CONTRIBUTION OF THE ISLAMIC WORLDVIEW TOWARDS CORPORATE GOVERNANCE
MOHAMED ASRI
MOHAMED FAHMI
MSc Accounting Sem 2 2003/04
I. INTRODUCTION
Today’s world of business is facing grave corporate
governance malaise. The collapse of huge and well established companies like
Enron, WorldCom debacles, Global Crossing and Adelphia
have evidenced us on how critical the issues of corporate governance nowadays.
Due to this, the credibility of the accounting profession especially has been
diminished severely. Public begin to criticize openly on how accountants
perform their professional duties in providing the true and fair view of the financial
position of their client’s company. Many recommendations and solutions have
been put forward to resolve these governance problems, yet none of them seems to
be effective. Public then may wonder, “Why
it is so difficult to promote good corporate governance?”
In actuality, the underlying concept of corporate governance
is neither unknown nor alien from the Islamic point of view. Corporate
governance as far as we are concerned is aim at enhancing accountability,
transparency as well as trustworthiness. These values are at paramount in
Islam. Hence, we could say that the principles and the objectives of corporate
governance are verily familiar to us although some may say that the corporate
governance concept is recently realized. In fact, Islamic approach is deemed
relevant in promoting good corporate governance in business organization.
Through the guidance of Islam, success could be attained by maintaining high
human idealism, by fulfilling high spiritual and ethical requirement in all
human affairs including business activities. In Islam, business activities
concerned with two respects namely the physical aspects of life as well as
meeting one’s spiritual needs.
This paper will attempt to answer this question by arguing
the recommendations provided in the Western and at the same time propose the
Islamic worldview as the core ingredient to improve effective corporate
governance. The remaining sections of this paper therefore, will be ordered as
follows: The next section will discuss the Islamic worldview. The Islamic
concepts and values on corporate governance will be dealt then. This is
followed by the corporate governance section. Subsequently the role of Islamic
worldview on the effective corporate governance will be discussed in great
depth. Before we conclude this paper, a proposal on the effective corporate
governance framework will be presented. The final section will be the
conclusion of the study.
II. ISLAMIC
WORLDVIEW
The word “Islam” is derived from the origin words of S L M.
It epitomizes variety of connotations. Customarily, Islam typifies al-Din,
submission, surrender, obedience as well as peace (al-Faruqi
1982). This has manifested that a man can only attain true peace of physical
and spiritual via full surrender, obedience and submission to Allah the
Almighty. This has been irrefutably mentioned by Allah in the Quran (
Worldview or underlying philosophy or weltanschauung on the other hand, epitomizes how man perceives this
world. Worldview denotes “a set of
implicit or explicit assumptions about the origin of the universe and the
nature of human life” (Chapra 1992, pp. 1). Conventionally, every community or system is
controlled or influenced by its own worldview.
The different worldviews among these communities or systems will
eventually lead to dissimilar end means of human life. Other aspects of life such
as ultimate possession, cramped resources by virtue of human beings disposals,
the relationship among men in term of rights and responsibilities, their
surrounding environment as well as their interpretations of efficiency and
equity will also be different (Chapra 1992).
On the other hand, according to Al-Attas[1]
(1994), from the Islamic point of view, worldview is considered as vision of
reality and truth (ru’yat al-Islam li al-wujud). He then further
interprets the Islamic worldviews as “a
metaphysical survey of visible as well as the invisible worlds including the
perspective of life as a whole, is not a worldview that is formed merely by the
gathering together of various cultural objects, values and phenomena into
artificial coherence”. (p. 26). Hence, as far as Islamic nature of reality
(ontology) is concerned, 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 and peculiar (Izetbegovic
1984). Since these views are principally derived from the Quran,
this reflects that Islamic worldviews are identical to Quranic
worldview. Unlike in the Western, their emphasizing is on logical reasoning as
well as illumination of rationality. Due to this, Islam has distinguished
itself from other available worldviews (Khurshid
Ahmad as cited by Mawdudi 1988). For instances, the
Western’s and Christian‘s worldviews are secular and religious respectively.
The ontology as far as the Quranic
view is concerned, entails diversity of purports (Mawdudi
1998). 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.
Islam perceives world or earth only as a transit for man to
the perpetual life in the hereafter. Muslims believe that world is a place
where they are accountable to other Allah’s creatures as well as to Allah
Himself. These believe have limited the Muslims conducts. Muslims can neither
free to act as they wish nor follow the wishes of any groups. Every man will be
judged on the reckoning day for what ever deeds he or she has done during his
or her life in this world. If good deeds are more than bad deeds, this will promise
an everlasting place in Jannah (paradise) while hell
is waiting for those who have chosen to defy Allah’s command or bad deeds more
than good deeds.
Allah has manifested His right way by means of the Prophets. The
ultimate duty of these prophets with revelations was to transform humanity from
a state of Jahiliya (Lost in the earthly life) to a
true Muslim. Allah manifests in the noble Qur’an: "I have not created the jinn and ins
(human beings) except to worship Me" (51:56).
Prophets such as Muhamad, Isa,
Daud and Musa (pbut) have received revelation from Allah in the form of
scriptures. These prophets were inherently carried similar paramount messages
from Allah which is to worship and obey all His commands. Although these
Prophets carried similar ingrained commandments, the details were not identical.
