Islamic Banking, Accounting And Finance International Conference– The 9thiBAF 2020

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Islamic Banking, Accounting And Finance International Conference–

The 9

^th

iBAF 2020

Extent of Disclosures on Halal Assurance Management System (HAMS): Cases of Halal Certified Companies Listed on Bursa Malaysia

Mohd Khairuddin A. Mulok, Zurina Shafii

Faculty of Economics and Muamalat, Universiti Sains Islam Malaysia (USIM), Bandar Baru Nilai, 71800 Nilai, Negeri Sembilan Malaysia

Tel: +606 758 5404 E-mail: [email protected] Tel: +603 798 6325 E-mail: [email protected]

Abstract

Malaysia's position as one of the drivers of the halal industry in the world at the same time puts it as a leader in developing a comprehensive and trusted halal management and assurance system which become a global reference and yardstick. The Department of Islamic Development Malaysia (JAKIM) as the body responsible for providing halal certification to manufacturers and products produced in Malaysia, introduce the Halal Assurance Management System (HAMS) in 2011 as a measure to establish a systematic mechanism in monitoring, controlling and improving halal management and assurance at the internal level of the entity. It is an effort to inculcate accountability and integrity among businesses in preserving product and process validity. In line with this principle, it is appropriate for companies to channel information related to the implementation of HAMS to their stakeholders through appropriate disclosure in appropriate publications and media. This study examines and analyzes the level of disclosure related to HAMS in the form of programs, activities and measures implemented in JAKIM halal- certified listed companies. For this purpose, a total of seven JAKIM-halal certified public listed companies among food and beverage manufacturers were selected as the study sample. Reviews and analysis are made on the annual reports, publications and websites of the companies concerned to extract and identify the disclosures made related to the implementation of HAMS components. The results of the study found that the level of disclosure related to HAMS components by these companies is very minimal and limited. The establishment of the Internal Halal Committee (IHC) and training programs which are important aspects in the implementation of HAMS are also not covered in the marketing strategies of most companies. Lack of value proposition is a factor why this scenario applies. This study also found that the size and maturity of a corporate influence the level of disclosure made. Based on these findings, it is suggested that the level of awareness and sensitivity among consumers be increased to put pressure on businesses. The evidence also suggests the need for mandatory enforcement of standards on these types of disclosures.

Keywords: Halal Management, Halal Assurance, Halal Disclosure

1. Introduction

In the challenge of global economic uncertainty due to COVID-19 pandemic control, Malaysia’s status as one of the world's leading manufacturers of halal products to some extent gives breath to its economic growth. In the trend of declining global oil prices, Malaysia's dependence on revenue from petroleum produce need to be gradually reduced and its strength in as a halal hub can be one of an excellent buffer. The development of the halal industry has gained worldwide recognition as Malaysia has been rated as "Top Country for the Global Islamic Economy Indicator" over the United Arab Emirates, Saudi Arabia and Qatar with total exports worth RM45 billion in 2019 (Zainul, 2019). The contribution of halal industry on the Gross Domestic Product (GDP) is forecasted as 7.4 percent and the export figure is expected to rise to RM50 billion by the end of 2020 (Halal Industry Development Corporation, 2019). With this rapid development, the Government expects the market value of Malaysia's halal industry to reach RM614 billion by 2025.

These swift developments in Malaysia halal industry is supported by a well-established governance system to ensure that Malaysia's halal assurance is always at a competitive level. In 2013, the Islamic Development Department of Malaysia (JAKIM) as the government agency responsible for halal certification moved towards the internalization of halal assurance by introducing the Halal Assurance Management System (HAMS) as a guide for industry players to establish internal halal governance. HAMS, among others, outlines procedures for identifying key elements in halal determinations as well as steps to be taken in light of the

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identified risks. In addition, JAKIM is in the process of introducing the Malaysia Halal Management System (MHMS) which will take effect from 1 January 2021, as a step towards strengthening the implementation of HAMS.

In line with these actions, this paper aims to study the extent to which HAMS implementation translated to public disclosure as a source of reference in measuring a company's commitment and value proposition towards halal governance. This study covers companies listed on the main board of Bursa Malaysia and is guided by the disclosures made by the management in their 2018 Annual Reports.

