Introduction

In the contemporary environment, business organizations have to face up to the task

of meeting the expectations of a wide variety of their stakeholders. A stakeholder is
normally defined as someone that can be considered to have an interest a stake!, indirect or
direct, in the companys operations. In contrast, stakeholder is "any group or individual
which is affected by the operations of the company#. $ach category of stakeholders has a
distinct interest and expectations from an organization. %orporate organizations have to meet
the expectations of each group of stakeholders without &eopardizing that of another
stakeholder group. 'o meet these expectations with some reasonable degree of effectiveness,
organizations are obliged to adopt a broader agenda which takes these diverse expectations
into account. %orporate (ocial )esponsibility is thus increasingly adopted by organizations
operating at national and international levels to address these varied stakeholders
expectations.
In Islam, business activities are not undertaken to satisfy only material needs and
wants but more importantly it should be undertaken to fulfill religious obligations and to
achieve other non*material ob&ectives such as to secure social needs. 'he aims of the Islamic
system of business are therefore not primarily materialistic but are based on the concepts of
human well being and achieving a good life overall. %orporate governance in banking has
been analyzed very extensively in the context of conventional banking markets. +y contrast,
little is written on corporate governance from Islamic perspective particularly the governance
structures of Islamic finance sector. ,ndeniably, corporate governance is one of the vital
elements of any corporation development and it is even bigger challenge to Islamic finance
system due to its additional risk as compared to the conventional banking system. 'herefore,
it is strongly indicated that any Islamic corporation needs to have a proper corporate
governance framework to ensure its growth and success.
'he purpose of this paper is to draw an analytical review on corporate governance and
corporate social responsibility %()! from the Islamic perspective. It was found that it is
very important to take into consideration the corporate governance and %() in Islamic
financial institutions because it might help to draw the right image about the organization.
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Corporate Governance in Islam
.enerally, the definition of corporate governance can be divided into two senses.
/irstly, in narrower sense corporate governance can be defined as a formal system of
accountability of senior management to the shareholders. (econdly, in expansive term,
corporate governance includes the entire network of formal and informal relations involving
the corporate sector and their conse0uences for society in general 1asan, 2--3!.
%houdhury and 1o0ue 2--4! views that the ob&ective functions of corporate
governance in Islam is to define and attain an ob&ective criterion by means of understanding
the relations between critical variables supported by policies, programs and strategic
coalition. A clear and precise of the ob&ective criterion leads to the determination of such
policies, programs and strategies by means of institutional consensus and the exercise of
proper instruments as re0uired by the corporation. 'hese ob&ective functions put maqasid
(hariah as the ultimate goal of corporate governance. 'he corporate governance in Islam
plays very essential roles in order to meet the specific goals and ob&ectives of the corporation.
Islam adds further value by insisting the element of ma0asid (hariah which cannot be found
in the 5estern concept.
'he former refers to the corporate governance model based on the principle of
consultation where all stakeholders share the same goal of Tawhid or the oneness of Allah
%houdury and 1o0ue, 2--4!.
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'he figure shows that the Islamic corporate governance approach is premised on the
Tawhid epistemological model whereby the functional roles of corporation are working via
the Shariah rules. 'he principle of Tawhid derives important concept of vicegerency
khalifah), trust amanah! and &ustice or e0uilibrium aladl wal Ihsan!. 'he stakeholders as
vicegerent of Allah have fiduciary duty to uphold the principle of distributive &ustice via the
Shuratic process. %hapra 63327284! mentions that the practice of Shura is not an option but
it is rather an obligation. 'he constituent of Shura provide. 'here are two main institution
involved in the above process of corporate governance namely the Shariah board and the
constituent of Shuras groups of participants for example all the stakeholders. In determining
the scope of Shariah, the institution of Shariah board comes into a picture and it plays
crucial role to ensure that all corporation activities are in line with the Shariah principles. In
addition, the shareholders also play a big role as active participants and conscious
stakeholders in the process of decision making and policy framework by considering the
interest of all direct and indirect stakeholders rather than maximize their profit alone. 'he
other stakeholders including community should also play their roles to provide mutual
cooperation to protect the interest as a whole and to stimulate the social wellbeing function
for social welfare. All of these processes are centered on toward fulfilling the ultimate
ob&ective of Islamic corporate governance of complementing the private and social goals via
upholding the principle distributive &ustice %houdury and 1o0ue, 2--47 9:*99!.