The differences were depending on the condition, nation as well as the Prophet
who was in charge. Muhamad (pbuh)
was the last Prophets govern this world. He was very special in the eyes of
Allah. This has been evidenced by Allah via Quran. Quran is the last scripture revealed by Allah and Its will
lead man until the day of reckoning. Quran is a
complete scripture as compared to others which consists all-inclusive doctrine
as well as some particulars on many dimensions of human life.
Table 1: Implications of Different Worldviews on Man’s Way of
Life
|
Types |
Worldviews |
Man’s Way of Life |
|
Western |
Secularism |
Separation between religion and other aspects of life, materialistic,
individualistic, less socio economic justice |
|
Christian |
Religious |
Less public relations, less concern with the worldly life |
|
Islam |
Dual worldviews:
|
Maslahah of the ummah (public benefit), accountability, trustworthiness,
transparency etc. |
III. ISLAMIC
CONCEPTS AND VALUES ON CORPORATE GOVERNANCE
There are four values which the authors believe to be
essentially associated with the concept of corporate governance namely khilafah, accountability, transparency as well as
trustworthiness. These concepts are mainly derived from the Islamic worldview.
Hence, this part will look at these concepts in quite depth.
Khilafah
Khilafah refer to the role, status
as well as the man kind’s responsibilities to themselves and to the ummah as a whole. According to Abdalati
(1994), khilafah are the relationship between man and
god, man and his fellow men, man and the other elements and creatures of the
universe man and his innermost self. This means, every human has the
responsibility to all Muslims for what ever deeds they have done with regards
to the resources that God (Allah) has given to him or her.
Human principally has been assigned to safe guard this world
which belongs to Allah (Quran
In governing the corporation, man is seen as the central
element for the system to be effectively working in the right route. As man is
the shareholder, creditor, auditor, regulator, manager as well as the director
thus, its manifest that man plays the paramount roles in managing and lead to the attainment of company’s vision and mission. The
issues of man in term of values, ethics and moral conduct therefore need to be
well apprehended in the first place to ensure the anxiety of the society could
be taken care. The concern among other things are upholding trust, maintaining
integrity, exercising transparency and accountability, conservative in managing
resources, caring and concern of the environment. The failure to ingrain these
values may pose grave problem to the company as well as to the public at large.
Accountability
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 rida’ (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. It does not matter what activity the Muslims
do either ibadah (solah) or
purchasing shares in the stock market, they must follow the Islamic teaching
framework carefully. The importance of accountability to the man’s life also
has been manifested by the prophet of Islam as: “Each one of you is a guardian and each guardian is accountable to
everything under his care”.
In the view of corporate governance practices, as far as
Islam is concerned, the company directors, management as well as the auditor
should perform their professional duties with the objective of satisfying the
needs of the shareholders and to Allah as well. Supposing, there should be no
such malaise (i.e. fraud; material misstatement) exist in the company if this
concept could be internalized and could be reflected in their conducts.
Unfortunately, most of them have been shadowed by the material worldly life
which has led to the bad conducts that cause the
owners (shareholders) of the company suffer the consequences.
Transparency
The concept of transparency has been divulged by Allah in the
following ayat: “O
you who believe! When ye deal with each other, in transactions involving future
obligations in a fixed period of time, reduce them to writing. Let a scribe writedown faithfully as between the parties…” (Al-Baqarah 282, Beginning of the Ayat). This verse states that every transaction must
be written to avoid justice.
As corporation is responsible to a wide spectrum of
stakeholders, its aim should not focus strictly on monetary values but also on
social responsibility to the ummah. Applying the
concept of transparency, corporation should also disclose information regarding
its policy, activities undertaken, contribution to the community and the use of
resources and protection of environment (Haniffa,
2002).
Trustworthiness
The concept of trustworthiness has been irrefutably stated
Via Surah Al Anfal (Verse
27): “O ye who believe! Betray not the
trust of God and the Apostle, nor misappropriate knowingly things entrusted to
you”. 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.
As trustworthiness is one of the highly regarded virtues in
Islam, every individual within an organization is required to subscribe to
ethical and moral practices while carrying out their commercial activities. The
stewardship sense will lead all to utilize the possessions entrusted upon them
by Allah to the best of their abilities as a form of submission to Him. Leaders
will be judged not by how big the wealth has grown but by how well wealth is
managed using the principles as clearly laid down by Islam.
In developing good corporate governance all these virtues are
deem significant to be nurtured in the culture of the company. The so called
religious belief corporate culture will affect the corporate governance to the
great extent. It can also be considered as the system of shared values and
belief in which people within the organization interact to each other. Such
circumstances will impetus the system as well as the structure of the
organization in producing values and norms.
