Study Guide Module 1

Module 1: Governance and leadership Note: This study guide must be read in conjunction with details outlined on Moodle. Information may be updated on the course website. Please always follow the instructions provided on Moodle, as all newest updates only appear on the Moodle site. Introduction In this unit, we set the framework for this course by defining leadership and governance, and discussing the role and importance of leaders in supporting good governance in the organisation. Objectives On completion of this module you should be able to: • • • • define corporate governance and discuss your definition discuss how governance systems affect the operations of the organisation understand and discuss various ways that leadership has been envisaged describe in very general terms the roles of directors, managers and leaders in ensuring good governance in organisations. Readings Source Textbook (Required) Lussier & Achua 2013 Chapters 1 & 10 Electronic article (Required) Watson, GH 2003, ‘Corporate governance: Quality at the top’, Annual Quality Congress Proceedings, vol. 57, pp. 123–138. Electronic journal article (Required) Busco, C, Frigo, ML, Giovannoni, E, Riccaboni, A & Scapens, RW 2005, ‘Beyond compliance: why integrated governance matters today’, Strategic Finance, vol. 87, no. 2, pp. 34–43. Electronic journal article (Recommended) Daily, CM, Dalton, DR & Cannella, AA 2003, ‘Corporate governance: Decades of dialogue and data’, Academy of Management Review, vol. 28, no. 3, pp. 371–382. Electronic journal article (Recommended) Meyer, ND 2004, ‘Systemic IS governance: An introduction’, Information Systems Management, vol. 21, no. 4, p. 23–34 Electronic journal article (Recommended) Hernandez, M, Eberly, MB, Avolio, BJ & Johnson, MD 2011, ‘The loci and mechanisms of leadership: exploring a more comprehensive view of leadership theory’, The Leadership Quarterly, vol. 22, no. 6, pp. 1165– 1185. Electronic journal article (Recommended) Hiller, NJ, DeChurch, LA, Murase, T & Doty, D 2011, ‘Searching for outcomes of leadership: a 25–year review’, Journal of Management, vol. 37, no. 5, pp.1137–1177. Electronic journal article (Recommended) Avolio, BJ, Walumbwa, FO & Weber, T 2009, ‘Leadership: current theories, research and future directions’, Annual Review of Psychology, vol. 60, no. 1, pp.421–449. Module 1 - Page 1 Why be concerned about leadership and governance? Recent corporate collapses have led to renewed interest in improving corporate governance by changing the laws relating to governance. Generally this has meant increased impositions to increase the monitoring and control of organisations, and subsequently focusing more on governance issues in the education of business students. This is not to suggest that governance is merely about preventing financial or other scandals. As we will see it is concerned with defining what we want the organisation to achieve as well as how to go about achieving these goals. The suggested journal article readings above discuss why governance and leadership are vital within organisations. The first three articles discuss the concept of governance while the other three broadly examine the literature on organisational leadership. It is important to remember that no set of rules, however comprehensive, is ever going to stop corporate collapses or prevent people in organisations from acting in their own self-interest at the expense of the organisation. But when combined with leadership commitment and an organisational culture and values that foster good governance, breaches are less likely to occur. In this course we focus on leadership, but throughout the course examine the role of leaders in ensuring good governance of organisations (and the role of good governance in ensuring good leadership). The importance of leaders in ensuring good governance is perhaps best stated by the Australian National Audit Office (2003) in their Public sector governance better practice guide (p. 15): While rules, systems and structures are certainly important, they are primarily the vehicles by which crucial values and behaviours are applied. Good governance is therefore primarily a function of the behaviours and values of the organisation’s leaders and of the overall culture of the organisation. The role of governance In this Module, we will introduce you to some literature and research findings in relation to governance and leadership. Within the existing literature on governance, there is an implicit assumption that the choice of various governance structure options and leaders could be associated with firm performance (Dalton & Dalton 2011). Aguilera et al. (20008, p. 475) discuss the role of governance in terms of organisational ‘mechanisms to ensure that executives respect the rights and interests of company stakeholders, and that those stakeholders are held accountable for acting responsibly regarding the protection, generation, and distribution of wealth invested in the firm’. However, judging by recent corporate scandals and crises, it is an open debate regarding the efficacy of governance structures, policy approaches and practices put in place to manage the ‘principal-agent problem between shareholders and managers’ in order for ‘firms to operate more efficiently and perform better’ (Aguilera et al. 2008, p. 475) . The first four journal article readings above focus on the concept of governance. Take time to read some of them now. There are more research-based journal articles suggested under ‘Additional Readings’ at the end of the Module to help you grasp the concept of governance. Reflection 1–1 Why do you think good governance is such an issue at the moment? Is it an overreaction to corporate collapses, or is it the result of the changing nature of business? Can you identify changes in the way business is conducted or in society that would make good corporate governance more difficult or easier to achieve? What is governance? What is meant when people talk about ‘governance’? As quoted in Psaros (2009, p. 3), the Australian Securities Exchange Corporate Governance Council defines corporate governance as: the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations. It encompasses the mechanisms by which companies, and those in control, are held to account. Corporate governance influences how the objectives are set and achieved, how risk is monitored and Module 1 - Page 2 assessed, and how performance is optimised. Good corporate governance structutres encourage companies to create value (through entrepreneurialism, innovation, development and exploration) and provide accountability and control systems commensurate with the risks involved. Furthermore, as quoted in Psaros (2009, p. 4), the Organisation for the Economic Co-operation and Development defines corporate governance as involving: … a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. Another important explanation of corporate governance is that provided by Sir Adrian Cadbury, a prominent proponent of corporate governance reforms, in which he explains that: Corporate Governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society (Sir Adrian Cadbury in ‘Global Corporate Governance Forum’, World Bank, 2000). The following definitions are a small selection found on the web for governance and corporate governance. You might note that some of these definitions are for profit oriented organisations and some for not-for-profit organisations. The act of affecting government and monitoring (through policy) the long-term strategy and direction of an organization. In general, governance comprises the traditions, institutions and processes that determine how power is exercised, how citizens are given a voice, and how decisions are made on issues of public concern. In the non-profit sector, refers to the actions of the volunteer board of directors of an organization with respect to establishing and monitoring the long-term direction of that organization. Concept originally used by specialists in medieval English society, which was characterized by cooperation between the different sources of power (church, nobility, merchants, peasants, etc.). During the 1980s the World Bank took up the concept of governance to describe the way power is exercised in the management of a country’s economic and social resources. At the heart of discussions about governance are terms such as responsibility, information, transparency, the rule of law. Governance does not refer to political power in the strict sense. It is not the art of administration at a given level of power, but the art of coordinating administration between different territorial levels. The exercise of economic, political, and administrative authority to manage the nation’s affairs at all levels. It comprises all the mechanisms, processes, and institutions through which the citizens and groups articulate their interests, exercise their legal rights and obligations and mediate their differences. Governance is not the sole domain of government but it transcends government to encompass the business sector and civil society. The establishment and maintenance of social, political, and economic arrangements by which practitioners control their practice, self-discipline, working conditions, and professional affairs. Systems and processes for ensuring proper accountability, probity and openness in the conduct of an organisation’s business. The debate on redefining corporate management processes, including social and environmental responsibilities. The rules and regulations within which an organization works to ensure probity and accountability. Jargon for rules on how companies should be run. Sometimes includes more abstract notions of corporate ‘culture’, that is, the habits practised by managers. If you compare these definitions, you will note that the following factors are covered in various definitions of governance: Module 1 - Page 3 • it is required by all organisations—governments, companies, not-for-profit organisations • it is about relationships between various groups which could include shareholders, directors and managers, employees and members of society and the balancing of their interests • it refers to strategy and direction, laws, and the policies, practices, procedures of organisations and associated controls • it is about accountability, stewardship, honesty, and probity. If you read any textbook on governance, you will probably find that it focuses on the legal requirements such as those found in corporation law in various countries, and perhaps some of the semi-legal guides such