'he Tawhid and Shura based approach provides the epistemological foundation of
Islamic corporate governance. 'his approach however seems to be unclear and ambiguous as
to how it could be adopted and implemented in the current corporate governance system.
;oreover, the practice shows that ma&or corporations including I/Is tend to follow the
existing corporate governance model which is founded on the episteme of rationalism and
rationality. It is a time to focus more on the empirical studies rather than theoretical to study
and examine the operational aspects of this Tawhid and Shura based approach.
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Corporate Social Responsibility
'here are a numerous of definitions of %(). 'he ma&ority of definitions integrate the
three dimensions7 economic, environmental and social aspects into the definition, what is
usually called the triple bottom line. In general, %() is essentially a concept whereby
companies decide voluntarily to contribute to better society and a healthier environment. At
present, a good number of companies are promoting their %() strategies as a response to a
variety of social, environmental and economic pressures. 'hey want to send a signal to their
stakeholders that companies are investing for their future and they expect that the voluntary
commitment will help to increase their profitability. 'here is a competitive advantage that
companies believe they can reap by being socially responsible. 'hey foresee that by
communicating effectively about their social, environmental and economic contributions,
they can strengthen their brand, enhance their corporate reputation with customers and
suppliers and attract and retain a committed and skilled workforce. 'he commitment towards
%() will in turn lead to better performance in terms of profitability, competitiveness
and risk management. Islam is the complete code of life. It guides every aspect of human life
including spirituality, business and social &ustice by encompassing an entire socio*economic
system )ice, 6333!. <ne of the key characteristic of the Islamic ethical system is that it
allows no separation between the individual in public and in private life. (ocial responsibility
refers to the obligations that an organization has to protect and contribute to the society in
which it function +eekun, 633=!. 'here are some rules of ethical discipline in Islamic
commercial transactions. 'hey are all pursuant to the concept of lawful and unlawful and
reflect features of social responsibility in every aspect of the transactions.
'he concept of %() in Islam encompasses a broader meaning embracing the Taqwa
.od consciousness! dimension by which corporation as group of individual, assuming the
roles and responsibility as servants and vicegerents in all situations >usuki, 2--9!. Islamic
%orporate (ocial )esponsibility I%()! derives itself from core principles of the holy
?uran. 'he ma&or foundational principles for I%() are unity, vicegerency and trusteeship,
rights and responsibilities and &ustice and e0uilibrium.
'he unity of Allah is the first principle of Islam and of everything Islamic. Allah is the
<ne and absolutely <ne. According to Islam, the purpose of man is to live his life in
submission and obedience to Allah. 1e supposed to fulfill this purpose within the ethical
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framework devised by Allah. 'he ?uran states that Allah is the one and only creator of this
universe who is worthy of worship. $verything in the heavens and on earth belongs to 1im.
+ased on 'awhid, the main ob&ective of social responsibility should be to demonstrate
responsibility not only to Allah, but also provide one single direction in guaranteeing a
unified spirit in adhering to (hariah ;oten, 633-!. In other words, by accepting unity of
Allah, all commercial activities must adhere to shariah and non*conformance will result in sin
1aniffa et al., 2--2!. 'he concept of 'awhid also signifies mans role as vicegerent on earth.
As khalifah, mankind is not free but responsible and accountable to Allah.
