and Regulations of NSE 1954 (NSE, 2011).

Through coordination with other authorities such as Central Depository System (CDS) and the Capital

Markets Authority (CMA), the NSE provides clear guidelines on trading activities in the Kenyan

market (NSE, 2011).

CMA is a regulatory body that controls all capital market factors in Kenya. It has the responsibility of

licensing, supervising and monitoring the activities in the stock exchange and CDS. Through onsite

and offsite market surveillance, CMA fosters investor‟s confidence by ensuring rules, regulations and

requirements for trade are complied with and market integrity is sustained. This results in orderly, fair

and efficient markets in Kenya. CMA also plays a crucial role in mobilization and allocation of capital

resources in an economy in order to provide enough incentives for long term investments (NSE,

2011).

Listed companies in Kenya are required to produce quarterly and semi-annual financial statements as

well as audited annual reports. Financial statements are to be prepared according to International

Financial Reporting Standards (IFRS) and audited using International Standards on Auditing (ISA).

The Institute of Certified Public Accountants (ICPAK) together with the CMA and NSE has also

established the Financial Reporting Award (FiRe) that reviews the annual reports of participating

companies and gives awards to the statements that most comply with IFRS. The CMA Guidelines

additionally encourage companies to disclose additional information on director and management

remuneration.

1.2. Statement of the Problem

Corporate financial reporting, specifically annual reports, are a crucial tool in communicating vital

information about a company, both financial and non-financial information (Barako, 2007). Potential

investors in Kenya obtain vital information on trading activities of listed companies at the NSE

through their annual reports and other bulletins from the CMA. These reports are available and easily

accessible publicly. The NSE encourages firms to disclose more information so as to raise capital

relatively cheaply. Managers, therefore, tend to provide voluntary disclosures and forecasts to show

investors that they are aware of the firm's economic environment and are able to quickly respond to

changes.

Over the years, a growing interest in voluntary disclosure practices has been exhibited by many

researchers. Some have tested the association between voluntary disclosure and several aspects such

as profitability (Verrecchia & Weber, 2006), cost of equity capital (Botosan, 2000) and stock

liquidity. These studies, however, were centered in industrialized economies with very few studies

done in the context of developing nations. More importantly, most of these literatures are leaning

more on factors that influence the extent of voluntary disclosure.

In Nigeria, Salawu (2012) sought out to determine the extent and forms of voluntary disclosure of

financial information on internet reporting. She based her study on the Nigerian Stock Exchange.



Findings revealed that out of the total of 139 companies with websites, only 77 of them disclosed

financial information on their web pages while the remaining 62 did not. Studies done in the Kenyan

context include a study by Lopokoiyit (2012) who investigated the effect of corporate governance

practices on share prices of companies listed at the NSE. He found a direct relationship between

corporate governance practices and share price. Also, Asava (2013) looked at the effect of voluntary

disclosure on stock returns of companies listed at the NSE. Her study revealed that there was no

relationship between voluntary disclosure and stock returns.

Given that voluntary disclosure of information comes with a cost, it is imperative to find out whether

or not there is a corresponding benefit in the form of good earnings reports. The question that begs

therefore is whether there is a relationship between voluntary disclosure and financial performance of

companies quoted at the Nairobi Securities Exchange.

1.3. Objectives

1.3.1. General Objective

This primary objective of this study was to examine empirically the relationship between voluntary

disclosure and financial performance measure of ROI for companies listed at the NSE.

1.3.2. Specific Objectives

These included:

The effect of voluntary disclosure of general corporate and strategic information on financial

performance.

The effect of voluntary disclosure of financial information on financial performance.

The effect of voluntary disclosure of forward-looking information on financial performance.

The effect of voluntary disclosure of socio-environmental and board disclosures on financial

performance.

1.4. Research Questions

What is the effect of voluntary disclosure of general corporate and strategic information on

financial performance?

What is the effect of voluntary disclosure of financial information on financial performance?

What is the effect of voluntary disclosure of forward-looking information on financial

performance?

What is the effect of voluntary disclosure of socio-environmental and board disclosures on

financial performance?

1.5. Research Hypothesis

For purposes of this research, both a null and an alternative hypothesis were developed to test the

nature and significance of the relationship between the various items of voluntary disclosure and the

measure of financial performance ROI for the listed companies selected from the NSE.

1.5.1. General Corporate and Strategic Information and Financial Performance

General and strategic information comprises of information about the size of a company, its economic

outlook, the mission statement, historical data and background, business strategies, market share

analysis, competition and also a description of major goods and services. There are no studies

conducted on this broad category of disclosure. However several aspects included in this category

have been tested. For example, Amir and Lev (1996) found that by disclosing information on market

share analysis, firms in the wireless communication industry increased their firm value. Also, Jensen

and Meckling (1976) noted that larger firms incur higher agency costs due to the fact that they employ

heavy investments in capital. Marston and Polei (2004) support this claim by asserting that higher

disclosure levels reduces agency costs that may be brought up by a conflict of interest between

managers and owners of finance. The following hypothesis was developed:

Null: There is no link between disclosure of general corporate and strategic information and ROI for

firms quoted at the NSE. ( H0 : β1

= 0 )




Alternative: There is a link between disclosure of general corporate and strategic information and

ROI for quoted firms (𝐻1 : 𝛽1 ≠ 0).

1.5.2. Financial Information and Financial Performance

Investors are interested in information relating to liquidity ratios, gearing ratios, return on

shareholders‟ funds and value added statements. Financing decisions are affected by the optimal

capital structure that a firm maintains. Wallace and Naser (1995) and Hossain, Perera and Rahman

(1995) noticed that there exists a positive link between leverage and the level of disclosure. Likewise,

by providing a historical analysis, disclosure helps to improve the capability of investors to assess

future earnings by making better earnings forecasts (Barron, Kile & O‟keefe, 1999). Hence, the

following hypotheses were stated:

Null: There is no link between disclosure of financial information and ROI for quoted firms

(𝐻0 :𝛽2 = 0).

Alternative: There is a link between disclosure of financial information and ROI for quoted firms

(𝐻1 :𝛽2 ≠ 0).

1.5.3. Forward-Looking Information and Financial Performance

According to Celik, Ecer and Karabacak (2006) forward- looking information helps to forecast the

future of a company in terms of performance and strength of the management in place. Information on

profit forecasts, sales revenue forecast and earnings per share forecasts is included in this category of

disclosure. If management generates inaccurate predictions over and over again, the credibility of any

future forecasts may be dismissed, which may result in a potential increase in the cost of capital

especially to investors. Regardless of whether managers are motivated by possible litigation costs or

the need to guard their reputation, Skinner (1994) argues that management earnings forecasts may

reduce expected legal costs by reducing the likelihood that an imminent mandatory disclosure will

result in a large negative stock price response. Companies that wish to obtain external sources of

finance may be inclined to disclose more forward-looking information in order to gain the confidence

of the providers of these funds. Clarkson, Kao and Richardson (1994) stated that firms in search of

external sources of finance are more likely to provide voluntary forward-looking information relating

to estimated future earnings irrespective of the existing competition in the industry. Hence, the

following hypotheses were developed:

Null: There is no link between disclosure of forward-looking information and ROI for quoted firms

(𝐻0 :𝛽3 = 0).

Alternative: There is a link between disclosure of forward-looking information and ROI for quoted

firms (𝐻1 : 𝛽3 ≠ 0).

1.5.4. Socio-Environmental and Board Disclosures and Financial Performance

One way in which stakeholders and other interested parties can assess the effects of an organization

on its environment and hence form an opinion about the reputation of the company is through an

analysis of the company‟s Corporate Social Responsibility (CSR) practices. According to Fama and

Jensen (1983a), nonexecutive members of the board act as a reliable means to minimizing the impact

of agency conflicts between managers and owners. Franks, Mayer, and Renneboog (2001) argued that

these nonexecutive members are considered important in ensuring that the essential mechanisms

needed to enhance the effectiveness of the board are in place. In their study, Haniffa and Cooke

(2002) established that a significant positive relationship exists between percentage of ownership

attributed to foreigners and the level of voluntary disclosure. This lead to the development of the

following hypotheses:

Null: There is no link between socio-environmental and board discourses and ROI for quoted firms

(𝐻0 :𝛽4 = 0).

Alternative: There is a link between socio-environmental and board discourses and ROI for quoted

firms (𝐻1 : 𝛽4 ≠ 0).

1.6. Significance of the Study

Voluntary disclosures provide an extra way for investors to judge a company‟s performance. This

study will, therefore, enable the investors to make better investment decisions and better capital



allocations. It will also emphasize on increased transparency which reduces information asymmetry

that may exist between the investors and the management team. Moreover, managers will be in a

position to make out the extent to which they should disclose particularly considering the cost

accompanying disclosure so that it does not outweigh the benefits of cheaper capital. This study will

likewise extend the literature on voluntary disclosure hence posing an eye opener to academicians to

conduct further research on this area.


This section presents the concept of voluntary disclosure and its relationship with a firm‟s financial

performance at the NSE. It developed a theoretical framework that analyzed several theories which

had been developed to explain the significance of voluntary disclosure with respect to business

entities and investors. These were Agency, Signaling, Legitimacy and Stakeholder theories. It also

looked into the empirical evidence in relation to voluntary disclosures. Moreover, it identified the

different categories of items considered voluntary disclosures and their relationship to financial

performance. Further, it examined the various measures of financial performance, looking at which

measure would best be suited for the purposes of this research. Finally, this chapter critiqued the

literature relevant to this study and identified any research gaps that other researchers capitalized on in

the quest to study the effects of voluntary disclosures of various aspects of a firm.

2.1. Theoretical Framework

The theory of Voluntary Disclosure was first instigated by Verrecchia (2001) when he identified three

elements of disclosure. These are explained in Table1 below.

