The Relationship Between BOD Ethical Commitment and Risk Management and Internal Control System with the Performance of Shariah-Compliant Companies
DOI:
https://doi.org/10.15282/jgi.5.3.2022.7690Keywords:
BOD Ethical Commitment, Risk Managemet and Internal Control System, Shariah-Compliany Companies, Performance of CompanyAbstract
Shariah companies need to maintain good performance to ensure the sustainability of companies. Shariah companies operate based on Islamic moral foundations, specifically in terms of their accountability and transparency which are considered as key values that need to be considered when conducting their business operations. However, corruption cases can affect the performance of Shariah companies. Studies have shown that Shariah-compliant companies are underperforming as compared to their conventional counterparts. Therefore, the objective of this study is to examine whether BOD ethical commitment (corporate ethics values, action to promote ethics, code of ethics and whistleblowing policy) and risk management and internal control system (content, implementation, role, objective, framework and separation section) will affect the performance of Shariah companies. Data was collected from the 2019 annual reports of 60 Shariah manufacturing companies. Data was analysed using Smart Partial Least Square. The study found BOD Ethical Commitment (whistleblowing policy) and Risk Management and Internal Control System (separation of risk management and internal control) have a significant relationship with performance. The study implies that shariah-compliant companies should focus on the disclosure of whistleblowing policy and separation of risk management and internal control system in their annual reports for them to improve their performance as disclosure of this information, will help to improve the confidence of the market to invest in them
References
Afrifa, G. A., & Tauringana, V. (2015). Corporate governance and performance of UK listed small and medium enterprises. Corporate Governance.
Agiomirgianakis, G., Voulgaris, F., & Papadogonas, T. (2006). Financial factors affecting profitability and employment growth: the case of Greek manufacturing. International Journal of Financial Services Management, 1(2-3), 232-242.
Ahmad, R. A. R., Zakaria, N. B., Yunos, R. M., Ahmad, S. A., & Abdullah, N. (2016). Risk Management and Internal Control Disclosure among Malaysian Listed Issuers. Management & Accounting Review (MAR), 15(1), 297-313.
Ahmed, E., & Hamdan, A. (2015). The impact of corporate governance on firm performance: Evidence from Bahrain Bourse. International Management Review, 11(2), 21
Alemu, A. A. (2020). The Effect of Internal Control on Organization Performance in Reference to Moha Soft Drinks Company, Ethiopia: A Case Study in Hwassa Pepsi Cola Factory. International Journal of Research in Business Studies and Management, Volume 7, Issue 3, PP 10-19.
Al-Matari, E. M., Al-Swidi, A. K., & Fadzil, F. H. B. (2014). The measurements of firm performance's dimensions. Asian Journal of Finance & Accounting, 6(1), 24.
Amran, A., Bin, A. M. R., & Hassan, B. C. H. M. (2009). Risk reporting: An exploratory study on risk management disclosure in Malaysian annual reports. Managerial auditing journal
Ashraf, D., & Mohammad, N. (2014). Matching perception with the reality— Performance of Islamic equity investments. Pacific-Basin Finance Journal, 28, 175-189.
Bazrafshan, E., Kandelousi, A. S., & Hooy, C. W. (2016). The impact of earnings management on the extent of disclosure and true financial performance: Evidence from listed firms in Hong Kong. The British Accounting Review, 48(2), 206-219.
Blazovich, J. L., & Smith, L. M. (2011). Ethical corporate citizenship: Does it pay? In Research on professional responsibility and ethics in accounting. Emerald Group Publishing Limited.
Bursa Malaysia Berhad. (2018). Retrieved from https://bursasustain.bursamalaysia.com/droplet-details/resources/statement-on [1] risk-management-internal-control-guidelines-for-directors-of-listed-issuers
Byrne, B. M. (2016). Structural equation modelling with AMOS: Basic concepts, applications, and programming. Routledge
Campbell, J. M., & Park, J. (2017). Extending the resource-based view: Effects of strategic orientation toward community on small business performance. Journal of Retailing and Consumer Services, 34, 302-308.
Chin, W. W., Marcolin, B. L., & Newsted, P. R. (2003). A partial least squares latent variable modeling approach for measuring interaction effects: Results from a Monte Carlo simulation study and an electronic-mail emotion/adoption study. Information systems research, 14(2), 189-217
Choi, T. H., & Jung, J. (2008). Ethical commitment, financial performance, and valuation: An empirical investigation of Korean companies. Journal of Business Ethics, 81(2), 447-463.
Civelek, M. E., Çemberci, M., Artar, O., & Uca, N. (2015). Key factors of sustainable firm performance: A strategic approach.
Cordeiro, W. P. (2003). The only solution to the decline in business ethics: Ethical managers. Teaching Business Ethics, 7(3), 265-277.