2. Component of Halal Assurance Management System (HAMS)

The Halal Assurance Management System (HAMS) is designed to create a halal assessment function internally by companies seeking for halal certification. It aims to create an internal mechanism to prevent, monitor and control any issue of halal noncompliance in the product manufacturing process. To ensure a high level of commitment in implementing HAMS, several measures need to be taken those are;

i. establishment of the Internal Halal Committee (IHC) as the HAMS implementing agent within the organization. The IHC should consist of knowledgeable and well-trained members in halal standards and certification process;

ii. provide appropriate and adequate training programs related to halal standards and certification for staff involved in product development;

iii. development of product recall procedures to ensure their practicality and effectiveness when necessary; and

iv. determining the effectiveness of traceability of supply chain for a product to identify the affected product in the event of a non-halal supply issues;

In order to strengthen the implementation of HAMS, a number of principles are expected to be carried out by IHC which are;

i. the determination of Halal Critical Points (HCP) which covers the possible causes of violations of the halal standard requirements and policy statement;

ii. the development and verification of flow charts to confirm the implementation of supply operations are in line with the documented steps;

iii. Implementation of control measures for all HCPs identified in accordance with halal certification standards;

iv. development of corrective actions that are regularly reviewed to ensure its applicability in the event of noncompliance;

v. documentation system and management of records relating to the implementation of HAMS including halal assurance manuals, roles and responsibilities of IHC and evidences of roles and actions taken by IHC; and

vi. verification of process involves reviewing by the IHC on compliance with the operating procedure specified in the halal assurance monitoring process.

The Malaysia Halal Management System (MHMS) guidelines, which will come into effect on January 2021, is an effort to improve HAMS. In implementing the halal assurance system (HAS), MHMS provides flexibility to small and medium industries (SMEs) by simply creating an internal halal control system (IHCS) with very minimal requirements. MHMS also details its implementation according to the scheme based on the type of industry and product. In addition, the draft of the guidelines reveals that it consolidates and details the components and principles of the halal management system in an orderly manner as the general requirements of the HAS. Emphasis on the aspect of halal risk control can also be seen through the improvement of Halal Critical Point (HCP) component to Halal Risk Control (HCR) which includes the development of flow charts and the implementation of Halal Risk Management Plan (HRMP). One improvement that needs to be noted is the enforcement of internal halal audit process which is an enhancement to the verification process in HAMS.

3. Methodology

In the context of this writing, halal certified company refers to companies that have obtained halal certification from JAKIM.

As a business that has been recognized and operates as a publicly listed company, they are considered to have made due commitment to the importance of halal assurance. This paper uses a cross-sectional analysis approach to the annual report of companies for 2018, which are the main source in obtaining disclosures made. In addition, information is also obtained from other official published materials and the websites of relevant companies.

For the purpose of this study, a total of seven (7) listed companies were selected among the food and beverage companies that consistently managed to obtain halal certification from JAKIM, as listed in Table 3.1. The disclosures made by the companies in the annual report are evaluated based on the component of HAMS to determine the level of implementation by the companies based on their published materials.

Table 3.1. Brief profile of companies selected

Company Year of

Incorp Industry Market Capital*

(RM)

Profit/(Loss)* Net (RM)

Total Asset*

(RM) Nestle (Malaysia) Berhad (Nestle) 1912 Food and Beverages 35,000 million 659 million 2,847 million

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Fraser & Neave Holdings Bhd (F&N) 1962 Food and Beverages 2,607 million 179 million 4,491 million Hwa Tai Industries Berhad (Hwa Tai) 1974 Food and Beverages 17 million (3.9 million) 58 million Dutch Lady Milk Industries Bhd (Dutch Lady) 1963 Food and Beverages 4,110 million 129 million 405 million Saudee Group Berhad (Saudee) 1985 Food and Beverages 61 million (2.8 million) 111 million Power Root (M) Sdn. Bhd. (Power Root) 1999 Food and Beverages 801 million 9.7 million 356 million Kawan Food Berhad (Kawan Food) 1984 Food and Beverages 877 million 23 million 377 million

* Base on annual report of the selected companies for 2018 4. Disclosure of HAMS implementation

Based on general observations and reviews of disclosures regarding the implementation of HAMS among listed companies, we have found that the publicity levels are very low. The process of extracting and organizing disclosures made in annual reports, other published materials and websites on companies efforts, programs and achievements in the implementation of halal control and assurance based on HAMS components became limited due to lack of information. Since the companies selected for this study are those who have been certified halal by JAKIM, we can assume that they have complied with the requirements set forth under HAMS. This situation should be an advantage to these companies compared to their competitors and logically should be manipulated in their marketing agenda. However, it seems to be ignored with very minimal disclosure by most companies, as if the compliance did not provide value proposition to be disclosed to investors and potential investors, customers and other stakeholders.

