Human Governance Development Index of

Shariah Compliant Companies in Malaysia and Indonesia

IDRIS GAUTAMA SO1, HASNAH HARON2, ANDERES GUI3, ELFINDAH PRINCES4,

SYNTHIA ATAS SARI1

1Management Department, Binus Business School, Bina Nusantara University, Jl. K. H. Syahdan No.

9, Kemanggisan, Palmerah, Jakarta 11480, INDONESIA

2Faculty of Economics and Muamalat, Universiti Sains Islam Malaysia, Bandar Baru Nilai, 71800

Nilai, Negeri Sembilan, MALAYSIA

3School of Information Systems, Bina Nusantara University, Jl. K. H. Syahdan No. 9, Kemanggisan,

Palmerah, Jakarta 11480, INDONESIA

4Information Systems Management Department, BINUS Graduate Program-Master of Informatiion

Systems Management, Bina Nusantara University, Jl. K. H. Syahdan No. 9, Kemanggisan, Palmerah,

Jakarta 11480, INDONESIA

Abstract - This research aims to form a Human governance index (HGI) using Board of Directors (BOD)

attributes such as BOD job experience, BOD education background, BOD education level, BOD age, BOD

gender diversity, degree of integrity, BOD training and development, and the quality of the internal control

system. This research is based on a review of 70 Shariah-compliant companies' annual reports for the fiscal

year ending in 2019. There are a total of 70 Shariah-compliant businesses. A representative from academia

checked the measurement of this study. This study revealed that HGI is higher for Malaysia than Indonesia with

0.60 and 0.48 respectively. BOD job experience index has the highest mean for both countries, indicating that

the majority of BOD has more than ten years of experience and the BOD gender diversity index has the lowest

mean for both countries, indicating that the majority BOD are males. BOD education background index is

almost similar between Shariah companies in Malaysia and Indonesia. BOD education level index and BOD

age for Malaysia is lower than Indonesia. However, it can be seen that the integrity index is much higher for

Malaysia than Indonesia, as in Malaysia it is mandatory to include the statement of internal control in the

annual report, but it is not the case in Indonesia. Human governance has been proven to increase organizational

performance through values, norms, and ethics implemented within the organization.

Key-Words – Human Governance, Human Governance Development Index, Shariah Compliant Company

Received: July 16, 2022. Revised: January 23, 2023. Accepted: February 15, 2023. Published: March 10, 2023.

1 Introduction

Over the past few decades, there has been a rise in

public awareness of how businesses are involved in

social and environmental concerns. Companies

worldwide are under increased pressure to provide

information about their corporate social

responsibility as the global economy grows more

intertwined. [1]. Therefore, the quality of the

information companies provide in their annual

reports has attracted significant attention among

regulators and market participants worldwide.

Emerging economies require that a company

disclose one of its challenges in the annual report.

[2]. Investors and creditors are more concerned with

the company's social responsibility and employee

information than just its liquidity, profitability, and

financial health [3] in making decisions. When

management makes poor decisions and changes that

may impact employees' responsibilities and tasks,

they will undervalue employees' contributions,

skills, or talents. It demonstrates how leaders' failure

to make decisions for the company impacts their

employees [4]. As a result, all organizations in the

beginning years now have disclosure of corporate

social responsibility (CSR) as part of their strategy

plans.

Governance is an essential element in achieving

higher organizational performance. Human

Governance (HG) should be prioritized in

management compared to other forms of

governance as the implementation is related to

ethical behavior in the company.

The concept of HG differs from that of Corporate

Governance (CG). HG focuses on and is closely

connected to employees by establishing quality

values through ethics, moral conduct, and behavior

to CG, which focuses on the process, policies, and

other factors [5]. HG can support advantageous

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relationships within the company. It can also solve

Corporate Governance’s failures and act as a

corporate control. Previous research has also shown

a positive relationship between HG to sustainability

reporting [17, 13], which is in line with the global

agenda that all companies should achieve

Sustainable Development Goals (SDG) set by the

United Nations in 2015. To increase sustainability

reporting for Shariah companies, an excellent

human governance structure is needed by having

good board leadership, training of BOD, level, and

internal quality control in place. The focus of CG is

on external laws that control business activities [6].

