Skip to main content

Integrating sustainability practices into islamic corporate governance for sustainable firm performance: from the lens of agency and stakeholder theories

Abstract

While the literature indicates that Islamic Corporate Governance (ICG) practices enhance firm performance, there is scant research on how sustainability practices affect the nexus between ICG and firm performance. To address this knowledge gap, this study developed a framework for conceptualizing the moderating effect of sustainability practices on the relationship between Islamic corporate governance and firm performance. This study incorporated sustainability practices into the ICG framework to evaluate their impact on firm performance by integrating agency and stakeholder theories. This study derived the most important factors from the theoretical perceptions of these two theories and, as a result, established their nexus through the development of research propositions. This study contributes to the body of knowledge on Islamic banking by presenting a novel approach for incorporating sustainability practices into an ICG framework that improves firm performance. Along with adding to the scant body of knowledge on Islamic corporate governance and sustainability, this research gives critical insights to policymakers and concerned stakeholders, particularly Accounting and Auditing Organization for Islamic Financial Institutions, on how to adopt sustainable governance policies/standards and improve existing standards. To the authors’ knowledge, this is the first study to integrate sustainability practices into ICG in order to promote the sustainability of Islamic banks and financial institutions.

This is a preview of subscription content, access via your institution.

Fig. 1

References

  1. Abd Razak, A.H.: Centralisation of corporate governance framework for Islamic financial institutions: Is it a worthy cause? ISRA Int. J. Islamic Finance 10(1), 36–51 (2018)

    Article  Google Scholar 

  2. Abdallah, M.B., Bahloul, S.: Disclosure, shariah governance and financial performance in Islamic banks. Asian J. Econ. Bank. (2021). https://doi.org/10.1108/AJEB-03-2021-0038

  3. Adamu, H., Lutfi, S.L., Malim, N.H.A.H., Hassan, R., Di Vaio, A., Mohamed, A.S.A.: Framing Twitter Public Sentiment on Nigerian Government COVID-19 Palliatives distribution using machine learning. Sustainability 13(6), 3497 (2021)

    Article  Google Scholar 

  4. Ajili, H., Bouri, A.: Corporate governance quality of Islamic banks: measurement and effect on financial performance. Int. J. Islamic Middle East. Financ. Manag. 11(3), 470–487 (2018)

  5. Akhtar, M.F., Ali, K., Sadaqat, S.: Factors influencing the profitability of Islamic banks of Pakistan. Int. Res. J. Financ. Econ. 66(66), 1–8 (2011)

    Google Scholar 

  6. Akhtar, S., Khan, T., Khan, P.A.: Examine the key drivers affecting bottom line: a panel estimation study of indian commercial bank. J. Critical Rev. 7(9), 2020 (2020)

    Google Scholar 

  7. Ali, S.E.A., Lai, F.-W., Hassan, R., Shad, M.K.: The long-run impact of information security breach announcements on investors’ confidence: The context of efficient market hypothesis. Sustainability 13(3), 1066 (2021c)

    Article  Google Scholar 

  8. Ali, S. E. A., Lai, F.-W., Hassan, R.: Socio-economic factors on sector-wide systematic risk of information security breaches: Conceptual framework. In 9th International Economics and Business Management Conference. Melaka, Malaysia: European Proceedings of Social and Behavioural Sciences, pp 502–512 (2020)

  9. Ali, F., Wang, M., Jebran, K., Ali, S.T.: Board diversity and firm efficiency: Evidence from China. Corp. Gov.: Int. J. Busi. Soc. 21(4), 587–607 (2021a)

  10. Ali, S.E.A., Lai, F.-W., Dominic, P.D.D., Brown, N., Lowry, P.B., Ali, R.F.: Stock market reactions to favorable and unfavorable information security events: A systematic literature review. Comput. Secur. 110, 102451 (2021b)

  11. Al-Malkawi, H.-A.N., Pillai, R.: Analyzing financial performance by integrating conventional governance mechanisms into the GCC Islamic banking framework. Manag. Financ. 44(5), 604–623 (2018)

    Google Scholar 

  12. Alnasser, A.S., Muhammed, J.: Introduction to corporate governance from Islamic perspective. Humanomics 28(3), 220–231 (2012)