Table1. Elements of Voluntary Disclosure (Verrecchia, 2001)

Association-Based Disclosure Looks at how disclosure is related to the activities of investors seeking to

maximize their wealth in the capital market environment

Discretionary-Based

Disclosure

Looks at the level of discretion that managers exercise when it comes to

disclosure that aids in firm valuation.

Efficiency-Based Disclosure Examines the efficiency of disclosures.

Investors, particularly in public companies, were removed from the management of their assets and

therefore required financial disclosure to make rational decisions on how their resources were

managed (Masita, 1978). Several theories had been fronted to relate voluntary disclosure with

business entities and investors. These are Agency, Signaling, Legitimacy and Stakeholder theories.

2.1.1. Agency theory

Agency theory sets out to explore the relationship between a principal and an agent. Jensen and

Meckling (1976) depict an agency relationship as one whereby a principal(s) appoints an agent and

delegates authority to the agent to act on his behalf.

Managers are often empowered by the owners of the firm to make decisions on their behalf. A

potential agency problem arises where shareholders are not kept in the loop with respect to some

important information that managers have access to, consequently causing information asymmetry

among them. The agent, who is the manager, usually has an information advantage over the principal,

who is the shareholder. This in turn creates a conflict of interest, which ultimately results in agency

costs. Hence the principal needs to be keen to ensure that he is not exploited by the agent.

Voluntary disclosure is one way of ensuring agency problem is minimized especially if managers who

possess confidential information about a firm are able to use their informational advantage to make

dependable communication to interested parties in order to maximize firm value (Barako, 2007).

Healy and Palepu (2001) considered that disclosure of non-mandatory information is expected to

reduce agency costs.

In view of the fact that organizations constantly strive to obtain additional funds from capital markets

at as low a cost as possible, managers are motivated to provide more reliable information. This helps

to reduce the monitoring costs incurred by shareholders in an attempt to prevent exploitations by

management.




2.1.2. Signaling Theory

A signal is a movement, action or sound that is used to communicate instructions or information. For

instance, in a recruitment exercise, prospective job applicants strive to „signal‟ their capabilities

through well written curriculum vitae‟s that clearly outline their strengths in terms of work

experience, educational background and even mental and physical abilities.

In like manner, signaling theory as advanced by Ross (1977) suggests that if investors are not able to

effectively differentiate with certainty between two firms which they perceive to be performing

equally well, the firm that performs better will ensure that they provide a „signal‟ so as to catch the

attention of these investors and enjoy a positive company reputation. They may do this by disclosing

additional information unbeknown to investors and which will positively affect the outlook of the

company. Similarly, it should be noted that not disclosing any information at all is also a signal.

Ross (1977) asserts that managers prefer to signal in the form of disclosures so that they can mitigate

against problems associated with lack of disclosures. In line with signaling theory, managers will

settle for disclosure over non-disclosure. However, it should be noted that the costs of disclosure

should outweigh the benefits. Signaling theory advocates that firms considered “healthy” in terms of

better earnings and performance will probably disclose more information than “distressed” firms.

Distressed firms are those whose performance is spiraling down probably due to economic recession

and poor management strategies (Wruck, 1990).

2.1.3. Legitimacy Theory

Legitimacy theory has widely been used in relation to socio-economic and environmental disclosures.

It stems from the fact that business organizations have a moral obligation to operate within the norms

of the society at large. According to Dowling and Pfeffer (1975) legitimacy theory is a condition

whereby the value systems of an organization are in harmony with those of the society. Organizations

do not only work in the interest of their investors, but they also ensure that their actions do not

negatively affect the environment in which they conduct their business by avoiding pollution and

other illegal activities. Hence, if managers make out that the operations of their organizations are

contrary to what society expects of them, then there is need to immediately reinforce legitimacy

(Dowling and Pfeffer, 1975).

Society normally permits entities to continue with their operations for as long as they meet their

expectations. For that reason, there exists a „social contract‟ between an organization and the society

in which it operates (Deegan, 2002). If a company‟s activities are not carried out with the societal

norms in mind, the community will work to ensure the company ceases its operations. This amounts

to threats to organizational legitimacy and adversely affects the company‟s corporate image and

reputation. This is the reason why most companies would prefer to disclose their efforts towards

Corporate Social Responsibility (CSR) in their annual reports to communicate their legitimacy to the

community.

2.1.4. Stakeholder Theory

Stakeholder theory looks at how managers strive to create value and their responsibility to a

company‟s stakeholders. No matter what a company‟s ultimate goal is, managers are expected to

always work towards satisfying the interests of the people or groups that are affected by their actions

and inactions. According to Gray and Owen (1987) stakeholders exercise a considerable amount of

control over an organization‟s resources and hence, managers are obligated to provide them with the

necessary information that may aid them in decision making, even if it is environmental in nature.

One of the economic objectives of business organizations is to maximize shareholders wealth. This

can be achieved through creation of superior products of high quality and offering top notch services

for customers. This value creation process can be evident through efficient operational processes,

repeat purchases from customers and an improved corporate image. Managers are aware that failure to

create such value may result in withdrawal of support and investment from the stakeholders. Thus, for

an organization to continue existing in its full operational capacity, the support of stakeholders was

necessary. This was the reason why managers will choose to disclose information voluntarily to their

stakeholders so as to enable them to make better investment, financial and social responsibility

decisions.



The greater the influence that stakeholders have on a company, the more the company must work to

their advantage. Literature hints that companies provide disclosures voluntarily for various reasons

most of which could be related to satisfying various stakeholder groups including adversarial

stakeholders (Gray & Bebbington, 2001).

2.2. Empirical Studies on Voluntary Disclosure

Cerf (1961) investigated the relationship between voluntary disclosure of information and its level of

profitability as well as the size of the firm and its shareholders in the U.S Market. The purpose was to

find out the connection between voluntary disclosure of information and its level of profitability. The

methodology used was a descriptive approach and that he analyzed annual reports of 25 different

companies that were listed on the New York Stock Exchange (NYSE). He noted a positive link

between the above mentioned variables.

Leuz and Verrechia (2000) scrutinized 102 annual reports of German firms listed in the DAX 100

stock index over the course of 1998 to find out the economic consequences of increased disclosure.

They used event study design as their methodology of research. Their finding suggested that firms

that commit to either International Accounting Standards (IAS) or the U.S GAAP exhibit a higher

turnover in terms of shares as compared to firms using German GAAP.

Botosan (1997) examined 122 manufacturing firms situated in America in a quest to establish whether

there existed any association between disclosure and cost of equity capital. The methodology of the

study was a descriptive study coupled with correlation analysis based on the voluntary disclosures

available in the annual reports for the year 1990. The findings were that firms that attracted lesser

following by analysts proved that a higher level of disclosure is associated with lower cost of equity

capital. On the other hand firms with a high analyst following depicted no association between the

two measures probably because the disclosure measure is limited to the annual reports.

Likewise, Kristandl and Bontis (2007) investigated the relationship between the level of voluntary

disclosure and cost of equity capital. They centered on 95 listed companies from Germany, Sweden,

Denmark and Austria. Findings of the study revealed that an anticipated negative relationship existed

between the cost of equity capital and the level of forward-looking information and an unforeseen

positive relationship was noted between cost of equity capital and the level of historical information.

2.3. Conceptual Framework

This section will deal with the Operationalization of the variables of the study, that is, measures of

voluntary disclosures and measures of financial performance.

Fig1. Conceptual Framework

Voluntary disclosure items can be summarized into four categories: General corporate and strategic

information disclosure, Socio-Environmental and Board disclosures, Forward-looking disclosures,

Financial Information disclosures.

2.3.1. General Corporate and Strategic Information

The General company information relates to information that outlines the activities of managers in the

organization which includes company size, company policies, procedures, brief historical background,

the vision and mission statements, organization structures, description of major goods or services,

description of market, and marketing networks for finished goods and services.




Strategic information on the other hand relates to a company‟s current business strategies, the effects

of these strategies and how the organization achieves competitive advantage using its strategic

position. Such information includes disclosures relating to competition in the industry. The

importance of disclosing these strategic elements of an organization in annual reports is highly

recommended by CICA (2001).

Company size is one factor to be considered in this category. According to the study conducted by

Ahmed and Court is (1999) firm size is seen to have a positive and significant relationship with

disclosure. Likewise, Papadognas (2007) observed that the size of a firm is key to determining its

profitability. Another factor is market share analysis. This involves an analysis of the market growth,

penetration and dominance. Most companies with a larger market share exhibit higher profit margins

hence better financial performance. According to Amir and Lev (1996) disclosing information that is

not financial in nature increased firm value in the wireless communications industry.

2.3.2. Financial Information

Financial information is derived from the financial reports prepared from the books of accounts and

analyzed in various categories to include income statements, balance sheet, statement of cash flows

and statement of changes in equity. These reports are presented to the stakeholders in annual general

meetings where auditors read and explain their contents. Voluntary disclosure items in the financial

information category include: liquidity ratios, gearing ratios, return on assets, value added statements

and a historical summary of financial statements for at least three years.

Companies are expected to fulfill their financial obligations; both short-term and long-term, when

they arise. This is because investors and other lenders of funds will always look at the risk of default

before putting money into the business. It is therefore prudent for firms to ensure that they protect

their going concern status. Firms with high liquidity are often seen as being financially stable and will

exhibit more disclosures (Belkaoui & Kahl, 1978; Cooke, 1989). Wallace, Naser and Mora (1994)

however defended a low liquidity position by suggesting that firms of that nature might disclose more

information to give an explanation for their status.

Financial results released are the foundation of an organization‟s budget and performances. The

analysis involves comparing a firm‟s performance with that of other firms in the same industry and

evaluating trends over time. Financial analysis involves the use of simple mathematical techniques, an

understanding and appreciation of business strategy and future prospects through an examination of

financial statements. Financial ratios are a vital analytical tool. Debt management ratios play a key

role in financial management. The extent to which a firm uses debt financing is what is called

financial leverage. Ahmed and Nicholls (1994) argued that in countries where most funds are sourced

through financial institutions, companies are likely to make more information disclosures in their

annual reports in the event that they are servicing huge debts in their books.