As a result, HG must improve corporate governance

in order to avoid failure, particularly in terms of

humanity.

Furthermore, the development of the HG index

complements the existing board governance index

as established by prior literature [7]. They

constructed the board governance index and found a

positive association with firm operating

performance. The development of the HG index by

the current research has the potential to close the

gap in the literature, as evidenced by the index

approach's success in studies of governance

performance. It more accurately reflects the total

strength of a certain area of governance, such as the

BOD's honesty, qualification, and training, which

have an influence on the values and ethics.

HG includes the traits of value, religion, belief

system, culture, and ethics, which can help improve

the company's practices to achieve its objectives. A

more comprehensive governance framework will be

put in place due to the HG approach, as ethical

conduct was initially intended to be in the realm of

all professions to produce value and protect

sustainability [8]. HG can also help add value to

employees and maximize company value as a

successful organization comes from a valuable

employee with high ethics and integrity [6][9].

Hence, the main objective of this study is to develop

the HG index through BOD attributes; job

experience, education background, education level,

age, gender diversity, level of integrity, the quantity

of training attended, and quality of the internal

control system. The next objective of this study is to

examine the HG disclosure of Shariah-compliant

companies in Malaysia based on the developed

index.

Shariah-compliant companies provide an interesting

avenue to analyse the HG disclosure of a company.

Besides ensuring the activities and financing comply

with the Shariah law and principles, Shariah-

compliant companies are also expected to uphold

their ethics and values in their overall operation.

Islam strongly emphasizes social justice in dealing

with a human.

This paper will discuss the HG governance practices

of Shariah Compliant Companies of two emerging

economies, Malaysia and Indonesia. Indonesia

established the Shariah-based capital market in

2003, while Malaysia's official list of Shariah-

approved securities was approved in 1997. Both

countries are actively promoting the Shariah-based

capital market as investors have a growing interest

in this market.

Due to this reason, this current study is motivated to

examine the extent to which Shariah-compliant

companies are expected to practice their Islamic

image and disclose the HG information in their

annual reports.

The paper begins with an elaboration on what

human governance is and the elements of Human

Governance. It will then explain the theory used in

Human Governance. Research methods and

findings will be discussed and will conclude with

recommendation for this study.

2 Literature Review

In an organization, people are essential. Human

behavior is governed by internal, inside-out, and

value-based convictions. HG plays a key role in

enhancing employees' morals and conduct. It

addresses values, religion, belief systems, culture,

and ethics in order to foster a supportive culture

that yields moral principles and high ethical

standards [8]. All workers should act in a way that

is positive, genuine, and devoid of toxicity, as

encouraged by HG. Exemplary leadership,

integrity, training and development, a good internal

control policy, spirituality, culture, and recruiting

and selection may all be used to gauge an

organization's HG [5]. An organization will gain

more moral if it practices good HG [6].

2.1 Job Experience

Job experience is any past, present, or future

professional or personal events that may influence a

person's decision-making. [10]. BOD's experiences

may influence how effectively they monitor and

advise the organization and deal with business

challenges [11].

2.2 Education Background

Education background can be defined as the field in

which a subject’s most advanced degree was

awarded; formal or informal [12]. Previous studies

argued that education background should be an

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essential determinant in evaluating BOD

qualification as the consequences of the education

background will affect accounting values, practices,

and corporate accountability [13][14][15].

2.3 Education Level

Board's education level can be used as a

measurement of HG . HG can be measured through

CEO's attributes such as age, tenure (job

experience), and gender diversity [16][17]. Higher

education, such as a doctoral degree (Ph.D.),

provides a more profound knowledge, broader

analysis, and a unique perspective on problem-

solving for the organization [18].