IV. CORPORATIONS:
AN ISLAMIC PERSPECTIVE
Historically, trade has been seen as a major contributor to
the Islamic civilization. The special place of trade in Islam has also been
manifested by Allah in the Quran. Although trade is
encouraged in Islam but riba (usury) is totally
unacceptable as Allah has mentioned in the Quran (2:
275-276) “trading is permitted but riba (usury) is forbidden”. Riba
is prohibited because it concentrates wealth and nurture inequality via
exploitation. In addition, Islam also forbids speculation, gambling and
hoarding. This has been evidenced through these following ayahs:
يَا
أَيُّهَا
الَّذِينَ
آمَنُواْ
إِنَّمَا
الْخَمْرُ
وَالْمَيْسِرُ
وَالأَنصَابُ
وَالأَزْلاَمُ
رِجْسٌ مِّنْ
عَمَلِ الشَّيْطَانِ
فَاجْتَنِبُوهُ
لَعَلَّكُمْ
تُفْلِحُونَ
O ye who believe!
Intoxicants and gambling, (dedication of) stones, and (divination by) arrows,
are an abomination, - of Satan's handwork: eschew such (abomination), that ye
may prosper (5:90).
يَا
أَيُّهَا
الَّذِينَ
آمَنُواْ
إِنَّ كَثِيرًا
مِّنَ
الأَحْبَارِ
وَالرُّهْبَانِ
لَيَأْكُلُونَ
أَمْوَالَ
النَّاسِ
بِالْبَاطِلِ
وَيَصُدُّونَ
عَن سَبِيلِ اللّهِ
وَالَّذِينَ
يَكْنِزُونَ
الذَّهَبَ
وَالْفِضَّةَ
وَلاَ
يُنفِقُونَهَا
فِي سَبِيلِ
اللّهِ
فَبَشِّرْهُم
بِعَذَابٍ أَلِيمٍ
O ye who believe! there are indeed many among the priests and anchorites, who
in Falsehood devour the substance of men and hinder (them) from the way of
Allah. And there are those who bury gold and silver and spend it not in the way
of Allah. announce unto them a most grievous penalty (
However, nowadays, the core anxiety of people is that trade
can cause the economic entity to neglect ethical duty (Abdul Rahman 1998). As
far as Muslims are concerned, Islam has the fundamental principles which could
be used as guidance to coordinate corporate dealings. The concept of
corporations has been existed since the age of Prophet Muhamad
(pbuh). During this era, lots of people involve in
commercial ventures by pooling their resources. This act was very similar to
the notion of modern corporation nowadays. For
instance, “al-inan” (limited partnership) in Islam is
akin to the concept of joint stock companies which resembles the limited
partnership. This concepts of partnership (limited partnership) entails two or
more individuals form a business where they agree to contribute capital, share
the profits as predetermined before the business started and also have agreed
to bear the losses based on their capital contribution in case the business
face failure. Here, the partners’ liability is limited. The members’ works and
performance will be monitored by the board of directors. As the representatives
of the company’s shareholders board of directors carry a responsibility to
ensure the members perform their duty within their capacity and act for the
sake of the business instead of their personal interest.
Mudharabah is another form of
partnership in Islam which akin to the modern joint stocks venture. It is a
form of partnership where one party supplies the capital whereas another party
will run or operate the business. The profit will be distributed based on the
predetermined profit ratio. This notion of mudarabah
has number of similarities with the modern joint stock companies. This is
evidenced by the disaffiliation of control and possession or ownership. In
other words, the capital providers will not going to involve in the daily
business operations. Besides, there is unlimited number of shareholders being
practiced. Also, share transfer is allowed and will not cause the company to
dissolve.
The only problem of this modern corporation is the inability
to comply with certain values in Islam as well as the Shari’ah requirements.
Thus, in order to make this system in line with the Shari’ah, the companies act
need to be revised accordingly to the Islamic Law and the ultimate goals of the
corporation need to be altered from profit maximizing alone to also nurture the
socio economic justice (Abdul Rahman 1998). Apart from revising the law as well
as to ultimate goals of the companies, the role of the leaders (managers)
should not be ignored. In fact, perfect rules, regulations and planning are
useless without proper implementation as well as supervision by the managements
and board of directors respectively.
According to Khalifah Ali, there
ought to be certain qualities before a person can be a leader. Some of these
qualities are outlined in the Quran where Allah
addresses the prophet;
"It was by the
mercy of Allah that you (O Prophet) were lenient with them, for if you had been
stern and hard-hearted, they would have dispersed from around you. So forgive
them and seek mercy for them and consult with them in the conduct of affairs.
And when you have resolved [on an issue], then put your trust in Allah. Lo!
Allah loves those who put their trust in Him” (3:159).
A
few matters are pointed out here such as a leader must be kind hearted,
compassionate and forgiving towards their people. If he is cruel to them, they
will cease him. When a decision is made he must consult them. Allah then
further mentioned that no weaknesses should be shown and the policy be pursued
with single-minded of purpose, determination and boldness. Khalifah
Ali then concluded that the qualities of a leader are namely knowledge and hikmah (wisdom, insight), taqwa
(piety), ‘adl (justice) and rahmah
(compassion), courage and bravery; shura
(mutual consultation), decisiveness and being resolute, eloquence, spirit of
self sacrifice and sabr (patience).