    Article  Google Scholar 

  13. Alshehhi, A., Nobanee, H., Khare, N.: The impact of sustainability practices on corporate financial performance: Literature trends and future research potential. Sustainability 10(2), 494 (2018)

    Article  Google Scholar 

  14. Alvino, F., Di Vaio, A., Hassan, R., Palladino, R.: Intellectual capital and sustainable development: A systematic literature review. J. Intellect. Cap. 22(1), 76–94 (2020)

  15. Baron, R.M., Kenny, D.A.: The moderator–mediator variable distinction in social psychological research: Conceptual, strategic, and statistical considerations. J. Pers. Soc. Psychol. 51(6), 1173 (1986)

    Article  Google Scholar 

  16. Bashir, A.-H.M.: Risk and profitability measures in Islamic banks: The case of two Sudanese banks. Islamic Econ. Stud. 6(2), 1–24 (1999)

  17. Belal, A.R., Abdelsalam, O., Nizamee, S.S.: Ethical reporting in islami bank Bangladesh limited (1983–2010). J. Bus. Ethics 129(4), 769–784 (2015)

    Article  Google Scholar 

  18. Ben Zeineb, G., Mensi, S.: Corporate governance, risk and efficiency: evidence from GCC Islamic banks. Manag. Financ. 44(5), 551–569 (2018)

    Google Scholar 

  19. Bose, S., Khan, H.Z., Rashid, A., Islam, S.: What drives green banking disclosure? An institutional and corporate governance perspective. Asia Pacific J. Manage.35(2), 501–527 (2018)

    Article  Google Scholar 

  20. Buallay, A.: Corporate governance, sharia’ah governance and performance: A cross-country comparison in MENA region. Int. J. Islamic Middle East. Financ. Manag. 12(2), 216–235 (2019)

  21. Carter, C.R., Rogers, D.S.: A framework of sustainable supply chain management: moving toward new theory. Int. J. Phys. Distrib. Logist. Manag. 38(5), 360–387 (2008)

    Article  Google Scholar 

  22. Daily, C.M., Dalton, D.R.: The relationship between governance structure and corporate performance in entrepreneurial firms. J. Bus. Ventur. 7(5), 375–386 (1992)

    Article  Google Scholar 

  23. Denis, D.K., McConnell, J.J.: International corporate governance. J. Financ. Quantitative Anal. 38(1), 1–36 (2003)

    Article  Google Scholar 

  24. Di Vaio, A., Palladino, R., Hassan, R., Escobar, O.: Artificial intelligence and business models in the sustainable development goals perspective: A systematic literature review. J. Bus. Res. 121, 283–314 (2020)

    Article  Google Scholar 

  25. Echchabi, A., Abd Aziz, H.: Shari’ah issues in Islamic banking: a qualitative survey in Malaysia. Qual. Res. Financial Markets 6(2), 198–210 (2014)

    Article  Google Scholar 

  26. Fallatah, Y., Dickins, D.: Corporate governance and firm performance and value in Saudi Arabia. Afr. J. Bus. Manage. 6(36), 10025–10034 (2012)

    Article  Google Scholar 

  27. Fama, E.F., Jensen, M.C.: Separation of ownership and control. J. Law Econ. 26(2), 301–325 (1983)

    Article  Google Scholar 

  28. Farag, H., Mallin, C., Ow-Yong, K.: Corporate governance in Islamic banks: New insights for dual board structure and agency relationships. J. Int. Finan. Markets. Inst. Money 54, 59–77 (2018)

    Article  Google Scholar 

  29. Freeman, R.E., Reed, D.L.: Stockholders and stakeholders: A new perspective on corporate governance. Calif. Manage. Rev. 25(3), 88–106 (1983)

    Article  Google Scholar 

  30. Gangi, F., Mustilli, M., Varrone, N.: The impact of corporate social responsibility (CSR) knowledge on corporate financial performance: evidence from the European banking industry. J. Knowledge Manage. 23(1), 110–134 (2018)

  31. Del Giudice, M., Di Vaio, A., Hassan, R., Palladino, R.: Digitalization and new technologies for sustainable business models at the ship–port interface: a bibliometric analysis. Maritime Policy Manage. pp 1–37 (2021).

