Corporate governance disclosure in the annual report:

An exploratory study on Indonesian Islamic banks

Salim Darmadi

Indonesian Capital Market and Financial Institution Supervisory Agency (Bapepam-LK)

Jalan Lapangan Banteng Timur No. 2-4, Jakarta 10710, Indonesia

Indonesian College of State Accountancy (STAN)

Bintaro Jaya Sektor V, Tangerang Selatan 15222, Indonesia

This version: 8 November 2011

Abstract

Due to their different characteristics, banks are expected to report the features of their
corporate governance in the corporate report. This paper is aimed to explore disclosure on
corporate governance mechanisms in annual reports of Islamic commercial banks in
Indonesia. Corporate governance mechanisms addressed in this study include the Shariah
Supervisory Board, the Board of Commissioners, the Board of Directors, board committees,
internal control and external audit, and risk management. Employing a sample comprising
seven Islamic commercial banks in Indonesia, the present study constructs the so-called
Corporate Governance Disclosure Index (CGDI) to score the banks disclosure level. It is
revealed that Bank Muamalat and Bank Syariah Mandiri, the countys two largest and oldest
Islamic commercial banks, score higher than their peers. Disclosure of the sample banks on
some dimensions, such as board members and risk management, is found to be strong. On the
other hand, disclosure on internal control and board committees tends to be weak. The result
of this study may have some important implications for the enhancement of corporate
governance disclosure of Islamic banks, thereby wider acceptance and enhanced reputation
could be gained.

JEL classification: G21, G28, G34, M41

Keywords: Corporate governance, disclosure, Indonesia, Islamic banks

_______________________
The views expressed in this paper are those of the author and do not necessarily reflect the views of
Bapepam-LK, or of the authors colleagues on the staff of Bapepam-LK. The author gratefully
acknowledges helpful comments by Dr. Amir Shaharuddin and participants at the 2011 International
Seminar and Conference on Islamic Economics at Universitas Negeri Jakarta, Indonesia. All errors
and omissions remain the authors responsibility.

Email: salim.darmadi@gmail.com; salim.darmadi@bapepam.go.id

Electronic copy available at: http://ssrn.com/abstract=1956254

1. Introduction

Being the largest Muslim country in the world, Indonesia experiences rapid growth in its

Islamic banking industry. Even though the market share of Islamic banks in the country is

still below 4%, the total value of Islamic banks assets in 2010 had been fifty times larger

than that in 2000. As at 31 December 2010, there were eleven Islamic commercial banks and

23 Islamic banking units, as well as 150 Islamic rural banks, in the country[1]. The Islamic

Banking Law, as the legal foundation for the Islamic banking development, was also enacted

in 2008[2]. It is expected that the Indonesian Islamic banking industry continues to grow,

following increased awareness of the Indonesian Muslims, growing well-educated

population, and increasingly widespread branches throughout the country.

Since modern commercial banks are generally run as corporations, agency problems (as

theorized by Jensen and Meckling, 1976) may arise due to differences of interests between

shareholders and management. In firms with a higher level of ownership concentration, such

problems may occur between the controlling shareholder and minority shareholders (Shleifer

and Vishny, 1997). Hence, various corporate governance mechanisms are intended to

minimize this conflict. In the banking industry, corporate governance has a higher level of

significance since banks mobilize public saving, depend on public trust, and have more

diverse stakeholders. Weak governance in banks has resulted in the collapse of banks during

crises, as well as financial scandals involving the owner and management, which could have

systemic impacts on the economy. In Islamic banking, greater attention should be placed

since Islamic banks are exposed to more non-compliance risks, as well as weaker institutional

environments of emerging markets in which they mostly operate (Claessens, 2006). Further,

in Islamic banks, investment depositors appear to be part of the agency conflicts since they

participate in the profit and loss like shareholders, making good governance mechanisms

highly required to protect their interest and to maintain their confidence. Due to the banks
2

Electronic copy available at: http://ssrn.com/abstract=1956254

diverse stakeholders, such governance mechanisms need to be disseminated and disclosed in

corporate reports.

The present study explores the practice of disclosure on corporate governance

mechanisms in annual reports of Indonesian Islamic banks. It contributes to the knowledge in

at least two important ways. First, this study is conducted in the Indonesian context. Even

though studies using data across different countries, such as those conducted by Haniffa and

Hudaib (2007) and Hassan and Harahap (2010), may provide more powerful insights, studies

in the context of one single economy is still important since one particular economy has its

unique national characteristics. Indonesia has a relatively different institutional environment

from other Muslim countries. For instance, the country adopts two-tier board structure, where

corporations shall have a supervisory board (called Board of Commissioners) and a

management board (called Board of Directors). The Islamic banking industry in the

country, which emerged in early 1990s, was initiated by the Muslim society instead of the

government. Further, the countrys fully-pledged Islamic banks are generally the results of

conversion from conventional banks or spinoffs from their conventional-bank parents.