V. CORPORATE
GOVERNANCE
Corporate governance can be interpreted as the process in
which the company is administered and controlled by a few parties such as board
of directors, management, auditors etc. These parties have the duty to ensure
that the company is heading towards the mission as well as the vision of the
company. At the same time, they are also accountable to the companies’
stakeholders (Abdul Rahman 1998; Shahul, 2000 u.p.). In
Today’s corporate boards, managers, auditors, and accounting
standard setters are presumably all working together to create a financial
reporting process of unparalleled integrity. However, certain aspect of the
business operation raised the question of effective corporate governance. In
the running of a corporation, owners and management are two separate parties.
Owners cannot effectively manage a business, a task that would require
significant and consensus-building whom realized the limitations of the
corporate structure from its inception, form the corporate board of directors
to serve on their behalf.
However, the fact that the Chief Operating Officer (CEO)
influences the membership of corporate board of directors and controls the
agenda of all that goes on at board meetings seems to be contrary with purpose
of the board existence itself. In addition to that, most cash bonus plans as
well as most stock option plans or stock award plans are based on accounting
results (Bloedorn and Chingos,
1991; Ittner et al., 1997),
financial statement has become the focal point of management’s wealth
maximization strategy.
Beginning 1970s, many corporate mergers and acquisitions took
place. To keep up with the phase of business orientation, CPA firms also grow
internationally in order to retain market share. As the CPA firms grew and
merged, they became more strategic and more cost-conscious in their effort to
obtain new clients. Firms sought to provide a full menu of consulting as well
as the ‘internal audit’ services to clients in every industry to demonstrate
their market strength and expertise. The downward pressure on auditing costs
led to relative reductions in salary and quality of audit staff, less
substantive test of details and more reliance on analytical review techniques,
and factors that generally led to a lower quality audit. What investors and
creditors do observe all too often lately are instances where it appears the
auditors and/or the audit committees were not effective. These are the cases of
fraud, material errors or misstatements, material omissions, restatements of
multiple prior years’ earnings because of accounting oversights or improprieties,
or maybe just aggressive accounting called to the attention of the corporation
by the SEC or shareholder advocates. Recent examples abound and include such
icons as AOL Time Warner, WorldCom, Boeing, Computer Associates, Xerox, Enron,
Tyco, IBM and on local front MAS and Renong are two examples.
Recommendations for
Effective Corporate Governance from Western Perspective
The collapse of big and well established companies was mainly
due to the ineffective and lack of keen-eyed surveillance functions of the
board of directors and audit functions. American Institute of Certified Public
Accountants (AICPA) (1993) in their report states that good and effective
corporate governance could be nurtured via strengthening the role of the board
of directors. In addition to that, President of United States of America (USA)
George W. Bush also addresses comment on the grave corporate governance
problem. During the recent State of the union address, he urged that the
corporate must be made accountable to employees and shareholders and held to
the highest standards of conduct. According to him, this could be attained
through tighter standards and tougher disclosure requirement.
On the other hand, the Blue Ribbon Committee (BRC 1999) has
discovered three essentials facts pertaining to the oversight responsibility of
corporate governance as well as the audit committee. Firstly, in order to
produce a so called quality financial reporting, a collaborative working
environment, two ways communications among management, board of directors,
audit committee internal auditors and external must be well developed and
established. Secondly, to reduce the fraud in the financial statement, the role
of the corporate governance need to be strengthened. This fact is similar with
the recommendation of the AICPA report in 1993. Thirdly, to enhance the
confidence in the capital market, the elements of integrity, quality and transparency
need to be cultivated in the financial reports. This confidence will be
diminished if fraud is found to be existed in the financial statement.
In fact, the external auditors are required by the
International Standards on Auditing (ISAs) to
communicate pertaining to significant matters which struck their attention
during their assignation with the governance body in their client’s company.
Besides, the internal auditors also given the authority to discuss paramount
items they found with the governance body. This is the requirement of the
authoritative Practice Advisories (Pas) as issued by the Institute of Internal
Auditors (IIA). As far as auditing profession is concerned, the external
auditors concern with the external users of the companies whereas the internal
auditors concern with the internal matters within the organization itself. The
existence of both groups is ultimately to shield the interest of the
shareholders as well as lead the company to the right route in the most
effective and efficient manner.
According to Baker and Wallage
(2000, p. 173-174) ‘an effective system of corporate governance requires an
effective system of financial reporting and that an effective system of
financial reporting requires a well-ordered system of financial accounting’. A
look at financial reports will tell us that it consist primarily of audited
financial statements prepared in accordance with accepted accounting standards
and must be audited by statutory auditors. Baker and Wallage
(2000) argue that this model of financial reporting possess two difficulties.
First, audited financial statement does not represent the economic reality and
therefore gives an opportunity for directors to misrepresent or hide the true
economic condition of their companies. Second, the independence of auditors is
being questioned as they may be subject to the influence of the directors of
the company. In resolving these issues, the authors studied recommendations
made by Institute of Chartered Accountants of Scotland (ICAS) on Auditing
into the Twenty-first Century. The summary of the recommendations are as
listed in the table 2 and 3 below:
Table 2: Summary of the Recommendations to Improve Financial
Report
|
The financial reports ought to provide
assurance that: |
|
1.
The financial statements are right. |
|
2.
The company will not fail |
|
3.
There has been no fraud |
|
4.
That the company has acted within the law |
|
5.