  32. Grassa, R.: Corporate governance and credit rating in Islamic banks: does shariah governance matters? J. Manage. Governance 20(4), 875–906 (2016)

    Article  Google Scholar 

  33. Grassa, R., Chakroun, R.: Ownership structure, board’s characteristics and corporate governance disclosure in GCC banks: what about Islamic banks? Int. J. Account. Audit. Perform. Eval. 12(4), 360–395 (2016)

    Google Scholar 

  34. Hakimi, A., Rachdi, H., R. Ben Selma Mokni, Hssini, H.: Do board characteristics affect bank performance? Evidence from the Bahrain Islamic banks. J. Islamic Account. Bus. Res. 9(2), 251–272 (2018)

    Article  Google Scholar 

  35. Halliday, C.S., Paustian-Underdahl, S.C., Fainshmidt, S.: Women on boards of directors: A meta-analytic examination of the roles of organizational leadership and national context for gender equality. J. Bus. Psychol. 36(2), 173–191 (2021)

    Article  Google Scholar 

  36. Hamad, S., Draz, M.U., Lai, F.-W.: The impact of corporate governance and sustainability reporting on integrated reporting: A conceptual framework. SAGE Open 10(2), 1–15 (2020)

    Article  Google Scholar 

  37. Haniffa, R.M., Cooke, T.E.: Culture, corporate governance and disclosure in Malaysian corporations. Abacus 38(3), 317–349 (2002)

    Article  Google Scholar 

  38. Hassan, R., Marimuthu, M.: Bridging and bonding: having a Muslim diversity on corporate boards and firm performance. J. Islamic Acc. Bus. Res. 9(3), 457–478 (2018a)

  39. Hassan, R., Marimuthu, M.: Contextualizing comprehensive board diversity and firm financial performance: Integrating market, management and shareholder’s perspective. J. Manag. Organ. 24(5), 634–678 (2018b)

    Article  Google Scholar 

  40. Hassan, R., Marimuthu, M., Satirenjit, K.J.: Diversity, corporate governance and implication on firm financial performance. Glob. Bus. Manag. R. Intern. J. 7(2), 28–36 (2015)

  41. Ienciu, I.-A.: The relationship between environmental reporting and corporate governance characteristics of Romanian listed entities. Account. Manage. Inform. Syst. 11(2), 267–294 (2012)

    Google Scholar 

  42. Jan, A.A., Tahir, M., Lai, F.-W., Jan, A., Mehreen, M., Hamad, S.: Bankruptcy profile of the Islamic banking industry: evidence from Pakistan. Bus. Manage. Strategy 10(2), 265–284 (2019)

    Article  Google Scholar 

  43. Jan, A.A., Lai, F.W., Isa, M.P.B.M., Hamad, S.: The structure of Shariah Governance in Islamic Banking Industry: A theoretical review. Int. J. Psychosoc. Rehabil. 24(6), 10465–10476 (2020)

    Google Scholar 

  44. Jan, A.A., Lai, F.-W., Tahir, M.: Developing an Islamic corporate governance framework to examine sustainability performance in Islamic banks and financial institutions. J. Clean. Prod. 315, 128099 (2021)

  45. Jensen, M.C., Meckling, W.H.: Theory of the firm: Managerial behavior, agency costs and ownership structure. J. Financ. Econ. 3(4), 305–360 (1976)

    Article  Google Scholar 

  46. Johl, S.K., Toha, M.A.: The Nexus between proactive Eco-Innovation and firm financial performance: A circulareconomy perspective. Sustainability 13(11), 6253 (2021)

    Article  Google Scholar 

  47. Kaczmarek, S., Nyuur, R. B.: The implications of board nationality and gender diversity: evidence from a qualitative comparative analysis. J. Manage. Governance, pp 1–27 (2021).

  48. Kamardin, H.: Managerial ownership and firm performance: The influence of family directors and non-family directors. In Ethics, Governance and Corporate Crime: Challenges and Consequences: Emerald Group Publishing Limited, 47–83 (2014).