Second, exploratory studies on corporate governance of Islamic banks, based on information

disclosed in corporate annual reports, are relatively scarce in the literature. Such exploratory

studies have addressed corporate social responsibility (e.g. Maali et al., 2006; Hassan and

Harahap, 2010) and ethical identity (e.g. Haniffa and Hudaib, 2007).

The sample of this study consists of seven banks whose 2010 annual reports are available

on their websites; namely Bank Muamalat, Bank Syariah Mandiri, Bank Mega Syariah, Bank

Syariah Bukopin, Bank Victoria Syariah, BCA Syariah, and BJB Syariah. The so-called

Corporate Governance Disclosure Index (CGDI) is constructed for each bank to measure the

extent of governance disclosure. The corporate governance mechanisms addressed include

the Shariah Supervisory Board, the Board of Commissioners, the Board of Directors, board

committees, internal control and external audit, and risk management[3]. The result reveals
3
that Bank Muamalat and Bank Syariah Mandiri show higher CGDI scores than their peers.

Some other banks show low levels of disclosure. Three areas requiring much improvement

are internal control and external audit, board committees, and corporate governance

implementation reporting.

The remainder of the present paper is structured in the following manner. Section 2

reviews prior theoretical and empirical work on corporate governance of Islamic banks and

corporate governance disclosure. This is followed by Section 3, which briefly discusses the

characteristics of the sample banks, as well as the methodology to score the disclosure level.

In Chapter 4, the results of CGDI scoring are presented and further discussed. Finally,

Section 5 concludes the paper.

2. Literature review

2.1. The importance of corporate governance in Islamic banks

In the banking industry, corporate governance practices are unique compared with those

in other sectors where governance mechanisms are simply intended to align the interests of

shareholders and managers (Jensen and Meckling, 1976) or, in the cases of firms with more

concentrated ownership structure, of the controlling shareholder and minority shareholders

(Shleifer and Vishny, 1997). The uniqueness is due to the duty of managers to manage and

safeguard the funds provided by various parties, including depositors. Economic behavior of

the banks can also affect economic outcomes, where in some countries banks act as a major

source of external financing for firms. Further, banks have more diverse stakeholders and

thus monitoring costs tend to be high, leading to the importance of corporate governance

mechanisms. Banks business is also risky due to highly-leveraged nature of its capital

structure, where banks face many short-term claims and are relatively dependent on

depositors confidence.

4
 In Islamic banking, greater attention on corporate governance needs to be placed 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 Ahmeds 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 Ahmed, all precautions need to be taken to

maintain confidence of depositors in Islamic banks. The tools may include sufficient

regulation, proper supervision, sound risk management, and good corporate governance.

Again, when an Islamic bank fails to protect the depositors interests, depositors are likely to

protect their own rights by withdrawing their deposits in the bank.

Third, most Islamic banks operate in emerging markets, where the institutional

environment tends to be weaker (Claessens, 2006). In such markets, where high levels of

ownership concentration and family control are more prevalent, applicable regulations tend to

be less protective for minority shareholders (as well as IAHs) from asset expropriation
5
committed by the controlling shareholder. Additionally, transparency and disclosure practices

are also weaker in these markets compared with those in more developed economies, making

monitoring costs and information asymmetry higher. Alternatively, lack of market discipline

appears to be another issue in less developed markets (Claessens, 2006). These conditions,

hence, stress the importance of good corporate governance in Islamic banks.

2.2. Corporate governance disclosure in the annual report

In the framework of agency theory, agency costs arise due to information asymmetry that

exists between shareholders and managers, or between the controlling shareholder and

minority shareholders. Increased corporate disclosure is viewed as one way to mitigate the

information asymmetry. Managers, who are more inclined to have detailed knowledge on the

firms operation, provide shareholders and other user groups with particular information that

may influence their economic decision (Cooke, 1989; Narayanan et al., 2000). Financial

reporting regulations generally require minimum disclosure requirements, thus other

information to be disclosed is considered voluntary. Voluntary disclosure is managers

discretion, and as contended by Verrecchia (1983), managers will disclose voluntary

information when the benefits outweigh the associated costs. Healy and Palepu (2001)

identify five forces that motivate managers to disclose additional information, namely the

hypotheses of capital market transactions, corporate control losses, stock compensation,

litigation costs, and proprietary costs.