That the company has been competently managed, |
|
6.
That the company has adopted a responsible
attitude to environmental and societal matters. |
Table 3: Summary of Recommendations to Improve Auditor’s Work
|
The auditors should be: |
|
1.
Independent of the managing directors of the
company being audited |
|
2.
Responsible
for reporting to a third party if they suspect that the managing directors are involved in
fraud or other illegal acts |
|
3.
Accountable to a wide range of stakeholders |
|
4.
Financially liable if they fail in their
duties. |
According to Baker and Wallage
(2000) the implementation of this recommendations would gives several
implication. Firstly, the internal audit function is necessary. In this way, the external auditors would
cooperate with, and assess the work of the internal auditors, and they would
opine independently on the managing directors’ statement concerning their
responsibilities as directors. Secondly, managing directors are expected to
have a greater accountability to a wider stakeholders and this would change the
format of current audited financial statements that is prepared to fulfill
decision usefulness criterion for investors and creditors. Next, companies are
expected to have a two-tier board of directors, comprising a Supervisory Board
and a Managing Director.
Detomasi (2002) suggest three
independent elements to achieve effective corporate governance. First, a strong
public sector governance is needed detailing how financial reporting and
auditing practices are to be conducted. Second, a community of well trained
managers and executives that are able to formulate and execute effective
corporate strategies within the boundaries set by law and securities
regulation. Finally, independent auditors capable of performing neutral and objective
auditing practices of corporate behaviour must
complement the work of managers and legislators.
Malaysia’s Move towards Effective Corporate Governance
In
The other changes is, under the provision of the Financial
Reporting Act 1997, MASB is now responsible for promulgating accounting
standards. Unlike what happen previously where the standards were promulgated
by the accounting bodies. The Securities Industry Act 1983 also has been
amended in the effort to strengthening the role of corporate governance. For
instance, section 99B has now required the chief executive officers (CEOs) as
well as directors of public listed companies to disclose their interest not
only in the listed companies but also interest in any associated companies as
well to the Securities Commission (SC). Besides, the increase in penalties for
such failures to comply with this requirement and the lowering of the threshold
for substantial shareholding reporting to 2%, clearly shows the seriousness of
the government in handling governance issues towards better transparency in
term of ownership disclosure.
Another endeavor to promote greater disclosure and
transparency is by introducing new code pertaining to take over and mergers
which take effects on
One of the important elements addressed in this report was
the Malaysian code of corporate governance. First and foremost, it is a set of
principles and best practices recommended for good governance. This
recommendation focuses on four areas like principle, best practices, near best
practices and exhortation to other participants. The summary of the code is
provided in the table 2 below;
Table 4: A summary of Malaysian Code of Corporate Governance
|
Types of Area |
Objective |
|
Principle |
To provide flexibility and common sense in its application
which is subject to the circumstances of each corporation |
|
Best practices |
A set of guidelines of practices for the company to design
a code of corporate governance |
|
Near best practices |
Merely helpful tips since no disclosure are required if
companies do not follow them |
|
Exhortation to other participants |
Totally voluntary for the company |
All these efforts have shown to us on how concern the related
parties to nurture a good corporate governance. A lot of recommendations and
laws have been revised world wide to cater the malaise, yet none of them
historically able to promote better governance in the company.
VI. THE ROLE OF ISLAMIC
WORLDVIEW TOWARDS EFECTIVE CORPORATE GOVERNANCE
Any attempt to make corporate governance effective must
incorporate Islamic concepts and values that have been discussed in the above
section. Corporate activities might just be the interaction of two or more
parties in business dealing using money as the medium of transaction but if it
is done within Islamic Shari’ah without any intercession or association of
partners to Allah and with the intention to please Him, then this will be a
sign of worship to Allah (see Bilal Philips 1994).
Abdul Rahman (1998) applies the concept of tawhid, khilafah and taklif in his Islamic corporate governance framework.
According to him an Islamic corporate governance framework should integrate
both the regulatory aspect that is based on Shari’ah and Islamic moral precepts
as its core structure. He claimed that the institution of shura,
hisbah and religious audit can be used to achieve effective
corporate governance.
Shura
Shura has been practiced since the
time of the prophet Muhammad (pbuh) whereby he and
his group of companion of highly knowledge discuss on certain issues. In the
Holy Quran, there is one chapter entitled ‘Shura’ itself. Allah says
وَالَّذِينَ
اسْتَجَابُوا
لِرَبِّهِمْ
وَأَقَامُوا
الصَّلَاةَ
وَأَمْرُهُمْ
شُورَى
بَيْنَهُمْ
وَمِمَّا
رَزَقْنَاهُمْ
يُنفِقُون َ
Those who hearken to
their Lord, and establish regular Prayer; who (conduct) their affairs by mutual
consultation; who spend out of what We bestow
on them for Sustenance (42: 38)
In worldly matters, the Prophet (pbuh)
used to consult others and be consulted by them, while in religious matters, he referred to the revelation which took care of
all matters related to faith. In the modern Islamic organization, a group of
people comprising of representatives of shareholders, employees, customer can
be formed acting as shura to assist corporate
directors in the running of the business activities as well as to ensure
consensus in decision arrived. To the
Western, inviting all these groups in the decision making process might be
unreasonable because their focus is mainly aiming at maximizing wealth for the
shareholders and creditors (Kam, 1990; Shahul, 2001).