  49. Khan, H.-U.-Z., Mohobbot, A.M., Fatima, J.: Determinants and recent development of sustainability reporting of banks in developing countries: The case of Bangladesh. Corp. Ownersh. Control. 11(4), 505–520 (2014)

    Google Scholar 

  50. Khan, P.A., Johl, S.K.: Firm Performance from the Lens of Comprehensive Green Innovation and Environmental Management System ISO. pp. 1–19 (2020)

  51. Khan, P.A., Johl, S. K., Ntim, C.G.: Nexus of Comprehensive Green Innovation, Environmental Management System-14001–2015 and Firm Performance. Cogent Bus. Manag. 6(1), 1691833 (2019)

  52. Khan, P.A., Johl, S.K., Johl, S.K.: Does adoption of ISO 56002‐2019 and green innovation reporting enhance the firm sustainable development goal performance? An emerging paradigm. Bus. Strategy Environ. 2021, 1–15 (2021)

  53. Kolsi, M.C., Grassa, R.: Did corporate governance mechanisms affect earnings management? Further evidence from GCC Islamic banks. Int. J. Islam. Middle East. Financ. Manag. 10(1), 2–23 (2017)

    Article  Google Scholar 

  54. Kumar, S., Dua, P.: Environmental management practices and financial performance: evidence from large listed Indian enterprises. J. Environ. Plann. Manage., pp 1–27 (2021).

  55. Kumar, S., Rao, P.: A conceptual framework for identifying financing preferences of SMEs. Small Enterp. Res. 22(1), 99–112 (2015)

    Article  Google Scholar 

  56. Kyere, M., Ausloos, M.: Corporate governance and firms financial performance in the United Kingdom. Int. J. Financ. Econ. 26(2), 1871–1885 (2021)

    Article  Google Scholar 

  57. Lai, F.W., Shad, M.K., Wahab, H.A.: Economic value analysis for a government funded research program in green fertilizer technology development. Global Bus. Manage. Res. 9(1s), 313 (2017)

    Google Scholar 

  58. Lai, F.W., Shad, M.K.: Economic value added analysis for enterprise risk management. Glob. Bus. Manag. Res. 9(1), 338–347 (2017)

  59. Lassoued, M.: Corporate governance and financial stability in Islamic banking. Manag. Financ. 44(5), 524–539 (2018)

  60. Mairafi, S.L., Hassan, S., Arshad, S.B.M.: An analysis of the literature on Islamic bank risk-taking. Acad. Account. Financial Stud. J. 22, 1–7 (2018)

    Google Scholar 

  61. Mallin, C., Farag, H., Ow-Yong, K.: Corporate social responsibility and financial performance in Islamic banks. J. Econ. Behav. Organ. 103, S21–S38 (2014)

    Article  Google Scholar 

  62. Matoussi, H., Grassa, R.: Is corporate governance different for Islamic banks? A comparative analysis between the Gulf Cooperation Council context and the Southeast Asia context. Paper read at The Economic Research Forum (2012).

  63. McConnell, J.J., Servaes, H.: Additional evidence on equity ownership and corporate value. J. Financ. Econ. 27(2), 595–612 (1990)

    Article  Google Scholar 

  64. Meutia, I., Febrianti, D.: Islamic social reporting in Islamic banking: Stakeholders theory perspective. Pap. Read SHS Web Conf. 34, 12001 (2017)

  65. Mirchandani, A., Gupta, N.: Impact of ownership structure and corporate Governance on the performance: a case of selected banks in UAE. Int. J. Econ. Financ. Issues 8(3), 197 (2018)

    Google Scholar 

  66. Mollah, S., Zaman, M.: Shari’ah supervision, corporate governance and performance: Conventional vs. Islamic banks. J. Bank. Finance 58, 418–435 (2015)

    Article  Google Scholar 

  67. Musibah, A.S., Alfattani, W.S.B.W.Y.: The mediating effect of financial performance on the relationship between Shariah supervisory board effectiveness, intellectual capital and corporate social responsibility, of Islamic banks in Gulf Cooperation Council countries. Asian Soc. Sci. 10(17), 139 (2014)

    Article  Google Scholar 

  68. Naciti, V.: Corporate governance and board of directors: The effect of a board composition on firm sustainability performance. J. Clean. Prod. 237:117727 (2019).