There are a number of techniques that can be used by firms to distribute corporate

information to external stakeholders (OSullivan et al., 2008). However, as argued by

Botosan (1997), the corporate annual report is viewed as the principal medium to convey

financial and non-financial information in a detailed manner. The annual report is considered

important because of its effectiveness in conveying a certain corporate image or message

(Preston et al., 1996), managing external impressions, and possessing a certain degree of

credibility (Neu et al., 1998). As argued by OSullivan et al. (2008), even though the annual
6
report is not the only way to disseminate information, firms with high-quality disclosure will

ensure that important information is incorporated in their annual reports.

Further, it is also argued that information on corporate governance is important to be

disclosed by the firm. Bushman and Smith (2003) define corporate transparency as the

widespread availability of relevant, reliable information about the periodic performance,

financial position, investment opportunities, governance, value and risk of publicly traded

firms (p. 76). Bhat et al. (2006) contend that knowledge on a firms governance structure

will be useful to assess the credibility of financial information, as well as to accurately set

expectation and to reduce uncertainty concerning the firms performance. Such disclosure

also reveals who are responsible for governing the firm, how their compensation is

structured, and how and where they invest financial resources (Bushman et al., 2004).

Additionally, disclosure on the features of corporate governance can enhance monitoring and

internal control, improve firm performance (Labelle, 2002), and drive improvements to the

internal structure and process (Association of Chartered Certified Accountants, 2009). If the

governance mechanisms are not disclosed, the firms stakeholders may not be able to access

such information. In banking sector, due to its opaque and highly-regulated characteristics,

corporate governance is subject to the regulation of banking authority. Hence, disclosure on

governance mechanisms may play a more important role compared with that in other sectors.

Islamic banks appear to be financial institutions with a religion-based identity; hence,

they are expected to adhere to the Islamic ethical values in their operation, in addition to

applicable regulations. Islam itself encourages good governance within a firm. In Islam,

corporate governance is aimed to protect the interests of all stakeholders with adherence to

shariah principles (Hasan, 2009). The Islamic concept of corporate governance stresses the

important areas of accountability and trustworthiness. Haniffa and Hudaib (2004) suggest that

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
7
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 (e.g. 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 Shariah Supervisory Board, the Board of Commissioners, the Board of

Directors, 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 Shariah Supervisory Board (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 board

of directors, 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].

8
 Boards of Commissioners and Directors. The board of directors is viewed as one of the

important determinants of effective corporate governance, since it plays an important role to

mitigate conflicts between shareholders and managers (Klein, 1998). The characteristics of

the board, including board size and board independence, have been widely addressed in either

theoretical or empirical research. Even though there are persisting debates on whether firms

should have large or small size of the board, some studies suggest that firms with more

complex operations need to have a greater number of people serving on the board (Klein,

1998; Coles et al., 2008). Further, it is believed that that a larger proportion of independent

directors on the board will be advantageous to the firms since it would lead to better

monitoring, as well as wider perspectives and expertise (Hermalin and Weisbach, 1988;

Pearce and Zahra, 1992). The presence of independent board members is also intended to

protect the right of minority shareholders.

Concerning the legal form of the firm, Indonesias Islamic Banking Law determines that

an Islamic bank should be a corporation. This means that Islamic banks must adhere to the

Corporation Law[5]. Indonesia inherits some aspects of the Dutch law, including its two-tier

board system. According to the Corporation Law, Indonesian firms shall have two boards in

their organizational structure, namely the Board of Commissioners (BOC) and the Board of

Directors (BOD). The members of these two boards are elected or appointed by shareholders

in the shareholders general meeting. The BOC represents shareholders and conducts

advising and monitoring roles on the firms management. Hence, the role of the BOC is

entirely non-executive, and its members consist of the 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
9
commitment to enforce good corporate governance. Different from the regulation for

conventional banks, Bank Indonesia requires Islamic banks to have at least one independent

commissioner on the BOC, without determining the number of BOC members should be

employed by the bank. The BOD is fully responsible in conducting management of the bank

based on shariah and prudential principles.

Board committees. The BOC can conduct its duties by itself or delegate its authority to

standing committees responsible to the board (Klein, 1998). The establishment of a board

committee can be mandatory for firms to a particular extent, for example for listed firms or

banks. Klein (1998) contends that due to the need of expert-provided information about the

firms activities, certain committees are set up to assist in decision making process. Further,

board committees are expected to conduct independent monitoring on the firm. For example,

the audit committee helps alleviate agency problems by ensuring that accurate and unbiased

accounting information is released in a timely manner to shareholders, creditors, and other

stakeholders. The importance of board committees attracts more interests following financial

scandals involving high-profile companies.

