commercial banks and 23 Islamic banking units, as well as 150 Islamic rur

HUM ​29,1 Islamic Banking Law, as the legal foundation for the Islamic banking de
2008[2]. It is expected that the Indonesian Islamic banking industry continu
awareness of the Indonesian Muslims, growing well-educated population
branches throughout the country.
4​Humanomics Vol.
​ 29 No. 1, 2013 pp. 4-23 ​
q ​
E merald Group Publishing Since modern commercial banks are generally run as corporations, a
Limited 0828-8666 DOI 10.1108/08288661311299295 Jensen and Meckling, 1976) may arise due to differences of interests betwee
The current issue and full text archive of this journal is available at
In firms with a higher level of ownership concentration, such problems ma
www.emeraldinsight.com/0828-8666.htm
shareholder and minority shareholders (Shleifer and Vishny, 1997). Hence
mechanisms are intended to minimize this conflict. In the banking indus
higher level of significance since banks mobilize public saving, depend on pu
stakeholders. Weak governance in banks has resulted in the collapse of
vernance disclosure ​in the annual financial scandals involving the owner and management, which could have sy
In Islamic banking, greater attention should be placed since Islamic
non-compliance risks, as well as weaker institutional environments of emergi
operate (Claessens, 2006). Further, in Islamic banks, investment depositors
ratory study ​on Indonesian Islamic banks ​ Salim conflicts since they participate in the profit and loss like shareholders, makin
highly required to protect their interest and to maintain their confiden
Capital Market and Financial Institution Supervisory Agency stakeholders, such governance mechanisms need to be disseminated and discl
a, Indonesia and Indonesian College of State Accountancy The present study explores the practice of disclosure on corporate go
STAN), Tangerang Selatan, Indonesia reports of Indonesian Islamic banks. It contributes to the knowledge in at lea
study is conducted in the Indonesian context. Even though studies using dat
is paper is to explore disclosure on corporate governance mechanisms in annual reports of as those conducted by Haniffa and Hudaib (2007) and Hassan and Hara
a. Design/methodology/approach – Employing a sample comprising seven Islamic powerful insights, studies in the context of one single economy is still importa
esent study constructs the so-called Corporate Governance Disclosure Index (CGDI) to has its unique national characteristics. Indonesia has a relatively different
orate governance mechanisms addressed in this study include Shariah Supervisory Board, other Muslim countries. For instance, the country adopts two-tier board str
d of Directors, board committees, internal control and external audit, and risk have a supervisory board (called “board of commissioners” – BOC) and a m
that Bank Muamalat and Bank Syariah Mandiri, the county’s two largest and oldest
of directors” – BOD). The Islamic banking industry in the country, whic
r than their peers. Disclosure of the sample banks on some dimensions, such as board
initiated by the Muslim society instead of the government. Further, the coun
nd to be strong. On the other hand, disclosure on internal control and board committees
s – This study shows that the average disclosure level among the sample banks is
are generally the results of conversion from conventional banks or spinof
mportant implications for the enhancement of corporate governance disclosure of Islamic parents. Second, exploratory studies on corporate governance of Islamic
nhanced reputation could be gained. Originality/value – This paper is believed to be disclosed in corporate annual reports, are relatively scarce in the literature
of disclosure on corporate governance mechanisms among Islamic commercial banks. addressed corporate social responsibility (Maali ​et al.​, 2006; Hassan and Ha
he largest Muslim country that has a different institutional setting from that in other (Haniffa and Hudaib, 2007).
e governance, Disclosure, Indonesia, Islamic banks, Banks Paper type Research paper The sample of this study consists of seven banks whose 2010 annu
web sites; namely Bank Muamalat, Bank Syariah Mandiri, Bank Mega Syaria
Muslim country in the world, Indonesia experiences rapid growth in its Victoria Syariah, BCA Syariah, and BJB Syariah. The so-called Corporat
hough the market share of Islamic banks in the ​country is still below 4 (CGDI) is constructed for each bank to measure the extent of governance disc

c banks’ assets in 2010 had been

​ 50 times larger than that in 2000. As of 31 Corporate ​governance
lamic
disclosure5
re those of the author and do not necessarily reflect the views of Bapepam-LK. The
pful comments by Amir Shaharuddin and participants at the 2011 Islamic Seminar and
M
at Universitas Negeri Jakarta, Indonesia. All errors and omissions remain the author’s ​29,1
 2. Literature review ​2.1 The importance of corporate go
industry, corporate governance practices are unique compar
6 mechanisms are “simply” intended to align the interests of s
ed include the ​Shariah ​Supervisory Board (SSB), the BOC, the BOD, board 1976), or in the cases of firms with more concentrated owne
nd external audit, and risk management[3]. The result reveals that Bank minority shareholders (Shleifer and Vishny, 1997). The uni
andiri show higher CGDI scores than their peers. Some other banks show low and safeguard the funds provided by various parties, includi
s requiring much improvement are internal control and external audit, board can also affect economic outcomes, where in some countrie
nance implementation reporting. for firms. Further, banks have more diverse stakeholders an
The remainder of the present paper is structured in the the importance of corporate governance mechanisms. Bank
iews prior theoretical and empirical work on corporate governance of Islamic nature of its capital structure, where banks face many short-
e disclosure. This is followed by Section 3, which briefly discusses the depositors’ confidence.
nks, as well as the methodology to score the disclosure level. In Section 4, the
ented and further discussed. Finally, Section 5 concludes the paper.
In Islamic banking, greater attention needs to be placed on corporate governance for at least three reasons. First,
Islamic banks need to comply with ​shariah ​law, in addition to adherence to banking regulations (Archer ​et
al.​, 1998). Chapra and Ahmed (2002) state that most depositors and investors of Islamic banks are highly
concerned that their funds are managed in accordance with ​shariah ​rules. Hence, such banks are more
exposed to non-compliance risks. Chapra and Ahmed’s survey also shows that most depositors of Islamic
banks are prepared to withdraw their funds if those banks fail to operate in accordance with ​shariah ​rules.
Safieddine (2009) explains that:
[​...​] while agency problems in conventional companies arise when managers deviate from their duty to maximize
shareholders’ wealth, any divergence by managers of Islamic financial institutions from placing all supplied funds in
Sharia​-compliant investments creates an additional source of agency problems (p. 144).

