Islamic Values and Voluntary Corporate Governance Disclosure
Citra Laksmi Chrisworo and Erina Sudaryati
Faculty of Economics and Business, Universitas Airlangga, Surabaya, Indonesia
Keywords: Islamic Values, Corporate Governance, Voluntary Disclosure, Traditional Ownership Structure.
Abstract: The aim of this study was to empirically examine the influence of Islamic values on the level of voluntary
corporate governance disclosures in public companies in Indonesia and the influence of traditional
ownership structures and corporate governance on the level of voluntary GCG disclosures. In this regard,
this study was structured on the basis of Islamic values and voluntary corporate governance disclosures. The
population in this study was banking sector companies listed on the Indonesian Stock Exchange from 2012–
2016, which consisted of 43 companies. Data from 2012 to 2016 was used, representing the period after the
adoption of the GCG code, and a purposive sampling technique was utilized. An examination of the
influence of Islamic values on voluntary GCG disclosures was carried out by using multiple linear
regression analysis, assisted by SPSS 24.0 software.
1 INTRODUCTION
The collapse of large-scale public companies is mostly
caused by poor corporate governance (Hussainey & Al-
Najjar, 2012; Ntim et al., 2012). The main characteristic of
poor corporate governance is the self-interest of corporate
managers, who ignore the needs of stakeholders, thus
eventually leading to a drop in stakeholders’ expectations
with regard to gaining more benefits from the company’s
performance (Isnandar & Sudaryati, 2015). The collapse
of large companies has a major impact on the economy of
a country (Haniffa & Hudaib, 2006), which is
characterized by a number of employment terminations
that subsequently have an impact on the country’s
unemployment rate (Ntim et al., 2012). In this regard, it
can be inferred that poor corporate governance practices
will have a major impact on the economy of a state. Such
a condition has encouraged governments to improve the
rules and develop policy reforms in relation to good
corporate governance. In general, policy reforms require
public companies to increase transparency, accountability,
openness, independence, responsibility, and fairness to all
stakeholders. Good corporate governance deals with the
balance between economic and social goals and between
individual and communal goals. A good corporate
governance framework is designed to encourage the
efficient and equitable use of resources, which requires
accountability from the management of the resources. By
so doing, the goal is to align the interests of individuals,
enterprises, and communities (Choudhury & Alam, 2013).
However, the policy reforms undertaken to achieve
good corporate governance are still largely dependent on
the extent to which companies are willing to be involved
and to disclose corporate governance mechanisms in their
corporate reports (Collett & Hrasky, 2005). With regard to
companies disclosing corporate governance mechanisms
more broadly, one important factor is the willingness to
disclose corporate governance voluntarily. In this sense,
voluntary corporate governance disclosure is a reflection
of the extent to which a company provides broader
information to the public on the basis of the company’s
desire to implement existing rules and provide protection
to stakeholders regarding the company’s operational
mechanisms (Albassam et al., 2017).
Voluntary corporate governance disclosure aims to
create a more transparent, accountable, independent, and
fair corporate report, one which is a reflection of universal
religious principles. A couple of the universal principles of
all religions are honesty and fairness (Qur’an 11:85). In
this regard, religion instills universal values in all people
in relation to being honest and fair in social life. In the
economic context, universal religious values teach each
individual to be transparent by not reducing the dosage in
trade (Qur'an 6: 152). In this context, the activities aimed
at voluntarily disclosing corporate governance relate to the
implementation of religious teaching in social life in that
they are based on the view that every human activity in
life, either vertically or horizontally, is governed by
provisions that are in accordance with the commands of
God. The underlying principles of every action are based
on the sources of law from the holy books of each religion.
Indonesia, as a country with the largest Muslim
population in the world, seeks to provide protection and
comfort for every citizen, especially for the Muslim
population, and governance structures must meet the
expectations of the Muslim community by providing an
acceptable Islamic business governance model. Therefore,
Chrisworo, C. and Sudaryati, E.
Islamic Values and Voluntary Corporate Governance Disclosure.
In Proceedings of the Journal of Contemporary Accounting and Economics Symposium 2018 on Special Session for Indonesian Study (JCAE 2018) - Contemporary Accounting Studies in
Indonesia, pages 261-266
ISBN: 978-989-758-339-1
Copyright © 2018 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved
261

the trade sector, financial business, and all forms of
economic transactions in general should reflect the
principles of Islam. With regard to the standardization of
regulations, corporate governance should comply with
Shariah rules contained in the Qur’an and Hadith
(Alnasser & Muhammed, 2012).
Islamic values are holistic guidelines for Muslims in
practicing all aspects of daily living (Vinnicombe, 2010).