All companies surveyed have made a general statement on their commitment to comply with halal standards. This statement is made either through halal policy stated or in the annual report or in the marketing statement on their website. According to observations, large companies with a big market capitalization such as Nestle, F&N and Dutch Lady display halal policy whereas others just put a general statement on halal commitment. Comparison of types of halal statements is shown in Table 3.2. Halal policy provides a summary of the commitment in implementing the halal assurance system. In the MHMS draft, halal policy is a necessary aspect even for SME companies and it needs to be announced within the organization and to other stakeholders.

Table 3.2. Halal statement of commitment

Companies Type of Statement

Nestle Halal Policy

F&N Halal Policy

Hwa Tai General Halal Commitment

Dutch Lady Halal Policy

Saudee General Halal Commitment

Power Root General Halal Commitment

Kawan Food General Halal Commitment

Table 3.3. Comparison of Halal governance disclosure on internal Halal committee and training program Comparison

Item Nestle F&N Hwa Tai Dutch Lady Saudee Power

Root Kawan Food

1. Internal Halal Committee

We have set up the Nestlé Halal Committee comprising senior

Muslim executives from various disciplines

to be responsible for all matters pertaining to Halal

compliance. We have established a

Department of Halal Affairs to further enhance capacity and credibility in

Halal.

An internal Halal Committee is set up in each of

manufacturing our plants and is held responsible

for all matters pertaining to

Halal compliance.

relevant No disclosur

e

Dutch Lady Milk Industries Berhad has

an Internal Halal Committee responsible

for all matters pertaining to Halal.

Dutch Lady Malaysia’s Internal Halal Committee was

established to undertake a collective responsibility towards ensuring the Company practices’ adherence to the Halal Policy in

alignment with JAKIM’s requirements.

e

relevant No disclosure

2. Training Program

SME Mentoring Programme, in partnership with the Halal Industry

Continuous strengthening of

employee’s Halal awareness

e

Internal Halal Committee by conducting Halal Showcase and Halal

e

relevant No disclosure

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Item Nestle F&N Hwa Tai Dutch Lady Saudee Power

Root Kawan Food Development

Corporation (HDC) and SME Corp. Collaborate with HDC for our

Vendor Development

Programme.

Conducted training on Nestlé Halal Standards to all our quality

management communities from

various regions.

understanding and with the following initiatives: - Regular Halal

Awareness training program - Regular training

in Good Manufacturing

Practices (GMP) and Good Hygiene Practices (GHP)

Week, with the purpose of engaging

with internal employees on the importance of Halal in

year 2018.

As shown in Table 3.3, disclosures on the formation of the Internal Halal Committee (IHC) which should be made up of at least four people with two of whom are Muslims managers were made only by Nestle, F&N and the Dutch Lady, the same companies that promotes their halal policies. IHC is an important element as it plays as coordinating and monitoring function for HAMS implementation. If we compare with banking sector, the IHC plays a similar role with the Shariah Committee which is the main reference for the implementation of Shariah-compliant banking in each of the IFIs. If we refer to an IFI annual report, we will find that the existence of this committee has been strengthened with the decision to include their statement in the statutory reporting which among other things contains its role and opinion on the level of Shariah compliance by IFI. This situation not only increases the confidence of stakeholders but also reflects the high level of transparency and integrity. As such, it is inappropriate that this important role is not being highlighted in the annual reporting. In fact, in the MHMS draft, the establishment of the IHC strengthened by increase the number of its members to five, including a Halal Executive who is appointed on a permanent basis.

Training programs are another important element of HAMS. It aims to ensure that the requirements of halal standards and certification are understood and taken into account by every employee involved in each level of product manufacturing process.

Studies related to the bases of failure in Shariah compliance have found that the human factor is the main cause which consists of a lack of understanding of the compliance requirements, negligence and low level of awareness. Our review on the disclosures related to this item found, the same three multinational companies with capital worth more than RM 1 billion showed comprehensive disclosure in halal training and awareness programs for the relevant workforce. In fact, Nestle, a company experienced in managing production in a Shariah-compliant environment, also shares experience and knowledge with small and medium enterprises (SMEs) in the field of halal food and beverage processing. IHC of F&N and Dutch Lady are also active in organizing training and awareness programs for staff especially those who work at the manufacturing line.