Second, Islamic banks have unrestricted investment account holders (IAHs). These account holders appear to
be part of the agency conflicts since they participate in the profit and loss like shareholders (Chapra and
Ahmed, 2002; Nienhaus, 2007). Even though their deposits are generally higher than shareholders’ equity,
they have no voice in shareholders’ meetings. However, allowing depositors to have voting rights in
shareholders’ meetings is unlikely to do since IAHs are much greater in number and more poorly organized
compared to shareholders. As contended by Chapra and
controlling shareholder and minority shareholders. Increased corporate disclo
Ahmed, all precautions need to be taken to maintain confidence of depositors in Islamic banks. The tools may
mitigate the information asymmetry. Managers, who are more inclined to hav
include sufficient regulation, proper supervision, sound risk management, and good corporate governance
firm’s operation, provide shareholders and other user groups with particular in
(GCG). Again, when an Islamic bank fails to protect the depositors’ interests, depositors are likely to protect
their economic decision (Cooke, 1989; Narayanan ​et al.​, 2000). Financial rep
their own rights by withdrawing their deposits in the bank.
require minimum disclosure requirements, thus other information to be disclo
Third, most Islamic banks operate in emerging markets, where the
Voluntary institutional
disclosure environment
is managers’ tends toand as contended by Verrecchia
discretion,
be weaker (Claessens, 2006). In such markets, where high levels voluntary information when the benefitsfamily
of ownership concentration and outweigh the associated costs. Healy
control are more prevalent, applicable regulations tend to be lessforces
protective for minority shareholders (as well
that motivate managers to disclose additional information, namely the
as IAHs) from asset expropriation committed by the controlling transactions, corporate control losses, stockand
shareholder. Additionally, transparency compensation, litigation costs, an
disclosure practices are also weaker in these markets compared with There those are
in more developed
a number economies,
of techniques that can be used by firms to dis
making monitoring costs and information asymmetry higher. Alternatively, lack of market discipline appears
external stakeholders (O’Sullivan ​et al.​, 2008). However, as argued by Boto
to be another issue in less developed markets (Claessens, 2006). These conditions, hence, stress the
report is viewed as the principal medium to convey financial and non-fin
importance of GCG in Islamic banks.
manner. The annual report is considered important because of its effect
corporate image or message (Preston ​et al.​, 1996), managing external impre
2.2 Corporate governance disclosure in the annual report degree ​In the framework of agency
of credibility (Neu​et theory, agency
al.​, 1998). As argued by O’Sullivan​et al. ​(2008
costs arise due to information asymmetry that exists between shareholders and managers, or between the
is not the only way to disseminate information, firms with high-quality disc
 information is incorporated in their annual reports. onsible for governing the firm, how their compensation is
t financial is
Further, it is also argued that information on corporate governance resources
important(Bushman ​et al.​by
to be disclosed , 2004).
the Additionally,
firm. Bushman and Smith (2003) define corporate transparency ance
as can
“theenhance monitoring
widespread and internal
availability control, improve firm
of relevant,
rovements
reliable information about the periodic performance, financial position, to the internal
investment structuregovernance,
opportunities, and process (Association of
value and risk of publicly traded firms” (p. 76). Bhat ​et al. ​(the 2006) governance
contend thatmechanisms
knowledgeare on not disclosed, the firm’s
a firm’s
governance structure will be useful to assess the credibility of information. In the banking
financial information, as wellsector,
as to due to its opaque and highly
accurately
nce is subject
set expectation and to reduce uncertainty concerning the firm’s performance. to the regulation of banking authority. Hence,
ay a more important role compared with that in other sectors.
Corporate ​governance Islamic banks appear to be financial institutions with a religion-based
Islamic ethical values in their operation, in addition to ap
governance within a firm. In Islam, corporate governance
disclosure7
with adherence to ​shariah ​principles (Hasan, 2009). The
the important areas of accountability and trustworthiness. H
HUM ​29,1

8
[​...​] one of the avenues to demonstrate their accountability and commitments in serving the needs of the Muslim
community and society in general is via disclosure of relevant and reliable information in their annual reports (p. 5).

With respect to the spirit of transparency and accountability, Islamic banks are expected to disclose the
features of their corporate governance to their stakeholders, enabling the stakeholders to assess how the bank
is governed and how their investments is managed in ​shariah​-compliant and prudential manners.