2.4 Age

HG can be measured through CEO age by

expressing the age of an executive adjusted by year

to identify the influences of HG on a firm's leverage

decision through secondary data collected from

Bursa Malaysia [16]. Age has a significant positive

relationship with the environmental corporate social

responsibility disclosure and computed the square

age term of directors by multiplying mean age by

itself [19]

2.5 Gender Diversity

Gender, age, education, experience as a director,

and skill boost CSR performance [16][20][21]. [22]

and management commentary disclosure or

sustainability disclosure is positively impacted by

the number of female BOD members [23].

2.6 Level of Integrity

Three separate categories of Malaysian public sector

organizations—state level, state statutory body, and

federal statutory body—can be used to gauge the

level of integrity. The ethical commitment was

measured by looking at six (6) dimensions:

corporate moral values, action to promote ethics,

ethics committee, whistle-blowing policy, code of

ethics, and sustainability practices [24].

2.7 Training and Development

It was suggested that training and development

should enhance employees' human values,

specifically integrity, moral conduct, and ethics [5].

It is found that training is associated positively with

firm performance [25]. This result agrees with a

study conducted [26], which also found that a

practical training and development program will

increase job proficiency in the organization through

a positive employee with a high value of integrity.

Thus, the more training programs attended by BOD,

the higher the value of integrity and job proficiency

in the organization will lead to better performance.

2.8 Quality of Internal Control

The internal control system was measured using six

(6) dimensions. They are the internal control

structure, a distinct dimension section of internal

control, the execution of internal control, the

function of internal control, the aim of internal

control, and the content of internal control

disclosure [27]. Chinese listed non-financial

enterprises' internal control system quality was

63.67% [28]. The level of the internal control

system was measured with a questionnaire. The

result showed that the status of the internal control

system of the selected companies in Somalia is high,

with an overall mean of 2.85 [29]. The average

internal control system of companies listed in Bursa

Malaysia was 4.196 [30]. From the studies, risk

assessment is the highest rated item of the internal

control system, followed by control activities,

monitoring, control environment, and information

and communication. The mean of the quality

internal control system of Malaysian Public

Hospitals was 2.96 by measuring service quality and

patient satisfaction [31]

3 Resource-Based Theory

Each company has a vast range of resources and

skills at its disposal. Three different categories of

resources exist: 1) Physical capital resources include

things like buildings, machinery, and equipment; 2)

Human capital resources include things like

education and experience; and 3) Organizational

capital resources include things like formal

structures [3]. Financial, physical, human, technical,

and organizational resources can all be categorized.

The cornerstone of strategy is made up of resources

and capabilities, and internal resources and

capabilities serve as the main compass for a firm's

strategy [32]. Human capital, social capital (i.e.,

connections and exchanges between internal and

external parties), and organizational capital (i.e.,

procedures, technology, databases) make up an

organization's resources [33].

Resources for the company include both material

and intangible assets that might offer it a

competitive edge. Physical assets, which are

tangible assets like real estate, machinery, and other

tangibles like cash and equipment, are examples of

tangible resources. The expertise and abilities of

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employees, a company's reputation, and a firm's

culture are examples of intangible assets and

resources. In this study, HG components are

regarded as intangible assets that give an advantage

over competitors. This theory focuses on the idea

that internal resources might help a company

maintain a competitive edge by assisting it in

fending off threats from rivals and other external

market factors [34]. Being more accountable and

transparent by sharing relevant information about

the organization's operations might provide you a

competitive edge.

4 Research Method

Fig. 1: Conceptual Model

The creation of an HG index is the study's primary

goal. Based on prior research, the HG Index was

developed. It consists of 8 sub-indices: (i) the BOD

job experience index; (ii) the BOD educational

background index; (iii) the BOD educational level

index; (iv) the BOD age index; (v) the BOD gender

diversity index; (vi) the level of integrity index; (vii)

the amount of training the BOD attended; and (viii)

the quality of the internal control system index.