;an is considered to be the vicegerent of Allah on earth and thus trustee of Allahs
resources. 'he principle of vicegerency denotes that mankind is the representative of Allah on
earth and as such Allah has entrusted mankind with stewardship of Allahs possession. Allah
states this principle in the holy ?uran, "I will create a vicegerent on earth# ?uran, 278-!.
'he concept of khalifah refers to the role, status as well as the mankinds responsibility to
themselves and to the ummah as a whole. 'his means every human being are responsible to
all ;uslims for whatever deeds they have done with regards to the resources that Allah has
entrusted to him. As a khalifah, leaders in business organizations are re0uired to practice %()
essentially from the principle of 'awhid. /rom an Islamic perspective all possessions, wealth,
expertise, abilities, positions and power belongs to Allah. ;ankind is only trustees. As
trustees, it is imperative that human being manage these possessions to the best of their
abilities to create a maximum added value in social responsibility with an intention of
creating benefit to the community as a whole +ardai, 2--2!.
According to the concept of vicegerency, the right attitude towards human beings is
the mutual sacrifice and cooperation to fulfill the basic needs of all, to develop the entire
human potential and to enrich human life as a whole. 1umans have been endowed with
intellectual to choose either to be righteous or otherwise. As a trustee of Allahs resources on
earth, mankind has been given the free will to steer his own life. ,nlike other creatures in
Allahs universe, human can choose their behavior to be either ethical or unethical. $very
individual is accountable and ultimately responsible for his own actions.
'he concept of vicegerency implies that human beings are e0ual and human
interactions should be based on trust, e0uity, and &ustice @arvez, 2---!. ;uslims should be
honest, sincere, and truthful in their business dealings and ensure exactness in terms of
promised product specifications such as weights, measures and other attributes. Islam
condemns cheating and lying and commands businessmen to be straightforward in all their
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dealings and transactions. /inally, &ustice in Islam also includes the e0uitable distribution of
wealth. $0uilibrium must be practiced by means of fair competition in an open marketA
treating others fairly and maintaining fairness in wage distribution and avoid discrimination
in all forms. In this respect Allah (5'! says, ".ive full measure when you measure and
weigh with a balance that is straight# ?uran, 6=78:!. 'he concept of trust, in Islam, is
inseparably linked with responsibility, implying that the wealth that is entrusted to a human
being is indeed a responsibility that he will be called to account for in the 1ereafter. 'he
combination of these principles denotes a divine accountability for each ;uslim to en&oin
good and &ustice and forbid evil and in&ustice. 'hese core principles therefore constitute the
basis of individual social responsibility.
Conclusion
/rom the above discussion, it is clear that the teachings of Islam not only appear to be
in close conformity with the concept of traditional %() but in many respects go further than
the minimum standards adopted by the framework. In particular Islam exceeds the
re0uirements of the traditional %() in a number of important ways. /irst, it appears to be
wider in scope, for example in the transparency re0uirements in business transactions.
(econd, it has a clear codification defining what is permissible or Halal and what is forbidden
or Haram. 'hird, Islam has an explicit enforcement mechanism in the Shariah as well as in
community enforcement and the final sanction of the accountability of the individual for
unethical behavior on the >ay of Budgment ?uran 6=768!.
'he design of corporate governance model in Islam has its own uni0ue features and
presents distinctive characteristics in comparison with the western concept. 'he study
summarizes the distinct features of Islamic corporate governance into four aspects namely the
episteme, the corporate ob&ective, the nature of management, the management board and the
capital*related ownership structure. In the aspect of epistemological method, Islam puts
Tawhid as the episteme while the corporate ob&ective is premised on protecting of all the
stakeholders interest and rights in line with the principle of maqasid Shariah. 'he nature of
management of Islamic corporate governance model is centered on two fundamental
principles of shura and interactive, integrated and evolutionary process and the apex level of
management is the (hariah board that is responsible to supervise and oversee the overall
corporate activities so as to comply with the Shariah principles.
:
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