2.3 Corporate governance mechanisms in Indonesian Islamic banks ​Based on previous studies
(Chapra and Ahmed, 2002; Haniffa and Hudaib, 2007; Safieddine, 2009), the present study addresses a
number of corporate governance mechanisms and tools that need to be disclosed by Indonesian Islamic banks.
These mechanisms include SSB, the BOC, the BOD, board committees, internal control and external audit,
risk management, and corporate governance implementation reporting.
Shariah Supervisory Board​. It is important to note that various parties have stressed the importance of a SSB, which
can ensure that the activities of an Islamic bank are in line with shariah law (Safieddine, 2009). Hence, the
SSB plays an important role as an internal control mechanism (Haniffa and Hudaib, 2007), with the duties of
reviewing and supervising the activities of an Islamic bank in order to ensure that they are in accordance with
shariah ​principles. The SSB is an independent body within an Islamic bank and, therefore, it is not subject to
instructions and influences by management, the BOD, or shareholders (Nienhaus, 2007).
In Indonesia, as regulated by the Islamic Banking Law, Islamic banks are required to have an SSB, whose members are
appointed by the shareholders’ general meeting based on recommendations provided by the Indonesian
Council of Ulamas (​Majelis Ulama Indonesia​). Bank Indonesia requires the SSB of Islamic banks to have
board meetings of at least once a month and to submit periodic supervisory reports to Bank Indonesia[4].
et al.​, 2008). Further, it is believed that that a larger proportion of independe
Boards of commissioners and directors​. The BOD is viewed as one of the important determinants
advantageous to the firms since it would lead to better monitoring, as well as
of effective corporate governance, since it plays an important role to mitigate conflicts between shareholders
(Hermalin and Weisbach, 1998; Pearce and Zahra, 1992). The presence of ind
and managers (Klein, 1998). The characteristics of the board, including board size and board independence,
intended to protect the right of minority shareholders.
have been widely addressed in either theoretical or empirical research. Even though there are persisting
Concerning the legal form of the firm, Indonesia’s Islamic Banking
debates on whether firms should have large or small size of the board, some studies suggest that firms with
bank should be a corporation. This means that Islamic banks must adh
more complex operations need to have a greater number of people serving on the board (Klein, 1998; Coles
Indonesia inherits some aspects of the Dutch law, including its two-tier b
Corporation Law, Indonesian firms shall have two boards in their organizational structure, namely the BOC
and the BOD. The members of these two boards are elected or appointed by shareholders in thedisclosure9 shareholders’
general meeting. The BOC represents shareholders and conducts advising and monitoring roles on the firm’s
management. Hence, the role of the BOC is entirely non-executive, and its members consist of the
M ​29,1
representatives of shareholders and/or independent commissioners (from outside the firm). Further, the BOD
conducts the day-to-day management of the firm, and is responsible to both the BOC and shareholders[6].
In Indonesia, all of BOC and BOD members are subject to the fit-and-proper tests conducted by Bank
Indonesia. Such tests are aimed to assure that board members of Islamic banks possess adequate levels of
competence, credibility, and integrity, as well as the commitment to enforce GCG. Different from the
regulation for conventional banks, Bank Indonesia requires Islamic
ation committee,
banks to havewhere
at least
a committee
one independent
is led by an independent
commissioner on the BOC, without determining the number of s the
BOC bank’s
members
internal
should
audit
be function
employed andbyrecommends
the a public
bank. The BOD is fully responsible in conducting management ring
of committee
the bank based on ​shariah
evaluates ​and prudential
the bank’s policy on risk management.
principles. e has responsibilities in evaluating the compensation policy, as
Board committees​. The BOC can conduct its dutieseby candidates
itself or to serve on
delegate itsthe BOC, BOD,
authority and SSB.
to standing
committees responsible to the board (Klein, 1998). The establishment ofInternal control and
a board committee canexternal
be mandatoryaudit​. The existence of an effecti
for firms to a particular extent, for example for listed firms or banks. Klein (1998)Islamic
contends
financial
that institutions,
due to the in ongoing efforts to ensure
need of expert-provided information about the firm’s activities, certain committees culturearewithin
set upthe to organization
assist in (Chapra and Ahmed, 200
decision making process. Further, board committees are expected to conduct independent
ensure thatmonitoring
internal control
on thesystems in all banks are in line
firm. For example, the audit committee helps alleviate agency problems by parts ensuring
of internal
that accurate
controls and
is the internal audit system. Chapr
unbiased accounting information is released in a timely manner to shareholders, functioncreditors,
should beand strong
other
and independent and should repo
stakeholders. The importance of board committees attracts more interests following addition, financial scandals
audits conducted by an independent
involving high-profile companies. mechanisms of corporate governance. An audit provides in
In Indonesia, the Code of GCG, the latest version of which was issued managers, and that
in 2006, states therefore
the BOC plays a crucial role in maintain
can establish board committees to support its function. Alternatively, Bank Indonesia has determined that it is and Meckling, 1976; Imhoff,
reducing agency costs (Jensen
compulsory for conventional and Islamic banks to form at least three committees: the audit committee, the
risk-monitoring

Corporate ​governance
Through the regulation of Bank Indonesia, Indonesian Islamic banks are required to have an effective and independent
internal audit function, which is conducted by competent personnel. Further, with respect to the independent
audit on financial statements, Islamic banks shall appoint a particular public accounting firm that are
registered in Bank Indonesia.
Risk management​. A number of risks are inherent in banking business, including in Islamic banking. Banks need to
be highly cautious for their exposure to all risks. As stated by Chapra and Ahmed (2002), board members and
senior management should be aware of the risks and develop sound risk management within the bank. Banks’
failure to manage such risks can lead to declining confidence of depositors, as well as systemic impacts on the
economy. To support this, banking supervisory authorities will need to promote effective risk management. In
Basel II, a number of risks have been incorporated to ensure that banks have adequate capital to deal with
those risks and mitigate their impacts, namely market risks, credit risks, operational risks, and other risks.
Bank Indonesia has issued a regulation that guides banks in managing their risks[7]. The regulation requires Islamic
commercial banks to implement risk management for at least four risks, namely market risks, credit risks,
liquidity risks, and operational risks. Further, an Islamic bank with a higher degree of business complexity
should also manage other four risks, including legal risks, compliance risks, strategic risks, and reputation
risks. The BOD shall establish a risk management division that is independent from other units.
Corporate governance implementation reporting​. In line with the Code of GCG, Bank Indonesia determines that
Islamic banks shall prepare a report on the implementation of GCG at the end of a financial year. The report
should disclose such items as board equity ownership, remuneration policy, board meetings, internal fraud,
 and the distribution of charity funds. Such a report is also generally incorporated as part of the
banks’ annual reports. Further, Islamic banks are required to conduct self-assessments on the implementation of
GCG at least once a year. The self-assessments include a number of elements, such as the implementation of the
boards’ duties and responsibilities, the implementation of internal and external audits, and financial and
non-financial transparency.
3. Sample and methodology ​3.1 Characteristics of the sample banks As
​ previously mentioned, there were 11
Islamic commercial banks at the end of 2010. The sample of the present study consists of seven banks whose 2010
annual reports are available on their web sites, namely Bank Muamalat, Bank Syariah Mandiri, Bank Mega Syariah,
Bank Syariah Bukopin, Bank Victoria Syariah, BCA Syariah, and BJB ​Syariah[8]. This subsection highlights the

characteristics of the seven banks, which include

​ firm-level characteristics and ownership structure.
Table I shows firm-level characteristics of the sample banks. I include a number of financial figures and indicators,
namely total assets, financing, third-party funds, ​return on assets (ROA), and return on equity (ROE). In these

variables, generally Bank Muamalat

​ and Bank Syariah Mandiri lead their peers. Further, even though its shares are
not publicly traded on the stock exchange, Bank Muamalat is a publicly held corporation, while other banks are
privately held[9]. The sample banks have not yet issued shares on the stock exchange, and the Bank Muamalat is the
only bank issuing ​sukuk ​on the Indonesia Stock Exchange (IDX). ​Table II reports the controlling shareholder of

each sample bank. I also indicate the ownership

​ type of each bank, whether it is controlled by a foreign institution, a
family, the government, or other types of institution. The ownership type is indicated by tracing the ultimate
controlling shareholder (the parent of its parent company). For ​example, even though BJB Syariah is controlled by