In this sense, in everyday life, the activities of Muslims
will consist of components of Islamic values and
components of materialism/secularism. However, both
aspects should be guided by religious values so that
transparency, fairness, morality, and social justice can be
accomplished in the daily activities of Muslims. The
implementation of Islamic values in the company’s
operational activities relates to the incorporation of the
principles of Shariah. The implementation of these
principles will provide guidance for companies to adapt
corporate values to those that apply to society in general in
order to gain community legitimacy (O’Donovan, 2000).
The implementation of Islamic values in a company
will encourage the company to be more transparent,
accountable, and fair to all related parties. Such an
implementation can be realized by the company through
disclosing the corporate report more broadly so that the
stakeholders can understand the company’s operational
processes more easily and clearly. From this perspective,
applying Islamic values will encourage a company to
provide transparent, accountable, and equitable company
reports more voluntarily and in accordance with Islamic
principles in muamalah.
Research conducted by Albassam et al. (2017)
provides evidence that Islamic values in a company
encourage more voluntary reporting on corporate
governance. According to Albassam et al. (2017),
companies with a greater commitment to incorporating
Islamic values within corporate operational activities have
a greater involvement in voluntary corporate governance
disclosures. Incorporating Islamic values in corporate
operations encourages companies to be more transparent
in implementing their good governance practices.
The present study was conducted on banking sector
companies, which are companies that have a lot of contact
with Islamic values. Islamic values forbid usury in
muamalah activities (Qur’an 2, pp. 278-281). Usury can
be understood as a form of interest on loans or savings
provided by banking companies. The implementation of
Islamic values in banking sector companies is expected to
provide confidence and convenience for Muslims to
transact with banking companies without any presumption
of such transactions violating Islamic values.
Based on the background outlined above, the main
purpose of this study is to examine the extent of
companies’ commitment to incorporating Islamic values in
their operational activities, and its effect on the level of
information relating to corporate governance practices
disclosed by the company. The study has clear practical
implications for future research, practice, and the broader
society in empirically demonstrating that corporations
voluntarily incorporating Islamic values into their
operations are more likely to be transparent about their
corporate governance practices, thereby providing new
and important insights into the effect of Islamic values on
voluntary corporate governance compliance and
disclosure.
2 THEORETICAL
BACKGROUND
Voluntary corporate governance disclosure is where
corporate management aims to be more transparent in
delivering company reports. The expected transparency of
voluntary corporate governance disclosures is related to
the intention of corporate management to minimize the
information gap between shareholders and corporate
managers. The effort to minimize the information gap can
thus be seen as a manifestation of the desire of corporate
management to create fairness for all of the company’s
stakeholders.
2.1 Agency Theory and Islamic Values
According to Jensen and Mekling (1976), agency theory
describes the relationship that arises due to a contract
between a principal and agent, in which the principal
delegates authority to the agent. According to Eisenhardt
(1989), there are two problems in the principal-agent
relationship: the conflict between desires or goals, and the
difficulty for the principal to verify what the management
has done in managing the company. On the one hand,
shareholders find it difficult to verify the operational
activities of management, while, on the other hand, the
management has more information on the operations and
financial position of the company.
To overcome the information gap between principal
and agent, the company should incorporate Islamic values
into its corporate values. By so doing, Islamic values will
encourage the company management (agent) to be more
transparent and fair in conveying information to the
shareholders (principal). The Islamic values held by the
company will result in corporate managers (agent) being
more honest in conveying information to the principal.
2.2 Islamic Values, Transparency, and
Voluntary Corporate Governance
Disclosure
Islamic values are those adopted by Muslims and derived
from the Qur’an and Sunnah. These values are binding
upon every Muslim and attach themselves to every activity
in his/her life (Choudhury & Alam, 2013). The values
embedded in Muslims encourage individuals to reflect on
their daily lives (Vinnicombe, 2010).
The application of Islamic values in daily life
activities encourages individuals to be more honest and
open in their behavior. They are required to be more
transparent in the work they do. However, in life, one
JCAE Symposium 2018 – Journal of Contemporary Accounting and Economics Symposium 2018 on Special Session for Indonesian Study
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cannot be separated from the demands of one’s worldly
life, which means that the principle of materialism often
leads to a conflict with Islamic values inherent in the
individual. Therefore, it is important to understanding how
to reduce the contradiction between the principles of
materialism occurring in the activities of life and
prevailing Islamic values.
A company, as an economic entity closely related to
the principles of materialism, is expected to be a motivator
in harmonizing the relationship between the principles of
materialism and Islamic values, so as not to cause
significant opposition, especially for those working in the
company and society as a whole. The company is expected
to be able to absorb Islamic values and apply them in its
operational activities. The adoption of Islamic values into
corporate values is expected to result in the company
being better accepted by the wider community, reflected in
the company’s market share.