The gearing ratio shows how much the borrowed amount from creditors is used to generate profit for

the organization. Gearing ratio =Debtcapital

Equitycapital . On the other hand, total assets turnover

ratio measures the utilization of all the firms operating assets in relation to turnover.

Total asset turnover ratio = salestotal assets . Profitability ratios show the combined effect of

liquidity, assets management and debt on a firm‟s operating results. Without profit a firm would be

unable to attract outside capital. Owners, creditors, and management pay closer attention to boosting

profits because of the great importance placed on earnings in market place.

2.3.3. Forward-looking Information

According to Celik, Ecer and Karabacak (2006) forward- looking information helps to forecast the

future of a company in terms of performance and strength of the management in place. Information on

profit forecasts, sales revenue forecast and earnings per share forecasts is included in this category of

disclosure. If management generates inaccurate predictions over and over again, the credibility of any

future forecasts may be dismissed, which may result in a potential increase in the cost of capital

especially to investors.



Forward-looking information is considered an important topic in a firm‟s disclosure because of its

capability to convey value-relevant information to external users (Amir & Lev, 1996). More attention

has been devoted to forward-looking disclosure by professional and .regulatory bodies. The Jenkins

Committee (AICPA, 1994) suggests that forward-looking information is essential in order to meet the

needs of various users of annual reports. Skinner (1994) argues that management earnings forecasts

may reduce expected legal costs by reducing the likelihood that an imminent mandatory disclosure

will result in a large negative stock price response. Following Baginski, Conrad and Hassell (1993) it

is evident that analysts‟ forecasts can be improved by forward-looking information that is of superior

quality hence attracting more investors which translates to better financial prospects for a company.

2.3.4. Socio-Environmental and Board Disclosure

The Kenyan Centre for Corporate Governance (KCCG) issued a guideline on disclosures and

corporate reporting in 2005. This draft emphasized on corporate social responsibility and board and

ownership structure. These constitute the social and board disclosures. Other items in this category

include information about employees; the number of employees, their productivity and morale levels

and also workplace safety.

Most stakeholders assess a company‟s reputation by its Corporate Social Responsibility (CSR)

practices (Fombrun & Shanley, 1990).A practical approach to CSR helps firms to obtain huge sums of

capital that might ordinarily be difficult to get. According to Investor Digest (2003) firms actively

engage in social responsibility stand a greater chance of attracting the attention of blue chip export

supply firms in the global supply chain.

Disclosures of employees, their productivity and participation, and employee turnover are not

common in annual reports. This is due to the fact that the human resources element in organizations is

quite unpredictable and difficult to control. That could be the reason why Brennan (2001) noted in his

study that some companies provided very little and others no information at all about their employees.

Of greater importance in board disclosures is the information on the composition of the directors, their

academic and professional qualifications, share ownership, the numbers, age, business and managerial

experiences, and any other interests they might have in the company. Needless to say, the efforts of

managers who contribute immensely towards improved performances in the firm is revealed thorough

voluntary disclosures and this serves to reduce agency conflict between them and directors of the

firms. Recognizing manager‟s efforts in management and towards increasing social responsibility

provides a balance and increases efficiency in productivity.

Haniffa and Cooke (2002) asserted that there was indeed a need for foreigners to closely monitor

actions undertaken by management. Also, Singhvi (1968) found that in India, companies dominated

by foreign owners provided higher quality disclosures than local companies. Furthermore, since most

of the companies were multinationals, the existence of foreigners in the board structure greatly

influenced the approach of management in corporate financial reporting.

2.3.5. Measures of Financial Performance

Measures of financial performance can be categorized into traditional measures and modern measures.

Traditional measures include Return on Equity employed, Profit Margin on Sales, Earnings per Share

and Return on Investment whereas, an example of a modern performance measurement is Economic

Value Added.

Profit margin on sales (PMS): Profit margin on sales is a profitability ratio that measures how much

a company actually retains for every shilling of sales. It is computed by dividing net income by sales.

𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 𝑜𝑛 𝑆𝑎𝑙𝑒𝑠 =𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒

𝑆𝑎𝑙𝑒𝑠

This ratio helps to ensure cost control in companies. It is mostly used for inter-departmental

comparison. It is not appropriate for comparing performances of two different companies in the same

industry owing to the fact that these companies incur different types of expenses in their operations

and financing activities and hence their profit margin ratios may differ due to differing expenses. This

ultimately rules out the appropriateness of this ratio for use in this study.




Earnings per Share (EPS): The firm‟s earnings per share is quite important to the present or

prospective shareholders and managers. This ratio measures profitability from the shareholder‟s

viewpoint. Earnings per share represents the amount in shillings earned during the period on behalf of

each outstanding ordinary share. It can be computed as follows:

𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑃𝑒𝑟 𝑆𝑕𝑎𝑟𝑒 =𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑆𝑕𝑎𝑟𝑒𝑕𝑜𝑙𝑑𝑒𝑟𝑠

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠𝑕𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

This ratio enables investors and shareholders to establish how much the company is making and

earning on their behalf. Comparison of a company‟s EPS over the years can also enable investors to

gauge the effectiveness and efficiency of management. However, EPS is easy to manipulate and can

be affected by accounting policies hence is not a suitable measure for this study.

Return on Equity (ROE): This is the ratio of net profit or income after interest and taxes to ordinary

equity. It relates net income to the amount invested by the shareholders.

𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦 =𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒

𝐸𝑞𝑢𝑖𝑡𝑦 𝑒𝑚𝑝𝑙𝑜𝑙𝑒𝑑

Shareholders invest in companies so that they can be able to obtain a return on their money and this

ratio tells how well they are doing. If a company has a high ROE, it implies that the company is

generating more cash internally which makes it more marketable as compared to other companies in

the same industry. Since it considers earnings retained in previous years, it communicates to investors

how their money is being invested and the effectiveness of management. However, this measure only

looks at shareholders equity and gives no consideration to debt. This may mislead investors especially

if the company is servicing huge amounts of debt but has a high ROE.

Economic Value Added (EVA): As the name suggests, it is a measure of economic performance of

companies, both internally and externally. It proposes that the equity capital used to earn profits must

eventually be paid for. The profits accrued must be more than the initial capital invested. Companies

which do not make profits operate at a loss, and since the return does not match the cost of capital

invested, then, no wealth is created (Ivancevich, Konopaske & Matteson, 2002).

EVA applies the principal in the Weighted Average Cost of Capital (WACC) to adjust for no-cash

expenses. WACC should be computed for preference share capital, bonds and other long term debt,

and ordinary share capital.

𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝑉𝑎𝑙𝑢𝑒 𝐴𝑑𝑑𝑒𝑑 = 𝑁𝑂𝑃𝐴𝑇 − (𝑊𝐴𝐶𝐶 × 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑)

𝑊𝐴𝐶𝐶 = 𝐾𝑒𝑔 𝐸

𝐸 + 𝐷 + 𝐾𝑑 1 − 𝑇

𝐷

𝐸 + 𝐷

Where:

NOPAT is the Net Operating Profit after Tax.

𝐾𝑒𝑔 is the cost of equity.

𝐾𝑑 is the cost of debt.

𝐸 is the market value of equity in the firm.

𝐷 is the market value of debt in the firm.

T is the tax rate.

Given that EVA is the best measure of economic performance it operates on premise that operational

and capital costs are covered to give a credible impression to stakeholders. The shortfall exhibited by

EVA is that it does not focus on the future; it deals with the present period. However, even though

EVA is a modern financial performance measure, has immense benefits, and outweighs the other

traditional measures of performance such as ROI and ROE (in that it considers the shareholders value

and cost of equity capital), it is hard to get the requisite data which is indispensable to the calculation

of the measure especially taking into consideration the privacy of such data as interest on debts. It is

also difficult to estimate the WACC at a given time.



Return on investment (ROI): This is the most popular financial performance measure. The ratio

measures the profitability of a firm in relation to its assets employed. It is computed by dividing

earnings by total assets.

𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 =𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒

𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

The ratio measures the overall effectiveness of management in generating profits with the available

assets. It helps the company to realize more income in form of return on investment, and gives

information about a firm‟s effectiveness. It also is aids in decision making and profit maximization.

ROI is widely used because of its simplicity and adaptability. It is not only simple to calculate but it

can also be used by creditors and owners to evaluate a company‟s ability to make an adequate return.

It can be used for comparison and benchmarking purposes for companies in a similar industry. ROI

aids in determining the financial strengths of a company. An additional benefit of ROI is that it

enables one to judge the efficiency and effectiveness of the management team. Thus, ROI is a

versatile tool for determining both profitability and financial performance.

Nevertheless, the flexibility of ROI has a downside as asserted by Ross, Wester field and Jordan,

(2001) in that it can be influenced to satisfy a certain group of users. According to Harvard Professor

Clayton Christensen managers will under-invest in high-return units and over-invest in poorly

performing units if the measures of return affect their bonuses.

Given the above analysis, I settled for the use of ROI as the measure of financial performance of the

firms listed on NSE owing mostly to its simplicity, comparability and that it is a basic tool in

measuring both profitability and performance.

2.4. Critique of Literature Relevant to the Study

Whereas several studies have been undertaken to examine the likely effects of voluntary disclosure on

a number of aspects of a firm, it is important to critically analyze their significance and relevance. For

example, in my opinion, the study conducted by Cerf (1961) is very relevant to this research. Cerf

examined the connection between voluntary disclosure and its profitability level in the United States

Market. This study is relevant because it was conducted on the New York Stock Exchange where

companies are expected to provide disclosures of information in their annual reports and are likewise

given an incentive to voluntarily disclose so as to gain a competitive advantage. My research likewise

intends to focus its population on the Nairobi Securities Exchange for similar reasons. Also, the

methodology used in Cerf‟s study is very practical. Cerf used a descriptive approach, which is suitable

since it can be able to gather, organize, tabulate and describe data more reliably. What‟s more, it

makes use of graphs and tables for easy interpretation. There is thus a high likelihood that the findings

from Cerf‟s study depicting a positive link could hold true.