Table 3.4. Comparison of Halal governance disclosure based on principle of Halal Assurance Management System Comparison

Item Nestle F&N Hwa Tai Dutch Lady Saudee Power Root Kawan Food

Determination of Halal Critical Points

No relevant

disclosure No relevant

disclosure No relevant disclosure

Risk assessment -

Failure to meet statutory requirements

and Halal.

Development of Verification Flowchart

No relevant

Implementation of Control Measures

As a responsible

corporate citizen of Malaysia, we are extremely mindful of obligations to our

the country and its consumers.

We therefore manufacture, import and

distribute

Halal Assurance Management

System (HAS) is implemented

to maintain and ensure sustainability

of Halal production

processes according to JAKIM Halal requirements

and

Our halal expression means the product is not

poisonous or hazardous to health; has

not been prepared, processed or manufactured

using any instrument

that is contaminated

with

Dutch Lady Malaysia

remains committed in

providing Halal products to its consumers

by putting in place various

Halal monitoring

tools and systems that

sets out the Company’s

The R&D department and chemist

lab are to ensure all products meet

with the highest standards and

market expectations.

This is the result of the Total Quality Management approach

Our products are also certified as HALAL by the Islamic Development

Department of Malaysia (JAKIM), which meets

the Islamic World Body Requirements

.

Conforming to the highest

food and safety standards around the

world, including HACCP and

Halal standards, all

KAWAN products are manufactured

by the own state of the

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Item Nestle F&N Hwa Tai Dutch Lady Saudee Power Root Kawan Food

only products which have been certified

Halal by the Department of Islamic Development

Malaysia (JAKIM) and

the relevant recognised

Islamic authorities.

Our Halal Assurance System complies with

the strictest Halal practices across our

factories, ensuring highest standards of

hygiene, quality and food safety.

warehouses Our are certified Halal and only store halal products. Our transportation

system complies to

Halal requirements

and the strictest hygiene control.

standards. All our products

are Halal certified by Department the of Islamic Development

Malaysia (JAKIM) and other relevant authorised

Islamic certification

bodies in accordance

with the halalan toyyiban standards and

the Islamic Shariah Law requirements.

Product Halal certifications are achieved conforming by

with Halal audit requirements

by JAKIM and other

relevant Islamic certification authorities, as

well as adherence to

Good Halal Manufacturin g Practices.

impurities according to Shariah Law and Fatwa;

and has not in the course of

preparing, processing or

storage been in contact with, mixed,

or in close proximity to any food that fails to satisfy

Shariah Law and Fatwa.

We are proud to claim that

all our products are

Halal certified and comply with 1500:2009. MS

commitment to adhering to

Jabatan Kemajuan

Islam Malaysia’s

(JAKIM) requirements.

This covers the highest standards of

hygiene, quality and

safety conditions

from the purchasing of

raw material to distribution

of our products. As

a JAKIM accredited

‘HALAL’

premise, we comply to the

Good Manufacturin

g Practices - Good Hygiene Practices -

Abide by Halal Requirement

for Foods Within the Company Premises”.

adopted by the company.

The move has assisted us to

successfully obtain HACCP accreditation

for good hygiene standards and

to meet the guidelines of

Halal certification

from the Malaysian

Islamic Development

Department (JAKIM). All

products produced are 100% Halal.

We strictly sourced Halal

meats and ingredients from 100%

certified Halal sources. We

also ensure that our manufacturin

g process conform to the strictest JAKIM Halal

Standards.

manufacturinart g facilities utilising the

proprietary technologies.

Development of Verification Flowchart

No relevant

disclosure No relevant disclosure Development of

Corrective Action

No relevant

disclosure No relevant disclosure Documentation

System and Management of Records

No relevant

Process

Verification No relevant

Table 3.4 summarize the analysis on the disclosure made in relation to the principles of HAMS. Disclosures regarding the principles of HAMS are generally low among the companies studied. In terms of identifying the halal critical point (HCP), for example, only Kawan Food mentioned about the risk assessment conducted for non-compliance with halal standards, though only in general. Most companies focus on the aspects of implementation of control measures in which all the companies surveyed provide information on compliance with environmental hygiene, manufacturing, distribution, transportation and other standards. The review did not find any disclosures that could be related to the role of IHC in the development of verification flowchart, development of corrective action, documentation system and management of records, process verification and development of product recall procedure. This indicates that the level of implementation of HAMS is still dependent on external reviews by JAKIM and related agencies. It can also be concluded that, as the companies have complied with JAKIM's halal standards, it is possible that these elements have been practiced but have not been disclosed. However, this depends on JAKIM's auditing and review process whether it only conducted on the process or includes internal control of the company.