In Indonesia, the Code of Good Corporate Governance, the latest version of which was

issued in 2006, states that the BOC can establish board committees to support its function.

Alternatively, Bank Indonesia has determined that it is compulsory for conventional and

Islamic banks to form at least three committees: the audit committee, the risk-monitoring

committee, and the remuneration and nomination committee, where a committee is led by an

independent commissioner. The audit committee evaluates the banks internal audit function

and recommends a public accounting firm to be hired. The risk-monitoring committee

evaluates the banks policy on risk management. The remuneration and nomination

committee has responsibilities in evaluating the compensation policy, as well as providing

recommendations on suitable candidates to serve on the BOC, BOD, and SSB.

10
 Internal control and external audit. The existence of an effective internal control

system is highly important in Islamic financial institutions, in ongoing efforts to ensure

management oversight and to develop a healthy culture within the organization (Chapra and

Ahmed, 2002). Banking supervisory authorities also need to ensure that internal control

systems in all banks are in line with the nature of their risks. One of the important parts of

internal controls is the internal audit system. Chapra and Ahmed (2002) suggest that the

internal audit function should be strong and independent and should report directly to the

board and senior management. In addition, financial audits conducted by an independent

auditor appear to one of the important external mechanisms of corporate governance. An

audit provides independent checks on the information provided by managers, and therefore

plays a crucial role in maintaining confidence in financial reporting as well as reducing

agency costs (Jensen and Meckling, 1976; Imhoff, 2003).

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.

11
 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 Good

Corporate Governance, Bank Indonesia determines that Islamic banks shall prepare a report

on the implementation of good corporate governance (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 eleven 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 websites, 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.

12
 Table 1 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).

[Insert Table 1 about here]

Table 2 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 Islamic banks generally shows a high

level of ownership concentration. Family control also appears to be the most common type of

ownership.

[Insert Table 2 about here]

3.2. Methodology

In the present study, I construct the so-called Corporate Governance Disclosure Index

(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 1). 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
13
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:

where nj is the number of items expected to be disclosed by jth Islamic bank; Xij equals 1 if

ith item is disclosed and 0 if ith item is not disclosed. Hence, the CGDI would have 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.

4. Results and discussions

Table 3 reports the CGDI for the sample banks addressed in this study. For each bank, I

calculate the overall index, as well as the index for each of the seven dimensions. It seems

that a wide variation exists in disclosure practices among the seven Indonesian Islamic banks.

I rank the banks based on their overall CGDI. It is revealed that Bank Muamalat and Bank

Syariah Mandiri show the highest CGDIs, scoring 0.89 and 0.83, respectively. This means

that two banks disclose 89% and 85%, respectively, of 72 items constructed in the checklist.

On the other hand, BJB Syariah and Bank Syariah Bukopin appear to have the lowest CGDIs,

scoring 0.32 and 0.49, respectively.

The last column in Table 3 also reports the average index, for either the overall index or

the index for each dimension. The items on the BOD dimension are the most frequently-

disclosed constructs, with the average of 0.73. Other dimensions showing relatively high

indices are the BOC and risk management, with the dimensional indices of 0.70 and 0.69,

respectively. Alternatively, the aspect of internal control and external audit is found to be the

14
category with the lowest level of disclosure, with the average dimensional index of 0.38.

Given the average overall index of 0.60, it can be seen that there are only two banks

possessing above-average disclosure levels, namely Bank Muamalat and Bank Syariah

Mandiri.

It can be concluded that Bank Muamalat and Bank Syariah Mandiri show higher levels

of corporate transparency, particularly in terms of corporate governance disclosure, compared

to their peers. The two banks also achieve the highest possible index for a number of

dimensions. Bank Muamalat achieves perfect dimensional indices (1.00) for the BOC and

BOD, while Bank Syariah Mandiri is excellent at disclosure on the BOD and corporate

governance implementation.

[Insert Table 3 about here]

Shariah Supervisory Board

Disclosure on the profile of the SSB would provide assurance that the bank is conducted

in accordance with shariah law (Haniffa and Hudaib, 2004). Islamic banks are expected to

disclose a set of aspects on their SSB, including the description of board members (name,

position, picture, and profile), duties and responsibilities, board meetings, meeting

attendance, and remuneration for board members. In addition, they need to communicate the

boards opinion whether products, services, and profits/losses have been in accordance with

shariah principles. For this dimension, with the average index of 0.61, Bank Syariah Mandiri

scores the highest, followed by Bank Muamalat, and the lowest being BCA Syariah and BJB

Syariah.

