Leadership Research Summary:
• To understand what drives corporate leaders to choose certain corporate governance practices there is need to look beyond the individual traits of the leader, examining the effect of the elements of the institutional environment on managerial decisions.
• Drawing on the contextual approach to leadership and insights from institutional theory, this study examines the impact of government integrity on corporate governance practices. From the field study, we find that government integrity has a positive causal effect on corporate leaders’ corporate governance decisions and choices.
• The positive impact of government integrity on corporate leaders’ actions is also confirmed using a laboratory study, showing that a social norm of promoting leadership integrity, positively impacts on corporate responsibility especially in contexts where the government lacks credibility. Specifically, the study finds that corruption and bribery by corporate leaders is low in contexts that are transparent and high in contexts with low government integrity.
Leadership Research Implications and Findings:
• Through a combination of field and experimental the study not only provides a comprehensive analysis of corporate decision making observed at the national level, but shows too the behavior of the individual leader under different contextual and norm conditions.
• In addition, the study has implications for investors. For example, using knowledge of a country’s level of government integrity, minority investors may be able to determine the probability of exploitation they are likely to suffer from majority shareholders or from self-interested executives (Fama & Jensen, 1983). In cases where government integrity is low, minority investors may have to consider mechanisms that allow their voices to be heard either by pooling their resources together, engaging more with legal advisors or making use of proxy voting.
• Moreover, investors, in general, may need to take more attention on how CEOs make decisions and how firms report their financial reports in countries that have low levels of government integrity and low levels of enforcement.Finally, the fact that managerial accountability to both shareholders and the board is better in countries with higher levels of government integrity has implications for corporate governance practice.
• The logic of this observation is that the need for monitoring should, therefore, be higher in countries with low levels of government integrity. In such countries, companies may need to incur more agency costs by appointing more independent directors and making use of well-designed managerial incentives that help align the interests of management with those of shareholders (Shleifer & Wolfenzon, 2002).
• The present study finds that government integrity has a positive effect on corporate governance practices and choices made by corporate leaders. Beyond the question of corporate governance choices made by corporate leaders, this study has unveiled what appears to be weaknesses on current anti-corruption practices within the business environment. Consequently, two important lessons are discernible from this study.
• First, from the field study, our findings demonstrate that governments need to get it right first before expecting corporate citizenry to do the right thing. Second, from the experimental study, it is clear that in contexts where government integrity is low, the nature of the problem lies at the heart of what is right, ethical and acceptable, on the one hand; and what is mandated by the law, on the other. This gap may be bridged by instilling acceptable social norms in corporate leaders.
• According to Axelrod (1986), a norm exists in a given social setting to the extent that individuals usually act in a certain way and are often punished when seen not to be acting this way. The problem, of course, is that in contexts characterized with high levels of corruption pervasiveness (Rodriguez et al., 2005) there may not be norms to talk about as irresponsible actions go unpunished. This raises the question of the origin of norms or put differently, what is the content of behavior that might later turn into a norm?
• Moreover, how can norms be sustained and maintained? An evolutionary approach to norms (Axelrod, 1986) suggests that norms, that are often a reflection of underlying interests and resulting political struggles in a society, originate from the dominant actors in society who have the power, through punishments, to promote a certain type of behavior. As such, norms often precede laws but are then supported, maintained and extended by laws (Miyashita, 2007).
• Therefore, to the extent that those with power to change societal norms do not have the interest or motive to do so, contexts that lack government integrity may be difficult to change with the effect that corporate leaders may continue to make bad corporate governance choices and decisions.