Leuz and Verrechia (2000) in their study examined 102 annual reports of German firms listed in the

DAX 100 stock index over the course of 1998 to find out the economic consequences of increased

disclosure. According to their study, if a firm sets out to increase disclosures in their annual reports,

information asymmetry is greatly reduced leading to lower cost of capital for the firm. This is because

adverse selection is likely to occur given that there is information asymmetry between buyers and

sellers in a transaction. Hence, I agree that incorporating more disclosures in annual reports reduces

the chances of occurrence of information asymmetry between organizations and their shareholders or

among prospective buyers and sellers. In their study, German firms decided to adopt International

Accounting Standards (IAS) or the U.S GAAP for their annual financial reporting to the capital

markets. This switch was thought to increase firm‟s dedication to disclosing more and enabled the

firms to derive measurable economic benefits in form of lower capital.

I find the switch particularly relevant today for firms not using an international reporting regime

since much discussion on high quality standards that are accepted world-wide is based on the

assumption that higher disclosure standards reduce firms cost of equity. However, I find their

methodology to be unsuitable. They used event study design which is more demanding in its data

requirements, reduces the number of observations and hence limits the tests that can be performed.

Even though it was difficult to document evidence of economic theory compelling commitment of

firms, their finding suggested that firms that commit to either International Accounting Standards

(IAS) or the U.S GAAP exhibit a higher turnover in terms of shares as compared to firms using

German GAAP. This study is therefore important to this research as it outlines the economic benefits

that firms stand to gain by increased disclosure practices.




2.5. Summary

This section has thoroughly discussed the theories that have been developed to expound on the

significance of voluntary disclosure in the relationship between business entities and investors. These

are Agency, Signaling, Legitimacy and Stakeholder theories. It has shown how the various items

considered voluntary disclosures affect financial performance. Likewise it has discussed the different

measures of financial performance and highlighted the best possible measure that could be used to

ascertain whether there is a link between voluntary disclosure and financial performance of firms.

This measure of performance is Return on Investment (ROI). Finally, by critically analyzing relevant

literature pertaining to this study, it is evident that a study on voluntary disclosure practices of firms is

very relevant to the Kenyan companies today.

2.6. Research Gap

While existing studies done in Kenya examine the relationship of voluntary disclosure to corporate

governance (Lopokoiyit, 2012), CSR (Oyenje, 2012) or Stock Returns (Asava, 2013) there is still a

dire need to dig deeper and conduct an in-depth analysis of the relationship between Voluntary

Disclosure and the Financial Performance of firms in Kenya. This is because, the cost of voluntary

disclosure initiatives are complex and may not be quantifiable. This study therefore will focus on

establishing whether there exists a relationship between the voluntary disclosure and the firms‟

financial performance of quoted companies at NSE in order to fill this research gap.

3. RESEARCH METHODOLOGY

The section considers the research design, population of the study, sampling design, data collection

and analysis techniques that were used during the study. The population of interest consisted of all the

companies quoted on the NSE. These companies are closely monitored by investors and their

measures of performance are likely to be related to those considered in firm valuation.

3.1. Research Design

The study made use of a descriptive research design. This approach was suitable because it involves

gathering data, organizing, tabulating, depicting, and describing the data. It can also be used for both

qualitative and quantitative data. Moreover, it makes use of visual aids such as graphs and tables to

assist the readers in understanding and interpreting the data. For purposes of this study, the dependent

variable was the firm‟s financial performance, measured by ROI, while the independent variables

were the four categories of voluntary disclosure namely: General Corporate and strategic information,

financial information, Forward-looking information and Socio-Environmental and Board disclosures.

3.2. Population of the Study

Population is the total of all items under consideration in the study. The population was drawn from

the 61 companies quoted at NSE as at December, 2013. The companies are subdivided into 11 sectors

namely: banking, insurance, agricultural, commercial and services, automobiles and accessories,

investment, manufacturing and allied telecommunication and technology, construction and allied

energy and petroleum, growth and enterprise market segment.

3.3. Sampling and Sample of the Study

The sample consisted of 10 listed companies which were consistently listed and were relatively stable

and best performing as measured by the NSE 20-share index from the year 2011 to the year 2013.

These companies were chosen on the basis of average Market Capitalization as at Quarter 4 of 2013.

Annual reports, which were the major source of data for this study, were readily available in full for

the selected period.

3.4. Data Collection

Secondary data was used in the study. This was because secondary data is easily available, accessible

and saves time. Published annual reports of quoted companies from NSE were obtained from NSE

handbooks, Capital Markets Authority website and also from the company‟s website. This consisted

of annual reports of the companies in the sample from the year 2011 to 2013. The financial statements

for each company were subjected to the voluntary disclosure checklist shown in Appendix A. Each

item disclosed was given a score of „1‟ and those items not disclosed „0‟. The scores for each category

were summed up for each of the years the company has disclosed and recorded to facilitate the

process of data analysis.



3.5. Data Analysis and Presentation

The data collected was analyzed using both descriptive and statistical analysis tools with the help of

Excel 2007. The values in respect of Net Income and Total Assets of the sampled companies for the

period 2011-2013 were used to calculate ROI for each period. These values for ROI together with the

voluntary disclosure scores for each of the companies in the sample were then presented in tables in

their respective years. A regression analysis was conducted on the data obtained from the annual

reports. To determine the relationship between voluntary disclosure and the financial performance of

firms, a coefficient of correlation (𝑅) was computed on the scores of voluntary disclosure against the

firm‟s financial performance using the Pearson Product Moment coefficient of correlation.

The hypotheses developed in Chapter one was also tested for both the individual predictor variables

and for the combined model (using p-value approach) to see whether the regression relation is

significant. A t-test was used for the Univariate analysis. This is because the number of observations

was less than thirty i.e. 𝑛 < 30. The equation for the t-test of the slope at 𝑛 − 2 degrees of freedom

for the significance of β was as follows:

𝑡 =𝑏 − 𝛽

𝑆𝑏 , 𝑤𝑕𝑒𝑟𝑒 𝛽 = 𝑏 ± 𝑡 × 𝑆𝑏

Given that the combined model had four independent variables (General Corporate and Strategic

information 𝑥1, Financial Information𝑥2, Forward-looking information 𝑥3 and Socio-Environmental

and board disclosures 𝑥4 ) the regression equation was given as:

𝑦 = 𝛽0 + 𝛽1𝑥1 + 𝛽2𝑥2 + 𝛽3𝑥3 + 𝛽4𝑥4 + ℯ

Where: 𝑦 = 𝑑𝑒𝑝𝑒𝑛𝑑𝑒𝑛𝑡 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 (𝑅𝑂𝐼)

𝑥1 = 𝑖𝑛𝑑𝑒𝑝𝑒𝑛𝑑𝑒𝑛𝑡 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐺𝑒𝑛𝑒𝑟𝑎𝑙 𝐶𝑜𝑟𝑝𝑜𝑟𝑎𝑡𝑒 𝑎𝑛𝑑 𝑆𝑡𝑟𝑎𝑡𝑒𝑔𝑖𝑐 𝑖𝑛𝑓𝑜𝑟𝑚𝑎𝑡𝑜𝑛

𝑥2 = 𝑖𝑛𝑑𝑒𝑝𝑒𝑛𝑑𝑒𝑛𝑡 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝐼𝑛𝑓𝑜𝑟𝑚𝑎𝑡𝑖𝑜𝑛

𝑥3 = 𝑖𝑛𝑑𝑒𝑝𝑒𝑛𝑑𝑒𝑛𝑡 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐹𝑜𝑟𝑤𝑎𝑟𝑑 − 𝑙𝑜𝑜𝑘𝑖𝑛𝑔 𝑖𝑛𝑓𝑜𝑟𝑚𝑎𝑡𝑜𝑛

𝑥4 = 𝑖𝑛𝑑𝑒𝑝𝑒𝑛𝑑𝑒𝑛𝑡 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑆𝑜𝑐𝑖𝑜 − 𝐸𝑛𝑣𝑖𝑟𝑜𝑛𝑚𝑒𝑛𝑡𝑎𝑙 𝑎𝑛𝑑 𝑏𝑜𝑎𝑟𝑑 𝑑𝑖𝑠𝑐𝑙𝑜𝑠𝑢𝑟𝑒𝑠

𝑒 = 𝑒𝑟𝑟𝑜𝑟 𝑡𝑒𝑟𝑚

A significance test for 𝛽0 was conducted at a 5% level of significance (95% confidence interval). The

test for significance of regression is a test to determine whether a linear relationship exists between

the response variable y and a subset of the regression variables𝑥1, 𝑥2 ,……,𝑥𝑛 . Given that; 𝐻0 = 𝛽1 =𝛽2 = ⋯𝛽𝑘 = 0, the null hypothesis was subjected to a test statistic i.e.

𝐹 =𝑆𝑆𝑅

𝑘

𝑆𝑆𝐸𝑛 − 𝑝

=𝑀𝑆𝑅

𝑀𝑆𝐸

Where; 𝑘 = 𝑝 − 1

The critical value 𝐹𝛽 ; 𝑘, 𝑛 − 𝑝 is the tabular value of F distribution, based on the chosen 𝛽0 level and

the degrees of freedom 𝑝 − 1 (𝑜𝑟 𝑘) and 𝑛 − 𝑝. Thus in the above equation, if the test statistic

𝐹 > 𝐹𝛽 , 𝑘, 𝑛 − 𝑝 then 𝐻0 will be rejected meaning there is a significant relationship between the

dependent and independent variables. The findings were then organized, summarized and presented

in tables after which inferences and conclusions were made based on the data analyzed.

