Corporate Governance

Social Responsibility and Islamic Principles

By J. Robert Brown

We try on this Blog to introduce readers to approaches to corporate governance that occur outside the territorial boundaries of the United States. Anyone who follows the debate knows that some systems do not focus entirely on shareholder rights and profit maximization. The Civil Code system, with Germany the most notable example, seeks to take into account the interests of employees.

There are, however, other, less well known examples. The post below is from a student at the University of Denver Sturm College of Law, Ahmed Alabdulkarem, who looks at practices in Saudi Arabia and the obligations imposed on Islamic companies.

Ahmed Alabdulkarem writes:

Companies in the United States are subjected to a legal obligation to act in the best interests of shareholders, something that usually translates into profit maximization. They have no additional legal obligations to their community or employees.

It is, however, different in the Kingdom of Saudi Arabia, where companies are governed by Islamic law. Islam imposes an obligation of Zakat, the duty to give alms. Zakat is one of the five pillars of Islam, which also include prayers and the month of Ramadan fasting among others. Its importance comes from the idea that the rich must provide financial support to the needy.

The duty applies not only to individuals but also to all Saudi and Gulf Cooperation Consul companies. As in the United States, corporations in Saudi Arabia are treated as fictional persons with specific legal obligations. This fictional personality explains the reason for which the payment of Zakat is levied on businesses under the Islamic law principles. It is also a way of paying back to the company's community.

Companies must make an annual payment equal to 2.5% of income and capital (for the capital and income items included in calculating Zakat, gohere). Revenues are collected by theDepartment of Zakat, a governmental organization and distributed to needy and poor people across the country. Zakat payments made of listed companies has to bedisclosed and filed with the Capital Market Authority (the Saudi Version of the SEC). See Article 27(b)(20). The information, therefore, can be found in annual reports filed by publicly traded companies.

As an example, the Saudi Basic Industries Crop (SABIC), one of the largest Petrochemical companies in the world, has a net income of more than SR 20 Billion. For the fiscal year of 2006, SABIC paid SR 1.05 Billion to the Department of Zakat, see, SABIC’s annual report.

The Department of Zakat deposits the funds into the Department of Social Security under the Ministry of Social Affairs, the agency responsible for allocating and distributing funds paid to the government.  This entity ensures that Zakat payments go to the needy and poor.  The financial support, for example, isused to assist orphans, widows, elders and others without regular sources of income.  Furthermore, Zakat impacts Saudi society by shrinking the gap between rich and poor.  In part because of the Zakat payments, most homelessness in the Kingdom has been eliminated.  

Full post as published by The Race to the Bottom on February 29, 2008 (boomark / email).