The implementation of Islamic values in the
company’s operational activities is expected to provide
incentives for corporate management to be more
transparent in conveying information in its company
reports. In this regard, Islamic values embedded in the
company’s rules will serve as a guide for corporate
managers to be more honest and open in their operational
activities. The practical realization of openness in the
corporate report can be manifested through a broader
reporting of corporate governance activities. Companies
that apply Islamic values will strive to provide transparent
information by presenting all the available information to
the stakeholders. The compliance of the company with
good corporate governance can also manifest itself in the
form of voluntary additional information in the company
report. Thus, companies that have a commitment to
implementing good corporate governance will disclose
corporate governance information more voluntarily. This
is based on the fact that companies that are committed to
increasing their voluntary corporate governance
disclosures can undoubtedly fulfil their primary
obligations with regard to implementing good corporate
governance. Based on the above background, the
hypothesis for this research is as follows:
H
1
: Islamic values have a positive effect on voluntary
corporate governance disclosures.
3 RESEARCH METHODOLOGY
3.1 Data Collection
It is interesting to analyze the implementation of Islamic
values in relation to the effort to increase voluntary
corporate governance disclosure in banking companies in
Indonesia because, first, banking companies in Indonesia
apply the principles of corporate governance, and
secondly, banking companies in Indonesia apply Shariah-
based principles that are disclosed in their annual reports.
This study collected data from multiple channels. In this
sense, the required information was obtained from the
Indonesian Stock Exchange (IDX) by identifying banking
sector companies operating from 2012–2016. The
population of this study was 154 banking companies. The
researchers collected data on related variables, i.e. Islamic
values and voluntary corporate governance disclosures, as
well as data on control variables such as audit quality, the
percentage of institutional ownership, the number of
boards of directors, the percentage of total capital
expenditure to total assets, dividend payout, leverage, the
percentage of operating profit to total assets, and sales
growth.
3.2 Definition and Measurement of
Variables
The researchers designed certain variables for this
research, and Table 1 describes the variables as well as the
measuring method.
Dependent
Variable
GINDX
Indonesian corporate governance
index constructed by Albassam
(2014) (see Appendix 2, pp. 341-
348). It takes a value of 1 if each of
the 65 CG provisions is disclosed, 0
otherwise.
BDIR
Sub-index of GINDX related to the
board of directors, consisting of 35
provisions. It takes a value of 1 if
each of the 35 CG provisions is
disclosed, 0 otherwise.
DTRA
Sub-index of GINDX related to
disclosure and transparency,
consisting of 14 provisions. It takes a
value of 1 if each of the 16 CG
p
rovisions is disclosed, 0 otherwise.
INCR
Sub-index of GINDX related to
internal control and risk
management, consisting of 6
provisions. It takes a value of 1 if
each of the 6 CG provisions is
disclosed, 0 otherwise.
SHAR
Sub-index of GINDX related to the
rights of shareholders and general
assembly, consisting of 8 provisions.
It takes a value of 1 if each of the 8
CG provisions is disclosed, 0
otherwise.
Independent
Variable
Islamic Values and Voluntary Corporate Governance Disclosure
263

IVDI Islamic values (IV) voluntary
compliance and disclosure index,
consisting of 10 provisions. It takes a
value of 1 if each of the 10 IV
provisions is disclosed, 0 otherwise;
scaled to a value between 0% and
100%.
Other
Explanatory
Variables
AUFZ
1 if a firm is audited by one of the
big four audit firms (i.e.
PricewaterhouseCoopers, Deloitte &
Touché, Ernst & Young, and
KPMG), 0 otherwise.
BODZ
Natural log of the total number of
directors on the board of a com
p
an
y
.
INON
Percentage of shares held by
institutional shareholders.
Control
Variables
CEXP
Percentage of total capital
ex
p
enditure to total assets.
DVPS
1 if a firm paid dividends during the
financial
y
ear, 0 otherwise.
LEVG
Percentage of total debt to total
assets.
PROF
Percentage of operating profit to total
assets.
SAGR
Percentage of current year’s sales
minus previous year’s sales to
p
revious
y
ear’s sales.
4 RESULT AND DISCUSSION
The researchers tested a five-year period (from 2012 to
2016) and a total of 154 observations. The description of
the research results will explain the descriptive analysis
and hypothesis testing.
4.1 Descriptive Analysis
Descriptive analysis was used to provide an overview of
the data used in the study, which can be seen in Table 4.2.
