Corporate Governance Principles and Islamic Law

Abstract

Corporate governance is one of the vital elements of any corporation and economic development. Globalization and cross borders investments effect many Islamic countries economies. Starting from this point; International and local Investors need to know that there is a legal frame work that will support and serve their interests. Despite its rapid growth and increasing presence on world financial markets in the Islamic world, little is written on corporate governance from Islamic perspective. Few studies have been carried out in order to come up with alternative models of corporate governance from the Islamic point view. These studies seem to suggest that Islamic corporation may adopt a totally different model of corporate governance or a modified version of the western model of corporate governance as an alternative for its corporate governance framework as well as in actual practice. Many Islamic corporations adopted the western model of corporate governance. Moreover, some would argue that there is a wide difference between the Islamic law and the modern Corporate Governance principles. Some research claims that Islamic Law has nothing to do with Corporate Governance principles, and because the Islamic law is an absolute divine law, there is a profound confrontation between Islamic law and western legal system. As well as introducing Corporate Governance Codes in Islamic countries without any reference to the Islamic rules support this idea. The proponents of the western model of corporate governance continuously attempt to defend their model and the opponents strongly criticize them especially in the aspect of shareholder value and stakeholder value, principle-agent relationship or the agency problems. In this article, I will try to find if there is any relation between the modern Corporate Governance principles and the Islamic law rules by focusing on the Corporate Governance principles in regards to shareholder value and stakeholder value with the contact of ownership issue in Islamic law. Analyzing the relation between the shareholders and the board of directors and compare it to the concept of fiduciary “Wakalah” in Islam. Finally, I will analyze the disclosure rules in modern corporate governance with the concept of “Gharar” rule in Islamic law. The main objective of this comparison is to find if there is any harmony and/ or difference in the factors between the modern Corporate Governance principles and the Islamic law rules, if there are any.