These indices were taken, accordingly, from a

variety of sources [16][22][24][27][35].

The index score for the BOD work experience

assessment was 1 if the experience was greater than

ten (10) years, and 0 otherwise. A score of one is

equal to 100%, while a score of zero is equal to 0%.

The entire score is divided by the total BOD number

to determine the job experience index.

Business gets a score of 1 on the BOD education

background index, whereas non-business gets a

score of 0. For a score of 1, 100% is given, and for a

score of 0, 0% is given. The overall score is divided

by the total BOD number to get the education

background index.

A score of 0 indicates a degree or less, 1 indicates a

degree, 2 indicates a professional certification, 3

indicates a master's, and 4 indicates a Ph.D. A score

of 4 receives a 100% assignment, a score of 3

receives a 75% assignment, a score of 2 receives a

25% assignment, and a score of 0 receives a 0%

assignment. The entire score is divided by the total

BOD number to determine the education level

index.

A score of 0 is assigned for those under the age of

39, 1 for those between the ages of 40 and 49, 2 for

those between the ages of 50 and 59, and 3 for those

over 60. A score of 3 is given a 100%, a score of 2

is given a 67%, a score of 1 is given a 33%, and a

score of 0 is given a 0%. By dividing the overall

score by the total BOD number, age is determined.

Females receive a score of 1 and men receive a

score of 0 for the BOD gender diversity metric. For

a score of 1, 100% is given, and for a score of 0, 0%

is given. The entire score is divided by the total

BOD number to get the gender diversity index.

The degree of integrity index refers to the disclosure

of (i) corporate ethical ideals (1 item), (ii) activities

done to promote ethics (3 items), (iii) code of ethics

(2 items), existence of an ethics committee (2

items), and whistleblowing policy (comprise of 2

items). Each item receives a score of 1 if it is

disclosed and a value of 0 if not. There are 10 things

in all. By dividing the total number of disclosed

items by the 10 things that should have been

disclosed, one may get the degree of integrity index.

The number of training sessions the Board of

Directors attended during the year is shown by the

amount of training index. If the Board participates

in training and development more than five (5)

times, they will receive a 1; otherwise, they will

receive a 0. For a score of 1, 100% is given, and for

a score of 0, 0%. The overall score is divided by the

total BOD number to determine the size of the

Training index.

The disclosure of the internal control system is

referred to by the internal control system quality

index. The control system's quality is assessed using

21 different factors. By dividing the total number of

revealed items by the 21 things that should have

been declared, the quality of the internal control

system index is calculated.

A pre-test analysis of the developed index has been

conducted with academics that have experience

working on corporate social responsibility,

corporate governance, and sustainability reporting

practices. This is to ensure that the design of the HG

index is reliable and valid.

The study's second objective is to examine how

corporations disclose HG based on the developed

index. This study employs content analysis, a

technique that has been widely employed in

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research on voluntary disclosure. It is a research

strategy used to ascertain the presence of specific

concepts or terms within the text that are relevant to

the study's aims. Content analysis is a

methodological approach for categorizing the

symbolic contents generated by all forms of

recorded communication [36]. It enables the

analysis of yearly reports to be conducted

methodically, repeatably, and uniformly [37].

Secondary information from publicly accessible

yearly reports and relevant websites is used in this

study. Companies that adhere to Shariah and are

listed on Bursa Malaysia make up the study's

population. There are 696 businesses identified as

adhering to Shariah as of November 2019. (Security

Commission of Malaysia, 2019). This research

focuses on businesses who have regularly filed

annual reports between 2016 and 2019 and have

been listed on Bursa Malaysia. Fig.1 shows the

conceptual model.