Table 2: Descriptive Statistic
Var Min Max Mean Std
Deviation
VG .6615 .9231 .879520 .0386093
IVDI .00 .90 .3805 .26124
AUFZ 0 1 .69 .465
BODZ 3 12 7.06 2.538
INON .4358 1.000 .758026 .1612936
CEXP .0001 .0233 .002867 .0030443
DVPS 0 1 .42 .496
LEV .7399 .9479 .864409 .0424926
PROF -.0972 .1144 .014323 .0203630
SAGR
-
3.5933
.8377 .106371 .4649905
Based on the results shown in Table 4.2, the mean
value of voluntary corporate governance disclosure (VG)
is 0.87952, with a deviation rate of 0.0386, indicating that
the voluntary corporate governance disclosures of banking
companies in Indonesia have considerable value, since the
mean value is close to 1. The mean value of Islamic values
is 0.3805, with a deviation rate of 0.26124, indicating that
the Islamic values absorbed by banking companies in
Indonesia are still low, since the value is less than 0.5.
4.2 Regression Analysis
In this research, the method of analysis used was multiple
linear regression analysis, which aimed to determine the
effect of Islamic values on voluntary corporate governance
disclosures. The regression analysis results used to
determine the regression equation can be seen in Table
4.3.
JCAE Symposium 2018 – Journal of Contemporary Accounting and Economics Symposium 2018 on Special Session for Indonesian Study
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Table 3: Regression Coefficient Values
Model Unstandardized
Coefficients
p-value
B
(Constant) .874 .000
IVDI .062 .000
AUFZ -.005 .521
BODZ .004 .004
INON .011 .537
CEXP .452 .626
DVPS -.002 .801
LEV -.058 .364
PROF -.116 .476
SAGR -.008 .193
From Table 4.3, it can be seen that the
regression coefficient values of the output resulted in
the following regression equation model:
VG = 0.874 + 0.062 IVDI – 0.005 AUFZ + 0.004 BODZ
+ 0.011 INON + 0.452 CEXP – 0.002 DVPS – 0.058 LEV
– 0.116 PROF – 0.008 SAGR + ε
4.3 Results of Coefficient of
Determination Testing
The coefficient of determination test aimed to determine
the level of influence of the variables used in this study on
voluntary corporate governance disclosures, the results of
which can be seen in Table 4.4.
Model R R
2
Adjusted R
2
1
.573
a
.329 .287
Based on Table 4.4, it can be seen that the value of
Adjusted R² is 0.287, indicating that voluntary corporate
governance disclosures can be explained by 28.7% of the
influence of the independent variables used in this study.
4.4 Hypothesis Testing
Hypothesis testing was carried out by using the t test
obtained from the multiple linear regression analysis.
Based on the results of the t-test from the multiple linear
regression analysis in Table 4.3, it can be concluded that
Islamic values and the number of directors in the company
have a positive and significant effect on voluntary
corporate governance disclosures, since the regression
coefficient value is positive and the p-value is < 0.05.
Based on the results of the t-test from the multiple
linear regression analysis, it can be concluded that the
financial performance ratios do not affect voluntary
corporate governance disclosures, since the p-value is <
0.05. In addition, the quality of the auditor and the
proportion of institutional ownership have no effect on
voluntary corporate governance disclosures.
5 CONCLUSIONS
The research results show that Islamic values have a
positive effect on voluntary corporate governance
disclosure. In this regard, a company’s commitment to
providing broader and more transparent information
through voluntary corporate governance disclosures can be
enhanced by absorbing Islamic values into the company’s
prevailing rules. Attempts to absorb Islamic values into
corporate rules will encourage companies to be fair and
transparent with regard to voluntarily disclosing corporate
governance. In addition, the research results show that
financial performance ratios do not affect voluntary
corporate governance disclosure, thus highlighting that a
predisposition to disclose corporate governance more
openly is not based on the size of a company’s financial
performance, but on the existence of moral awareness
within the company to be fair to stakeholders and to
understand the impact of the company’s operational
activities.
The number of directors in the management structure
also determines the size of voluntary corporate governance
disclosures. In this sense, the greater the number of
directors in the management ranks, the bigger the impetus
to publicize all the company’s operational activities to the
stakeholders. A large number of directors will provide
more stress on the importance of being more open and
transparent to the public, particularly in relation to systems
of corporate governance already in place.
The quality of the auditor and the degree of
institutional ownership do not have a major impact on
voluntary corporate governance disclosure. Auditors
should always provide positive inputs in relation to the
sustainability of a company’s operations. In addition,
auditors should always direct managers to be transparent
Islamic Values and Voluntary Corporate Governance Disclosure
265

in their reports for the benefit of all parties. Thus, audit
quality does not have a significant impact on voluntary
corporate governance disclosure. Those making up a
company’s institutional ownership, whether large or small,
are always eager to obtain clear information on the
activities of company managers. In this regard,
institutional owners will always expect corporate
managers to disclose corporate governance voluntarily
Because of the number of banking companies that
did not provide the data needed for the research, this study
has limitations in relation to the number of samples used.
With this in mind, future research should use all
companies that voluntarily disclose components of
corporate governance and adopt Islamic values in their
company rules.
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