4. RESEARCH FINDINGS AND DISCUSSION

This section presents the research findings, analysis and discussion on the relationship between

voluntary disclosure and financial performance of companies quoted on Nairobi Security Exchange.

The data in this study was derived from the analysis of annual reports of 10 companies at the NSE 20

index chosen on the basis of market capitalization for Q4 of 2013.

4.1. Descriptive Statistics

Analysis of the reports from the year 2011 to 2013 revealed that the Return on Investment had a mean

of 0.1527 and a standard deviation of 0.1227 indicating that the values of ROI obtained from the data

over the three years were closer to the mean. These findings are summarized in Table 2.




Table2. Descriptive Statistics

Variable N Mean Std. Deviation

ROI 30 0.1527 0.1293

General Corporate and Strategic Information 30 8.8000 1.0770

Financial Information 30 4.7667 0.9551

Forward-looking Information 30 5.7000 1.0693

Socio-Environmental and Board Disclosures 30 11.2000 1.1944

Fig2. Histogram showing distribution of ROI

4.2. Univariate Analysis

This analysis sought out to examine whether there exists a relationship between each of the individual

predictor variables of voluntary disclosure with Return on Investment.

4.2.1. General Corporate and Strategic Information and Financial Performance-ROI

The analysis sought to establish the effect of General Corporate and Strategic information on ROI for

the three years. The scatter graph in Figure 2 depicts a negative linear relationship of the form

𝑌 = 0.3841 − 0.0263𝑋1 with a coefficient of determination R² of 0.048 and a coefficient of variation

R of 0.2191 indicating that there is a relationship between voluntary disclosure of General Corporate

and Strategic Information and ROI. The test of the slope at 5% level of significance showed that the

value obtained from the t-test 1.190<2.048 hence the null hypothesis 𝐻0: 𝛽1 = 0 was rejected .These

findings are summarized in Table 3 and Figure 3.

Table3. General Corporate and Strategic Information and ROI

Equation Parameter Estimates Model Summary

Constant B1 R² R 𝑆𝑒𝑦 Df

Linear 0.3841 -0.0263 0.0480 0.2191 0.1305 28

Fig3. General Corporate and Strategic Information and ROI

02468

1012

0.0

50

0

0.1

00

0

0.1

50

0

0.2

00

0

0.2

50

0

0.3

00

0

0.3

50

0

0.4

00

0

0.4

50

0

Fre

qu

ency

Dependent Variable - ROI

ROI values of companies

from 2011-2013



4.2.2. Financial Information and Financial Performance-ROI

A regression analysis on voluntary disclosure of Financial Information and ROI established that there

was a negative relationship between the two variables. In particular, the data set produces a coefficient

of Determination R² of 0.3173 and correlation coefficient R of 0.5633. This is because the t-statistic is

greater that the t-value from the tables implying that slope at 5% level of significance, 3.611>2.048

hence resulting in the rejection of the null hypothesis𝐻0: 𝛽2 = 0. Table 4 and figure 4 below present a

summary of these statistics and the scatter graph showing the relationship between these two

variables.

Table4. Financial Information and ROI



Linear 0.5160 -0.0762 0.3173 0.5633 0.1 28

Fig4. Financial Information and ROI

4.2.3. Forward-Looking Information and Financial Performance-ROI

A regression analysis of the relationship between voluntary disclosure of forward looking information

and ROI resulted in a Pearson Product Moment correlation coefficient of 0.0984(close to 0.00)

signifying a weak positive relationship between the two variables. This relationship is illustrated in

the scatter graph on Figure 5. A test of the slope at 5% level of significance revealed a t-value of

0.524<2.048 hence indicating that the null hypothesis 𝐻0: 𝛽3 = 0 can be rejected, thereby confirming

that there is a link between the two variables.

Table5. Below presents a summary of these statistics.



Linear 0.0847 0.0119 0.0097 0.0984 0.1331 28

Fig5. Forward-looking Information and ROI




4.2.4. Socio-Environmental and Board Disclosure and Forward-Look Financial Performance-ROI

On regressing the Socio-Environmental and Board disclosures scores with the ROI obtained from the

companies, it was established that there exists a weak negative relationship between the two variables

as evidenced by a Pearson Product Moment Correlation Coefficient, R, of 0.1349. The test for the

slope at 5% significance level showed a t-value 0.719<2.048 indicating that the null hypothesis was

rejected because Table 4.5 and figure 4.4 below illustrate these observations.

Table6. Socio-Environmental and Board disclosures and ROI



Linear 0.3163 -0.0146 0.0182 0.1349 0.1326 28

Fig6. Socio-Environmental and Board Disclosures and ROI

4.3. Multiple Regression Analysis

This analysis involved a regression analysis on ROI against all the four variables, namely:

X1= General Corporate and Strategic Information

X2= Financial Information

X3= Forward-looking Information

X4= Socio-Environmental and Board Disclosures

The multiple linear regression model was of the form:

𝑦 = 0.4660 + 0.0365𝑥1 − 0.1008𝑥2 + 0.0129𝑥3 − 0.0203𝑥4

A summary of the regression output is shown in Table 4.6 below.

Table7. Summary of Multiple Regression Output

Variables Coefficients Standard Error

Intercept 𝛽0 0.4660 0.2484

General Corporate and Strategic Information 𝛽1 0.0365 0.0253

Financial Information 𝛽2 -0.1008 0.0277

Forward-looking Information 𝛽3 0.0129 0.0191

Socio-Environmental and Board Disclosures 𝛽4 -0.0203 0.0177

ROI 𝑦 N/A 0.1107

Findings from the regression analysis depicted a coefficient of determination, 𝑅2 of 0.3888 and a

Pearson Product moment Correlation Coefficient, R, of 0.6235 implying that the model is a significant

good fit since there is a strong relationship between ROI and the four predictor variables of voluntary

disclosure i.e. General Corporate and Strategic Information, Financial Information, Forward-looking

Information and Socio-Environmental and Board Disclosures. Table 8 summarizes these statistics.



Table8. Multiple Regression Statistics

Model Multiple R R Squared Adjusted R

Squared

Standard

Error

Degrees of

Freedom

Observations

Multiple Linear 0.6235 0.3888 -3.4312 0.1107 25 30

Using the ANOVA table shown below, a significance test for the slope 𝛽0 conducted at a 5% level of

significance revealed an f-statistic of 3.9758. This value was greater than the F-critical value obtained

from the F distribution table hence leading to the rejection of the null hypothesis meaning there is a

significant relationship between ROI and the four predictor variables of the study.

Table9. ANOVA table

Cause of Variation Df SS MS F Significance F

Regression 25 0.1948 0.0078 3.9758 2.76

Residual 4 0.3063 0.0767

Total 29 0.5011 0.0845

4.4. Discussion

This research sought to explore the relationship between voluntary disclosure and financial

performance of companies quoted at the NSE. In particular, an analysis on the effect of the individual

predictor variables on ROI indicated mixed results. The Univariate regression analysis revealed that

General Corporate and Strategic Information and Socio-Environmental and Board disclosures

depicted a weak negative linear relationship with ROI evidenced by Pearson‟s Product Moment

coefficient of correlation of 0.2191 and 0.1349 respectively. On the other hand, Financial Information

portrayed a negative linear relationship with ROI with a correlation coefficient of 0.5633 whereas

Forward-looking information depicted a weak positive linear relation with correlation coefficient of

0.0984.

Further, a multivariate regression analysis on the combined model indicated that the four predictor

variables put together established a strong linear relationship with financial performance measure,

ROI, as shown by a Pearson Product Moment correlation coefficient of 0.6235. The test on the slope

of the multiple linear regression models additionally confirmed the significance of this relationship.

By adopting a descriptive study approach, Cerf (1961) who investigated the relationship between

voluntary disclosure of information and its level of profitability noted that there exists a positive link

between the two variables. Verrecchia and Weber (2006) also found a positive connection between

profitability and voluntary disclosure. On the other hand, Asava (2013), who used the same approach

coupled with content analysis, examined the effect of voluntary disclosure on stock returns of

companies listed at the NSE from 2008-2012. Her findings revealed that there was no relationship

between voluntary disclosure and stock returns for both the individual predictor variables and the

combined model.

This study analyzed 10 companies at the NSE 20 share index and findings were consistent with

studies from past researchers like Ahmed and Courtis (1999). In their meta-analysis study of the

relationship between profitability and voluntary disclosures, they found out that the results using

financial performance measures are rather mixed and conflicting making it difficult to come up with

satisfactory conclusions. Findings from this study proved that the relationship between the individual

predictor variables with ROI produced mixed results.

This study is also consistent with a research done by Kristandl and Bontis (2007) whereby different

voluntary disclosure items produced different results such that there was a negative relationship

between cost of equity capital and the level of forward-looking information and a positive relationship

between cost of equity capital and the level of historical information.

5. SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

This section provides a summary of the findings obtained in Chapter four above on the relationship

between voluntary disclosure and financial performance of companies quoted at the Nairobi Securities

Exchange. The section also presents conclusions, limitations and recommendations of the study.




5.1. Summary of Findings

This study sought out to examine empirically the relationship between voluntary disclosure and

financial performance of companies quoted at the Nairobi Securities Exchange from the year 2011 to

2013. The analysis involved identifying the items voluntarily disclosed by 10 companies chosen from

the NSE 20 share index based on market capitalization as at Quarter 4 of 2013. A disclosure index

containing four categories of voluntary disclosures was used to determine the voluntary disclosure

scores for each company. The four categories are; General Corporate and Strategic Information,

Financial Information, Forward-looking Information and Socio-Environmental and Board

Disclosures. These four categories formed the four predictor variables of the study, with the

independent variable being the financial performance measure, ROI.