Bank Jabar Banten, its ownership type

​ is “government-controlled” since Bank Jabar Banten is controlled by a
regional government. Except for Bank Muamalat, the ownership structure of the Indonesian
Bank Muamalat
Bank Syariah Mandiri
Bank Mega Syariah
Bank Syariah Bukopin
Bank Victoria Syariah
BCA Syariah
BJB Syariah
Total assets​a ​21,401 32,482 4,638 2,194 337 875 1,930 Financing​a ​15,918 23,958 3,154 1,612 28 417 1,603 Third-party funds​a ​17,393
28,998 4,041 1,622 167 557 1,322 Return on assets (%) 1.36 2.21 1.90 0.74 1.09 1.04 0.72 Return on equity (%) 17.78 63.58 26.81 9.65
2.41 1.67 1.62 Year operation starts 1992 1999 2004 2008 2010 2010 2010 Number of branches 368 507 394 41 8 15 21 Public/private
Public Private Private Private Private Private Private Issuing stocks in capital market
No No No No No No No
Issuing ​sukuk ​in capital market
Yes No No No No No No
Note: a​​ Stated in billion Indonesian Rupiah (IDR) Source: 2010 annual reports and financial statements of the sample banks

Corporate ​governance disclosure11

Table I. Firm-level characteristics of the sample banks

HUM ​29,1
12
 Table II. Ownership structure of the sample banks
Ownership Bank
type Shares ownership of the controlling shareholder
Bank Muamalat Foreign 32.82% Islamic Development Bank Bank Syariah Mandiri Government 99.99% Bank Mandiri, one of the largest
banks, a listed bank, 66.68 per cent of shares being held by the Indonesian government Bank Mega Syariah Family 99.99% Mega
Corpora (a privately held, domestic
company) Bank Syariah Bukopin
Cooperative 65.44% Bank Bukopin, a listed bank, 39.54 per cent of
shares being held by Kopelindo (a cooperative) Bank Victoria Syariah Family 99.98% Bank Victoria International, a listed bank,
38.01 per cent of shares being held by Victoria Sekuritas (a privately held, domestic company) BCA Syariah Family 99.99% Bank
Central Asia, a listed bank, 47.15 per cent of shares being held by an Indonesian family through a Mauritius-based company BJB Syariah
Government 99.00% Bank Jabar Banten, a listed bank, 45.36 per cent of
shares being held by the regional government of West Java
Source: 2010 annual reports and financial statements of the sample banks
Islamic banks generally shows a high level of ownership concentration. Family control also appears to be the most
common type of ownership.
3.2 Methodology ​In the present study, I construct the so-called CGDI by employing a comprehensive ​checklist,

comprising items related to the SSB, the BOC, the BOD, board committees, internal
​ control and external audit, risk
management, and corporate governance implementation reporting (see Appendix). In order validity to be enhanced,
items are carefully developed from a number of studies and guidelines[10]. Scoring of the ​index for each bank is

conducted through a content analysis, where the entire annual report

​ is read before making any judgment (Cooke,
1996). Similar to Haniffa and Cooke (2002), in scoring items, the approach is essentially dichotomous, where an
item scores 1 if disclosed and 0 if it is not, without any penalty for each undisclosed ​item. All items are equally

weighted. The index is calculated using the following formula:

​
CGDI ​1⁄4
Pn​​ j ​t​1⁄4​1X​
​ ij n​
​ j

where ​X​would ​ij ​equals n​

​ j have
​ ​is the number of items expected to be disclosed by ​j​th Islamic bank; 1 if ​i​th item is

disclosed and 0 if ​i​th item is not disclosed. Hence, the CGDI the
​ minimum value of 0.00 and the maximum value of
1.00. ​The sample banks are then ranked based on their CGDI. The higher the index, the more
​ transparent the bank is
in disseminating information on its corporate governance mechanisms in the annual report.
index for each dimension. The items on the BOD dimension are the most freq
4. Results and discussions ​4.1 Corporate governance disclosure index ​Table III reports the CGDI for the
with the average of 0.73. Other dimensions showing relatively high indices ar
sample banks addressed in this study. For each bank, ​I calculate the overall index, as well as the index for
management, with the dimensional indices ​of 0.70 and 0.69, respectively. Alt

each of the seven dimensions. It seems

​ that a wide variation exists in disclosure practices among the seven
control and external ​audit is found to be the category with the lowest level of
Indonesian Islamic banks. I rank the banks based on their overall CGDI. It is revealed that Bank Muamalat
dimensional index of 0.38. Given the average overall index of 0.60, it can be
and Bank Syariah Mandiri show the highest CGDIs, scoring 0.89 and 0.83, ​respectively. This means that two
banks possessing above-average disclosure levels, namely Bank Muamalat
​ an
banks disclose 89 and 85 percent, respectively, of 72
​ items constructed in the checklist. On the other hand,
It can be concluded that Bank Muamalat and Bank Syariah Mandiri
BJB Syariah and Bank Syariah Bukopin appear to have the lowest CGDIs, scoring 0.32 and 0.49,
transparency, particularly in terms of corporate governance ​disclosure, co
respectively. ​The last column in Table III also reports the average index, for either the overall index
​ or the
 k Victoria Syariah
banks also achieve the highest possible index
​ for a number ofkdimensions. Bank Muamalat achieves perfect
Victoria Syariah
dimensional indices (1.00) for the BOC and BOD, while Bankk Syariah Mandiri is excellent at disclosure on
Victoria Syariah
k Victoria Syariah
the BOD and corporate governance implementation. ​Shariah ​Supervisory
BCABoard​
Syariah. Disclosure on the profile
BCA Syariah
of the SSB would provide assurance
​ that the bank is conducted in accordance with ​shariah ​law (Haniffa and
BCA Syariah
BCA Syariah
Hudaib, 2004). Islamic banks are expected to disclose a set of aspects on their SSB, ​including the description
BCA Syariah
BJB Syariah Average
of board members (name, position, picture, and profile), BJB Syariah Average
BJB Syariah Average
Corporate ​governance BJB Syariah Average
BJB Syariah Average
BJB Syariah Average
disclosure13
Shariah ​Supervisory Board 0.75 0.92 0.50 0.67 0.58 0.42 0.42 ​0.61 ​Board of commission
0.31 ​0.70 ​Board of directors 1.00 1.00 0.67 0.67 0.67 0.67 0.44 ​0.73 ​Board committees 0.8
0.53 ​Internal control and external audit 0.88 0.50 0.38 0.25 0.25 0.38 0.00 ​0.38 ​Risk mana
0.70 0.80 ​0.69 ​Corporate governance implementation reporting 0.80 0.80 0.40 0.40 0.20 0
0.83 0.51 0.49 0.54 0.57 0.32 ​0.60 ​Overall rank 1 2 5 6 4 3 7
Table III. CGDI of the sample banks

