Enhancing Board Effectiveness

Institutional, Regulatory and Functional Perspectives for Developing and Emerging Markets

Franklin N. Ngwu, Onyeka Osuji, Chris Ogbechie, David Williamson, Franklin N. Ngwu, Onyeka Osuji, Chris Ogbechie, David Williamson

• Verlag: Routledge
• Jahr: 2019
• ISBN:
  9781351689052
• Auflage: 1
• Thema: Betriebswirtschaft
• Thema: Unternehmensführung

Enhancing Board Effectiveness seeks to examine the conceptualization and role of the board in a variety of contexts and articulate solutions for improving the effectiveness of the board, especially in developing and emerging markets. Enhancing Board Effectiveness with therefore address the following central questions:

• 
  
  

• To what extent is the concept and role of the board evolving?

• 
  
  

• What rights, powers, responsibilities and other contemporary and historical experiences can enhance the effectiveness of the board, especially in the particular contexts of developing and emerging markets?

• 
  
  

• What socio-economic, political, regulatory and institutional factors/actors influence the effectiveness of the board and how can the policies and practices of such actors exert such influences?

• 
  
  

• In what ways can a reconstructed concept of the board serve as a tool for theoretical, analytical, regulatory and pragmatic assessment of its effectiveness?

In examining this issues, Enhancing Board Effectiveness will investigate theoretical, socio-economic, historical, empirical, regulatory, comparative and inter-disciplinary approaches. Academics in the relevant fields of accounting, behavioural psychology/economics, development studies, financial regulation, law and management/organizational studies, political economy and, public administration will find this book of high interest.

1
Introduction

Enhancing Board Effectiveness: Institutional, Regulatory, and Functional Perspectives for Developing and Emerging Markets

Onyeka K. Osuji, Franklin N. Ngwu, Chris Ogbechie and David Williamson

The growing popularity of corporate governance can be traced to the fact that companies are almost indispensable to individual entrepreneurship, societal welfare and national economic growth. The interdependence of corporate governance and societies is growing globally, including in developing and emerging markets. This is due to a number of factors. First, the emergence of the corporate form as a form of economic organization has led to globally wide-ranging progress. Companies have driven progress by matching entrepreneurship and the benefits it gives to individuals with societal development. Companies have been one of the vital catalysts for accelerated development to the extent that one can confidently argue that global economic, technological and other progress could not have been achieved without companies.

Second, the 2007–2008 global financial crisis and other corporate scandals have demonstrated a link between the governance of companies and the wellbeing of other components of society. Third, the proper governance of companies therefore has both internal and external impacts. Internally, a properly run company benefits the shareholders and the managers, while its external stakeholders include employees and their families, consumers, communities and society. Fourth, globalization, especially of cross-border dimensions of ideas, standards and practices, has created a vibrant platform for assessing the performance of companies in a wide range of areas, including non-traditional fields of private business. Fifth, some states lack the capacity and ability to regulate companies and other business forms, leading to suggestions for self-regulatory and alternative regulatory models for companies.

Sixth, there is no universal code of corporate governance at the global level that addresses specific issues in different national contexts, including in developing and emerging markets. As the institutional theoretic model shows, problems vary according to contexts, and for proposed solutions, therefore, there is a need to consider differences in institutional make-ups and contexts (North, 1990; Nissanke and Aryeetey, 1998; Menski, 2006). Institutions can be defined as rules and laws, values and norms of the society that provide the procedures and incentives that support and sustain human relations and interactions. They can be formal or informal and, through the incentives and procedures provided, organizations such as firms, individuals or groups of individuals pursue their different interests and goals within the standard constraints of economic theory. As organizations are varied, such as economic, educational, social, political and religious, so are their goals, such as profit maximization, winning a game, leaking of sensitive information and exploitation of minority shareholders. Nevertheless, institutions are dynamic and change through interactions with organizations which determine development and governance outcomes.