Using Excel 2007, a regression analysis on the multivariate model of these four predictor variables

and ROI resulted in a multiple linear regression model of the form:

𝑦 = 0.4660 + 0.0365𝑥1 − 0.1008𝑥2 + 0.0129𝑥3 + 0.0203𝑥4

Where; 𝑥1 = General Corporate and Strategic Information, 𝑥2 = Financial Information, 𝑥3 = Forward-

looking Information and 𝑥4 = Socio-Environmental and Board Disclosures.

The analysis obtained a Coefficient of Determination 𝑅2 of 0.3888 and a Pearson Product Moment

Coefficient of correlation 𝑅 of 0.6235, implying that there is a strong positive relationship between

voluntary disclosure and financial performance measure ROI. As such, only 38.9% of the data points

will appear on the linear plot. Further, an F-test conducted on the slope of the data set at 5% level of

significance resulted in the rejection of the null hypothesis; 𝐻0 = 𝛽1 = 𝛽2 = 𝛽3 = 𝛽4 = 0 , such that

there is a significant relationship between voluntary disclosure and Return on Investment.

Additionally, a test of the relationship between the individual predictor variables and ROI showed

mixed results with General corporate and strategic information and Socio-Environmental and Board

disclosure depicting a weak linear relationship with ROI, Financial information portraying a negative

linear relationship with ROI and forward looking information depicting a weak positive linear

relationship with Return on investment.

5.2. Conclusions

The findings of this study revealed that there is a significant positive relationship between voluntary

disclosure and financial performance measure, Return on investment for the companies quoted at the

NSE, when combined with Pearson Product Moment Correlation Coefficient of 0.6235. As such,

38.9% of the variations in financial performance measure ROI can be explained by variations in

voluntary disclosure whereas 61.1% of the variations in financial performance measure (Return on

investment) are explained by other factors outside of the multiple regression models developed.

Analysis of General corporate and strategic information and Return on Investment indicated that there

is a relationship between the two hence rejecting the hypothesis. The scatter graph in figure 4.1 below

depicted a negative linear relationship of the form 𝑌 = 0.3841 − 0.0263𝑋1 with a coefficient of

determination R² of 0.048 and a coefficient of variation R of 0.2191 indicating that there is a

relationship between voluntary disclosure of General Corporate and Strategic Information and ROI,

rejecting the hypothesis

A regression analysis on voluntary disclosure of Financial Information and ROI established that there

was a negative relationship between the two variables. In particular, the data set produces a coefficient

of Determination R² of 0.3173 and correlation coefficient R of 0.5633 This is because the t-statistic is

greater that the t-value from the tables implying that slope at 5% level of significance, 3.611>2.048

hence resulting in the rejection of the null hypothesis 𝐻0: 𝛽2 = 0

A regression analysis of the relationship between voluntary disclosure of forward looking information

and ROI resulted in a Pearson Product Moment correlation coefficient of 0.0984(close to 0.00)

signifying a weak positive relationship between the two variables. This relationship is illustrated in

the scatter graph on figure 4.3 shown below. A test of the slope at 5% level of significance revealed a

t-value of 0.524<2.048 hence indicating that the null hypothesis H0: β3

= 0 can be rejected,

On the Socio-Environmental and Board disclosures scores with the ROI obtained from the companies,

it was established that there exists a weak negative relationship between the two variables as



evidenced by a Pearson Product Moment Correlation Coefficient, R, of 0.1349. The test for the slope

at 5% significance level showed a t-value 0.719<2.048 indicating that the null hypothesis was rejected

5.3. Recommendations

This research report recommends that since there is significant relationship between voluntary

disclosure and financial performance, managers in organizations should disclose information

voluntarily not only for the purposes of obtaining cheaper capital but also because voluntary

disclosure of information increases transparency and accountability in annual reporting.

The prospective shareholders get to learn more from the additional disclosure and this motivates them

to invest in the companies listed on the NSE because they have more information relating to the

companies.

There is a direct relationship between corporate governance and share prices of companies listed at

the NSE, and that corporate governance practices improved ratios like EPS and ROA this has a big

impact on the company‟s return on investments in terms of more dividends to shareholders.

Given that voluntary disclosure comes with a cost, firms would do well to voluntarily disclose so as to

„signal‟ to potential investors and enjoy a positive reputation, thus maximizing firm value.

5.4. Limitations of the Study

Due to time constraints, the study sampled only 10 companies from the NSE 20 share index,

representing 16% of the population of the study. This raises further uncertainty about the extent to

which the results are generalizable owing to the fact that the sample may be small in an emerging

market that is relatively volatile. If more companies were examined, the results could have been more

representative. Also, due to time constraints, the study could only analyze reports for these companies

for three years only. If the period was relatively longer, more conclusive results would have been

realized.

Moreover, since measurement of voluntary disclosures is a subjective exercise, different researchers

will definitely have different ratings of voluntary disclosure items. The voluntary disclosure index in

this study consisted of 49 items grouped into four categories. The results would probably change if

more or less items were included. Additionally, since there is no universal index that measures

voluntary disclosure, researchers with different indices may obtain the same or different results given

the same population of study.

5.5. Suggestions for Further Research

Given that researchers are increasingly exploring the concept of voluntary disclosure, this study

recommends that an extension of this study be done in other jurisdictions in developing economies to

see whether the findings support those in this study.

Also, if research was centered on specific industries like Banking, Telecommunications and

Manufacturing, there could possibly be more focused results since different industries respond

differently to information disclosures.

Moreover, if the relationship between voluntary disclosure and financial information was investigated

as soon as the annual reports were released, probably the outcomes could have been more effective in

predicting the relationship.

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mandatory disclosures in corporate annual reports of firms listed on the stock exchange of Hong

Kong. A journal of accounting and public policy, 14, 311 – 368.

Worthington, A., and Tracey, W. (2004). A Review and Synthesis of the Economic Value-Added

Literature. School of Economics and Finance.

Wruck, K. (1990). Financial Distress: Reorganization and Organization Efficiency. Journal of

Financial Economics, 27, 425.

APPENDICES

Appendix A: Voluntary Disclosure Checklist

General Corporate and strategic information Disclosed (‘1’), Not Disclosed (‘0’)

1

2

3

4

5

6

Historical background of the company

Corporate, business and marketing strategies

Mission and vision statements

Description of major goods and services

Market analysis i.e. market share, market growth

Corporate goals and objectives

7 Corporate governance

8 Organization structure

9 Identification of major competitors

10 Regional economic and political stability

11 Effect of business strategies on current performance

12 Industry competitive analysis

Socio-Environmental and Board disclosures

13 Corporate social responsibility statement

14 Environmental policy

15 Environmental activities undertaken

16 Involvement in community projects

17 Categories of employees by age, gender and qualifications

18 Reasons for changes in employee numbers

19 Disclosure of welfare policy of workers

20 Work place safety policies

21 Redundancy policies

22 Information about employee turnover, absenteeism and strikes

23 Names of directors

24 Ages of directors

25 Professional qualifications of directors

26 Directors shareholding

27 Board of Directors meetings held and their attendance

28 Senior management responsibilities

Financial Information

29 Summary of financial statements for the last three years or over

30 Brief description and analysis of financial position

31 Share price information i.e. market price, par value

32 Earnings per share

33 Return on equity

34 Debt to equity ratio

35 Value added statements

36 Supplementary inflation adjusted financial statements

37 Liquidity ratios

38 Return on assets

Forward-Looking Information

39 Investments forecasts

40 Effect of business strategies on future performance of the co.

41 Information about new product and service development

42 Research and development expenditure

43 Advertising and publicity expenditures

44 Planning and capital expenditures



45 Sales forecasts

46 Cash flow forecast

47 Profit forecast

48 Information on dividend policy

49 Risk management policy for future investments

TOTAL

Source: Researcher (2014)

Appendix B: Top 10 Companies by Market Capitalization in Kshs Billion for Q4/2013

Listed Companies Oct/2013 Nov/2013 Dec/2013 Q4/2013 Average

SAFCOM 378.34 432.39 434.48 415.07

EABL 252.26 257.00 229.32 246.19

KCB 144.73 143.24 141.00 142.99

EQUITY 131.45 131.45 113.86 125.59

BARCLAYS 101.30 95.05 95.60 97.32

STAN-CHART 93.68 97.69 93.98 95.12

BAMBURI 77.67 76.22 76.22 76.71

CO-OP 74.81 77.11 74.39 75.44

NMG 60.14 60.33 59.20 59.89

BAT(K) 57.40 57.90 60.00 58.43

Top 10 Co.s Mkt Cap. 1,371.78 1,428.38 1,378.05

End-month total Mkt. Cap 1,873.66 1,975.00 1,920.72

Mkt Concentration 73.22% 72.32% 71.75%

Source: NSE

Appendix C: Financial Performance, ROI (𝑦) and Voluntary Disclosure Item (𝑥𝑛 )

COMPANY YEAR 𝒚 𝒙𝟏 𝒙𝟐 𝒙𝟑 𝒙𝟒

SAFARICOM 2011 0.1650 8 3 5 11

2012 0.1498 8 3 6 12

2013 0.1901 8 4 7 12

EABL 2011 0.2653 7 4 7 12

2012 0.3372 10 5 7 11

2013 0.2114 9 4 7 13

KCB 2011 0.0332 9 6 5 11

2012 0.0408 7 4 7 9

2013 0.0359 10 6 7 10

EQUITY 2011 0.0512 10 6 5 9

2012 0.0507 10 6 5 13

2013 0.0478 9 5 7 12

BARCLAYS 2011 0.0313 8 5 5 11

2012 0.0610 8 5 6 10

2013 0.0371 10 5 5 13

STAN-CHART 2011 0.0176 7 4 4 11

2012 0.0528 8 5 4 11

2013 0.0430 9 5 7 14

BAMBURI 2011 0.1736 10 5 4 12

2012 0.2489 10 5 5 12

2013 0.1065 11 5 5 12

CO-OP 2011 0.0319 10 6 7 10

2012 0.0384 10 6 5 11

2013 0.0394 9 4 5 10

NMG 2011 0.3114 8 4 5 10

2012 0.3505 8 4 4 10

2013 0.3153 8 4 5 10

BAT (K) 2011 0.3683 9 4 6 10

2012 0.4095 8 4 7 11

2013 0.3649 8 4 6 11

TOTAL 4.5798 264 143 171 336

Source: Researcher (2014)