M ​29,1

meeting attendance, and remuneration for board members. In

d’s opinion whether products, services, and profits/losses have
or this dimension, with the average index of 0.61, Bank Syariah
ank Muamalat, and the lowest being BCA Syariah and BJB

It is found that most banks in the sample do not

meetings, meeting attendance, board remuneration, and the
rinciples. Further, it is only Bank Muamalat and Bank Syariah
Bank Muamalat
– though not comprehensive – in conducting assessments on the
iri
ega Syariah
d in the following statements:
ega Syariah Activities of the SSB in 2010 included [​...​] methods and
Bank Syariah Bukopin (Bank Syariah Mandiri Annual Report 2010, p. 15 – translated
Bank Syariah Bukopin
Bank Syariah Bukopin

To assist the Shariah Supervisory Board in executing its duties at Bank Muamalat a special unit was formed, namely
the Shariah Compliance Unit (ShCU) that acts as Liason Officer between the Shariah Supervisory Board and the
divisions/business units in Bank Muamalat (Bank Muamalat Annual Report 2010, p. 58).

Additionally, three banks, namely Bank Syariah Mandiri, Bank Mega Syariah, and Bank Syariah Bukopin,
disclose in their annual reports the SSB’s recommendations to management. The following statement
indicates recommendation of the board for improvements to be carried out by management in the future:
 The Shariah Supervisory Board advised Bank Mega Syariah not to focus on business profits only, but the bank also
needs to adhere to prudential principles in performing banking business based on shariah rules (Bank Mega Syariah
Annual Report 2010, p. 13 – translated by the author).

Board of commissioners​. It is expected that Indonesian Islamic banks communicate a set of important
matters with respect to the BOC, namely the description of board members (name, position, independence,
picture, profile, and multiple commissionership), duties and responsibilities, board meetings, meeting
attendance, shareholding, and remuneration for board members. For this dimension, the average index is 0.70.
This suggests that, on average, the sample banks have disclosed most constructs developed in this dimension.
Information on the BOC disclosed in annual reports is expected to provide assurance to stakeholders that the
BOC has effectively conducted monitoring and advising roles on the BOD.
Bank Mandiri gains a perfect score (1.00) by disclosing all items for this dimension, followed by Bank Syariah
Mandiri. In their annual reports, these two banks also communicate recommendations provided by the BOC
to management, as in the following statement:
The advice from Commissioners for Board of Directors of Bank Muamalat about the finalization of Bank Muamalat’s
business plan in the year 2010 is about improving Management Information System so that it can be more accurate
and comprehensive for compiling customer data among all branches all over Indonesia (Bank Muamalat Annual
Report 2010, p. 143).
In terms of the performance report, Bank Muamalat and Bank Syari
Board of directors​. The BOD of Islamic banks is entrusted with resources to be managed to maximize
report from board committees in their annual reports. For instance, th
shareholders’, as well as depositors’, wealth. Thus, as suggested by Haniffa and Hudaib (2004), stakeholders
performance report of the Remuneration and Nomination Committee of Bank
may need to assess the profile of those managing the business. This implies that information regarding top
management team is important. For this dimension, most items that The are importantand
Remuneration to disclose areCommittee
Nomination similar toheld a meeting if it is considered ur
those in the BOC dimension. and Nomination Committee Charter. During 2010, the committee held three meet
The dimensional index for the BOD is the highest amongdiscussing the remuneration and nomination of the bank’s board members; (2)
seven dimensions included in this study’s
bank’s employees compared to other banks; (3) nominating the chairman candida
checklist. Nevertheless, it is only Bank Muamalat and Bank Syariah Mandiri scores above average, where
Board (Bank Syariah Mandiri Annual Report 2010, p. 102 – translated by the autho
both banks share the highest possible score (1.00). While description of the board members are generally
banks in their​
disclosed by the sample banks, remuneration for board members is only communicated by threeCorporate
annual reports, namely Bank Muamalat, Bank Syariah Mandiri, and BCA Syariah. For instance, in addition to
governance
information on the compensation level for each individual board member, BCA Syariah briefly communicates
its compensation policy in its 2010 annual report: disclosure15
The distribution of remuneration and other facilities to the Board of Commissioners, the Shariah Supervisory Board,
and the Board of Directors referred to shareholders’ decision, M ​29,1 in the shareholders’ general meeting,
as determined
taking into account the advice provided by the Remuneration and Nomination Committee. In general, the basic
components of remuneration include: (1) basic salary; (2) allowance, comprising health allowance, retirement
allowance, official vehicles, and Eid-ul-Fitr allowance of once a year (BCA Syariah Annual Report 2010, p. 50 –
translated by the author).