as the listing rules for stock exchanges or Statements of Accounting Practice. While it is important to understand the legalities of governance, these texts do not convey how people at all levels of the organisation are affected by, and involved in, assuring good governance. To overcome this problem, read the article by Watson (2003). This article will assist you in understanding how governance systems operate in organisations, and the roles of directors, managers and leaders. Watson (2003) states: The role of business leaders and board members in this management system is to set the guiding policy and strategic direction that the organization will execute in the future, while the role of business leaders and their team of operational management is to execute the firm’s strategic direction within the context of the board’s delegated authority. (p. 130) Note what the paper then talks about holding people accountable for their work (p. 130) and how ‘good governance’ should be operationally defined (p. 135). Read the article by Brusco et al. (2005). This connects the objectives of the Board of Directors to the operations of the organisation, and describes governance systems of the organisation. Governance as a system is also described in Meyer (2004). We can see that governance refers to strategy and direction, laws, and the policies, practices, procedures of organisations and associated controls. We will examine the legal framework in Module 3. If you have studied a course in business strategy or read widely in management you will understand what is meant by strategy and direction, policies, procedures, and controls. Although we do not cover Chapter 11 of the textbook in detail, you can get a head start to read this chapter an overview of strategic leadership in organisation. If you need to understand the concepts or terms better, read the article by Davies (2000) which is listed at the end of this module under ‘Additional reading’. It is neither long nor difficult. Reflection 1–2 What is your definition of ‘governance’? Is it specific to your organisation or would it apply equally to all organisations? Are there issues in your organisation or industry that make governance particularly important? Are you using a very narrow definition of governance (focused on the legal framework, the Board of Directors and executive management) or a broader definition with reference to the policies, rules, procedures and culture of the organisation? What is leadership? The leadership phenomenon has been contemplated, discussed, and documented since the appearance of the word ‘leader’ in the English language in the 1300s (Bass 1990). Approximately 15,000 articles and books have been published on the subject. Module 1 - Page 4 Interest in leadership has developed at an exponential rate. Over the years many definitions of leadership have been developed. As concluded by Bass in his review of leadership in 1990, ‘… there are almost as many definitions of leadership as there are persons who have attempted to define the concept’ (p. 11). It is therefore not surprising that there is no one definition of leadership that is accepted by practitioners and researchers. Within the domain of leadership in organisations, there is nonetheless a degree of agreement on definition from the early to present day researchers. For example: Leadership may be considered as the process (act) of influencing the activities of an organised group in its efforts toward goal setting and goal achievement’ (Stodgill 1963, p. 3). Leadership is defined as “the process of influencing the activities of an organized group toward goal achievement” (Rauch & Behling 1984, p. 46). Leadership is “… the ability of an individual to influence, motivate and enable others to contribute toward the effectiveness and success of the organization …” (House et al. 1999, p. 184). (Source: cited in Yukl 2006) A common theme of these definitions is that leadership entails a social influence process in which an individual influences a group to strive towards a goal. Whilst leadership can be defined in numerous ways, definitions focus upon an individual exerting more influence on the group than any other member. Much of the research into leadership adopts this key aspect as a working definition of leadership. Leadership is a dynamic process and the follower/leadership relationship is reciprocal, that is, leadership is twoway process. You should note that these definitions of leadership refer to a particular process or ability, and you might well assume that a leader, therefore, is a person who engages in this process or has this ability. However when people write about leaders, they tend to use the term to refer to a person in a position of authority in an organisation. This excludes many who behave as leaders—influencing activities of groups towards goal achievement—but who do not have formal authority. Keep this in mind when you are reading about leaders and leadership. The final three journal article readings above focus on the concept of leadership. Take time to read some of them now. There are more research-based journal articles suggested under ‘Additional Readings’ at the end of the Module to help you grasp the concept of leadership. For leadership, you should read at least Chapters 1 & 10 of