It is found that most banks in the sample do not disclose any information regarding board

meetings, meeting attendance, board remuneration, and the compliance of profits/losses with

shariah principles. Further, it is only Bank Muamalat and Bank Syariah Mandiri that disclose

the boards procedurethough not comprehensivein conducting assessments on the banks

products, services, and profits, as found in the following statements:

15
 Activities of the SSB in 2010 included methods and techniques to be
employed in [shariah] audit sampling (Bank Syariah Mandiri Annual
Report 2010, p. 15translated by the author).

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 SSBs 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. 13translated 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 Muamalats business plan in the year 2010 is
16
 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).

Board of Directors

The BOD of Islamic banks is entrusted with resources to be managed to maximize

shareholders, as well as depositors, wealth. Thus, as suggested by Haniffa and Hudaib

(2004), stakeholders 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 are important to disclose are similar to those in the BOC dimension.

The dimensional index for the BOD is the highest among seven dimensions included in

this studys checklist. Nevertheless, it is only Bank Muamalat and Bank Syariah Mandiri that

score above average, where both banks share the highest possible score (1.00). While

description of the board members are generally disclosed by the sample banks, remuneration

for board members is only communicated by three banks in their annual reports, namely

Bank Muamalat, Bank Syariah Mandiri, and BCA Syariah. For instance, in addition to

information on the compensation level for each individual board member, BCA Syariah

briefly communicates its compensation policy in its 2010 annual report:

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, as determined in the shareholders
general meeting, 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.
50translated by the author).

The detailed disclosure on the compensation level is a best practice adopted

internationally. However, such a practice in developing countries is relatively weak. The

disclosure on board remuneration would enable stakeholders to assess whether the pay level

is appropriate and has represented the performance of board members.

17
Board committees

Board committees are established to assist the BOC in decision making process, as well

as in conducting supervising and monitoring roles on management. The members of the

board committees are expected to possess particular expertise or experiences that would

support the effectiveness of such committees. Therefore, information on those serving on the

committees is also considered important. Most items for this dimension are relatively similar

to those for BOC and BOD dimensions. The items include the description of committee

members, committee meetings, meeting attendance, remuneration for committee members,

and the performance report.

In terms of the performance report, Bank Muamalat and Bank Syariah Mandiri have

included such a report from board committees in their annual reports. For instance, the

following is taken from the performance report of the Remuneration and Nomination

Committee of Bank Syariah Mandiri:

The Remuneration and Nomination Committee held a meeting if it is

considered urgent according to the Remuneration and Nomination
Committee Charter. During 2010, the committee held three meetings with
the following agendas: (1) discussing the remuneration and nomination of
the banks board members; (2) reviewing the remuneration of the banks
employees compared to other banks; (3) nominating the chairman candidate
of the banks Shariah Supervisory Board (Bank Syariah Mandiri Annual
Report 2010, p. 102translated by the author).

The average index for this dimension among the sample banks is relatively low at 0.53,

the second lowest after the dimension of internal control and external audit. Again, Bank

Muamalat and Bank Syariah Mandiri outweigh their peers in this dimensions index. BJB

Syariah, one of the newly-established Islamic commercial banks in Indonesia as at 31

December 2010, even does not disclose anything in terms of their board committees. Further,

it is important to note that none of the sample banks discloses the remuneration scheme for

committee members.

18
 Additionally, none of the sample banks has established a Corporate Governance

Committee. Even though not required by Bank Indonesia, such a committee is expected to

provide commissioners or directors with independent recommendations related to corporate

governance matters. The establishment of this committee is recommended in the Code of

Good Corporate Governance, which was issued by the National Committee on Governance

Policy (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 banks 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 banks

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.
19
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 rank with Bank Syariah Mandiri,

having the index of 0.80. BJB Syariah stresses its attention to sound risk management in its

annual report, which can be seen in the following:

Bank undertook the implementation of integrated risk management through

the improvement of risk management infrastructure and implementation of
adequate and sustainable risk management processes based on the
prudential banking principle (BJB Syariah Annual Report 2010, p. 30).

Different from that in the internal audit, risk management certification held by

employees is disclosed in annual reports of four banks, namely Bank Mandiri, Bank Syariah

Mandiri, Bank Mega Syariah, and Bank Bukopin Syariah. However, it is found that only

Bank Syariah Mandiri and Bank Syariah Bukopin disclose their risk profile in the risk

management report.