The detailed disclosure on the compensation level is a best practice

g the adopted internationally.
sample banks However,
is relatively such athe second lowest
low at 0.53,
practice in developing countries is relatively weak. The disclosure on board
xternal audit. Again,remuneration
Bank Muamalatwould
andenable
Bank Syariah Mandiri
stakeholders to assess whether the pay level is appropriate .and has represented the performance of
BJB Syariah, one of the newly established board
Islamic commercial
members. ​Board committees​. Board committees are established
10, even todoes
assist
notthedisclose
BOC in anything
decision making
in terms of their board
process, as well as in conducting supervising and monitoring roles of
hat none onthe
management.
sample banks Thediscloses
membersthe ofremuneration
the scheme
board committees are expected to possess particular expertise or experiences that would support the
effectiveness of such committees. Therefore, information on those serving on
Additionally, the committees
none of the sampleis also
banks has established a Corporate
considered important. Most items for this dimension are relatively similar to those for BOC and BOD
by Bank Indonesia, such a committee is expected to prov
dimensions. The items include the description of committee members, committee meetings, meeting
recommendations related to corporate governance mat
attendance, remuneration for committee members, and the performance report.
recommended in the Code of GCG, which was issued by
 (​Komite Nasional Kebijakan Governance​) in 2006.
Internal control and external audit​. Disclosure on internal control systems in the annual report will enable
stakeholders to examine that management is adequately overseen, so that the interests of shareholders,
depositors, creditors, and other stakeholders are secure. It is expected that Islamic banks disclose a set of
important factors, such as internal control framework, duties and responsibilities of the internal audit division,
and internal audit certification held by employees. Further, the bank’s external auditor also plays an important
role as abovementioned. Hence, this study expects that Islamic banks communicate their policies regarding
the appointment of external auditor.
Unfortunately, the disclosure practice of the Indonesian Islamic banks on this dimension is relatively insufficient. The
average dimensional index is 0.38, the lowest among the seven categories. Bank Muamalat still leads with the
score being 0.88, followed by Bank Syariah Mandiri that scores 0.50. The scores of other five banks range
from 0.00 to 0.38. A separate internal audit report is also found in the annual reports of Bank Muamalat and
Bank Syariah Mandiri. Accordingly, internal audit frameworks and the performance report on the internal
audit are also found in the two banks only. None of the sample banks discloses internal audit certifications
held by employees. Even though not disclosing does not mean that the bank has no certified internal auditors,
the disclosure of this specific skill will assure that the bank’s internal control system is supported by highly
skilled human resources. Bank Muamalat appears to be the only bank disclosing its policy on the appointment
of the external auditor.
Risk management​. Sound risk management will assure stakeholders that a bank has been prepared for uncertainties in
the future, and that the bank has enough capital to mitigate the risks. Hence, it is in the best interests of
stakeholders that the risks faced by a business are disclosed in a timely manner, including in its annual report
(Amran ​et al.​, 2009). In addition to the existence of a risk management unit and a risk management
framework, Islamic banks are expected to disclose how they manage four risks as required by Basel II and
Bank Indonesia, namely market risks, credit risks, liquidity risks, and operational risks. Further, the banks
need to disclose risk profile and risk management certification held by their employees.
For the dimension, the index is 0.69 on average, which indicates that the sample banks already have relatively
sufficient awareness to communicate their risk management. Bank Muamalat again leads with the index of
0.90. Interestingly, BJB Syariah, which tend to have the lowest index in previous dimensions, share the
second
2010, p. 57).
rank with Bank Syariah Mandiri, having the index of 0.80. BJB Syariah stresses its attention to sound risk
Again, Bank Muamalat and Bank Syariah Mandiri outweigh their competito
management in its annual report, which can be seen in the following:
banks, being the most well-established Islamic banks in Indonesia, also disc
Bank undertook the implementation of integrated risk management through the improvement of risk management
annual report, as stated in the following statement:
infrastructure and implementation of adequate and sustainable risk management processes based on the prudential
banking principle (BJB Syariah Annual Report 2010, p. 30). Since 2002, BSM has had the Code of Conduct that refers to the akhlaqul kar
intended to provide guidance in behavioral aspects in line with the expected value
Different from that in the internal audit, risk management certification held and
professional, by employees is the
responsible in disclosed in with all parties, including coll
interactions
annual reports of four banks, namely Bank Mandiri, Bank Syariah Mandiri, Bank Mega Syariah, and Bank
vendors, and the regulator (Bank Syariah Mandiri Annual Report 2010, p. 109).
Bukopin Syariah. However, it is found that only Bank Syariah Mandiri and Bank Syariah Bukopin disclose
Bank Indonesia has required Islamic banks to carry out self-assessments on
their risk profile in the risk management report.
is only disclosed by three banks, namely Bank Muamalat, Bank Syariah Ma
Corporate governance implementation reporting​. All Islamic banks included in the sample have
to convince stakeholders that the bank has been conducted what has been
a separate Corporate Governance Implementation Report in their annual reports. Even though the disclosure
aspect needs to be taken into account for disclosure in the future. However, it
level varies among the banks, it indicates to a particular extent their awareness in communicating the features
banks have an external party assess their GCG practices.
of corporate ​governance to stakeholders. Bank Syariah Bukopin states the following:

5. Concluding
Transparency, accountability, responsibility, independence and fairness remarks
become the ​Thisfor
foundation the Company in
paper examines the practice of disclosure on co
implementing GCG. The Board of Commissioners, Directors, Sharia Supervisory Board and all employees of the
among Indonesian Islamic banks. Islamic banks provide an interesting setting
Company are committed in implementing the GCG principles and practices (Bank Bukopin Syariah Annual Report
 due to several unique features, such as adherence to ​shariah xamines
​principlesthe
in extent
operations
of corporate
and unrestricted
governance
IAHs.
disclosure in seven
Indonesia, which has a different institutional environment from
D, board
other committees,
Muslim countries,
internalprovides
control another
and external audit, risk
interesting viewpoint. Corporate governance mechanisms are plementation
intended toreporting.
align theUsing
interests
content
of various
analyses on the banks’
stakeholders. Hence, the disclosure on such mechanisms is arguedach bank, either for the overall index or the dimensional index.
oyed using a comprehensive set of constructs. It is revealed that
Corporate ​governance nd Bank Syariah Mandiri show higher scores compared to other
may be referred to as the benchmark in terms of corporate
OC and BOD appear to be the most frequently disclosed by the
disclosure17
anks put much attention to displaying the profile of their board
HUM ​29,1 nternal control and external audit. This seems to imply that there
ers to communicate such issues in the annual report.
This research is subject to some limitations. The content analysis ma
instrument employed here may not represent all aspects
number of observations, despite its significant proportion
18
number of observations, future research is suggested to
akeholders with respect to how an Islamic bank is governed, which could
examining the determinants of corporate governance disclo
usted to them are managed.
Employing a sample consisting of seven Islamic
The results of this study may bring some practical implications. Given the average overall CGDI of the Indonesian
Islamic banks that is relatively low (0.60), this study then calls for the improvement of such disclosure in the
banks’ annual report. The enhancement of information being disclosed in annual reports is expected to benefit
the banks in several aspects. ​First​, by disclosing the features of corporate governance in a comprehensive
manner, the banks can expect to gain wider acceptance in the banking industry. This may leverage their
reputation, so that the banks can attract more savvy ​depositors and, in their capacity as issuers in the capital

