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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 Environment 1. 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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