Corporate governance implementation reporting

All Islamic banks included in the sample have a separate Corporate Governance

Implementation Report in their annual reports. Even though the disclosure level varies among

20
the banks, it indicates to a particular extent their awareness in communicating the features of

corporate governance to stakeholders. Bank Syariah Bukopin states the following:

Transparency, accountability, responsibility, independence and fairness

become the foundation for the Company in implementing GCG. The Board
of Commissioners, Directors, Sharia Supervisory Board and all employees
of the Company are committed in implementing the GCG principles and
practices (Bank Bukopin Syariah Annual Report 2010, p. 57).

Again, Bank Muamalat and Bank Syariah Mandiri outweigh their competitors in this

dimension. These two banks, being the most well-established Islamic banks in Indonesia, also

disclose the code of conduct in their annual report, as stated in the following statement:

Since 2002, BSM has had the Code of Conduct that refers to the akhlaqul
karimah (good conduct). The Code is intended to provide guidance in
behavioral aspects in line with the expected values and culture, namely
being Islamic, professional, and responsible in the interactions with all
parties, including colleagues, internal groups, customers, vendors, and the
regulator (Bank Syariah Mandiri Annual Report 2010, p. 109).

Bank Indonesia has required Islamic banks to carry out self-assessments on their GCG

practices. In fact, this is only disclosed by three banks, namely Bank Muamalat, Bank Syariah

Mandiri, and BCA Syariah. In order to convince stakeholders that the bank has been

conducted what has been required by the regulator, this aspect needs to be taken into account

for disclosure in the future. However, it is found that none of the sample banks have an

external party assess their GCG practices.

5. Concluding remarks

This paper examines the practice of disclosure on corporate governance mechanisms

among Indonesian Islamic banks. Islamic banks provide an interesting setting in corporate

governance studies due to several unique features, such as adherence to shariah principles in

operations and unrestricted IAHs. Indonesia, which has a different institutional environment

from other Muslim countries, provides another interesting viewpoint. Corporate governance

mechanisms are intended to align the interests of various stakeholders. Hence, the disclosure

21
on such mechanisms is argued to be advantageous in assuring stakeholders with respect to

how an Islamic bank is governed, which could influence the way resources entrusted to them

are managed.

Employing a sample consisting of seven Islamic commercial banks in Indonesia, this

study examines the extent of corporate governance disclosure in seven areas, namely the

SSB, the BOC, the BOD, board committees, internal control and external audit, risk

management, and corporate governance implementation reporting. Using content analyses on

the banks annual reports, the CGDI is constructed for each bank, either for the overall index

or the dimensional index. A checklist as the research instrument is employed using a

comprehensive set of constructs. It is revealed that for the financial year 2010, Bank

Muamalat and Bank Syariah Mandiri show higher scores compared to other banks. Given this

result, these two banks may be referred to as the benchmark in terms of corporate governance

disclosure. The dimensions of BOC and BOD appear to be the most frequently disclosed by

the sample banks. This partly indicates that the banks put much attention to displaying the

profile of their board members. Further, the lowest index goes to internal control and external

audit. This seems to imply that there is lack of awareness among the banks managers to

communicate such issues in the annual report.

This research is subject to some limitations. The content analysis may be biased to a

particular extent, and the research instrument employed here may not represent all aspects of

corporate governance disclosure. The small number of observations, despite its significant

proportion to population, is another issue. Given a sufficient number of observations, future

research is suggested to employ a more rigorous statistical approach in examining the

determinants of corporate governance disclosure.

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
22
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 good corporate governance 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.

4. This refers to the Regulation of Bank Indonesia Number 11/33/PBI/2009 concerning the
Implementation of Good Corporate Governance for Islamic Commercial Banks and
Islamic Banking Units. Previously, Islamic banks should adhere to Regulation Number
8/4/PBI/2006 concerning the Implementation of Good Corporate Governance for
Commercial Banks.

5. The term Corporation Law refers to Law Number 40 of 2007 concerning Corporation.

6. The Board of Directors in the context of Indonesias two-tier board system is absolutely
different from that in the unitary system. The BOD in Indonesian firms is equal to top
management in unitary 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.

23
8. The 2010 annual reports of other four banks (BNI Syariah, BRI Syariah, Bank Panin
Syariah, and Maybank Syariah) are not available on either corporate websites or the
internet.

9. The Capital Market Law in Indonesia (Law Number 9 of 1995 concerning Capital
Market) differentiates between public corporation and listed corporation. A firm is a
public corporation if its shares are widely-held according to the Law, but not listed on
the stock exchange. On the other land, a listed corporation (whose shares are publicly-
traded on the stock exchange) is definitely a public corporation as well.