Applying this to corporate governance arguably implies that achieving higher board effectiveness will depend on both micro and macro institutional make-ups and incentives on one hand and on the other their interactions with the organizations (boards). While the micro level relates to the internal norms and values (organizational culture), the macro level is about how the firm, through the board, interacts with the prevalent societal institutional incentives to achieve their goal, for instance, profit maximization. However, as the micros (firms) make up the macro, the macro institutional make-up and incentives expectedly influences the micro level and vice versa. A better understanding of the macro level can be achieved through Williamson’s (2000) Levels of Social Analysis model. Dividing the levels of social analysis into four—(1) social embeddedness, (2) institutional environment (political and legal system), (3) governance and (4) resource allocation—Williamson maintains that each of the levels is constrained by the preceding level except for the social embeddedness level.

While social embeddedness (informal institutions, customs and norms, including religion) constrains the institutional environment (formal rules of the game), the institutional environment constrains the governance level (the play of the game), which in turn constrains the resource allocation level. Williamson notes that while there are feedbacks in the reverse direction such as from the fourth level (resource allocation) to the third (governance) and then to the second (institutional environment) and the first (embeddedness), the emphasis in terms of socio-economic outcomes is mainly on the constraints among the levels. Moreover, as the constraints start from the level of embeddedness (informal institutions), which on its own is not constrained by another level, it can be argued that the informal institutions are of immense importance in understanding socio-economic outcomes (board effectiveness).

In the same vein, as social embeddedness (informal institutions’ norms and values) relate to higher contextual influences, which has been noted as the case in developing and emerging markets, enhancing board effectiveness in developing and emerging markets might therefore require a deeper examination of how institutions influence governance outcomes (board effectiveness).

It is clear that corporate governance–related social embeddedness is an imperative at the level of the board of directors. In the preface to Guidance on Board Effectiveness, March 2011 (FRC, 2011: 1), Baroness Hogg, the chairman of the Financial Reporting Council, UK, observed that the UK Corporate Governance Code

has always placed great importance on clarity of roles and responsibilities, and on accountability and transparency. It has become increasingly clear in the intervening period that, while these are necessary for good governance, they are not sufficient on their own. Boards need to think deeply about the way in which they carry out their role and the behaviours that they display, not just about the structures and processes that they put in place.

At the centre of the corporate governance discourse, therefore, is the board of directors, collectively and its members individually. Nevertheless, the board has faced increased scrutiny from both state and non-state actors in its roles and functions. The main function of the board is to run the company properly and ensure optimum benefit for shareholders (shareholder primacy and enlightened shareholder value models of corporate governance) or stakeholders (stakeholder model of corporate governance). The role, composition, performance and evaluation of the board are therefore considered vital to the proper governance of companies. For example, the UK Corporate Governance Code (FRC, 2016) makes provisions for membership of the board, the role of non-executive directors and directors’ performance evaluation, albeit on a ‘comply or explain’ basis. The focus on the board in corporate governance debate is also due to its role in influencing organizational practices and culture, including ethical behaviour, through filtering down the ‘tone at the top’ to the different levels of the company. Nonetheless, corporate governance models differ and the powers influence and responsibilities of the board vary from country to country and even within the same national jurisdiction and similar industries.

This book examines the conceptualization and role of the board in a variety of contexts and articulates solutions for improving the effectiveness of the board, especially in developing and emerging markets. This book addresses the following central questions: To what extent is the concept and role of the board evolving? What rights, powers, responsibilities and other contemporary and historical experiences can enhance the effectiveness of the board, especially in the particular contexts of developing and emerging markets? What socio-economic, political, regulatory and institutional factors/actors influence the effectiveness of the board and how can the policies and practices of such actors exert such influences? In what ways can a reconstructed concept of the board serve as a tool for theoretical, analytical, regulatory and pragmatic assessment of its effectiveness? These questions are addressed in 22 chapters that reflect theoretical, socio-economic, historical, empirical, regulatory, comparative, inter-disciplinary and other approaches and provide insights from national and global practices.