5 Result and Analysis

The descriptive data for the HG indices utilized in

the analysis are shown in Table 1. HG was made up

of 8 indices: i. BOD job experience index, ii. BOD

educational background index, iii. BOD educational

level index, iv. BOD age index, v. BOD gender

diversity index, vii. level of integrity index, viii.

quality of internal control system index.

Furthermore, the result reflects that Malaysia has a

higher HG index compared to Indonesia with a

value of 0.60 and 0.48 respectively. The result also

shows a big gap between the training indicators in

the two countries of 0.7 which is considered very

high as other indicators are not that far different.

Therefore, Indonesian companies need to focus on

improving the training index to gain a higher human

governance index within the company. In addition,

the quality of internal control for Indonesian

companies is 0.47 as compared to Malaysia

companies which has 0.70. This might be due to the

fact that in Malaysia the statement of internal

control is mandatory but not in Indonesia. The

finding of the study is consistent with the previous

study [28].

Out of the eight indices, the highest mean is BOD

job experience for both countries. It contributed

most to the Human Governance Index, where

Malaysia shows a mean of 0.93 and Indonesia a

mean of 0.90.

The Age index for Malaysia is 0.70 compared to

Indonesia 0.79, which indicates both countries have

BOD who are more mature.

For both countries, it can be seen that the majority

of BOD are males.

The level of integrity index for Malaysia is 0.47

(47%) whereas for Indonesia is 0.38 (38%), it can

be said that activities to promote ethics, existence of

code of ethics and ethic committee, are below

average compared to previous study [38]. Moreover,

it referred to the importance of honesty and accurate

reporting as fundamental values for the

effectiveness of integrity rules. These are becoming

essential factors of the companies to disclose more

to maintain their reputation and trust among the

customers [39].

Fig 2 shows the level of integrity of the companies.

If the company has a score of 0%-20% of integrity

level, the company might disclose only 1 to 2 items.

While if the company score from 80%-100%, it

shows that it has disclosed eight (8) or all the

integrity items. The result shows that 41 (58%)

companies in Malaysia have disclosed 4-6 items of

integrity, and 29 (41%) companies in Indonesia

have only disclosed up to 4 items. None of the

companies from both countries disclosed all the

items in this study.

Fig. 2: Human Governance Index for Level of

Integrity

The Educational Background index both of

Malaysia and Indonesia have similar level of 0.58

and 0.59 consecutively, while the Educational Level

index for Malaysia is 0.4, compare to Indonesia 0.46

which give indication that Indonesia Shariah

companies emphasis the important of education

level, while previous study showed there is no

significant relationship between BOD educational

background and performance [40].

Fig 3 shows the frequency number of training that

the BOD has attended. Most BOD have attended

less than five (5) training sessions for both

countries. There are 60 (85.7%) BODS from

15 70

Very Low

(0-20%)

Low (21-

40%)

Medium

(41-60%)

High (61-

80%)

Very High

(80-100%)

Level of Integrity

Malaysia Indonesia

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Malaysia, while 59 (84.3%) BODS from Indonesia

have less training.

Fig. 3: Human Governance Index for Training

Fig 4 shows the number of items in the internal

control policy that the company has disclosed. If the

company scores 0% - 20%, it disclosed only 1-4

internal control items. While if the company score is

80% - 100%, the company disclosed 18 or all the

items for the internal control policy. The findings

show that 31 Malaysian companies mostly score

61% to 80% for internal control policy. In

comparison, 26 Indonesian companies mostly score

41 % - 60 % for this internal control. On average,

the internal control index for Malaysia is 0.70 better

than Indonesia 0.47.

Fig. 4: Human Governance Index for Internal

Control Policy

Table 1 shows the descriptive statistics for the HG

indices of both Malaysia and Indonesia.