Cuomo, M. T., Tortora, D., Mazzucchelli, A., Festa, G., Di Gregorio, A., & Metallo, G. (2019). Impacts of Code of ethics on financial performance in the Italian listed companies of bank sector. JBAFP, 1(1), 1-1
Daily, C.M., McDougall Covin, J.G. and Dalton, D.R. (2002), “Governance and strategic leadership in entrepreneurial firms”, Journal of Management, Vol. 28, pp. 387-412
Derigs, U., & Marzban, S. (2008). Review and analysis of current Shariah‐compliant equity screening practices. International Journal of Islamic and Middle Eastern Finance and Management, 1(4), 285-303.
Elshandidy, T., Fraser, I., & Hussainey, K. (2013). Aggregated, voluntary, and mandatory risk disclosure incentives: Evidence from UK FTSE all-share companies. International Review of Financial Analysis, 30, 320-333.
Fatemi, A., & Luft, C. (2002). Corporate risk management: costs and benefits. Global Finance Journal, 13(1), 29-38.
Fazlzadeh, A., Hendi, A. T., & Mahboubi, K. (2011). The examination of the effect of ownership structure on firm performance in listed firms of Tehran Stock Exchange based on the type of the industry. Interactional Journal of Business and Management, 6(3), 249–267.
Gold, A. H., Malhotra, A., & Segars, A. H. (2001). Knowledge management: An organizational capabilities perspective. Journal of management information systems, 18(1), 185-214.
Hair Jr, J. F., Hult, G. T. M., Ringle, C. M., & Sarstedt, M. (2014). A primer on partial least squares structural equation modeling (PLS-SEM). Sage publications
Hair, J. F. Jr., Anderson, R. E., Tatham, R. L. & Black, W. C. (1995). Multivariate Data Analysis (3rd ed). New York: Macmillan
Hair, J. F., Ringle, C. M., & Sarstedt, M. (2013). Partial least squares structural equation modeling: Rigorous applications, better results and higher acceptance. Long range planning, 46(1-2), 1-12.
Hair, J. F., Risher, J. J., Sarstedt, M., & Ringle, C. M. (2019). When to use and how to report the results of PLS-SEM. European business review.
Haron, R., & Ibrahim, K. (2012). Target capital structure and speed of adjustment: Panel data evidence on Malaysia Shariah compliant securities. International Journal of Economics, Management and Accounting, 20(2).
Hashim, H. A., Abidin, A. F. Z., Salleh, Z., & Devi, S. S. (2020). Panel Dataset of Ethical Commitment Disclosures in Malaysia. Data in brief, 30, 105624
Hendricks, J. A., Defreitas, D. G., & Walker, D. K. (1996). Changing performance measures at Caterpillar. Strategic Finance, 78(6), 18.
Henseler, J., Ringle, C. M., & Sarstedt, M. (2015). A new criterion for assessing discriminant validity in variance-based structural equation modelling. Journal of the academy of marketing science, 43(1), 115-135.
Hooy, C. W., & Ali, R. (2017). Does a Muslim CEO matter in Shariah-compliant companies? Evidence from Malaysia. Pacific-Basin Finance Journal, 42, 126- 141.
Ibrahim, S. H. M., Wirman, A., Alrazi, B., Nor, M. N. B. M., & Pramono, S. (2004, April). Alternative disclosure & performance measures for Islamic banks. In Second Conference on Administrative Sciences: Meeting the Challenges of the Globalization Age, King Fahd University of Petroleum & Minerals, Dhahran, Saudi Arabia (pp. 19-21).
Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. The American economic review, 76(2), 323-329
Jusoh, R., Ibrahim, D. N., & Zainuddin, Y. (2008). The performance consequence of multiple performance measures usage: Evidence from the Malaysian manufacturers. International Journal of Productivity and Performance Management.
Kuncová, M., Hedija, V., & Fiala, R. (2016). Firm size as a determinant of firm performance: The case of swine raising. Agris on-line Papers in Economics and Informatics, 8(665-2016-45098), 77-89.
Kyereboah‐Coleman, A. (2007). The impact of capital structure on the performance of microfinance institutions. The Journal of Risk Finance.
Lee, G., & Fargher, N. (2013). Companies’ use of whistle-blowing to detect fraud: An examination of corporate whistle-blowing policies. Journal of business ethics, 114(2), 283-295.
Marquardt, N., & Hoeger, R. (2009). The effect of implicit moral attitudes on managerial decision-making: An implicit social cognition approach. Journal of Business Ethics, 85(2), 157-171
Mazri, K. F., Ismail, R. F., Arshad, R. O. S. H. A. Y. A. N. I., & Kamaruzaman, S. A. (2018). Corporate governance attributes as determinants of the Islamic social reporting of Shariah-compliant companies in Malaysia. International Journal of Economics and Management, 12(1), 169-180.