10. Sources that are used to develop constructs in the checklist include previous studies, such
as Haniffa and Hudaib (2004, 2007) and Kusumawati (2007), as well as Indonesian
banking regulations, Indonesias Code of Good Corporate Governance, and guidelines of
the Islamic Financial Services Board (IFSB). Other additional constructs, which are
considered best practices, are also included in the checklist.

References

Amran, A., Rosli, B. A. M., and Mohd-Hassan, B. C. H. (2009), Risk reporting: An exploratory
study on risk management disclosure in Malaysian annual reports, Managerial 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 transaction
cost economics, Journal of Management and Governance, Vol. 2 No. 2, pp. 149-170.
Association of Chartered Certified Accountants (2009), Disclosures on Corporate Governance,
ACCA Australia and New Zealand, Sydney.
Bhat, G., Hope, O. K., and Kang, T. (2006), Does corporate governance transparency affect the
accuracy of analyst forecasts? Accounting and Finance, Vol. 46 No. 5, pp. 715-732.
Botosan, C. A. (1997), Disclosure level and the cost of equity capital, The Accounting Review, Vol.
72 No. 3, pp. 323-349.
Bushman, R. M., Piotroski, J. D., and Smith, A. J. (2004), What determines corporate transparency,
Journal of Accounting Research, Vol. 42 No. 2, pp. 207-252.
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
(April), pp. 65-87.
Chapra, M. U. and Ahmed, H. (2002), Corporate Governance in Islamic Financial Institutions,
Islamic Development Bank-Islamic Research and Training Institute, Jeddah.
Claessens, S. (2006), Corporate governance of Islamic banks, available at
http://www.ifc.org/ifcext/corporategovernance.nsf/content/islamic_fin_institution_governance
(accessed 1 August 2011).
Coles, J. L., Daniel, N. D., and Naveen, L. (2008), Boards: Does one size fit all? Journal of
Financial Economics, Vol. 87 No. 2, pp. 329-356.
Cooke, T. E. (1989), Disclosure in the corporate annual reports of Swedish companies, Accounting
and Business Research, Vol. 19 (Spring), pp. 113-124.
Cooke, T. E. (1996), The influence of the keiretsu on Japanese corporate disclosure, Journal of
International Financial Management and Accounting, Vol. 7 No. 3, pp. 191-214.
Haniffa, R. M. and Cooke, T. E. (2002), Culture, corporate governance and disclosure in Malaysian
corporations, Abacus, Vol. 38 No. 3, pp. 317-349.
Haniffa, R. and Hudaib, M. (2004), Disclosure practices of Islamic financial institutions: An
exploratory study, working paper, University of Bradford, Bradford, September.
Haniffa, R. and Hudaib, M. (2007), Exploring the ethical identity of Islamic banks via
communication in annual reports, Journal of Business Ethics, Vol. 76, pp. 97-116.
24
Hasan, Z. (2009), Corporate governance: Western and Islamic perspectives, International Review of
Business Research Papers, Vol. 5 No. 1, pp. 277-293.
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. 203-227.
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 No. 1-3, pp. 405-440.
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. 117-128.
Jensen, M. and Meckling, W. (1976), Theory of the firm: Managerial behavior, agency costs and
ownership structure, Journal of Financial Economics, Vol. 3, pp. 305-360.
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. 131-146.
Labelle, R. (2002), The Statement of Corporate Governance Practices (SCGP): A voluntary
disclosure and corporate governance perspective, working paper, HEC Montral, Montral, June.
Maali, B., Casson, P., and Napier, C. (2006), Social reporting by Islamic banks, Abacus, Vol. 42
No. 2, pp. 266-289.
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. 707-722.
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. 265-282.
Nienhaus, V. (2007), Governance of Islamic banks, in Kabir-Hassan, M. and Lewis, M. K.,
Handbook of Islamic Banking, Edward Elgar, Cheltenham and Northampton, pp. 128-143.
OSullivan, 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. 411-438.
Preston, A. M., Wright, C., and Young, J. J. (1996), Imag[in]ing annual reports, Accounting,
Organizations and Society, Vol. 21 No. 1, pp. 113-137.
Safieddine, A. (2009), Islamic financial institutions and corporate governance: New insights for
agency theory, Corporate Governance: An International Review, Vol. 17 No. 2, pp. 142-158.
Shleifer, A. and Vishny, R. (1997), A survey of corporate governance, Journal of Finance, Vol. 52
No. 2, pp. 737-783.
Verrecchia, R. E. (1983), Discretionary disclosure, Journal of Accounting and Economics, Vol. 5
No. 1, pp. 179-194.

