Tabung Haji scandal offers lessons for Islamic corporate governance

The recent exposure of the Royal Commission of Inquiry (RCI) report on Lembaga Tabung Haji (TH) for the period of 2014 to 2020 has sent shockwaves through the Islamic corporate world. The report unequivocally states that 'Shariah compliance' cannot be confined to products alone; it must be supported by legal and governance frameworks that are in sync with Islamic principles.

The RCI findings uncovered a series of serious shortcomings within TH. These included negative reserves from 2015 to 2017, problematic transactions involving subsidiaries, a scandal surrounding the awarding of an RM8 million rubber seedling contract, high-cost renovation projects, and instances of power abuse in the leasing of premises and assets. This scandal serves as a stark reminder that if decision-making processes, director appointments, contract awards, and internal controls are weak, the integrity of an organization's Shariah compliance is compromised overall.

Crucially, the TH scandal underscores weaknesses in the legal structure of subsidiaries. These entities were often used as a 'safe haven' by management and board members, leveraging the doctrine of separate legal personality to evade liability for company losses. This gap arises from the artificial personality and limited liability accorded to civil companies under the Companies Act 2016, where directors' fiduciary duties are primarily to the company itself, not directly to depositors or investors. This creates a shield that allows corporate entities to escape financial and moral accountability, violating the core principle of Al-Ghunm bi al-Ghurm (profits accompany risks).

To prevent similar scandals, Malaysia should consider establishing a specific legal framework for Shariah-compliant business entities. Three structural reforms are proposed: recognizing quasi-collective entities to shift from absolute separate entity status to a concept of partial partnership, thereby absorbing Islamic partnership accountability. Secondly, implementing pro-rata liability would eliminate limited liability immunity for directors and shareholders if proven culpable. These measures aim to reinforce accountability and ensure that the integrity of Islamic finance is upheld.