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This study compares the profitability of sharia-compliant firms (SCFs) and non-sharia-compliant firms (NSCFs) and explores the causal links among board of directors (BODs) characteristics (size, gender, meeting frequency, tenure, turnover and compensation), sharia compliance, capital structure and profitability. Specifically, sharia compliance and capital structure serve as moderators.

A total of 72 SCFs and 65 NSCFs were investigated during 2011–2019, resulting in 1,644 data. A t-test was used to compare profitability, and causal relationships were explored through panel data regression.

SCFs outperform NSCFs in profitability in 24 of 36 t-tests. Surprisingly, 87 out of 864 instances of sharia violations were found in SCFs. Despite purifying sharia-compliant stocks from violations, the board negatively affected sharia compliance. Furthermore, sharia compliance contradicts the board’s tendency to increase profitability, implying a ceremonial screening, which reveals the board’s reluctance to incorporate sharia compliance into their management style. In contrast, boards in NSCFs rely more on their internal strengths and capacities to influence profitability, as they understand the adverse impact of debt.

The findings of this study are beneficial for evaluating Islamic loopholes for both boards that are apathetic to sharia compliance and regulators who are not transparent in Islamic financial screening.

Academic literature concentrates on comparing Islamic banks with conventional banks, while the comparison of corporate governance and management styles in SCF vs. NSCF is minimal. Additionally, a novel measurement, the Stapel scale, is proposed for finding the purity of Islamic stocks, which is most suitable when regulators and firms conduct Islamic loopholes.