25
 Table 1
Firm-level characteristics of the sample banks

Bank Bank Bank Mega Bank Bank BCA BJB

Muamalat Syariah Syariah Syariah Victoria Syariah Syariah
Mandiri Bukopin Syariah
Total assets* 21,401 32,482 4,638 2,194 337 875 1,930
Financing * 15,918 23,958 3,154 1,612 28 417 1,603
Third-party funds* 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
No No No No No No No
market
Issuing sukuk in capital
Yes No No No No No No
market
*stated in billion Indonesian Rupiah (IDR)
Source: 2010 annual reports and financial statements of the sample banks

Table 2
Ownership structure of the sample banks

Bank Ownership Shares ownership of the controlling shareholder

type
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% 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% of shares being held by
Kopelindo (a cooperative)
Bank Victoria Syariah Family 99.98% Bank Victoria International, a listed bank, 38.01% 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% 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% of shares being held by
the regional government of West Java
Source: 2010 annual reports and financial statements of the sample banks

Table 3
Corporate Governance Disclosure Index (CGDI) of the sample banks

Bank Bank Bank Bank Bank BCA BJB Average

Muamalat Syariah Mega Syariah Victoria Syariah Syariah
Mandiri Syariah Bukopin Syariah
Shariah Supervisory Board 0.75 0.92 0.50 0.67 0.58 0.42 0.42 0.61
Board of Commissioners 1.00 0.92 0.62 0.69 0.69 0.69 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 0.87 0.80 0.67 0.40 0.47 0.53 0.00 0.53
Internal control and external
0.88 0.50 0.38 0.25 0.25 0.38 0.00 0.38
audit
Risk management 0.90 0.80 0.70 0.20 0.70 0.70 0.80 0.69
Corporate governance
0.80 0.80 0.40 0.40 0.20 0.60 0.40 0.54
implementation reporting
Overall index 0.89 0.83 0.51 0.49 0.54 0.57 0.32 0.60
Overall rank 1 2 5 6 4 3 7

26
 Appendix 1
Checklist of corporate governance disclosure

A. Dimension: Shariah Supervisory Board 3. Existence of a risk-monitoring committee

4. Existence of a corporate governance committee
1. Names of members 5. Duties and responsibilities of each committee
2. Positions of members 6. Committee reports in the annual report
3. Pictures of members 7. Names of members
4. Profiles of members 8. Positions of members
5. Number of meetings held 9. Pictures of members
6. Members attendance in meetings 10. Profiles of members
7. Remuneration of members 11. Most members being independent
8. Duties and responsibilities of the board 12. Number of meetings held
9. Compliance of products and services with 13. Members attendance in meetings
shariah 14. Remuneration of members
10. Compliance of profit or loss with shariah 15. Performance of each committee
11. Examination procedures
12. Recommendation to management E. Dimension: Internal control and external
audit
B. Dimension: Board of Commissioners
1. Internal control report in the annual report
1. Names of members 2. Existence of an internal audit division
2. Positions of members 3. Internal audit framework
3. Pictures of members 4. Duties and responsibilities of internal audit
4. Profiles of members division
5. Independence of members 5. Internal audit certification held by employees
6. At least 50% of members being independent 6. Policies on the appointment of external auditor
7. Multiple commissionership/directorship held by 7. External auditor appointed by the bank
members 8. Performance of internal audit division
8. Number of meetings held
9. Members attendance in meetings F. Dimension: Risk management
10. Remuneration of members
11. Duties and responsibilities of the board 1. Risk management report in the annual report
12. Shareholdings of members 2. Existence of a risk management division
13. Recommendation to management 3. Risk management framework
4. Duties and responsibilities of risk management
C. Dimension: Board of Directors division
5. Risk management certification held by
1. Names of members employees
2. Positions of members 6. Market risk management
3. Pictures of members 7. Credit risk management
4. Profiles of members 8. Liquidity risk management
5. Number of meetings held 9. Operational risk management
6. Members attendance in meetings 10. Risk profile
7. Remuneration of members
8. Duties and responsibilities of the board F. Dimension: Corporate governance
9. Shareholdings of members implementation reporting

D. Dimension: Board committees 1. Corporate governance implementation report in

the annual report
1. Existence of an audit committee 2. GCG framework
2. Existence of a remuneration and nomination 3. Code of conduct
committee 4. GCG self-assessment
5. GCG assessment by an external party

27