Corporate Governance And Firm Performance Of Shariah-Compliant Company Of Consumer Product Industry

Abstract

Previous literatures on the Corporate Social Responsibility (CSR) have been stressed on the roles of companies towards their stakeholders for being socially and ethically in business especially when involving in the matter of sustainability. This has reflected to the issue of the CG functions in influencing the way companies behave through business activities. The purpose of this paper is to examine the influence of corporate governance (CG) attributes towards firm performance of the Shariah-compliant companies, specifically on the consumer product industry. The results of the study revealed that the CG attributes failed to exude the significant links with firm performance, except for the board size. In the context of consumer product industry of Shariah-compliant companies, it is vital to impart its social responsibility through their business operations in relating to the production of products/services which ultimately could affect to the firm’s financial health. Hence, the CG attributes play significant roles to ascertain that firm’s bottom-line is sufficient to protect the stakeholders’ welfares. Ways forward and limitation of the study are further deliberated.

Keywords: Corporate governanceperformanceShariah-compliantconsumer product

Introduction

The growing number of public listed companies with Shariah-compliant status (known as ‘Shariah-compliant companies’) underpinning the Islamic capital market is a reflection to the Islamic resurgence and increasing demand on the funds which offered by those companies whose business activities are carried out in accordance to the Shariah principles and are prohibited from engaging in activities that could shake the confidence especially among Muslim shareholders, such as riba’ (interest), gharar (uncertainty), maysir (gambling) and other speculation and unethical practices. Concerning that Shariah principles demonstrate the act of worship to God and sense of justice with other humans (Beekun, 1997), Islam solemnly puts a dividing line between Halal (permissible) and Haram (unlawful) practices in business activities which are closely linked to the ethical values and socially responsible in business. Opposition to the conventional idea of doing business which is only confined to succumbing to the commercial motive by Friedman (1970), the responsibility of companies nowadays is no longer hinges on solely making profit instead, but transcends to serving interests of wider circles of the stakeholders (Freeman, 1984) as a way to demonstrate social responsiveness through being ethical in business activities/practices (Carroll, 1979; Wood, 1991).

Since the protection of interests have widened to the corporate stakeholders, the consumer product industry constitutes as a significant sector that involves in producing food- and non-food products for its users, therefore the ways companies managing their resources are very crucial that determining the corporate bottom-line. Hence, the corporate governance attributes play essential roles to monitor the top management in managing well of their resources without neglecting the elements of quality and social values by ascertaining their trajectory and goals for the well-beings of their stakeholders, which are consistent with the values that are promoted in Islam. This is because from the lens of Islam, corporate governance attributes act as trustees of corporate resources, the persons who are entrusted to be responsible and have integrity to ensure that all resources are under the purview of top management that need to be well taken care of.

Given the importance of serving to the interests of consumers and other stakeholders in the context of the consumer product industry especially from the aspect of their nature of business and products would provide a substantial impact to the company’s performance. Since most of the performance-related studies are undertaken across industries, this study is expected to fill the loophole of the existing literature by focusing on single industry – consumer product industry, after taken consideration the nature of business of the studied industry which closely related to the rights of consumers in getting good product(s) producing by the responsible companies that can be considered from the aspect of its attributes such as halal status, hygienic sand safe condition.

Problem Statement

Since the overall business operations of companies are under purview of their top management, therefore it is salient to have good governance to oversee the business activities are consistently operated in the manner that the conformance to the Shariah requirements are in place. Given that Shariah-compliant companies are the subset of the public-listed companies in which conventional capital market runs in parallel to the Islamic capital market, thus all legal and governance-related guidelines imposed by the regulator are subject to be complied by the Shariah-compliant companies. Unlike the previous MCCGs which mainly provide concentration on the shareholders’ interests, however the corporate governance reforms through the recent revised Malaysian Code on Corporate Governance (MCCG) 2017 has taken the stakeholders’ interests into account which requires a balancing treatment from companies in conducting their business. This is because a proper governance allows fair distribution of responsibilities and rights of companies towards their direct and indirect participating parties. Thus, the good governance is expected to come up with better financial outcomes (Adjappong & Tauringana, 2015; Che Haat et al., 2008; Essen et al., 2012; Shawtari et al., 2017).

Islam emphasizes on the importance of holding responsibility and duties than on rights (Rice, 1999). Islam does not demarcate the lines between the practice of religion and business, since the elements of ethical values constitute a part of religion values and in fact it is proper guidelines for its adherents. Since the Shariah status is given for those listed companies that have been successfully meet the Securities Commission (SC)’s threshold in the screening process through the assessment of companies’ business activities and financial activities, the companies are not only being ethically and religiously responsible in carrying out business, but they are also expected to have good performance in business to ensure the long-term growth and sustainability. This is consistent with concept in Islam that prevails more on the protection of humans’ well-beings (i.e., welfare, interest or benefit) and to steer clear of any attempts that bring towards hardship or predicament (Arsad et al., 2015; Rahman, Tareq et al., 2017).

As far as the consumer products industry is concerned, this consumer industry is expected to be accountable in serving the needs of its wide range of stakeholders involving the food and non-food products, which entails for certain implementation of quality management system to ensure the production of quality products are in place (Fotopolous et al., 2010). However, the welfare of the stakeholders is often being neglected due to the emphasis given on the economic pursuits. Hence, being a religious-based business, this industry portrays the business activities of the companies must be undertaken as in accordance with Shariah principles and values which accentuate on the well-beings of its stakeholders through fulfilling their needs and desires, and stray from the path that incites any harm and hardship.

Research Questions

1. How the CG attributes and performance of the Shariah-compliant companies under the consumer product industry?

2. Do the CG attributes influence the performance of the Shariah-compliant companies under the consumer product industry?

Purpose of the Study

The objectives of the study are twofold; firstly, is to examine the corporate governance (CG) attributes and performance of the Shariah-compliant companies under the consumer product industry; and to investigate whether the CG attributes could influence towards the performance of the Shariah-compliant companies under the consumer product industry.

Research Methods

Followings are the deliberation on the research methodology pertaining to the nature of the research been carried out, data collection and the measurement of variables in order to meet the objectives of the study:

Findings

Conclusion

The roles of business in the midst of society are essential to craft reciprocal functions and benefits between the firm and its wider circles of stakeholders. Reminiscing to the seminal idea of the firm’s existence, the motives of the business operators weigh more on delineating costs reduction and improvement in profit which are derived from the factors of production. However, from the lens of Islamic approach, the business organisations act as being socially responsible to the society through its business activities. In the context of consumer product industry of Shariah-compliant companies, it is vital to impart its social responsibility through their business operations in relating to the production of products/services which ultimately could affect to the firm’s financial health. Hence, the CG attributes play significant roles to ascertain that firm’s bottom-line is sufficient to protect the stakeholders’ welfares.

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