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Corporate Governance for Islamic Business Organizations

By: Ezry Fahmy

1.0 Philosophical framework of IBOs in Islam

Most people may think that jump into business or the likes just the matter of getting a

hold of job and make money. This kind of scrutiny is not surprising since we are

surrounding by the secular environment where profit maximization is the main objective

above all. The discourse on philosophy of industrial revolution though only resolve on

how should the role of a business satisfying the ‘unlimited needs’ of the consumers

through limited resources.

Hence the negative impact towards the society via its productive manner is less

considered. However, for Islamic business organizations, is a special case, a must

embedded faith based system. Thus IBOs is in need of a framework that could sets a

standards of behavior to which corporation must subscribe in order to give rather positive

impact towards the society from its production, this is what we known as corporate social

responsibility. In simple words, it is a framework of how the business should play its

functions and roles towards the society; having a positive and productive impact on

society.

IBOs that lead by a Muslim people must abide by the rules of Shariah to make sure

the operational is in line with Islamic teachings, the business’s fundamental embedded

with moral and initiative that based on the belief that a corporation should be good to the

society. Thus having a CSR has nothing harm rather it is inscribed in the Shariah.

2.0 The importance of corporate social responsibility (CSR)

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As IBOs, having such corporate social responsibility (CSR) as a requirement of

corporate governance could be one way to control the business objective from being

driven by capitalism worldview that solely oriented toward profit; rather, an Islamic

organizations should involve in promoting the social welfare and protect the needs of

society as a whole.

We understand that IBOs is an entity that doing business to gain profits and as well as

protect their shareholder’s interest, however, Islamic teachings or Shariah framework and

principles teaches to not only focus on that particular aspect but must as well not

undermine and neglect their social responsibility and commitments to their stakeholders.

The existence word of ‘Islam’ in every aspect of Islamic organization operational,

transactions, up to financial reporting reflects a vital role that need to be noted. The use of

word Islam or Shariah is very broad and includes all aspects in a Muslim daily life. Thus

being responsible to the society should be included from the aspect of ethics, worship and

law of business transactions in it scope, as what they translated as tawhidic approach.

Tawhidic approach need to be expressed in the operational process of IBOs since it

covers all relationship, mainly Man-Allah, Man-Human Beings and Man-Environment.

From here we understand that this triangular relationship we can see it as IBOs and Allah,

IBOs and Human Beings, and IBOs and Environment1. Invoking the Shariah and

employing a tawhidic-based business paradigm imply that the entrepreneurs are no longer

driven by profit maximization alone, but by the pursuit of ultimate happiness in this life

and in the Hereafter2.

3.0 CSR in Islam

By means of CSR, the IBOs could reflect how Islam all these while stresses the

importance of public interests rather than merely individual interests. CSR framework is

1 Mohd Rizal Muwazir el. al. (2006). Corporate Social Responsibility Disclosure: A Tawhidic Approach. Jurnal

Syariah. 14 (1). pp. 125-142. 2 Dusuki, Asyraf Wajdi and Abdullah, Nurdianawati Irwani (2007) Maqasid al-Shari`ah, Maslahah and Corporate

Social Responsibility. The American Journal of Islamic Social Science. Vol. 24 No.1, pp. 25-45.

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not against Islamic concept rather some scholars pointed out that it is relates to several

principles in Islam such as Maqasid Al-Shariah, Maslahah,or/and preventing harm.

Moreover, social responsibility in Islam stems from the concept of brotherhood and

social justice3.

These terminologies bring huge meanings that proven related to the CSR framework

that has to do with IBOs operational aspect. The prime objectives of Maqasid Al-Shariah

are centralized on the objective of accomplishing the development of both the spiritual

and socio-economical well-being of Muslims. ‘Adl or Justice is another very important

principle and objective of the Shariah and its purpose is to create and maintain

equilibrium within a society. CSR commitment helps to realizing this level’s goal for

society engaging in activities or programs that may lead to improving and attaining the

perfections of public life.

The managers or head of the IBOs should first set an example and be a role model by

reflecting their role as the khalifah or vicegerent on earth. That’s why we believe that

Under the CSR precept, managers are expected to strive to preserve and protect their

stakeholders’ essential needs. Through understanding of the Maqasid Al-Shariah

(objective of the Shariah), the implementation of CSR framework could be done more

effectively efficiently without undermining corporation’s viability and long term

sustainability.

It is also important to understand that CSR precept is not only focusing on company

being good to the society through various means but also important to note that being

transparency in any decision and operational process to protect the stakeholder’s interest

also must be highlighted. The whole array part of business policies, processes and

procedures, contracts and agreements, financial system of reporting, human resource

management, social activities and contributions, marketing and advertising, reports and

3 Naqvi, Syed Nawab Haider. (1981). Ethics and Economics:An Islamic Synthesis. Leicester:The Islamic Foundation.

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circulars, zakat calculation and payment as well as the IT systems should be taken into a

consideration to a holistic view of Shariah4.

The IBOs must bear in mind that the execution of Shariah review is important in

exercising governance especially in ensuring the business operational process are

compliance with Shariah. Any lope hole in the presenting the report and so forth reveal it

lacks the depth of providing such assurance. That’s why the CSR come into picture to

remind the IBO’s responsibility towards the stakeholders. The CSR precept is essential in

the IBOs operations and should be out as a requirement of corporate governance because

it helps the IBOs to include the functions of stakeholders into the equation.

As a trustee in this world, it is imperative that we manage these possessions to the

best of our abilities to create a maximum added value in CSR by intention of creating

benefit to the ummah (community). In Islam, business organizations are considered as

human institution which is part of the ummah Islamiyyah (Islamic Community). As a

result, IBOs have to promote social responsibility5.

When we speak about how the elements of Maqasid Al-Shariah, Maslahah,or/and

preventing harm embedded in the CSR precept, thus it means CSR merely a precept that

sees the role and functions of a business organization as a whole, inner and outer part of

it. Maslahah or public interest is preserve from bringing mafsadah or harm towards the

people involved in the business or the society as a whole. The concept of Maslahah

versus Mafsadah can be put to a test through such example whereby the issue when the

business endanger people’s lives and disrupt their intellects as a result of environmental

degradation and manufacturing illicit drugs for public consumption, it may benefit

several people in the business because of the profit the acquire but the activities bring

harm towards the society.

4 Ng Boon Ka et al. (2009) Selected Shariah Committee Reports in Malaysia: A Critical Appraisal. INCEIF Working

Paper. (Unpublished). 5 Muhammad Ali Haji Hashim (1998). Building A Learning Organisation - An Islamic Approach. KL: IKIM. p.27-29.

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A holistic view of the relevance of CSR to be applied by IBO will resolve around

how the IBO operates. The organizations treatment and concern to their employees is

counted, as well as how well their concern on their business operational or services

helping the society. Managers, shareholders, and workers must always strive to improve

the corporation’s fulfillment of its social responsibility, since their personality and

character have been shaped by their heightened sense of ultimate accountability to God,

from which no one can escape. This is actually the manifestation of the taqwa (God-

consciousness) paradigm.

In conclusion, the lack of a concrete and solid framework to manage the conflicting

interests arising from its diverse stakeholders further thwarts the endeavor to promote

good CSR practices in the IBO.

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