  69. Naushad, M., Malik, S.A.: Corporate governance and bank performance: a study of selected banks in GCC region. Asian Soc. Sci. 11(9), 226 (2015)

    Article  Google Scholar 

  70. Nobanee, H., Ellili, N.: Corporate sustainability disclosure in annual reports: Evidence from UAE banks: Islamic versus conventional. Renew. Sustain. Energy Rev. 55, 1336–1341 (2016)

    Article  Google Scholar 

  71. Odenius, J.: Germany's corporate governance reforms: Has the system become flexible enough? Int. Monet. Fund. 8(179), 1–19 (2008)

  72. Olawumi, T.O., Chan, D.W.: A scientometric review of global research on sustainability and sustainable development. J. Clean. Prod. 183, 231–250 (2018)

    Article  Google Scholar 

  73. Othman, R., Ameer, R.: Conceptualizing the duties and roles of auditors in Islamic financial institutions: what makes them different? Humanomics 31(2), 201–213 (2015)

    Article  Google Scholar 

  74. Rahman, H. U., Zahid, M., Asif, M., Ullah, Z: Sustainability key performance indicators in Islamic banking sectors of Malaysia and Pakistan: a scale based evidence. J. Islamic Bus. Manage. 10 (1) (2020).

  75. Richard, P.J., Devinney, T.M., Yip, G.S., Johnson, G.: Measuring organizational performance: Towards methodological best practice. J. Manag. 35(3), 718–804 (2009)

    Google Scholar 

  76. Said, R., Rahim, A.A.A., Hassan, R.: Exploring the effects of corporate governance and human governance on management commentary disclosure. Soc. Responsib. J. 14(4), 843–858 (2018)

  77. Satkunasingam, E., Shanmugam, B.: Disclosure and governance of Islamic banks: A case study of Malaysia. J. Int. Bank. Regulations 6(1), 69–81 (2004)

    Article  Google Scholar 

  78. Selvarajan, T., Ramamoorthy, N., Flood, P.C., Guthrie, J.P., MacCurtain, S., Liu, W.: The role of human capital philosophy in promoting firm innovativeness and performance: Test of a causal model. Int. J. Human Resource Manage. 18(8), 1456–1470 (2007)

    Article  Google Scholar 

  79. Shad, M.K., Lai, F.-W., Fatt, C.L., Klemeš, J.J., Bokhari, A.: Integrating sustainability reporting into enterprise risk management and its relationship with business performance: A conceptual framework. J. Clean. Prod. 208, 415–425 (2019)

    Article  Google Scholar 

  80. Shad, M.K., Lai, F.-W., Shamim, A., McShane, M.: The efficacy of sustainability reporting towards cost of debt and equity reduction. Environ. Sci. Pollut. Res. 27(18), 22511–22522 (2020)

    Article  Google Scholar 

  81. Shad, M.K., Lai, F.W.: A conceptual framework for enterprise risk management performance measure through economic value added. Glob. Bus. Manag. R. Int. J. 7(2), 1–11 (2015a)

  82. Shad, M.K., Lai, F.W.: Enterprise risk management and firm performance validated through economic value added factors. Int. J. Econ. Stat. 3(2015), 148–154 (2015b)

  83. Shad, M. K., Lai, F.-W., Shamim, A., Khan, A. A.: Corporate sustainability reporting practices in the Malaysian oil and gas companies. Platform: A J. Manage. Humanities 1 (1):1–10 (2018).

  84. Syed, E., Syed, S., Fong-Woon, L., Rao, F., Ahmad, A.: Predicting delinquency on Mortgage loans: an exhaustive parametric comparison of machine learning techniques. Int. J. Ind. Eng. Manag 12, 1–13 (2021)

    Article  Google Scholar 

  85. Tahir, M., Shah, Q. A., Khan, M. M., Afridi, M. A.: Intellectual Capital and Financial Performance of Banks in Pakistan. Dialogue (Pakistan) 13 (1) (2018)

  86. Tahir, M., Jan, A.A., Shah, S.Q.A., Alam, M.B., Afridi, M.A., Tariq, Y.B., Bashir, M.F.: Foreign inflows and economic growth in Pakistan: Some new insights. J. Chin. Econ. Foreign Trade Stud. 13(3), 97–113 (2020)

  87. Tang, P., Yang, S., Yang, S: How to design corporate governance structures to enhance corporate social responsibility in China's mining state-owned enterprises? Resour. Policy 66, 101619 (2020)