APPENDIX D: Companies Listed at the NSE as at December 2013

AGRICULTURAL COMMERCIAL & SERVICES Liberty Kenya Holdings Ltd

Eaagads Ltd Express Kenya Ltd Pan African Insurance Holding Ltd

Kakuzi Ltd Hutchings Biemer Ltd Jubilee Holdings Ltd

Kapchorua Tea Co. Ltd Kenya Airways Ltd Kenya Re Insurance Corporation Ltd

The Limuru Tea Co. Ltd Longhorn Kenya Ltd INVESTMENT

Rea Vipingo Plantations Ltd Nation Media Group Ltd Centum Investment Co Ltd

Sasini Ltd Scangroup Ltd Olympia Capital Holdings Ltd

Williamson Tea Kenya Ltd Standard Group Ltd Trans-Century Ltd

AUTOMOBILE &

ACCESSORIES

TPS Eastern Africa Ltd MANUFACTURING & ALLIED

Car &General (K) Ltd Uchumi Supermarket Ltd A. Baumann & Co. Ltd

CMC Holdings Ltd CONSTRUCTION & ALLIED B.O.C Kenya Ltd

Marshalls(E.A.) Ltd ARM Cement Ltd British American Tobacco Kenya Ltd

Sameer Africa Ltd Bamburi Cement Ltd Carbacid Investment Ltd

BANKING Crown Paints Kenya Ltd East African Breweries Ltd

Barclays Bank of Kenya Ltd E.A. Cables Ltd Eveready East Africa Ltd

CFC Stanbic of Kenya

Holdings Ltd

E.A. Portland Cement Co. Ltd Kenya Orchards Ltd

Diamond Trust Bank Kenya

Ltd

ENERGY & PETROLEUM Mumias Sugar Co Ltd

Equity Bank Ltd KenGen Co. Ltd Unga Group Ltd

Housing Finance Co .Kenya KenolKobil Ltd TELECOMMUNICATION &

TECHNOLOGY

I &M Holdings Ltd KPCL Safaricom Ltd

Kenya Commercial Bank Ltd Umeme Ltd GROWTH ENTERPRISE MARKET

SEGMENT (GEMS)

National Bank of Kenya Ltd Total Kenya Ltd Home Afrika Ltd

NIC Bank Ltd INSURANCE

Standard Chartered Bank

Kenya Ltd

British American Investment

Co. Ltd

The Co-operative Bank of

Kenya Ltd

CIC Insurance Group Ltd

Source: NSE


Jane Mmbone Mutiva is doing masters of business Administration degree

program at Technical University of Mombasa. She is also a part time lecturer at

the same institution. She has equally worked as an Auditor before.

Dr Anwar Hood is thesis supervisor. He is a lecturer and currently the COD in

the management Science Department in the faculty of Business and Social Studies

at the University. His guidance and support throughout the thesis writing period

has been commendable.

Dr. Jane Wambui Muiruri-Ndirangu holds a Doctor of Business Administration

in HealthCare Management and Leadership. She is currently a Lecturer of

Technical University of Mombasa.




www.arcjournals.org

©ARC Page 196

Social Reporting in European Ethical Banks: A Comparative

Study

Luisa Pulejo, Carmelo Marisca, Nicola Rappazzo *

Department of Economics, Business,

Environmental Sciences and Quantitative Methods University of Messina, Messina, Italy

[email protected], [email protected], [email protected]

Abstract: In the last decade, interest on ethical banks has grown rapidly and considerably in the academic

and corporate communities. For this kind of entities, social accountability and reporting tools represent a

strategic factor to establish a relationship of trust with customers, to project a desirable reputation and to

promote sustainable development. Although the growing attention to this topic, there is a paucity of evidence,

particularly in Europe, of social reporting practices of ethical banks. Therefore, this paper sets out to

investigate sustainability disclosure practices of European banks adhering to the principles of ethical finance.

To this end, through a content analysis, this paper examines, over a 15-year period, from 2000 to 2014, the

annual reports of 13 institutions.

Keywords: ethical banks, corporate social responsibility, social reporting, comparative analysis.

1. INTRODUCTION

The financial crisis which has been affecting the international markets for several years now, in

addition to often negligent and irresponsible behavior by the main banks, has heightened a sense of

mistrust towards the whole financial system on the one hand, while on the other it has increased

interest in so called “ethical banks” from both investors and savers in general (Ijeoma, 2014;

Rodríguez Gutiérrez, 2013; Borgia, 2013).

These banks pursue the primary aim of promoting sustainable development and social inclusion,

principally by financing not for profit businesses or micro-enterprises and by investing resources in

enterprises engaged, for example, in organic farming, renewable energy or fairtrade. Moreover, these

banks attempt to respond to the requirements of investors and savers who pay particular attention to

social and environmental issues and demonstrate a high degree of awareness about the way in which

their savings are invested (Edery, 2006; Lynch, 2001). These brings about the need to implement a

transparent and participatory system of governance and to prioritize investment choices which can

guarantee positive performance from a social, cultural and environmental viewpoint, as well as an

economic one (Barresi and Marisca, 2011). The pursuit of the above mentioned aims, accompanied by

the desire to establish a relationship of trust with customers, has contributed to the growing use of

social accountability tools in the information practices of ethical banks. These documents have been

recognized by doctrine, for several years now, as tools capable of accounting for the undertakings

made and overall impacts of the activities carried out with reference to the community (Viganò and

Nicolai, 2009; Coupland, 2006).

Therefore, the aim of this paper is to attempt to find evidence on social information reported by

European banks adhering to the principles of ethical finance, and to examine how this banks treat

social reporting. For this reason it was considered appropriate to analyze the content of social reports,

annual reports and other social accountability documents implemented by a sample of 13 banks, over

a 15-year period, from 2000 to 2014.

2. THEORETICAL FRAMEWORK

As has already been mentioned, this paper concerns sustainability disclosure with reference to specific

banks which have characteristic elements distinguishing them from “traditional” banks. This is a

*This paper is the result of a joint effort of all the authors. However, Luisa Pulejo contributed with paragraph 1,

Carmelo Marisca with paragraphs 3, 5 and 7, while Nicola Rappazzo wrote paragraphs 2, 4 and 6.

Luisa Pulejo et al.


reference to so called “ethical banks”, in other words banks which “have the objective of achieving a

positive impact in the collection and in the use of money. They invest in new activities such as organic

farming, renewable energies, the Third sector (or not-for-profit sector), Fair Trade. They respond

more and more to the needs of those who are excluded from the banking system, and to the needs of

savers and investors who are increasingly interested in the way their savings are used” (FEBEA,

2010).

In this paper, however, the “idea” of ethical bank adopted is that proposed by Cowton and Thompson

(1999), who identified a set of aspects characterizing the activity carried out by this banks.

Specifically, these aspects are: a) the social value generated by the financing of activities with a strong

socio-environmental impact on the collectivity; b) the higher degree of stakeholder involvement and

active participation in the decision making process; c) the different types of security (not only in the

form of assets) required for granting loans.

Moreover, Cowton and Thompson focus their attention on the fact that these banks provide an

“unusually” information transparency to its members and customers, with particular regard for the

way in which the resources loaned by the bank are used. Doctrine has adopted a uniform approach to

the complementariness and interdependence of the economic and social functions of such banks

(Kendric, 2004; Ballesteros, 2003; Cowton and Thompson 2001; Green, 1989). In particular, some

authors distinguish between social and economic profitability, considering the first as the exclusive

funding of economic activities with an high social added value, and the second as good bank

management practices (San-Jose et al., 2010).

It is also necessary not to fall into the trap of equating or even confusing an ethical bank with a

“traditional bank” which demonstrates awareness of CSR activities. Indeed, there is no doubt that the

implementation of socially responsible policies and consolidation of social reporting practice by a

traditional commercial bank contributes to enlarging and highlighting its image of ethical correctness

(Carnevale et al., 2011; Scholtens, 2009). However, this does not mean that these aspects are not

sufficient to demonstrate the effective sharing of socially responsible values that may bring about a

change in management philosophy (Khan, 2009; Vermiglio, 2005; Pulejo, 1996). Indeed, it has been

underlined that socially responsible behavior by traditional banks, in most cases, is a mere marketing

tool aimed only at improving economic-financial performance (Reinig and Tilt, 2009; Ogrizek, 2002)

rather than a “raison d’être”, the result of sharing values inspired by ethical finance principles.

Further elements of differentiation between traditional commercial banks and ethical banks can be

identified as the strong preference the latter demonstrate for companies giving priority to ethical

investments, or investments based on projects leading to social and/or environmental improvements,

regardless of the fact that this preference may lead to lower profits (Kendric, 2004).

3. HYPOTHESES DEVELOPMENT

The attention paid to information transparency in recent years has forced banks in Europe to resort to

various tools. There has been widespread use of social accountability tools in order to account for the

economic, social and environmental elements of the activities carried out and of the results achieved.

For ethical banks, social and sustainability reports, prepared on the basis of general accepted

standards and guidelines, must be considered “compulsory and necessary” documents for the purpose

of externally reporting overall levels of performance and for demonstrating coherence between

corporate action and the aims pursued (Rappazzo, 2013). As mentioned previously, the latter do not

only concern the financial sphere, but also include the promotion of sustainable development and

support for activities orientated towards respect for ethical principles and those of social equality.

