Corporate Governance: Conventional vs. Islamic Perspective
12 Pages Posted: 2 Oct 2010 Last revised: 3 Apr 2011
Date Written: 2009
Although Islam as a way of life has always promoted good ethics, strong morals, unshakeable integrity and honesty of the highest order, it is not easy to incorporate such ethical values into an ‘Islamic’ corporate governance standard and implement it. Consequently, in practice, most of ‘Islamic’ companies use the conventional corporate governance standard which may not be consistent with the Islamic values. This paper, therefore, compares the corporate governance concepts in the conventional and the Islamic perspective. Main differences are found with regard to philosophical aspects, including objectives of the company, types of contract involve, key players in the corporate governance practice as well as the relationships between the players. The difference rooted from the fact the Islamic perspective sees the corporate governance practice as Muslim’s obligation to God, thus leads to the existence and obedient of the ‘implicit’ contract with God and explicit contract with humans. In the end, these placed God and Islam itself as key players in the corporate governance practice. This is in contrast to the conventional point of view that focuses on the material aspects. In practical field, the differences are minor. The mechanism and tools for the effective implementation of corporate governance are relatively the same. Nevertheless, as Islamic financial institutions deal with more complicated financial transactions and must comply with Shari’ah rules, it requires relatively stronger internal control. Unfortunately, most of the tools are not being practiced yet by IFIs either because less supporting infrastructure or insufficient human resources are available. These constitute the main challenges for IFIs in the near future.
Keywords: Corporate governance, Islamic corporate governance, business ethics
JEL Classification: G18
Suggested Citation: Suggested Citation