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Sunday, January 17, 2010

Corporate Governance from Islamic Perspectives

The primary objective of a limited company is maximisation of shareholders’ wealth. For a quoted company, shareholders’ wealth can be measured by the share price which should reflect the future dividends to be received by shareholders. Normally, responsibility and accountability are heaped onto director’s shoulder. Directors are responsible to increase the value of share by enhancing the company performance and in the same time are accountable with the decision that they have made. One of the difficulties with the practical application of this objective is that there are other parties with interests in the organisation. These include; trade creditors, loan creditors, management, employees and general public. 

In real world, companies may be working toward other objectives that may differ to those of shareholders. Managerial objectives could also conflict with those of shareholders and other interested parties. Although the firm is owned by the shareholders, the day to day control is in the hands of the managers (divorce ownership and control) and they are in ideal position to follow their own objective at the expense of others. The increasing number of collapses for gigantic corporations have made public especially investors more aware of the importance to demand high level of corporate governance practices from business entities which they have entrusted their money in them.

Corporate governance refers to the method by which a corporation is directed, administered or controlled.  It includes the laws and customs affecting the direction, as well as the goals towards which a firm moves. Theoretically speak, it concerned with the alignment of management and shareholders’ interests. According to the Cadbury Report (1992); “Corporate Governance is the system by which companies are directed and controlled”. Corporate governance can be broadly divided into two categories; self and statutory. Self-regulation involves human elements that include independence of Board of Directors, independence of Non-Executive Director and appraisal of the director’s performance. On the other hand, statutory regulation is the framework of governance that can be explained in legal terms (for example the requirement for full disclosure of directors’ emoluments, the establishment of audit committees, total number of non-executive directors over total membership of the board, clear accepted division of responsibilities (so no one person has complete power) and the separation of roles between the Chairman and Chief Executive positions. In summary, corporate governance applies not only to directors and executives but also to all players in the organisation.

Corporate governance is not new to Islam because Islamic religion has already stressed the needs for; accountability, responsibility, transparency and trustworthiness. These values are paramount in Islam. In Islamic worldview, since God gives us life, thus everything we do in this life (totally) must please God. Human being has been invented by Allah with the purpose to rule this world as a khilafah (vicegerent). As the best creature ever created, man has been equipped with remarkable qualities such as aql (mind), feeling (intuition) as well as the beautiful physical. These virtues on the other hand, have enabled man to better reflects, understand and distinguish between good and bad. With all these advantages man ought to worship Allah and not to interpret himself as autonomous. Thus, this has made Islamic concept of leadership different from other systems. Another commandment for Muslims is the concept of Tawhid, which promotes the need to submit fully to God. It highlights the unique and distinguished relationship between man and Allah. Thus, the need to strictly follow these corporate governance requirements is given greater weightage by Muslims because Islamic worldviews concern with this universe (world) and the hereafter or the Day of Judgment. The belief in dual worldviews has made Islam looks exceptional. Such a belief renders them to devote their life totally to the achievement in this world. Corporate governance from Islamic perspectives is also governed by both positive and normative laws. This is because, in Islam, business activities concerned with two respects namely the physical aspects of life as well as meeting one’s spiritual needs.

The Islamic concept of corporate governance stresses four main areas; accountability, responsibility, transparency and trustworthiness. In terms of accountability Muslims believe that they will be accounted for whatever they do in this world in the hereafter (life after death). In Islam, Muslims verily have to fulfill the will of Allah in order to seek his pleasure and the promised rewards in the hereafter. Thus, it requires every deed and word in this world must be in line with the Islamic teachings. This also means that there is no separation between economic responsibility and ethical responsibility. In addition, Islam also looks into the essence of responsibility. Like accountability, the responsibility implies being responsible not only towards human beings but also in performing one’s role in life. This role is given as an amanah (trust) from Allah. Should one neglect this responsibility, it is a form of betrayal to Allah. As for transparency, the essence of Surah Al-Baqarah (verse 282) of the Holy Quran states that to write it down whenever we contract a debt for fixed period. This verse is emphatic about the need to properly record every transaction in order to avoid injustice and also to avoid concealing any details that might lead to further injustice. In highlighting trustworthiness, the Holy Prophet (pbuh) also spelt out the significance of trustworthy businessmen in the following: “Righteous businessmen will be the first to enter paradise”. In another saying, he said: “A truthful merchant will be raised on the Day of Judgment together with the truthful and the martyrs”. Trustworthiness is also parallel with the concept of accountability whereby man in his judgement towards his action is influenced by the fear that he will be accounted by Allah.

Islam also looks into the essence in the concept of work and dedication to work. The concept of work and dedication to work is a form of ibadah (worship) and amal salih (virtuos act). In the context of corporate governance, one will dutifully performs his works, because not only the works undertaken by him will be accountable in the hereafter, but work is also a form of ibadah that is directed for Allah’s pleasure. Islam also looks into the essence of vicegerency and trusteeship in the context of corporate governance. It emphasizes that the qualities of good Islamic manager are also the qualities of a practicing Muslim. It can be concluded that, with all the values uphold by Islam, it gives corporate governance very comprehensive coverage given a spiritual backing.

Resolutions Of The Securities Commission Shariah Advisory Council. 2nd Edition. Kuala Lumpur.


Chartered Islamic Finance Professional Part 1 Study Material. 2006. “IB1003 : Islamic Finance       Regulations And Governance”. Kuala Lumpur. International Centre For ducation In Islamic Finance.

1 comment:

  1. Assalamualaikum tuan,can you give some opinion on..’What are the biggest obstacles to develop Islamic Corporate Governance(theory and practice) in Malaysia and else where?tq.