Hence, it is hypothesized that:

H1: Ethical banks prepare and disseminate complete and exhaustive social and sustainability reports,

according to general accepted standards and guidelines.

Moreover, active participation and awareness of stakeholders in decision making processes and above

all the activation of a circuit of communication with the collectivity are some of the conditions that

banks must respect in order to be defined as “ethical banks”. Therefore, it is also hypothesized that:

H2: Ethical banks establish a dialogue and promote an active participation of stakeholders in social

accountability processes.

Social Reporting in European Ethical Banks: a comparative study


4. RESEARCH DESIGN

With the aim of better understanding the importance attributed to sustainability disclosure, it was

considered appropriate to conduct a content analysis on annual reports of a sample of European

ethical banks. Content analysis is a widely used qualitative research technique that enables a more

objective evaluation than comparing content based on the personal impressions of the researcher

(Morgan, 1993; Rosengren, 1981). It is also an unobtrusive and nonreactive way to study a

phenomenon (Babbie, 1992).

In order to choose the research sample, the methodology of “sampling by objectives” was used. This

sampling methodology allows the researchers to use his/her own judgement as regards the choice of

sample to be studied and to use only a sample that corresponds to the predetermined aims. In

particular, the sample is composed by all the ethical banks belonging to the “Fédération Européenne

de Finance et Banques Ethiques et Alternatives” (FEBEA). Created in 2001, FEBEA is the most

relevant European association incorporated by ethical banks, saving and loan cooperatives, investment

companies and foundations adhering to the principles of ethical finance, which account, all together,

for a balance sheet of 21 billion Euros and have some 528.000 customers and shareholders.

The attention was focused on ethical banks, members of FEBEA, which have made available their

annual reports (from 2000 to 2014) to the public on their websites. Corporate website are generally

used by banks as the preferred “place” for providing information on the various types of project and

financial investments. This makes it possible to publicize the ways in which the financial resources

provided by members and investors are used and the guiding values applied in corporate choices and

in the actions undertaken.

The corporate website of FEBEA members were checked over a period running from September 2014

to March 2015. A total of 95 annual reports were found. Thus, the sample is composed by 95 annual

reports of 13 ethical banks (see Table 1).

Table1. Sample size and composition

5. RESULTS

The first consideration to make from analyzing the documentation concerns the «heterogeneous»

nature of reports collected, both in terms of quantity and quality. This refers to the titles, the layout,

the nature of the data included, the range of information provided and the aims pursued by the banks.

As concerns the titles of the documents collected, for example, as has been highlighted by doctrine,

social accountability tools have a variety of names: Social Report, Annual Report, Annual Review

and Rapport d’activité (see table 1). With reference to the aims pursued, on the other hand, in some

cases there is a clear desire demonstrated by the banks to undertake a process of socio-environmental

reporting with the principal aim of achieving a high degree of information transparency, also for the

purposes of stakeholder involvement. In other cases, the attention paid to information transparency is

less clearly distinguishable, with a tendency to simply give information on the loans granted to

enterprises that show particularly awareness of socio-environmental issues. A further aspect worth

mentioning concerns the «periodicity» and «recurrence» with which reports are prepared and

published online. For quite all the banks, social reporting is not an occasional occurrence but a well

established annual practice over a number of years. For the purposes of this study, this made it

possible to make a comparison of the reports produced by each bank over time.

Social Reporting in European Ethical Banks: A Comparative Study


Given the above considerations, the analysis was conducted, firstly, categorizing “specific

information contents” to be considered relevant with respects to the purpose of the paper. These

information elements were identified by taking into consideration the characteristics individuated by

Cowton and Thompson (1999) and the indications provided by certain internationally recognized

standard setters on the minimum required content of social and sustainability reports. In particular, the

reference is to the Standards and/or Guidelines compliance of reports, to specific information

concerning the bank “corporate identity”, the “wealth created and distributed”, the relationships with

the various categories of stakeholders, the analysis of financial data, and the description of the

activities carried out and the projects/investments financed.

It was thus possible to make a spatial comparison of reports and measure the attention given by the

banks to social accountability, according to the hypotheses formulated, verifying if the reports

comprehend the specific information contents individuated. Results are summarized in Table 2.

Table2. Results

5.1. Standards And/or Guidelines Compliance

The first consideration to make concerns the adoption of general accepted standards or guidelines for

the preparation of reports. From the analysis undertaken, it appears that only few of the ethical banks

observed are Standards and/or Guidelines compliant. In particular the Banca Popolare Etica and the

Banca Simetica used the GBS Standards (GBS, 2007), which contains a set of principles for drafting

Social Report. Banca Carim, on the other hand, as is indicated by the drafters themselves, followed

the GRI (Global Reporting Initiative) guidelines only for the part of 2010-2014 social reports

concerning the reclassification of the profit and loss statement. The remaining reports make no

explicit reference to any standards and the information content varies in presentation, quality and

quantity.

5.2. Corporate Identity and Wealth Created and Distributed

The information on “corporate identity” and on “wealth created and distributed” are included only in

the reports produced by Italian banks. As concerns corporate identity, in particular, the information

given by Banca popolare Etica, Banca Carim and Banca Simetica is practically the same. It regards

the birth and historical development of the banks, their corporate mission, the values which

distinguish them from “traditional” banks, their institutional and organizational structure. It is worth

mentioning the absence, in most of the reports analyzed, of information on the wealth produced by the

bank over the operating period and distributed to the various stakeholders involved; indeed, it is

considered that the presence of this accounting information, which comes from certain and verifiable

sources and is the result of established information processes, is fundamental for reducing the risk of

producing a self-referential document in which “the information provided appears to be merely a

declaration of intent and, thus, is not subject to any form of spatial or temporal control” (GBS, 2007).



5.3. Dialogue with the Stakeholders

All the reports analysed give ample space to information concerning relationships with the various

categories of stakeholders. Along with the Italian ethical banks, which show particular interest in

establishing a dialogue with their principal stakeholders, the reports of Cultura Bank and GLS Bank

are worthy of note. In the 2011 Annual Report produced by Cultura Bank, for example, a specific

section is dedicated to highlighting the relationship between the bank and its employees and

shareholders, as well as relationships with “other stakeholders and partners”. Cultura Bank, therefore,

places particular importance on the legitimate interests and expectations expressed by all stakeholders,

whose satisfaction is a fundamental condition for achieving sustainable development. Indeed, the

report states that “To strengthen and develop the bank’s total sustainability, the bank’s social

environment is included in the bank’s long-term plans” and reference is made to particular groups of

subjects with interest in the bank’s activities (the Bank’s customers; Equity Certificate owners; Co-

workers; Entities within civil society; Foreign banks with similar values to Cultura Bank;

International professional organizations; The authorities and professional liaisons).

5.4. Financial Data Analysis

The majority of the reports analyzed contain a section specifically dedicated to the analysis of

financial data. It is worth singling out the example of Charity Bank, which has included a Financial

Picture and Analysis in its Annual Review ever since the first edition (2005). The information is

presented very clearly and simply, making the report easy to understand, even for readers without

specific knowledge.

5.5. Activities Undertaken and Projects Financed

All the reports observed, finally, dedicate ample space and particular attention to the activities carried

out by each bank. Detailed information on the projects financed is also provided. GLS Bank, in

particular, dedicates almost half of its 2011 Annual Report to a description of the projects that were

considered worthy of being financed. In a section entitled “What is GLS Bank actively involved in?”,

the bank clarifies that the projects financed mainly concern “basic human needs, such as education,

food, health, accommodation and energy”. In the section entitled “GLS banking operations”,

moreover, ample space is given to “loan examples”, with descriptions of the economic and social

function and the activities undertaken by the enterprises receiving the loans.

6. CONCLUSIONS

The results of the study undertaken showed that, for several years now, European “ethical banks”

have been widely using sustainability disclosure tools capable of satisfying the growing information

requirements of the various stakeholders involved in their activities. The reporting of information on

actions undertaken, on the way in which financial resources invested or loaned are used and on overall

performance all contributed to increasing information transparency and makes it possible to control

and monitor the ethical, social and environmental aims pursued by each particular bank.

Attention to information transparency, moreover, is of considerable importance considering that the

financial markets have always been characterized by strong information asymmetry and that the

limited availability of complete and exhaustive information inevitably reflects on the relationship

between banks and other economic operators (Wan Suk Ko and Su Sung Kim, 2015). For the latter

reasons ethical banks have made information transparency one of the founding values of their activity,

so as to effectively satisfy the requirements of the people with whom they work and the environment

in which they operate.

It can be seen, from a preliminary and explorative analysis, that the reports made available online by

ethical banks are, above all, of a «heterogeneous» nature. This could be the result of the current lack

of single, universally accepted Standard and the “voluntary” nature of the reporting methods adopted.

The existence of a shared and widely used standard would undoubtedly make it easier to compare the

reports produced and make the information contained in them more reliable.

Despite this, in line with the aim of this research, the survey highlighted the significant contribution

made by sustainability disclosure in terms of information transparency. Indeed, in almost all the

reports analyzed, strong awareness is demonstrated by ethical banks towards dialogue with the main

categories of stakeholders. Importance is given to financial information in the sections dedicated to

Social Reporting in European Ethical Banks: A Comparative Study


financial analysis and, in certain cases, also by including information on the added value created and

distributed. Finally, considerable effort is made by all the ethical banks to provide information on how

financial resources are used and to communicate to their stakeholders the social and economic value

generated by loans granted to enterprises with activities that have a strong socio-environmental

impact.

7. LIMITS

The above reflections are to be considered, in any case, as early synthetic indications of an analysis

that could be a starting point for more detailed future studies. Indeed, the analysis undertaken could be

more detailed and more extensive. The sample could be widened to ethical banks from other parts of

the world, thus permitting a much more detailed study of the topic.

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