Table 1. Descriptive Statistics

Malaysia

N=70

Indonesia

N=70

Min

Max

Mean

Min

Max

Mean

Job

Experience

0.50

1.00

0.93

0.25

1.00

0.90

Education

Background

0.10

1.00

0.58

1.00

0.59

Education

Level

0.10

0.68

0.41

0.08

1.00

0.46

BOD

Age

0.28

1.00

0.70

0.17

1.00

0.79

BOD

Gender

0.50

0.17

0.75

0.11

Integrity

0.10

0.70

0.47

0.80

0.38

BOD

Training &

Development

1.00

0.86

1.00

0.16

Internal

Control

0.33

0.95

0.70

0.95

0.47

HGI

0.60

0.48

6 Conclusion

Eight human governance indices have been created

as a result of this study: the BOD job experience

index, the BOD educational background index, the

BOD educational level index, the BOD age index,

the BOD gender diversity index, the level of

integrity index, the amount of training the BOD

attended, and the quality of the internal control

system index. The study found that, HG index for

Malaysia is higher (0.60) as compared to Indonesia

(0.48). The high HG index for Malaysia is

contributed by job experience (0.93) and training

(0.86), which are much higher than Indonesia. The

mean of age for BOD in Indonesia (0.79),

educational background (0.59), and education level

(0.46) is much higher than Malaysia. Majority of

BOD for both countries are males.

This study has its limitations, just like any other

study. Only the manufacturing industry is examined

and only one year period (2019) is covered. Future

studies may include more industries and examine

changes over time in other sectors. Although within

the acceptable sample size for this study, future

studies could expand the sample to increase

statistical capacity.

This study is an attempt to measure HG using

secondary data. Future studies can study the

relationship of HG to other variables, such as fraud,

governance, sustainability reporting, organization's

performance, and employee satisfaction, as HG has

been proven to increase the organization's

performance through values, norms, and ethics

Average more than 5

times

Average less than 5 times

Training Attended

Malaysia Indonesia

13 16

Internal Control Policy

Malaysia Indonesia

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Volume 20, 2023

implemented within the organization. Future studies

can use primary data such as interviews and

questionnaires to validate the constructed index. In

addition, other explanatory variables, such as the

behavioral issues of the Board of Directors, might

play a significant role.

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Contribution of Individual Authors to the

Creation of a Scientific Article (Ghostwriting

Policy)

Idris Gautama So, Professor in Management

Science, has the role of consolidating writing and

being a correspondence author.

Hasnah Haron; Professor and expert in Shariah

business and coordinating the information process

on Malaysia’s Shariah companies matters and

ensuring quality research related to Shariah issues.

Anderes Gui, an Expert in information management,

ensures secondary data availability and data

alignment from Malaysia and Indonesia to ensure

the quality of this research.

Elfindah Princes; Expert in research management,

she has contributed to extracting references and data

processing to ensure the quality of this research.

Synthia Atas Sari; Expert in research management

and knowledge in Shariah matters, contributing to

the data processing to ensure the quality of the

research.

Sources of Funding for Research Presented in a

Scientific Article or Scientific Article Itself

The authors would like to express their gratitude to

Universiti Sains Islam Malaysia and Binus

University – Indonesia for the grant provided to

execute this project (USIM/BINUS

UNIVERSITY/FEM/ SEPADAN-A/70221)

Creative Commons Attribution License 4.0

(Attribution 4.0 International, CC BY 4.0)

This article is published under the terms of the

Creative Commons Attribution License 4.0

https://creativecommons.org/licenses/by/4.0/deed.en

_US

WSEAS TRANSACTIONS on BUSINESS and ECONOMICS

DOI: 10.37394/23207.2023.20.56

Idris Gautama So, Hasnah Haron,

Anderes Gui, Elfindah Princes, Synthia Atas Sari

E-ISSN: 2224-2899

618

Volume 20, 2023

Conflict of Interest

The authors have no conflicts of interest to declare

that are relevant to the content of this article.