  88. Thompson, P., Cowton, C.J.: Bringing the environment into bank lending: implications for environmental reporting. Br. Account. Rev. 36(2), 197–218 (2004)

    Article  Google Scholar 

  89. Toha, M., Johl, S.K., Khan, P.A.: Firm’s sustainability and Societal Development from the Lens of Fishbone Eco-Innovation: A moderating role of ISO 14001–2015 Environmental Management System. Processes 8(9), 1152 (2020)

    Article  Google Scholar 

  90. Torelli, R., Balluchi, F., Furlotti, K.: The materiality assessment and stakeholder engagement: A content analysis of sustainability reports. Corp. Soc. Responsib. Environ. Manag. 27(2), 470–484 (2020)

    Article  Google Scholar 

  91. Ur Rehman, Z., Zahid, M., Rahman, H.U., Asif, M., Alharthi, M., Irfan, M., Glowacz, A.: Do corporate social responsibility disclosures improve financial performance? A perspective of the Islamic banking industry in Pakistan. Sustainability 12(8), 3302 (2020)

    Article  Google Scholar 

  92. Vafeas, N., Theodorou, E.: The relationship between board structure and firm performance in the UK. Br. Account. Rev. 30(4), 383–407 (1998)

    Article  Google Scholar 

  93. Walls, J.L., Berrone, P., Phan, P.H.: Corporate governance and environmental performance: Is there really a link? Strateg. Manag. J. 33(8), 885–913 (2012)

    Article  Google Scholar 

  94. Wu, M.-W., Shen, C.-H.: Corporate social responsibility in the banking industry: Motives and financial performance. J. Bank. Finance 37(9), 3529–3547 (2013)

    Article  Google Scholar 

  95. Zahid, M., Martins, J.M., Rahman, H.U., Mata, M.N., Shah, S.A., Mata, P.N.: The interconnection between decent workplace and firm financial performance through the mediation of environmental sustainability: Lessons from an emerging economy. Sustainability 13(8), 4570 (2021)

    Article  Google Scholar 

  96. Zahid, M., Rahman, H.U., Ali, W., Habib, M.N., Shad, F.: Integration, implementation and reporting outlooks of sustainability in higher education institutions (HEIs): Index and case base validation. Int. J. Sustain. High. Educ. 22(1), 120–137 (2020)

  97. Zaid, M.A., Wang, M., Adib, M., Sahyouni, A., Abuhijleh, S.T.: Boardroom nationality and gender diversity: Implications for corporate sustainability performance. J. Clean. Prod. 251, 119652 (2020)

  98. Zainudin, S.M., Abdul Rasid, S.Z., Omar, R., Hassan, R.: The Good and Bad News about the New Liquidity Rules of Basel III in Islamic Banking of Malaysia. J. Risk Finan. Manage. 12(3), 120 (2019)

    Article  Google Scholar 

Download references

Acknowledgements

The authors would like to thank the reviewers for their valuable suggestions to enhance the manuscript. The authors also want to thank the Management & Humanities Department and Centre of Social Innovation (COSI), Universiti Teknologi PETRONAS, to facilitate this research study.

Author information

Affiliations

Authors

Contributions

AAJ: Conceptualization, Writing—original draft, Writing—review & editing. FWL: Conceptualization, Validation, Writing—review & editing. MUD: Conceptualization, Validation, Writing—review & editing. MT: Validation, Writing—review & editing. SEAA: Methodology, Writing—review & editing. MZ: Writing—review & editing. MKS: Writing—review & editing.

Corresponding author

Correspondence to Ahmad Ali Jan.

Ethics declarations

Conflict of interest

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper. The authors would like to confirm that this paper is an outcome of the authors’ own work and has not been published elsewhere neither is considered for publication elsewhere.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Jan, A.A., Lai, FW., Draz, M.U. et al. Integrating sustainability practices into islamic corporate governance for sustainable firm performance: from the lens of agency and stakeholder theories. Qual Quant (2021). https://doi.org/10.1007/s11135-021-01261-0

Download citation

Keywords

  • Shariah Governance
  • Sustainable development
  • CSR practices
  • Shariah Supervisory Board
  • Content analysis