However, Islam has a wider spectrum of users in which the overall
organization’s objectives should take account off making the institution of shura applicable at this time of science and technology
just as at the time of camel and desert of the prophet!
Hisbah
The Hisbah is essentially organized
around safeguarding the limits of Allah from being violated, protecting the honour of the people, and ensuring public safety. It also
includes monitoring the marketplace, craftsmanship, and manufacturing concerns
to make sure that the laws of Islam are upheld by these entities. Allah states
in the Holy Quran:
“Let there arise from
you a group calling to all that is good, enjoining what is right and forbidding
what is wrong. It is these who are successful” (3: 104)
In Islam, economic activities including business trading and
its services are controlled by Shari’ah. Likewise, the system of Hisbah is an integral part of a just economy in a just
society which also provides the same for non-Muslims as residents in an Islamic
society. Off-hand, a Muslim should not cheat a non-Muslim in business
whatsoever. Prophet Mohammad once said: "Who ever (a Muslim) causes harm
to non-Muslim is also causing harm to me; and I shall be his opponent on the
Day of Judgment". Hisbah institution operationalize through the function of al-Muhtasib whose responsibilities are almost open-ended
in order to implement the foregoing principle: commanding the good and
forbidding the evil of wrongdoing[3].
Al-Muhtasib and/or his deputies as full judge must
enjoy high qualifications of being wise, mature, pious, well-poised, sane,
free, just, empathic, and learned scholar. He has the ability to ascertain
right from wrong, and the capability to distinguish the permissible (halal) from the non-permissible (haram).
The Hisbah carries out these responsibilities in
conjunction with the appropriate government agencies and other relevant
establishments.
Religious Audit
Islamic religious auditing provides an institution to solicit
advice and also to monitor performance so that the company operates as a
strictly Islamic concern. The Islamic precepts highlighted the differences
between Islamic and Western business practices. For example, the Islamic Shari’ah
prohibits, among other things, the payment and receipt of riba
or usury (Quran 2: 275-276), gambling (Quran 5:90), hoarding (Quran
AAOIFI Approach for
Effective Corporate Governance
The issue of governance is also the concern of Accounting and
Auditing Organization for Islamic Financial Institutions (AAOIFI). Since the
Muslim holds the concept of dual accountability, acting as the vicegerent of
God, adherence to Shari’ah rules and principles are of primarily importance for
an Islamic organization. As such, what is lawful should be distinct with the
unlawful and must be reflected in the policies, product, activities, and
transaction of the business as in accordance with the Islamic law of Shari’ah. In view of this, AAOIFI has established
standards of governance known as Governance Standard for Islamic Institutions
(GSIFI) to govern the manner in which Islamic Financial Institutions (IFI) are
controlled and in which those responsible for the direction of the companies
are accountable to the stakeholders with the principles mentioned above.
The first proposal made by AAOIFI is the establishment of Shari’ah
Supervisory Board (SSB) which comprise of specialised
jurist in fiqh almua’malat
(Islamic commercial jurisprudence) to conduct a Shari’ah review on the
activities carried out by IFI (GSIFI No. 1 and GSIFI No. 2). The membership of SSBs may also include other experts in the field of
accounting, economics, lawyers and bankers. In short, the SSB will play the role
as pilot towards management adherence to Shari’ah, examiner of IFI’s activities and transaction, coordinator between IFI
and external auditor and finally conclude all that in a report to the
shareholders. Abdallah (u. p.) listed three reasons
why SSB play a significant role for banks which offer Islamic financing:
1.
‘The Islamic banking system is different from
the usurious banking system. Areas of similarities and dissimilarities can be
recognized with certainty through SSB.
2.
Whereas the usurious banking system depends
largely on the rate of interest in governing the bank’s operations and
services, the Islamic banking system prohibits a rate of interest in any
banking operation.
3.
The Islamic banking system is governed by the
principle of ghunm bil-ghurm[4]
which, contrary to the usurious mode of finance, is a risk-bearing principle.
This principle governs the mechanism of the Islamic modes of finance, which are
different from those of the rate of interest in almost all respects.’
The function of SSB will be assisted by internal Shari’ah
review (GSIFI No. 3) acting as an internal auditor assessing the Shari’ah
compliance of IFI. Internal Shari’ah review is the intermediary party between
SSB and the management by performing their activities based on guidelines,
fatwa[5]
and instructions set by SSB and later prepare a report on the work done to SSB
and the management. Another aspect of governance introduced by AAOIFI is an
Audit and Governance Committee (AGC) as established in GSIFI No. 4. While SSB
concentrates on the religious aspect of the company, AGC is seen as the
responsible group for monitoring the overall conduct of the business covering
from the internal control aspect, compliance with Shari’ah laws and the
organizations adherence towards code of ethics.