This book is organized into three parts. Part I, ‘Board of Directors, Effectiveness, and Corporate Governance’, contains seven chapters on some applicable corporate governance principles and linkages between directors’ effectiveness and corporate governance. In Chapter 2, ‘Principles of Corporate Governance and Effective Board’, Folajimi Ashiru, Franklin Nakpodia and Emmanuel Adegbite examine the relevance of the board and the attendant differences in board structures and practices, taking into consideration the different governance models prevalent in different institutional contexts. The chapter is an attempt to deconstruct the role of boards given the persistence of firm failures despite the existence of regulations and increased focus on the corporate governance practices of firms. It proceeds on the basis that corporate governance is a mechanism that can guarantee the long-term going concern of firms and that boards of directors are an essential component of corporate governance given their monitoring, control and supervisory functions. Having shown that firms still undergo crises and in some circumstances fail despite the composition of boards, the authors provide insights into relevant theories that guide corporate governance and board behaviour in different jurisdictions.

In Chapter 3, ‘Codes for Boards of Directors: A Law and Morality and Organisational Differences Perspective’, David Williamson and Gary Lynch-Wood critically assess the efficacy of codes of ethics and codes of conduct for boards, drawing on the work of Fuller (1964) and their own work on the conditions of regulation and firm differences. The authors argue that additional mandatory measures are likely to be needed to complement codes of ethics and codes of conduct. In relation to developing and emerging economies, the authors provide an important caveat that in the absence of an institutional environment to protect contractual exchange, and when it is seen to be bona fide and taken to reflect good practice, a code then provides that contractual protection.

The nature and peculiar characteristics of boards in several developing and emerging markets, especially the BRICS and MINTS countries, are examined by Chris Ogbechie in Chapter 4, ‘The Nature of Boards in Developing and Emerging Markets’. The chapter was motivated by the literature’s wide extension of traditional corporate governance classification to developing and emerging economies without considering the countries’ unique peculiarities. It explores the nature of boards in developing and emerging economies and explains the failing corporate governance practices and corporate scandals in several of the countries. In particular, the author examines the contemporary roles of boards, especially risk and strategy equilibrium, on the basis that boards are expected to formulate strategies to help mitigate, if not eliminate, risk. Unlike many developed markets where private or outsider entrepreneurs dominate, in those developing and emerging countries, the nature of business ownership as either family-owned (FOBs) or state-owned (SOEs) encourages dominant ownership. The author finds that the dominant shareholder model ubiquitous in several developing and emerging economies can be rectified by requiring their organizations to go public. The argument is that in an environment in which ownership and management are widely separated, the owners are unable to exercise dominant control over the management or the board.

In Chapter 5, ‘Corporate Governance and Business Growth: Evidence from China’, Jia Liu, Dimitrios Stafylas, Junjie Wu, and Christopher Muganhu argue that the implementation of an effective system of corporate governance is now of critical importance to China’s drive for economic growth. The chapter provides evidence that is of value in policy development and practice to China and other economies pursuing similar trajectories. The findings indicate the extent to which China’s system of corporate governance has so far failed to achieve its objectives, and in what ways reforms are needed in order to enhance market credibility, enterprise competitiveness and economic growth. The chapter evaluates the Chinese government’s relevant policy and practice and discusses fundamental issues such as ownership structure and the establishment of corporate governance and the interaction of corporate governance with the internal and external institutional environments. The chapter also provides significant insights into the problems and prospects of corporate governance in today’s China through an empirical analysis of the role of corporate governance in business growth. It examines mergers and acquisitions in China to present evidence showing how corporate governance practice has influenced value creation and company growth. It highlights the need for the government to accelerate the reform of the ownership structure so as to give managers incentives to maximize company value and the imperativeness of installing and maintaining an effective corporate governance mechanism, under which board independence is real and not merely decorative, and directors’ decision-making is guided and constrained by sound and transparently applied principles.

Chapter 6, ‘Board Effectiveness: Do Committees Really Matter? Evidence from Turkey’, considers the role of board committees in promoting the effectiveness of directors, using Turkey as the context. In the chapter, Emek Toraman Çolgar examines the efficiency and socio-economic, political and regulatory factors affecting the adoption of regulations for boards of directors and board committees under Turkey’s corporate and capital markets laws. The chapter provides proposals for legislative amendments in relation to the formation, duties, powers and responsibilities of the board with a view to increasing its efficiency. It also demonstrates how regulations can create firm value in practice.