McKinney, J. A., Emerson, T. L., & Neubert, M. (2010). The effects of ethical codes on ethical perceptions of actions toward stakeholders. Journal of Business Ethics, 97, 505–516
Michael Geringer, J., Beamish, P. W., & DaCosta, R. C. (1989). Diversification strategy and internationalization: Implications for MNE performance. Strategic management journal, 10(2), 109-119.
Moneva, J. M., Rivera‐Lirio, J. M., & Muñoz‐Torres, M. J. (2007). The corporate stakeholder commitment and social and financial performance. Industrial management & data systems.
Omar, M., Nawawi, A., & Salin, A. S. A. P. (2016). The causes, impact and prevention of employee fraud: A case study of an automotive company. Journal of Financial Crime.
Pang, Y., & Li, Q. (2013). Game analysis of internal control and risk management. International Journal of Business and Management, 8(17), 103.
Parnell, J. A., Lester, D. L., & Menefee, M. L. (2000). Strategy as a response to organizational uncertainty: an alternative perspective on the strategy‐performance relationship. Management Decision.
Penrose, E.T. (2009). Retrieved from https://openlibrary.org/books/OL25226754M/The_theory_of_the_growth_of_the_firm
Persons, O. S. (2013). Characteristics and financial performance of no-ethics-code firms. Journal of academic and business ethics, 7, 1.
Ramayah, T., Cheah, J., Chuah, F., Ting, H., & Memon, M. A. (2018). Partial least squares structural equation modeling (PLS-SEM) using smartPLS 3.0.
Ramayah, T., Yeap, J. A., Ahmad, N. H., Halim, H. A., & Rahman, S. A. (2017). Testing a confirmatory model of Facebook usage in SmartPLS using consistent PLS. International Journal of Business and Innovation, 3(2), 1-14.
Reddy, K., & Fu, M. (2014). Does shariah compliant stocks perform better than the conventional stocks? A comparative study of stocks listed on the Australian Stock Exchange. Asian Journal of Finance & Accounting, 6(2), 155-170.
Salin, A. S. A. P., Ismail, Z., Smith, M., & Nawawi, A. (2019). Board ethical commitment and corporate performance: Malaysian evidence. Journal of Financial Crime
Schroeder, D. (2002). Ethics from the top: top management and ethical business. Business Ethics: A European Review, 11(3), 260-267.
Schwartz, M. S., Dunfee, T. W., & Kline, M. J. (2005). Tone at the top: An ethics code for directors? Journal of Business Ethics, 58(1), 79-100
Security Commission Malaysia. (2020). Prospectus Guidelines. Retrieved from https://www.bursamalaysia.com/listing/get_listed/listing_criteria
Security Commission Malaysia. (2020). Retrieved from https://www.sc.com.my/development/icm/shariah-compliant-securities/list-of[1]shariah-compliant-securities
Setiawan, A., & Djajadikerta, H. (2017). Impact of Internal Audit Function on Internal Control Disclosure. Advanced Science Letters, 23(9), 8078-8084
Shiamwama, S. M., Ombayo, J. A., & Mukolwe, M. S. (2014). Internal factors affecting the performance of businesses of retirees in kakamega municipality. International Journal of Business, Humanities and Technology, 4(2), 144-157.
Singh, J. B. (2006). A comparison of the contents of the codes of ethics of Canada’s largest corporations in 1992 and 2003. Journal of Business Ethics, 64(1), 17-29.
Stohl, C., Stohl, M., & Popova, L. (2009). A new generation of corporate codes of ethics. Journal of business ethics, 90(4), 607-622.
Treviño, L. K., Butterfield, K. D., & McCabe, D. L. (1998). The ethical context in organizations: Influences on employee attitudes and behaviors. Business Ethics Quarterly, 8(3), 447-476
Umar, H., & Dikko, M. U. (2018). The effect of internal control on performance of commercial banks in Nigeria. International Journal of Management Research, 8(6), 13- 32.
Urquia, L. G. M. (2018). Effects of internal control system on financial performance in an institution of higher learning. Journal of Fundamental and Applied Sciences, 10(3S), 110-125.
Weill, L. (2003). Leverage and corporate performance: A frontier Efficiency Analysis on European Countries. Available at SSRN 300640.
Wernerfelt, B. (1984). A resource-based view of the firm. Strategic Management Journal, 5: 171–180.
Wong, K. K. K. (2013). Partial least squares structural equation modeling (PLS-SEM) techniques using SmartPLS. Marketing Bulletin, 24(1), 1-32.
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2023 University Malaysia Pahang Publishing
This work is licensed under a Creative Commons Attribution 4.0 International License.