Problems with the
Implementation of SSB & Internal Shari’ah Review
There is no doubt for the need of supervisory on Shari’ah
matters pertaining to the operation of IFI. Ideally, SSB should be from one organizational
body since Islam does not recognise any separation
between business and religion. However, the present situation in
First, in performing their duties as Shari’ah supervisors,
SSB might have come out with certain fatwa with regard to some issues on the
Islamic financing of one bank. Since SSB is the religious authority governing the
rules and regulation of Islamic financing, the bank has to practice as has been
advised by them. The conflict arise when SSB issue a different fatwa on the
same matter to another bank. As a result, we would find the impact on the
financial report is that different banks disclose differently on the same
issues due to diverse recognition and measurement policies of the banks.
Second, as the bank operate at the international level by
opening up a branch in another country, the bank is most possibly govern by the
Shari’ah rules set up by SSB of the host country which is based on different
Islamic school of taught whether it be Shafie, Hanafi, Hanbali or Maliki. Therefore, a single Islamic bank might have
different accounting consequences on the recognition, measurement and
disclosure practice for the same Islamic financing services provided. Hence, the uniformity and consequently the
comparability of financial statements will be an issue of great challenge for
banks offering Islamic financing.
Third, since the internal religious audit fail to come into
existence as yet, the vacancy has been filled by SSB which in return raised the
question of independence of SSB and hence the credibility of their report.
However, since SSB are guided by their moral beliefs and obligations to
religious peers and the community, they are expected to perform their duty with
professional due care. Karim (u.p.)
argued that SSB ‘commitment to religious values and religious obligations
provide members of the SSB with strong incentives to be independent’.
VII. EFFECTIVE
CORPORATE GOVERNANCE FRAMEWORK: A
PROPOSAL
Bowie and Duska (1990) in their
analyses recommended the taking up of the stakeholder approach in undertaking
business activities. They explained that the stakeholder approach as applied to
the moral management of organizational stakeholders is based on the view that
profit maximization must be constrained by justice, that regard for individual
rights should be extended to all constitutes that have a stake in business. Applying
this concept from an Islamic perspective we propose a corporate governance
framework as illustrated in Figure 1 below.
Figure 1: An Effective Corporate Governance Framework
With the view that the principle of Islamic Shari’ah strike a
balance between the interest of individual and society, material and spiritual
gain, success in this world and the hereafter, company should be assured that
its decision making, action and control system will be constructed based on the
concept of tawhid or oneness of Allah. This section will discuss how
planning, action and control from the Islamic perspective can enhance effective
corporate governance.
The Decision Making Process
As company is responsible to a wide range of stakeholders,
the decision making process of the company should take into consideration their
interest. A group of Shura comprising of
representative of shareholders, representative of creditors, representative of
the public, BOD and SSB should be formed as the authority which is responsible
for direction and setting of the corporation. As shareholders, creditors also
contribute in providing capital in terms of loan for the operation of the
corporation. Therefore, both parties have their rights to say in the decision
making process to safeguard their interest and consequently to be included in
the shura team. Public concern on corporation
operation is at also high alert with cases such as misuse and unreasonable
losses of public fund, fraud cases among the public officers, pollution to the
environment, etc. The role of BOD and SSB has been mentioned earlier.
Exercising Shura demand that decisions made should
arrived through consensus by all parties involved. Since the decision made is
governed by the tawhidic concept, this will emerged
elements like truth, sincerity, discipline, tolerance and prevent and eliminate
activities prohibited by Islam.
Authors are in the opinion that establishing shura can resolve a number of issues. First, the joint
efforts of shura members will ensure checks and
balances for the need to satisfy the needs of all parties. For example, BOD
inclination towards profit so as to pay a return on shareholders investment
without having consideration on Shari’ah principles or the environment will be
counter by SSB and the representative of the public. However, this is not to
say that higher monetary and materials are objectionable in Islam, provided the
means employed are lawful and the gains legitimate. As all aspects are being
taken care of, the maslahah of ummah
or the public interest is ensured. By this way at least the essential needs of
the Muslim ummah which include religion, family,
property intellect and offspring as discussed by Kamali
(1989) are protected and secured.
Second, some explained that corporate governance failures are
contributed by single-handed control of chairman of BOD who is also the Chief
Executive Officer (CEO) of the company. Conflict might arise because CEO will
be able to control board meetings, the selection of agenda items, as well as
the selection of board members. As a
result, company’s direction is very much influenced by the individualistic
characteristics of the ‘big boss’. The independent status of the chairman is at
paramount in two respects. First and foremost, “he should encourage a healthy debate on the issue and bring to the
board a healthy level of skepticism and independence”[6]. Second, “he should ensure that every board solution
is put to a vote to ensure that it is the will of the majority and not that of the
dominant owner that prevails”[7]. In addition, the
finance committee through its report also promotes a balance in term of number
for the executives and non executives directors. This recommendation is aim at
ensuring that neither particular individual nor group of people can exert their
power as well as their influence to control the decision making.
Third, exertion of shura will allow
the development of a sense of stewardship, responsibility and accountability to
shareholders, who are the legal owners of corporations. Shura
are therefore subjected to higher standards which cover not only the technical
efficiency of operations, but also the implementation of an efficient
management system through the use of best practices developed from high ethical
values as opposed to one’s greediness and egoistic.
