Sensational corporate scandals occasionally scream from newspaper headlines. In the past few months, the French carmaker Renault and Japanese auto giants Nissan and Mitsubishi’s joint collaboration grabbed world attention with the chairman sitting in a Japanese jail amid shouts from board members, governments, and shareholders.
In 2015, German carmaker Volkswagen suffered embarrassing seemingly widespread emissions testing coverup. Back in 2001, the investors saw a colossal American corporate scandal that brought down one of the globe’s largest energy firms, Enron, and accounting firms, Arthur Andersen.
In Kenya, we experienced turmoil at Kenyatta National Hospital and Deacons East Africa went under administration along with insolvency from Imperial Bank and Chase Bank.
Many corporate scandals originate from staff or management hiding fraud from boards.
Social scientists Ronald Kidwell and Christopher Martin define corporate deviance as behaviour committed by organisational members that cause or intend to cause damaging effects on co-workers, managers, clients, or the institution itself.
Many times, though, the deviant behaviour originates from the governance structure of the firm. But how and why can some corporate boards allow, condone, or conduct deviant actions? Among the thousands of business research journals, the most prestigious management publication on the planet, the Academy of Management Review, recently published an article by Ruth Aguilera, William Judge, and Siri Terjesen that explores causes for corporate governance deviance.
Deviant governance does not only mean scandalous behaviour. Deviance at board levels also includes governance actions that are not in line with best practices. Examples can include a board overtly supporting a political party, conflicts of interest, hiring family members on staff, failure to review CEO performance, holding a non-diverse mix of genders, ages, ethnicities, and skills on the board, an even number of board members, and an inactive board and its committees, among a multitude other possible scenarios.
The research breaks down five causes and moderators that affect levels of deviance on boards.
First, national logic specific to a country involves four areas such as the level that governments involve themselves in business and provide cover-ups, the level of developmental-orientation in a society, the degree of social rights that stakeholders possess, and the level of liberalism in the market for shareholders. In short, if societies tolerate corporate mistreatment of communities, give little power to shareholders in practice not law, experiences state interference, or does not care about the collective good and uplifting of the nation, then corporate boards are more likely to approach their governance roles in deviant ways.
Second, entrepreneurial identity centrality means how the firm claims itself as willing to take risks, act proactively, and seek innovative solutions. If an organisation’s culture values risks taking associated activities, then boards tolerate more deviance.
Third, the two causes interact to yield corporate governance discretion. Governance discretion involves the latitude of accessible governance practices. Essentially, view governance discretion like a muscle that incorporates the level of greater skills and ranges of competent activities that boards involve in.
However, the fourth and fifth factors influencing deviance stand as moderators between the impact of discretion on deviance. The fourth factor, the extent of regulatory enforcement, stands crucial to board actions. As an example, the US holds a long history of poor enforcement of fraudulent insider trading within publicly traded companies. Therefore, many managers and board members became lax in their own oversight and actions. Such laxity caught famed lifestyle mogul Martha Stewart by surprise as she received jail time for insider trading which previously had been rarely prosecuted.
Fifth, corporate governance capacity entails the wherewithal of a board to exploit opportunities as they arise. Perhaps a merger, a new product line, or a large hiring spree could make the firm stronger. Does the company hold the financial resources capacity to make such important moves? The more financial capacity a board holds, the more likely the influence of capacity will create more deviance.
The above five causes and moderators that impact the levels of corporate governance deviance must not get overlooked by shareholders, stakeholders, regulators, or auditors. Among your own investment portfolio as a Business Daily reader, which one most troubles you about the firms whose equity you hold?