Articles

Stay in the Know

1. The Quality of Government Leadership is Key to Tackling Corporate Corruption

A study by Chizema and Pogrebna (2019) concludes that government leaders must set a good example to the business community if they want to eliminate corporate corruption.

Given that governments create the business environment, this finding suggests the central role of government leadership in setting the example of corporate citizenry.

While there are other channels that governments may employ to reduce levels of corporate corruption, it appears that only an exemplary approach yields better outcomes. Indeed, the same study suggests that financial incentives and criminal punishment will not root out corrupt business practices, but a government culture of honesty, integrity and strong leadership could help to cure corruption. Here, corporate governance choices made by business leaders are directly related to government integrity. As such according to the study, dishonest practices are more likely in states where the government operates in a way that is dishonest or unethical.

Beyond the question of corporate governance, the researchers unveiled weaknesses in current anti-corruption practices within the business environment, that seem to emphasize punishment or incentives.

Professors Chizema and Pogrebna, both at the University of Birmingham at the time, examined World Economic Forum data from 2011 to 2018 on small, medium and large companies in agriculture, manufacturing and non-manufacturing industries—such as mining and quarrying, utilities and construction—as well as services with headquarters in 93 countries.

The researchers who published their findings in a world-leading journal - The Leadership Quarterly - also demonstrated experimentally that leaders were more likely to make honest decisions and abstain from bribery and tax evasion when asked what a good leader would do in a particular business situation.

Professor Pogrebna commented: "This simple solution of asking 'what would a good leader do' had a much higher positive effect on leadership integrity than changing financial incentives or increasing the propensity of being caught and punished by the law. "The world craves credible and sincere leadership. Our policies need to shift from financial and legal solutions of the corruption problem to influencing leadership values and culture at all levels of the society."

When listing most important values in the desirable leadership culture, experimental participants named "credibility" as the most important characteristic of a good leader. Experimental study results demonstrate that Chief Executive Officers (CEO) are more likely to cheat in a corrupt environment than in a transparent one.

Where government integrity is low, the corruption problem arises from a gap between what is right and what is mandated by law. This gap may be bridged by instilling acceptable social norms in corporate leaders. Professor Chizema said: "Humanity has grappled with corruption for decades with many solutions proposed, yet the most widely-used toolkit involves regulation, law enforcement and economic measures, which have failed to eradicate dishonest business practices." He added that "governments need to get it right first before expecting corporate citizenry to do the right thing. Norms often precede legislation but are supported, maintained and extended by laws. If those with power to change societal norms do not have the interest or motive to do so, corporate leaders may continue to make bad corporate governance choices and decisions."

The researchers argue that the effect of government integrity must be taken into account—alongside company and CEO characteristics, plus corporate governance mechanisms—when analysing corporate leadership performance.

Their study also has implications for investors—for example, using knowledge of a country's level of government integrity, minority investors may be able to work out how likely they are to suffer from exploitation by majority shareholders or self-interested executives.

Where government integrity is low, minority investors may have to consider mechanisms that allow their voices to be heard—either by pooling resources, engaging more with legal advisors or making use of proxy voting.

REFERENCES

Chizema, A. and Pogrebna, G. (2019). The impact of government integrity and culture on corporate leadership practices: Evidence from the field and the laboratory, The Leadership Quarterly, 30(5), 101303, ISSN: 1048-9843. DOI: 10.1016/j.leaqua.2019.07.001.

2. Covid-19 and The Future of Corporate Governance

Paraphrasing Charles Darwin’s thoughts in The Origin of Species, Leon C. Megginson (1963, p4), then Professor of Management and Marketing at Louisiana State University state that “It is not the most intellectual of the species that survives; it is not the strongest that survives; but the species that survives is the one that is able best to adapt and adjust to the changing environment in which it finds itself.” Indeed, from time to time people, organisations and institutions are constantly confronted with changing environments. For example, COVID-19 represents a dramatic and serious change to the environment of doing normal business for people, firms and governments.
Thus, applying Darwin (1872) and Megginson’s (1963) theoretical reasoning to the business world, it could be stated that firms that are able to survive or cope better are the ones that are able to adapt and adjust to the changing business environment consequent to the breakout of COVID-19. The emphasis here is that it is not the strongest, as one is inclined to think, that survive rather those that survive are the ones that most accurately perceive their environment and successfully adapt to it. In the face of COVID-19 and in the long run, therefore, large cash reserves on their own may not necessarily save companies but the ability to understand the nature and extent of changes that need to be made now is likely to make the difference between success and failure.
For businesses, the responsibility of leading on the adaptability of the organisation lies with top management, however, under the counsel and oversight of the board of directors, an arrangement that characterise the academic discipline of corporate governance. With the unfortunate reality that COVID-19 is causing social and economic turbulence and the necessity of adapting and adjusting by business organisations, I think it is both timely and relevant to discuss the imminent changing landscape of corporate governance.
Of course, with the rapidly-developing situation, we are still in the early stages of understanding the full impact that COVID-19 will have on corporate governance. However, some important implications for corporate governance practices and standards are already emerging. As a matter of fact, since the breakout of COVID-19 a lot of changes in the manner in which boards work have taken place, of course, to a larger extent in some firms than in others. Some of these changes may have introduced new practices, however, on a temporal basis while others could still become the new normal. Indeed, corporate governance as we knew it before, may never be the same again.
Below is a list of a few examples of how the landscape of corporate governance could change:
- The current situation could increase the pool of independent directors who may not need to travel and this may be a good thing as organisations save on travelling costs.
- In the short-term executive compensation is likely to go down. The debate on executive-employee pay ratio will rage on and executive pay will become more sensitive.
- Shareholder engagement may suffer in the short-term period, as firms focus on strategies to survive but is likely to be salient in the long-run.
- We will witness more no face-to-face AGMs or a dual system of AGMs with some on the venue and others at home. This could mean more shareholders will get involved in AGMs, improving shareholder democracy.
- Recruitment of IT experts to the boards (with more and more of the company work done online cybersecurity risk increases). This development may mean two things. First, boards will get larger and second, boards will become more diverse, taking into consideration functional and age diversity.
- A more collaborative approach to governance will be witnessed and better articulation and pursuit of corporate purpose
- There will be need for effective ways of communicating with stakeholders especially in high uncertainty avoidance countries.
Corporate governance will never be the same and the sooner organisations realise this the better for them.

REFERENCES
Darwin, C. (1872). The Origin of Species. 6th Edition. John Murray: London.
Megginson, L.C. (1963). Lessons from Europe for American Business, Southwestern Social Science Quarterly, 44(1): 3-13.

Written by Prof Amon Chizema
a.chizema@governanceleadership.co.uk

Give Us Your Feedback

What Did You Think?