In Chapter 7, ‘Individualism in Boards or Directors: Why Good Board Members Make Bad Decisions’, Chris van der Hoven and Kalu Ojah argue that business failures represent failures of governance by owners or their agents and the persistent leadership failures suggest that boards of directors and board members do not always act in the best interests of the firm and shareholders despite their key roles in firms. While they acknowledge that firms are a cornerstone element of technological and economic progress, the authors argue that if boards are not adding value, then they are likely destroying it. The authors reason that value destruction can be caused by board members, collectively or individually, when they have miscalculated, delayed or left decisions unmade or made ethical errors. In contending that part of the reasons for persistent and increasing moral missteps in business is a noticeable shift from collectivism to individualism, the authors provide some mental scaffolding with discussions about culture and individualism, dominant logic, dynamic capabilities, ethics, biases and groupthink. In support of their proposal for a more collectivist mindset in decision-making amongst board members, the authors draw on Nonaka and Takeuchi, who note that knowledge does not always translate into wisdom and that wise decisions are those that serve society.

In Chapter 8, Surendra Arjoon’s ‘Tone at the Top, Organizational Culture and Board Effectiveness’ develops a conceptual framework that shows the inter-relationship between the ‘tone at the top’, organizational culture and board effectiveness. The author demonstrates that while the tone at the top is set by the senior executives and reflects the organization’s shared set of values that provide a network of cues that govern tolerance attitudes toward ethical breaches and compliance, organizational culture refers to the overall ethos including psychological and structural elements that affect behaviours and perceptions. Board effectiveness includes task outcomes, board composition and leadership, attitudes and receptiveness. Following a literature review, the author finds that the tone at the top defines organizational culture, while elements of the tone at the top and board effectiveness interact with each other and provide a conceptual model of the hypothesized relationships that serve as a platform for empirical work. The chapter concludes with strategies and recommendations for improving the tone at the top including consideration of ethical codes of conduct and measures for dealing with ethical breaches and promoting compliance, risk assessments and management systems and promotion of board engagement and board effectiveness.

In Part II, ‘Institutions, Regulations, and Corporate Governance’, there are eight chapters that examine the relationship between certain institutional and regulatory rules and actors in promoting board effectiveness for effective corporate governance. In Chapter 9, ‘Institutions and Board Effectiveness: Any Link? The United Kingdom, United States and Nigeria in Perspective’, Francis A. Okanigbuan, Jr. argues that informal institutional environments should be considered in designing a framework for promoting board effectiveness. The chapter evaluates the extent to which institutional make-up and incentives such as the enforcement processes of governance rules and sanctions can affect board effectiveness. It identifies the role of regulation by reference to the main streams of economics of institutions, to ascertain effective ways that local practice and customs as informal institutions can influence the development of formal rules as formal institutions. It reviews the role of the institutional regulatory framework in promoting board effectiveness in Nigeria and makes comparative references to the United Kingdom and United States to show that, while some aspects of corporate governance regulation may be considered to be ‘world best practices’, the successful implementation of these practices across the globe is largely dependent on the extent to which peculiar local circumstances permit.

In Chapter 10, Onyeka K. Osuji’s ‘Club Theory and Directors’ Performance Evaluation’ applies the club theoretic model to contextualize voluntary clubs in public interest regulation through corporate governance, particularly in developing and emerging markets. Drawing on the political theory of corporation and the institutional perspective, the chapter proposes an enforced self-regulatory system for directors’ individual and collective performance evaluation centred on voluntary clubs and propped up by facilitative public regulation. It argues that when properly and legally equipped, voluntary clubs effectively perform corporate governance regulatory roles, and directors, shareholders, market participants, stakeholders and society can all benefit. While it frames corporate governance clubs within regulatory institutional frameworks, the chapter demonstrates the impact of voluntary rules, standards and procedures on individual director and board effectiveness and therefore aligns private governance with broader society expectations. It highlights internal, external and ind...

Inhaltsverzeichnis

• Cover
• Half Title
• Series Page
• Title
• Copyright
• Contents
• Foreword
• 1 Introduction: Enhancing Board Effectiveness: Institutional, Regulatory, and Functional Perspectives for Developing and Emerging Markets
• PART I Board of Directors, Effectiveness, and Corporate Governance
• PART II Institutions, Regulations, and Corporate Governance
• PART III Issues in Improving the Functional Effectiveness of the Board
• List of Contributors
• Index