market, good investors. Second​

​ , such disclosure can represent to a particular extent the banks’ effort in
enforcing GCG within their institutions, which will be a good starting point when the banks consider seeking
other financing alternatives, such as by issuing ​sukuk ​or shares in the capital market. To date, among the
Indonesian Islamic banks, it is only Bank Muamalat who has been an issuer (for ​sukuk​) in the capital market.

Notes
1. In Indonesia, Islamic banks are called bank ​syariah ​(literally means ​shariah ​bank). This term is also used in the
Islamic Banking Law and other applicable regulations in the country. Nevertheless, in the present study, the term
“Islamic banks” is used. 2. The term “Islamic Banking Law” here refers to Law Number 21 of 2008 concerning Islamic
Banking. 3. This study addresses corporate governance mechanisms and tools as indicated in such studies as Chapra and Ahmed
(2002) and Safieddine (2009). Thus, it excludes other relatively irrelevant variables such as financial governance and
corporate social responsibility of Islamic banks.
corporation”. A firm is a public corporation if its shares are “widely held” according to
4. This refers to the Regulation of Bank Indonesia Number 11/33/PBI/2009 concerningOn
stock exchange. thethe
Implementation of GCG
other land, a listed for
corporation (whose shares are publicly trad
Islamic Commercial Banks and Islamic Banking Units. Previously, Islamic banks
definitely shouldcorporation
a public adhere to Regulation
as well. 10.Number
Sources that are used to develop constructs
8/4/PBI/2006 concerning the Implementation of GCG for Commercialstudies, Banks.such
5. The
as term
Haniffa“Corporation
and HudaibLaw” refers
(2004, 2007)to and Kusumawati (2007), as well as
Law Number 40 of 2007 concerning Corporation. 6. The BOD in the Indonesia’s
context of Indonesia’s
Code of GCG, two-tier
and board system
guidelines is Islamic Financial Services Board (IFS
of the
absolutely different from that in the unitary system. The BOD in Indonesian firms
which are is equal to
considered toppractices,
best management in unitary
are also included in the checklist.
board systems. 7. This refers to the Regulation of Bank Indonesia Number 11/25/PBI/2009 concerning the
Implementation of Risk Management in Commercial Banks. 8. The 2010 annual reports of other four banks (BNI
Syariah, BRI Syariah, Bank Panin Syariah, References ACCA (2009), ​Disclosures on Corporate Governance​, Association of
Accountants
and Maybank Syariah) are not available on either corporate web sites or the internet. 9. Australia andMarket
The Capital New Zealand,
Law Sydney. Amran, A., Rosli, B.A.M
(2009), “Risk reporting: an exploratory study
in Indonesia (Law Number 9 of 1995 concerning Capital Market) differentiates between “public corporation” and “listedon risk management disclosure in Malay
Auditing Journal​, Vol. 24 No. 1, pp. 39-57. Archer, S., Ahmed, R. and Al-Deehani, T. (1998), “Financial contracting,
governance structures, and the accounting regulation of Islamic banks: an analysis in terms of agency theory and
M ​ , Vol. 2 No. 2, pp. 149-70. Bhat, G., Hope, O.K.
transaction cost economics”,​Journal of Management and Governance​29,1
and Kang, T. (2006), “Does corporate governance transparency affect the accuracy of analyst forecasts?”, ​Accounting
and Finance​, Vol. 46 No. 5, pp. 715-32. Botosan, C.A. (1997), “Disclosure level and the cost of equity capital”, ​The
Accounting Review​,
Vol. 72 No. 3, pp. 323-49. Bushman, R.M. and Smith, A.J. (2003), “Transparency, financial accounting
information and corporate governance”, ​Federal Reserve Bank of New York Economic Policy Review​, Vol. 9 No. 1,
Boards: does one size fit all?”, ​Journal of Financial
pp. 65-87. Bushman, R.M., Piotroski, J.D. and Smith, A.J. (2004), “What determines corporate transparency”,
Economics​, Vol. 87 No. 2, pp. 329-56. Cooke, T.E.
Journal of Accounting Research​, Vol. 42 No. 2, pp. 207-52. Chapra, M.U. and Ahmed, H. (2002),
of Swedish companies”,
Corporate Governance in Islamic Financial Institutions​,
Accounting & Business Research​, Vol. 19, Spring, pp. 113-24. Cooke,
Islamic Research and Training Institute, Islamic Development Bank, Jeddah. Claessens, S. (2006), “Corporate
corporate disclosure”, ​Journal of
governance of Islamic banks”, available at: www.ifc.org/ifcext/
unting​ , Vol. 7 No. 3,
corporategovernance.nsf/content/islamic_fin_institution_governance (accessed 1 August 2011). pp. 191-214. Haniffa, R. and Hudaib, M. (2004),
tions: an exploratory study”, working paper, University of Bradford,
Corporate ​governance b, M. (2007), “Exploring the ethical identity of Islamic banks via
usiness Ethics​, Vol. 76, pp. 97-116. Haniffa, R.M. and Cooke, T.E.
rate governance and disclosure in Malaysian
disclosure19
corporations”, ​Abacus​, Vol. 38 No. 3, pp. 317-49. Hasan, Z. (2009), “Corporate governance: Western and Islamic perspectives”,
International
Review of Business Research Papers​, Vol. 5 No. 1, pp. 277-93. Hassan, A. and Harahap, S.S. (2010), “Exploring corporate
social responsibility disclosure: the case of Islamic banks”, ​International Journal of Islamic and Middle Eastern
Finance and Management​, Vol. 3 No. 3, pp. 203-27. Healy, P.M. and Palepu, K.G. (2001), “Information asymmetry,
corporate disclosure, and the capital market: a review of the empirical disclosure literature”, ​Journal of Accounting and
Economics​, Vol. 31 Nos 1/3, pp. 405-40. Hermalin, B.E. and Weisbach, M.S. (1998), “The determinants of board
composition”, ​Rand
Journal of Economics​, Vol. 19 No. 4, pp. 589-606. Imhoff, E.A. Jr (2003), “Accounting quality, auditing, and corporate
governance”, ​Accounting
Horizons​, Vol. 17 No. s-1, pp. 117-28. Jensen, M. and Meckling, W. (1976), “Theory of the firm: managerial behavior, agency
costs and
ownership structure”, ​Journal of Financial Economics​, Vol. 3, pp. 305-60. Klein, A. (1998), “Firm performance and
board committee structure”, ​Journal of Law and
Economics​, Vol. 41 No. 1, pp. 275-303. Kusumawati, D.N. (2007), “Profitability and corporate governance disclosure: an
Indonesian
study”, ​Indonesian Journal of Accounting Research​, Vol. 10 No. 2, pp. 131-46. Labelle, R. (2002), “The statement of
corporate governance practices (SCGP): a voluntary disclosure
and corporate governance perspective”, working paper, HEC Montréal, Montréal, June. Maali, B., Casson, P. and Napier,
C. (2006), “Social reporting by Islamic banks”, ​Abacus​, Vol. 42
No. 2, pp. 266-89. Narayanan, V.K., Pinches, G.E., Kelm, K.M. and Lander, D. (2000), “The influence of voluntarily disclosed
qualitative information”, ​Strategic Management Journal​, Vol. 21 No. 7, pp. 707-22. Neu, D., Warsame, H. and
Pedwell, K. (1998), “Managing public impressions: environmental disclosures in annual reports”, ​Accounting,
Organizations and Society​, Vol. 23 No. 3, pp. 265-82. Nienhaus, V. (2007), “Governance of Islamic banks”, in
Kabir-Hassan, M. and Lewis, M.K. (Eds),
Handbook of Islamic Banking​, Edward Elgar, Cheltenham, pp. 128-43. O’Sullivan, M., Percy, M. and Stewart, J. (2008),
“Australian evidence on corporate governance attributes and their association with forward-looking information in the
annual report”, ​Journal of Management and Governance​, Vol. 12 No. 1, pp. 5-35. Pearce, J.A. II and Zahra, S.A.
(1992), “Board composition from a strategic contingency
perspective”, ​Journal of Management Studies​, Vol. 29 No. 4, pp. 411-38.
and corporate governance: new insights for agency theory”, ​Corporate Governance
Preston, A.M., Wright, C. and Young, J.J. (1996), “Imag[in]ing annualNo. 2, pp. ​A142-58.
reports”, ccounting,
Shleifer, A. and Vishny, R. (1997), “A survey of corporate governa
Organizations and Society​, Vol. 21 No. 1, pp. 113-37. Safieddine, A.No. (2009),
2, pp.“Islamic
737-83. financial institutions
Verrecchia, R.E. (1983), “Discretionary disclosure”, ​Jo
Economics​, Vol. 5
(1) Names of members. (2) Positions of members.
No. 1, pp. 179-94.
Corporate ​governance
Appendix. Checklist of corporate governance disclosure ​A. Dimension: ​Shariah
Supervisory Board
(1) Names of members. (2) Positions of members. (3) Pictures of members. (4)
disclosure21
Profiles of members. (5) Number of meetings held. (6) Members’ attendance in
M ​29,1
meetings. (7) Remuneration of members. (8) Duties and responsibilities of the
board. (9) Compliance of products and services with ​shariah​. (10) Compliance of
profit or loss with ​shariah​. (11) Examination procedures. (12) Recommendation
to management.