your text book to obtain some general ideas. Textbook Read Ch. 1 of Lussier & Achua 2013 for a more detailed discussion. Moreover, note some of the recent theorising on what constitutes leadership: If one is to begin to understand what leadership is, it is worthwhile to examine what leadership is not. Leadership is not hierarchical, top-down, or based on positional power and authority. Although effective managers must practice good leadership and effective leaders must possess managerial skills, leadership is not management or some part or principle of it. To understand leadership, one must understand its essential nature, that is, the process of a leader and followers engaging in reciprocal influence to achieve a shared purpose. Leadership is all about getting people to work together to make things happen that might not otherwise occur or to prevent things from happening that would ordinarily take place (Rosenbach & Taylor 2006, p. 1). Module 1 - Page 5 Reflection 1–3 Think about a leader you respect and admire. What it is about the person that causes you to choose her/him as an effective leader. Think about a leader you do not respect and admire. What it is about the person that causes you to choose her/him as an ineffective leader. Analyse both incidents. What are the underlying qualities of leadership for the effective and ineffective leader? Have you focused on traits or behaviours in identifying your leader? Do you think these leaders would be equally effective or ineffective in other situations? Reflection 1–4 Are all executives, managers or supervisors, leaders? You will often see the top executives of organisations referred to as leaders. Does the executive position alone qualify a person to be called a leader? When you write about leaders, what definition of leader is implied? Leadership across cultures You will no doubt recognise that the textbook and many of the readings set for this course are based on research from Anglo countries—the USA, Australia, Canada, UK. The question that arises is whether what you are taught in this course is applicable in other countries. There is indeed a substantial literature on leadership across countries, and a large project called GLOBE—Global Leadership and Organizational Behavior Effectiveness— which investigated leadership across more than 100 countries has just been completed. You can find the book on this project in the library and publications from it are available in the library databases. At the front of the Study Guide you will see a list of selected references to leadership research in various countries around the world. If you are going to apply your knowledge of leadership in other countries or indeed if you supervise people from different cultures, then you should consider reading some of these articles. Take time to read them now. What is the role of leaders in good governance? What you see as the relationship between leadership and governance is going to depend on how you define each term. If you take a very narrow definition, then your focus is primarily on the top executives and the actions of the Board of Directors. If you take a broader approach, then you are considering what those at all levels who display leadership qualities/behaviours can do to influence the achievement of good governance through the conduct of operations of the whole organisation. Reflection 1–5 Good governance, it is claimed, is ‘primarily a function of the behaviours and values of the organisation’s leaders and of the overall culture of the organisation’. Could you make a good case for this based on the reading from Watson (2003) and from your experience of working in organisations? Module 1 - Page 6 Underlying theories in governance Before we can begin to discuss governance systems in organisations in any detail, we need to discuss underlying theories on which it is based. These theories are basic to any rigorous study of the governance or management of organisations. They deal with the following issues. First, why do we have firms and why do they take particular forms? Answering this question helps us to understand the nature of firms. The theories that attempt to answer this question are transaction cost economics and the knowledge-based theory of the firm. With both of these approaches it is acknowledged that problems arise because the actions of self-interested members of the firm may not result in socially desirable outcomes (whatever they may be). Second, what should the firms be trying to do? Are they operating to maximise profit for the shareholder or do they have wider responsibilities to other stakeholders? This issue is discussed in various theories that relate to corporate social responsibility. These issues will be considered in the next module. We will then be able to start dealing with the issue of the leader’s role in corporate governance. Additional readings The following readings are not required (except Watson’s paper) because we have tried not to overload you in the course. However, we consider them very useful and you may want to refer to them either for assignments, or because you have a problem in your workplace that has led you to read around the topic, or because you want to understand the topic better. Turnbull, S 1997, ‘Corporate governance: its scope, concerns & theories’, Corporate Governance: An International Review, vol. 5, no. 4, pp. 180–205. This paper outlines the conceptual, cultural, contextual and disciplinary scope of the rapidly evolving topic of corporate governance. As a basis for improving the rigour of research and analysis, some definitions are suggested. Reasons for the diversity of viewpoints and concerns are considered. To provide an orientation for new scholars and those from specialised disciplines, recent surveys of corporate governance are reviewed from their ethnocentric, contextual, and intellectual contingencies. The prospects of developing the topic as a ‘science of organisation’ are considered along with areas for future research. The entire journal, Corporate Governance: An International Review will be a useful publication throughout this term. This can be accessed from the CQU library through Wiley online Library. Bird, F 2001, ‘Good governance: a philosophical discussion of the responsibilities and practices of organizational governors’, Canadian Journal of Administrative Sciences, vol. 18, no. 4, pp. 298–312. This paper explores the basic responsibilities of those who ‘govern’ any kind of organisation, whether these be non-profits, widely held or closely held firms, cooperatives, or voluntary agencies. It adopts a perspective that is largely philosophical and sociological rather than legal or economic, and explores the basic functions of governors in relation to their organisations. It begins its inquiry by contrasting managing and governing. It argues that the practice of governing consists fundamentally in the exercise of reflective and authoritative judgment. The paper then reflects on the basic character of organisations, using what the author refers to as a revised stakeholder model. It argues that organisations are constituted and reconstituted by their ongoing, negotiated, asset-creating interactions with diverse constituencies. With this enlarged view of organizations as a frame of reference, the paper then spells out in order of importance the fundamental responsibilities of governors. Module 1 - Page 7 Sussland, WA 2004, ‘Business value and corporate governance: a new approach’, Journal of Business Strategy, vol. 25, no.1, pp. 49–56. In an attempt to deal with the various oversights of corporate boards, regulators, professional associations, and corporations have focused their efforts on the structures and procedures of boards of directors (BoD), such as the compositions of BoD, restrictions imposed on the auditors, the role of independent directors, etc. Procedures are the most visible part of governance and the easiest factors to regulate. However, by changing the procedures that frame corporate governance, we are not really changing what is being done within that frame. Thus, to achieve a quantum leap in the effectiveness of corporate governance, we need to look into the process of governance – what the BoD does, how it does it, and how the outcome is evaluated. In this article, we present some thoughts on three topics that can enhance the process of corporate governance: objective setting, the method o management, and the measure of the performances of the enterprise and of the BoD. Meyer, ND 2004, ‘Systemic IS governance: an introduction’, Information Systems Management, vol. 21, no. 4, pp. 23–35. Governance processes are a legal necessity; but beyond that, they’re fundamental to the success of every organization. When governance processes are well designed, they coordinate every aspect of an organization: its people, equipment, and money work in concert toward the strategic objectives of the firm. However, when poorly designed, governance processes can be counterproductive. This article presents a fresh perspective on IS governance as five interdependent organizational systems. The objective is to help leaders understand the scope of the IS governance challenge, and to provide an introduction to design processes that coordinate and control the IS organization while enhancing, not stifling, everyone’s performance. Watson, GH 2003, ‘Corporate governance: quality at the top’, Quality Congress. ASQ’s ... Annual Quality Congress Proceedings, vol. 58, pp. 123–138. Good governance is often observed in its absence – the failure of business leadership to provide adequate due diligence or responsible oversight. In recent years abuse of the top leadership positions of public companies has lead to escalating emphasis on issues related to shareholder responsibility, corporate ethics, and executive compensation. In response to the recent Enron – ArthurAndersen and the Worldcom crises, there has been a call for reform in administration of governance with an emphasis on increasing ethical behavior of management and avoidance of conflict of interest among the competing corporate stakeholders. This interest has focused on corporate reform in both public and private sectors for the way that top executives and board members are held accountable. This call for transformation in the ‘rules of governance’ is projected to grow as dissatisfaction with the execution of governance provides justification to focus attention on the issue: what is good governance? Good governance delivers benefits to each organizational stakeholder – but the question that is