Finally, success in good planning call for benefiting from
the effort of all shura members, exercised not
through disoriented individual action but through concerted effort. The Prophet, advises us that “The hand of
ALLAH is with the Jama’ah . Then whoever singles himself out (from the Jama’ah) will be singled out for the hell-fire.” Convinced
with this principle, the barakah or blessing of Allah
the Sustainer of this world and the hereafter with the practice of shura that is in line with the Islamic values.
Executing Decision
As shura comes out with a decision
and the management carries out the plan, there exist a dual relationship
between management and shura and management and
employees as shown by the line label a and b
respectively. Management entrusted with the responsibility to carry out
decision made by shura in an Islamic manner. The
manager is not merely responsible to his human superiority but simultaneously
to Allah. The responsibility to Allah is in fact a function of the intrinsic
quality of the manager’s life as an amanah from
Allah. The Islamic concept of accountability to Allah is the understanding that
human beings will stand before Him in the Day of Judgment to take account for
his deeds in this world. Therefore,
managers should take their work as a form of ibadah
(worship) and amal salih
(virtues act).
On the other hand, management-employee relationship should be
based on amanah (trust) and adl
(justice). While employees should be amanah in
performing their job, management should be just on the rights of the workers
pertaining to their salaries, training, education and the religious obligation
like performing prayers.
Control System
Hisbah function as a control
mechanism within a corporation. This task will carried
out by AGC, internal shariah review as well as
external auditor. As illustrated in the diagram, hisbah
authority is placed inside the management team so as to portray that they are
responsible to make audit on the management work. Besides that, they also make
audit on the work done by the employees of the corporation as depicted in label
c. The findings of hisbah authority will be reported
to the shura which serve as a source for shura to assess the overall running of the corporation and
make plans on how to improve it. The relationship between hisbah
authority and shura is shown in label d.
AGC plays an important role in assisting the shura by preserving the integrity of the financial
reporting process, and providing additional assurance on the reliability of
financial information presented to the shura
members. For AGC to play an effective
and independence role, the composition of its members should be from
non-executive directors. A study by Haniffa and Cooke
(2000, p. 4) suggest that ‘non–executive directors provide firms with links to
the external environment due to their expertise, prestige and contacts’.
Therefore, authors are in the opinion that ACG responsibilities include the
review of internal controls, accounting practices and audit plan, accounts and
financial reports, compliance with Shari’ah rules and principles and finally
the use of restricted investment accounts’ funds.
As the objective of hisbah
existence is to ensure compliance with rules and regulation set up by Islam and
the local authority, its position is best placed by internal Shari’ah review,
internal auditor and external auditor. These auditors, when performing their
duties should hold to God fearing concept with full sincerity that they are responsible
to a wide scale of users and ultimately to responsible to Allah. These values
will ensure that they will preserve their reputation so as to maintain their
independence.
As a conclusion to their task, the internal Shari’ah review
and internal auditor should produce a report to the management, shura as well as stakeholders together with the report of
external auditor’s annual report. The internal Shari’ah report should ensure
readers that the financial statements of the company were in accordance with
the Islamic Shari’ah and that they have access to all the documents and records
deemed necessary in carrying their duties. Any deficiencies or breach in the
conduct of management will be informed to shura so
that corrective action can be taken.
The above suggestions would be an ideal framework considering
those parties involve in the operation of an organization. With the current
lack of Islamic scholars in fiqh almua’malat,
it is deem necessary to have such experts to be placed in the team of shura and hisbah within an
organization. This implies a serious need for the education authorities to come
out with a drastic plan to prepare professionals who is well verse in both
accounting and fiqh al-mua’malat.
VIII. CONCLUSION
Worldviews
play a paramount role in the human being life. Its affect every single action
of a man. Different worldviews will certainly shape different qualities of man
kind which will eventually lead them to different end means of life as well.
Western worldview and Christian worldview concern on secularism and religious
respectively while Islamic worldview has dual worldviews which are in this
world and in the hereafter. These
remarkable and peculiar worldviews as compared to others have cultivated
Islamic concepts, values and norms to the Muslims (assuming all Muslims adopt
Islamic worldviews) at large.
The
implications of these worldviews have nurtured positive contribution to the
effectiveness of corporate governance. Although the Western have come out with
a variety of connotations and recommendations pertaining to the effective
corporate governance, the future of corporate governance globally still
equivocal since none of them seems to be effective. Historically, such
endeavors have shown failures. Hence, an
important note to ponder is that the codes of upholding trust, maintaining
integrity, exercising transparency and accountability, prudent management of
resources, maximizing returns, caring and concern of the environment would
remain as mere noble codes if the issues
of man, his values, ethics and moral conduct are not tackled in the first
instance. Corporate governance is basically the moral and ethical dimensions of
managing a company’s business. For the Muslims, the ethical codes of conduct
based on the tawhidic worldview and Quranic values are considered more elevating than those,
which are detached from religious moorings
As
far as Islam is concerned, the Western solutions will resume to face failures
as long as they are not able to cultivate a so called ‘true accountability’
(Islamic accountability) in their practitioners (i.e. accountants, auditors,
board of directors, managers etc.). Islam believes that the dual accountability
namely accountability to man to man as well as accountability to Allah are the
best solution to attain good corporate governance.
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