Patterns of social reporting from an Islamic framework and the moral legitimacy factors that influence them

• Author: Anna Che Azmi,Norazlin Aziz,Normawati Non
• Published date: 01 October 2020
• DOI: http://doi.org/10.1111/beer.12293
• Date: 01 October 2020

Business Ethics: A Eur Rev. 2020;29:763–779. wileyonlinelibrary.com/journal/beer  

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  763© 2020 John Wiley & Sons Ltd

1 | INTRODUCTION

As researche rs such as Granovetter (1985) and Sc hröder (2013) sug-

gest, organi sations’ economic de cisions are influence d by their social

environments and the specific moral arguments those social envi-

ronments per mit. As a conseq uence, social re porting has be come

a mainstream pr actice in Shar ia-compliant fir ms. Neverthe less, the

reports co mpanies make dif fer from one anoth er, as managers use

their discretion regarding the amount, type and quality of informa-

tion they disclo se. The existing liter ature—in studies by, for examp le,

Mergaliyev, Asut ay, Avdukic, and Ka rbhari (2019), Ullah, Jamali, and

Harwood (2014), O'Ma ra-Shimek, Guil lén, and Gomis (201 5) and

Aggerholm a nd Trapp (2014)—suggests ways in whic h companies in-

terested in communicating a virtuous Islamic identity can effectively

express that id entity through thei r social reporting . These studies all

propose that a t axonomic hiera rchy of social repor ting could be an

effective communication tool for organisations. Thus, understand-

ing the influen ce of this type of social repor ting is important .

Various studies, such as those by Tran and Beddewela (2020),

Mergaliyev et al. (2019), Mohammad and Husted (2019), Mallin, Farag,

and Ow-Yong (2014) and Hassan, Miglietta, Paltrinieri, and Floreani

(2018), explore aspects of moral legitimacy, such as size of Sharia su-

pervisory boards and the proportion of Muslims of the country where

the company does most of its business, as being among the institu-

tional factors influencing social reporting by Islamic financial institu-

tions. However, only a handful of studies (see, e.g., Schröder, 2013)

have observed the influence of moral arguments or judgements on

the economic decisions made by organisations and no study to date

has observed how moral values derived from the Islamic perspective

influence conventional organisations’ social disclosures. Suchman

(1995) indicates that moral legitimacy has its own behavioural dynam-

ics, which promote prosocial behaviour over self-interest. Moral legit-

imacy is defined in terms of “judgments about whether the activity is

the right thing to do… which unconsciously fuse the good of the eval-

uator with the good of society as a whole” (Suchman, 1995, p. 579).

Palazzo and Scherer (2006) further explain that managers interested in

Received: 28 Aug ust 2018 

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  Revised: 29 April 2 020 

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  Accepted: 5 May 2020

DOI: 10 .1111/bee r.12293

ORIGINAL ARTICLE

Patterns of social reporting from an Islamic framework and the

moral legitimacy factors that influence them

Anna Che Azmi1 | Normawati Non2 | Norazlin Aziz1

1Faculty of Busi ness and Accountan cy ,

Universit y of Malaya, Kuala Lump ur,

Malaysia

2Business Dep artment, Dub ai Men's College,

Higher Colle ges of Technology, Dubai,

United Arab Emirates

Correspondence

Anna Che Azm i, Faculty of Busine ss and

Accountanc y, University of Malaya ,

50603 Kuala Lumpur, Malaysia.

Email: annaazriati@um.edu.my

Funding information

Universiti Malaya Research Grant, Grant/

Award Number: RP011C-13SBS

Abstract

The objective of this s tudy is twofold: to exam ine the patterns that govern social

reporting wit h reference to an Islamic fr amework and to identif y the moral legiti-

macy factors t hat influence them. We sele ct 146 publicly listed Sh aria-compliant

companies and classif y the disclosures in their annual r eports according to an Islamic

framework that cate gorises items as either Required, Expected or Desi red to indicate

the degree of impor tance each item ca rries from an Islamic pe rspective. Bas ed on

this framework, we t hen analyse moral le gitimacy facto rs, specifical ly the type of

Sharia screening b ody and the proportion of Muslims in t he population, that may in-

fluence the prior itisation of the different categories of s ocial reporting. We find that

disclosures that fal l into the Required category of our fr amework—especially thos e

that relate to companies’ involvement in “haram” activities (activities not permissible

in Islam)—are still few among t he companies studi ed. Our research als o reveals that

both moral legitim acy factors und er investigation influ ence the three categor ies of

social reporti ng, although in different ways. Th is research contributes to the existi ng

literature by empiric ally examining how org anisations priorit ise their disclosure of

virtues and th e moral legitimacy factors t hat influence that prioritisation.

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     CHE AZMI Et Al.

achieving moral legitimacy must adopt a strategy of convincing others

rather than manipulating or persuading them. In this study, we appeal

to legitimacy theory, in particular the theory of moral legitimacy, to ex-

plain the patterns governing reporting by Sharia-compliant firms and

the relationship of that reporting to Muslim stakeholders.

The first obj ective of this stu dy is to examine pat terns of social

reporting u sing a taxonomy that captures th e prioritisation of Islamic

values in Sharia-based organisations and in Sharia-compliant compa-

nies in parti cular. The second objective of our s tudy is to identify and

analyse the mor al legitimacy factors tha t influence the th ree catego-

ries of disclosur e (Required, Expected and Desi red) in predominantly

Muslim countrie s. In these Muslim nations, we anal yse two moral le -

gitimacy fac tors: the type of Sha ria screening body an d the proportion

of Muslims in the pop ulation. These factor s are considered import ant

because of the way that Sharia-compliant companies are awarded their

status. Sharia-compliant companies are different from Islamic banks

or “Takaful” operato rs in that they do not necessarily h ave their own

Sharia super visory boa rds to assist them in a ligning their ope rations

with Sharia. In s ome cases, they may even be unaware of t he Sharia-

compliant stat us awarded to them by the Sha ria screening body.