debated is which stakeholder rights are most significant. Good governance plays an important role in the process of assuring customer satisfaction with the management of business in all areas from the flawless manufacture of products and consistent execution of services. It also assists in assuring employee satisfaction with such issues as equitable distribution of fair compensation packages and security of the work environment. The way an organization is governed particularly assures the shareholders that management will make all decisions at ‘arms length’ and consider ownership’s fiduciary interests as a priority. In short, governance defines the value context of the organization and shapes the direction of its mission while setting the long-term business perspective for ethical conduct and effective public responsibility. This paper focuses on the role of quality as a management practice for establishing and implementing processes that support good corporate governance and assure long-term, mutual success for all stakeholders in the modern corporation. Module 1 - Page 8 Activities and exercises Exercise 1–1 Work on your leadership skills. Do the exercises in your text:   Self-assessment exercise 1—Leadership potential (p. 5–6)  Applying the Concept 2—Leadership managerial roles (p. 16)  Applying the Concept 1—Managerial leadership skills (p. 9–10) Applying the Concept 3—Leadership theories (p. 21). Get a folder and put a summary of the results of the self-assessment exercise in it. Over the term you will be doing self-assessment exercises each week and at the end of term you will want to look back and see what these exercises have told you about your leadership abilities or potential. References Aguilera, RV, Filatotchev, I, Gospel, H & Jackson, G 2008, An organizational approach to comparative corporate governance: costs, contingencies, and complementarities’, Organization Science, vol. 19, no. 3, pp. 475–492. Australian National Audit Office 2003, Public sector governance volume 1, better practice guide, framework, processes and practices, Commonwealth of Australia, Canberra. Bass, BM 1990, Bass and Stogdill’s handbook of leadership: theory, research, and managerial applications, 3rd edn, Free Press, New York. Busco, C, Frigo, ML, Giovannoni, E, Riccaboni, A & Scapens, RW 2005, ‘Beyond compliance: why integrated governance matters today’, Strategic Finance, vol. 87, no. 2, pp. 34–43. Carver, J 2006, Boards that make a difference, 3rd edn, John Wiley & Sons, San Francisco, CA. Colley, JL, Doyle, JL, Logan, GW & Stettinius, W 2003, Corporate governance, McGraw-Hill New York. Daft, RL & Pirola-Merlo, A 2009, The leadership experience, 1st Asia Pacific edn, Cengage Learning, Melbourne. Dalton, DR & Dalton, CM 2011, ‘Integration of micro and macro studies in governance research: CEO duality, board composition, and financial performance’, Journal of Management, vol. 37, no. 2, pp. 404–411. Epstein, MJ & Roy, M 2010, ‘Corporate governance is changing: are you a leader or a laggard?’, Strategic Finance, vol. 92, no. 4, pp. 31–37. Module 1 - Page 9 Gold, D & Dienhart, JW 2007, ‘Business ethics in the corporate governance era: domestic and international trends in transparency, regulation, and corporate governance’, Business & Society Review, vol. 112, pp. 163– 183. Hernandez, M, Eberly, MB, Avolio, BJ & Johnson, MD 2011, ‘The loci and mechanisms of leadership: exploring a more comprehensive view of leadership theory’, The Leadership Quarterly, vol. 22, no. 6, pp. 1165–1185. Hiller, NJ, DeChurch, LA, Murase, T & Doty, D 2011, ‘Searching for outcomes of leadership: a 25-year review’, Journal of Management, vol. 37, no. 5, pp. 1137–1177. Iyengar, R & Zampelli, EM 2009, ‘Self-selection, endogeneity, and the relationship between CEO duality and firm performance’, Strategic Management Journal, vol. 30, no. 10, pp. 1092–1112. Judge, WQ, Douglas, TJ & Kutan, AM 2008, ‘Institutional antecedents of corporate governance legitimacy’, Journal of Management, vol. 34, no. 4, pp. 765–785. Lussier, RN & Achua, CF 2010, Leadership: theory, application, skill development, 4th edn, South-Western, Australia. Meyer, ND 2004, ‘Systemic IS governance: An introduction’, Information Systems Management, vol. 21, no. 4, pp. 23–34. Monks, RA & Minow, N 2008, Corporate Governance, John Wiley, Hoboken, NJ. Pierce, JL & Newstrom, JW 2006, Leaders & the leadership process: readings, self-assessments & applications, 4th edn, McGraw- Hill, New York. Psaros, J 2009, Australian corporate governance: a review and analysis of key issues, Pearson, Frenchs Forest, NSW. Rezaee, Z 2009, Corporate governance and ethics, John Wiley, Hoboken, NJ. Rosenbach, WE & Taylor, RL 2006, ‘The Heart of leadership’, in WE Rosenbach & RL Taylor (eds), Contemporary issues in leadership, 6th edn, Westview Press, Boulder, CO, pp. 1–5. Waldman, DA, Ram´ırez, GG, House, RJ & Puranam, P 2001, ‘Does leadership matter? CEO leadership attributes and profitability under conditions of perceived environmental uncertainty’, Academy of Management Journal, vol. 44, no. 1, pp. 134–143. Watson, GH 2003, ‘Corporate governance: quality at the top’, Annual Quality Congress Proceedings, vol. 58, pp. 123–137. Yukl, G 2010, Leadership in organizations, 7th edn, Pearson, Upper Saddle River. Module 1 - Page 10