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Table 3.5. Comparison of Halal governance disclosure on product recall procedure and effectiveness of traceability Comparison

Item Nestle F&N Hwa Tai Dutch

Lady Saudee Power

Root Kawan

Food Development of

Product Recall Procedure

No relevant

Determining the effectiveness Traceability

Vendor Development

Programme (VDP) supports

local manufacturers

to produce Halal raw ingredients

based on stringent Nestlé

standards and requirements.

VDP also aims to groom these

local manufacturers

to become Nestlé vendors.

All raw materials and

ingredients sourced are Halal compliant

and Halal certified. We conduct Halal briefing and surveillance audits with our

suppliers and manufacturers, co-

to ensure they meet our stringent Halal

standards.

An internal Halal Committee is set up in each of

manufacturing our plants and is held responsible

for all matters pertaining to

Halal compliance in

our supply chain, from materials selection, purchasing, raw

materials receiving, manufacturing

facilities and personnel

directly involved in production processes, to the

storage, warehousing, transportation and of our products.

No relevant

Saudee always seek to work with suppliers who contribute

to sustainable development

and are economically, environmentally

and socially responsible. We

uphold our commitment to ensure the raw

materials received is of

high Halal standard and is

safe for producing our

products.

No relevant

In relation to effectiveness of traceability, as can be seen in Table 3.5, Nestle highlights its Vendor Development Program (VDP) which indirectly controls the process of raw materials supply and identifies the suppliers involved in the manufacture of every product. F&N emphasizes on the functions of the IHC established at every manufacturing plant that can play a more effective role in monitoring and controlling all processes involving the supply of raw materials. Saudee likewise mentioned about the cooperation made with suppliers in ensuring environmental sustainability and the halal status of raw materials received. No relevant disclosures were made by other companies. As a food and beverage manufacturing company, standards in ensuring the halal status of raw materials used are one of critical aspects. Although the halal certification statement has provided an overview of this aspect, disclosures related to raw material policies, principles and control mechanisms certainly add value to stakeholders' perceptions of the company's seriousness in ensuring the halalan toyyiban status for the products manufactured.

5. Conclusion and recommendation

Based on the research done, the level of halal-related disclosures in the annual reports of listed companies is relatively low assessed using the HAMS component. However, the level of disclosure by multinational companies is much better than those active in the local market. This reflects the pressure and sentiment of the external market to affect the level of disclosure by these companies. The concerns of investors and consumers in evaluating the governance and compliance levels of halal standards based on disclosures in their annual reports put force on them on them to improve their published information. Therefore, the level of awareness and sensitivity of the local market needs to be enhanced to ensure the quality of information received from these companies.

Clearly, the maturity and size of a company affect the seriousness and commitment in providing added value to stakeholders.

Nestle, F&N and Dutch Lady are in a higher class in terms of the implementation of the halal assurance system and can be

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considered as a yardstick among their competitors. Nevertheless, moving forward, there are many areas for improvement that can be done to continue to develop the halal industry, especially ahead of the enforcement of MHMS.

In striving to strengthen the internal governance of halal assurance through the implementation of MHMS, it is good for JAKIM to take lessons and examples of Shariah governance developments that have been imposed on all financial institutions operating Shariah-compliant banking. Like the Shariah Committee at all IFIs, the role of the IHC in implementing halal assurance needs to be strengthened by ensuring that it operates independently of company management and is complemented by operational review and monitoring by the board of directors (BOD). Internal audits function may also be independently deployed to conduct reviews of IHC's implementation of HAMS and to report directly to BOD. With the establishment of internal controls in halal assurance, JAKIM can act as an oversight body and external advisor as per Shariah Advisory Council (SAC) of Bank Negara Malaysia (BNM) without having to engage in auditing at the company's operational level.

It is hoped that this study will provide information towards improvement of the guidelines for halal internal governance to ensure a more orderly and systematic implementation. The successful implementation of halal governance certainly has a positive impact on the country's position as a globally recognized and trusted halal product manufacturer and in turn can boost economic growth through the halal industrial sector.

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