ORIGINAL ARTICLE The effects of Shariah board composition on Islamic equity indices’ performance M. Kabir Hassan 1 | Federica Miglietta 2 | Andrea Paltrinieri 3 | Josanco Floreani 3 1 Department of Economics and Finance, University of New Orleans, New Orleans, Louisiana 2 Department of Economics, Management and Business Law, University of Bari, Bari, Italy 3 Department of Economics and Statistics, University of Udine, Udine, Italy Correspondence M. Kabir Hassan, Department of Economics and Finance, University of New Orleans, New Orleans, LA 70148. Email: mhassan@uno.edu Based on a sample of 54 Islamic indices over the period 2007–2014, we investigate the effect of Shariah board members’ educational background on Islamic indices’ risk and return characteristics via the screening criteria. Using a capital asset pricing model benchmark analysis, we assess the sensitivity of Islamic indices to their conventional peers in terms of beta and derive a measure of return (Jensen’s alpha). First, we observe that the higher the number of members in common among the boards, the higher the risk–return profile of Islamic indices. Second, commonalities among board members lead to standardization of the screening criteria and to similar Islamic indi- ces’ performance. Third, we show that different betas across providers depend on the screening criteria, while the economic educational background of board members affects performance in terms of Jensen’s alpha. Our study aims at contributing to the governance literature related to board composition and its importance as a possible driver of performance. In addition, given the impressive growth that Islamic finance has experienced during the last decade, this topic is of great interest to the asset management industry. 1 | INTRODUCTION The impact of board composition on screening criteria and, through them, on index performance is a question of paramount importance in the Islamic finance asset management industry, since the activities of Islamic financial institutions (IFIs) reached $1.89 trillion at the end of 2016 (IFSB Stability Report, 2017). In particular, Islamic funds, which exclude from the investment portfolio those stocks that are not compli- ant with Shariah (Islamic Law), are experiencing an impressive growth. Islamic funds track as benchmarks (actively or passively, as in the case of Islamic Exchange Traded Funds) Islamic equity indices, whose risk and return profile are analyzed in the present work. During the eco- nomic downturn and the recent financial crises, we have witnessed Islamic equity indices outperforming their conventional counterparts due to different composition and construction mechanisms (IFSB Sta- bility Report, 2016). These different results raise many questions related not only to the construction mechanism, but also to the choices made by the Shariah Board. As a specific governance body in each IFI (Ullah, Jamali, & Harwood, 2014), the Shariah Board must certify that a financial product or activity complies with the precepts and requirements of Islamic law, thus exerting substantial influence and control over IFIs. In the asset management industry, each Islamic index provider has to hire eminent Shariah scholars to sit in the Shariah Board entrusted with the responsibility to certify the Islamic index methodology. For this reason, the Shariah board members’ decisions have a direct influence on the composition of Islamic indices. In fact, basing their judgment on their expertise and knowledge of Islamic Law, the Shariah board members decide which exclusion screens and criteria have to be imposed on con- ventional indices in order to derive the correspondent compliant Islamic one. For this reason, in our study, we wonder whether the subjective characteristics of the board members, such as their education (BA, MSs or PhD in law or economics), can influence the decisions related to the exclusion screens, leading to a different index profile in term of risk and return. Should the different education background of the board’s members be able to influence the risk–return profile of the Islamic indi- ces, mutual fund managers, who use them as benchmarks in their investment decisions, could have an additional important set of information. Building on this proposition, at first, we focus on the composition and education of the Shariah board members and, then, move to ana- lyze if and how the board members’ educational background (speciali- zation in economics or law) can affect the performance and risk of Islamic equity indices, through the screens. Each Shariah board member has to be skilled both on Shariah and financial issues and, unfortunately, this is not a common pairing of expertise. As a result, many scholars sit on multiple boards and this shortage of suitable scholars leads to a Shariah board concentration issue (Bassens, Derudder, & Witlox, 2011). 248 | V C 2018 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/beer Business Ethics: A Eur Rev. 2018;27:248–259. Received: 29 March 2017 | Revised: 26 February 2018 | Accepted: 12 March 2018 DOI: 10.1111/beer.12185