B. Dimension: board of commissioners

rs. (5) Number of
(1) Names of members. (2) Positions of members. (3) Pictures of members. (4) Profiles of
tings. (7)
members. (5) Independence of members. (6) At least 50 percent of members being
onsibilities of the
independent. (7) Multiple commissionership/directorship held by members. (8) Number of
meetings held. (9) Members’ attendance in meetings. (10) Remuneration of members. (11)
Duties and responsibilities of the board. (12) Shareholdings of members. (13)
Recommendation to management. D. Dimension: board committees

C. Dimension: board of directors

(1) Existence of an audit committee. (2) Existence of a remuneration and nomination
committee. (3) Existence of a risk-monitoring committee. (4) Existence of a corporate
governance committee. (5) Duties and responsibilities of each committee. (6)
Committee reports in the annual report. (7) Names of members. (8) Positions of
members. (9) Pictures of members. (10) Profiles of members. (11) Most members being
independent. (12) Number of meetings held. (13) Members’ attendance in meetings.
(14) Remuneration of members. (15) Performance of each committee.

E. Dimension: internal control and external audit

(1) Internal control report in the annual report. (2) Existence of an internal audit
division. (3) Internal audit framework. (4) Duties and responsibilities of internal
audit division. (5) Internal audit certification held by employees. (6) Policies on the
appointment of external auditor. (7) External auditor appointed by the bank. (8)
Performance of internal audit division.

F. Dimension: risk management

(1) Risk management report in the annual report. (2) Existence of a risk management
division. (3) Risk management framework. (4) Duties and responsibilities of risk
management division.

Corporate ​(5) Risk management certification held by employees. (6) Market risk management. ​governance (7)
​ Credit
risk management. (8) Liquidity risk management. ​
disclosure​(9) Operational risk management. (10) Risk profile.

23
G. Dimension: corporate governance implementation reporting
(1) Corporate governance implementation report in the annual report. (2) GCG framework. (3) Code of conduct. (4) GCG
self-assessment. (5) GCG assessment by an external party.
About the author Salim Darmadi is a research staff member in Bapepam-LK and a Lecturer at STAN. His research papers are
forthcoming in such journals as ​Corporate Ownership and Control ​and ​Corporate Governance​. Salim Darmadi can be
contacted at: salim.darmadi@bapepam.go.id
To purchase reprints of this article please e-mail: reprints@emeraldinsight.com Or visit our web site for further details:
www.emeraldinsight.com/reprints