The contribut ions made by this study c an be understood in th ree

ways. First, o ur study contribu tes to the literature o n social reporti ng

that emphasise s the introduction of t axonomies for social rep orting,

as in studies by, for exam ple, Mergaliyev e t al. (2019), O’Mara-Shimek

et al. (2015) and Ag gerholm and Trapp (2014). Similar to Mergal iyev

et al. (2019), which positio ns the study of disclosu res within the “ma-

qasid al-Shari'ah” fra mework, our study positio ns disclosures within

an Islamic fram ework, specifically th e “Ahkam” concept in Isl am. An

important aspect of this cont ribution is that we co nstruct a ta xo-

nomic, hierarchical framework based on the principle that different

acts hold dif ferent levels of priority, dividing d isclosures of ac tions

into three catego ries: Required, Expected and Desi red. Second, this

study exten ds the existing literat ure (Al-Shammari, 2013; Oth man &

Thani, 2010; Ousa ma & Fatima, 2010) on Sharia-based inves tments

other than Islamic financial institutions. We measure empirically the

prioritisat ion of virtues as expressed i n disclosures made by Sharia-

compliant compa nies in a multinatio nal setting. I n doing so, we are

able to provide a ric her underst anding of the diver se methods by

which Islamic social reporting is achieved by Sharia-compliant com-

panies. Third, this study contributes to current literature, including

the work of Newson a nd Deegan (200 2) and Schröder (2013), by

offering insig hts into the conne ction betwe en legitimacy f actors,

particularly moral legitimacy factors derived from the Islamic frame-

work, and discl osure within vari ous categories. I n this regard, our

findings suggest that different types of Sharia screening influence

disclosures in t he Expected and D esired categories, while the propor-

tion of Muslims in th e country influences th e Desired category only.

2 | LITERATURE RE VIEW

The global marke t has witnessed the emer gence of Islamic funds from

as early as the mid-1970s (El Khamli chi, Sarkar, Arouri, & Teulon, 2 014).

Since then, grow ing numbers of bot h Muslim and non-Mu slim inves-

tors have been see king ethical inve stments that ge nerate Sharia-

permitted in come and earnings. Ethical inv estments’ ability to att ract

funds depend s not only on their fi nancial perf ormance, but als o, and

more importantly, on their compliance with Sharia law. A company's

core business ac tivities must be condu cted in accordance with Isl amic

law, which mandates th at the company engage only i n “halal” activitie s

(those that are law ful or permissible in Isl am) and avoid involvement in

“haram” activ ities (those that are unlaw ful or not permissible i n Islam).

The main “haram” elements identified in Sharia include employ-

ment of or involvement w ith any form of intere st (“riba”) and ac tivi-

ties related to consumption of alcohol (“khamar”) and pork-based food

products . Operationally an d in terms of principles , sharia also prohibit s

business act ivities associated with specu lation, excessive uncertaint y

(“gharar”) an d gambling (“maysir”), on the gro unds that such practices

could result in in un fair distribu tion of profits or l osses, risky i nvest-

ments and hoar ding of assets. Ub eroi and Khade m (2012) elaborate

on these three o perational pr inciples, whic h can be unders tood by

first acknow ledging that all a ctivities an d transactio ns involve spec-

ulation and risk a nd that it is the degree of “gharar,” as determin ed by

cost-benefit analy sis, uncertaint y and gain, that disqualif ies certain ac-

tivities; hen ce the term “gharar” it self carries th e meaning of “excessive

uncertaint y.” On the contrary, speculation, o r “maysir,” is conceptually

distinct due t o the fact that th e latter involves t he “creation of risks

and risk-taking that wou ld not be present othe rwise and which amo unt

to zero-sum transactions that are socio-economically non-productive”

(Uberoi and Kha dem, 2012, p. 156). In addition to avoiding t he afore-

mentioned prohibited elements and operational principles, the com-

pany must also ens ure that it neither engages i n nor is associated with

companies that e ngage in activi ties involving the p roduction of adult

entertain ment or the possession of ha rmful weapons.

The need for a spe cific trading p latform that man ages only

Islamic investm ents and equit ies gave rise in the late 1990 s to the

first Islamic index (El Khamlichi et al., 2014). Internationally, financial

markets such as St andard & Poor's cr eated the Globa l BMI Sharia

Indices (GBSI). Ad ditionally, the Dow Jones Indices L LC (DowJones)

launched its D ow Jones Islamic Market In dices (DJIMI), the Financial

Times Stock Exc hange (FTSE) es tablished th e Global Islamic I ndex

Series (GIIS) an d Morgan Stanle y Capital Inter national (MSCI) cre -

ated the MSCI Islam ic Index series. The ma rket capitalisation fo r the

S&P Global 1, 200 Sharia In dex alone was wor th USD20.86 billio n

(Islamic Financial Services Board, 2015). Worldwide, the Islamic

funds indust ry had asset s under manageme nt reaching USD66 .7

billion at the end of 2 017 (Islamic Financial S ervices Boa rd, 2018).

Elsewhere, smaller Islamic indices that cater to specific country re-

quirements , such as the Kuala Lumpur Sharia In dex in Malaysia and

the KSE-Meeza n Index in Pakistan, have em erged.

2.1 | Islamic social reporting

Various studies h ave established a link be tween social repor ting and

Islam (Maali, Ca sson, & Napier, 2006). From the Islam ic perspective,