The Relationship between Islamic Corporate Social Responsibility and Firm’s Performance: Empirical Evidence from Shari’ah Compliant Companies

Abstract

Shari’ah Compliant Companies (ShCC) are companies that conduct activities which are not contrary to the Islamic principle.  Numbers of ShCC in Bursa Malaysia increase tremendously since the introduction of Islamic Capital Market and it was in line with the Ninth Malaysia Plan that wanted Malaysia to become global hub for Islamic Capital Market.  Based on the Islamic theoretical foundation of social accountability and full disclosure, social activities are becoming common practice among ShCC and social reporting are beginning to present in the annual report. The objectives of this paper are to assess the level of Islamic Corporate Social Responsibility (i-CSR) disclosure for the ShCC and examine the relationship between i-CSR disclosure and firm performance. The study used weighted disclosure analyses approach, a self-constructed disclosure checklist was developed to measure the level of i-CSR disclosure that been classified according to five dimension of Maqasid Al-Shari’ah and Maslahah. The study examines the annual reports of sample of 114 ShCCs which selected based on market capitalization ended 2008 for two years period of 2010 and 2011. In this study, Smart PLS was applied to test the relationship between i-CSR disclosure and firm performance. Subsequently bootstrapping was conducted to investigate the standard error of the estimate and t-values. The result indicates that the level of i-CSR disclosure in overall was low and lacking of Islamic values and principles or under protection of faith (Al-Din). The result was consistent with prior studies. It was found that there was a significant relationship between i-CSR disclosure and firm performance. The findings are limited to the ShCCs which selected based on market capitalization ended 2008 for two years period of 2010 and 2011. The source of data used in this study is the companies’ annual report only. This study has brought up several implications which may be applied in many countries irrespective of whether they are developing or developed countries. Firstly, it provides strong evidence to show that boards of directors and human capital are significant variables in the extent of disclosure. Secondly, the study is expected to alert the Securities Commission with regards to the definition of Shariah-compliant status which should not just include “good public perception and Image Company” but also the extent of the application of Islamic values and Shariah principles in the conduct of their businesses. The study extends the previous studies by providing a new benchmark of an Ideal Islamic Corporate Social Responsibility Index based on the  Maqasid Al- Shariah and the application of Maslahah in Shariah Compliant Companies. However this study focuses on i-CSR disclosure in ShCC annual reports for 2010 and 2011 only. Hence, future research may consider analyzing other forms of communication channels such as the company’s web site, standalone sustainability reports, newspapers and in-house magazine. Future research could also include data for more than two years period.

Keywords: Islamic Corporate Social Responsibility (i-CSR), Shari’ah Compliant Companies, Firm’s performance, Islamic Perspectives