CHAPTER ONE

INTRODUCTION

Definition of Key terms

LEADERSHIP

 Leadership is both a research area and a practical skill encompassing the ability of an individual,
group or organization to "lead", influence or guide other individuals, teams, or entire organizations.
 Leadership is a “particular type of power relationship characterized by a group member’s
perception that another group member has the right to prescribe 89 behaviour patterns for the
former regarding his activity as a group member” (Janda, 1960, p. 358).
 Leadership is “interpersonal influence, exercised in a situation, and directed, through the
communication process, toward the attainment of a specified goal or goals” (Tannenbaum,
Weschler, & Massarik, 1961, p. 24).
 Leadership is “an interaction between persons in which one presents information of a sort and in
such a manner that the other becomes convinced that his outcomes … will be improved if he
behaves in the manner suggested or desired” (Jacobs, 1970, p. 232).

GOVERNANCE

 Corporate governance is the collection of mechanisms, processes and relations used by various
parties to control and to operate a corporation. Governance structures and principles identify the
distribution.
 Governance comprises all of the processes of governing – whether undertaken by the government
of a state, by a market, or by a network – over a social system and whether through the laws,
norms, power or language of an organized society.
 Governance is the way rules, norms and actions are structured, sustained , regulated and held
accountable. The degree of formality depends on the internal rules of a given organization and,
externally, with its business partners.
 In international development, good governance is a way of measuring how public institutions
conduct public affairs and manage public resources in a preferred way. Governance is "the process
of decision-making and the process by which decisions are implemented (or not implemented)".

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Elements Of Governance

In line with this reasoning, and building upon the approach of the World Bank, the Bank has identified
four basic elements of good governance:

(i) Accountability,
(ii) Participation,
(iii) Predictability, and
(iv) Transparency.

ETHICS

Ethics or moral philosophy is a branch of philosophy that "involves systematizing, defending, and
recommending concepts of right and wrong behavior". The field of ethics, along with aesthetics, concerns
matters of value, and thus comprises the branch of philosophy called axiology.

Ethics is defined as a moral philosophy or code of morals practiced by a person or group of people. An
example of ethics is a the code of conduct set by a business.

Business ethics is a form of applied ethics or professional ethics, that examines ethical principles and
moral or ethical problems that can arise in a business environment. It applies to all aspects of business
conduct and is relevant to the conduct of individuals and entire organizations.

Business ethics is the study of appropriate business policies and practices regarding potentially
controversial subjects including corporate governance, insider trading, bribery, discrimination, corporate
social responsibility, and fiduciary responsibilities.

Business ethics enhances the law by outlining acceptable behaviors beyond government control.
Corporations establish business ethics to promote integrity among their employees and gain trust from
key stakeholders, such as investors and consumers. While corporate ethics programs have become
common, the quality varies.

The field of ethics (or moral philosophy) involves systematizing, defending, and recommending concepts
of right and wrong behavior. Philosophers today usually divide ethical theories into three general subject
areas: metaethics, normative ethics, and applied ethics.

Three major areas of study within ethics recognized today are:

1. Meta-ethics, concerning the theoretical meaning and reference of moral propositions, and how
their truth values (if any) can be determined
2. Normative ethics, concerning the practical means of determining a moral course of action
3. Applied ethics, concerning what a person is obligated (or permitted) to do in a specific situation
or a particular domain of action.

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Leadership As An Art / Science

Leadership Is Both An Art And A Science

Background

Leadership a critical skill in modern organizational management. Has responsibility of guiding

organization, employees towards achievement of set objectives. Need for special, advanced skills in such
guidance. Oversight over other issues such as motivation, conflict resolution, work ethics, team work.
Debate over nature of skills necessary in effective leadership.

Leadership An Art

1. Art involves human skill.

Natural, inborn skill, rather than acquired.

2. Analysts.
Leadership involves skills, qualities that one cannot gain/have through learning.

3. Acquiring leadership skills, qualities, requires human skill that is natural.

4. Gifted leadership.
Inborn talents that enable individual to guide, relate with, work with, motivate, others

Leadership thus is an art.

Leadership As A Science

1. Leadership talent requires education to sharpen its ability, potential.

 Knowledge on best ways, methods, styles, approaches in leadership.
 Knowledge on features, needs, demands of leadership necessary for individual to know how to
apply skills for effectiveness.
 Knowledge based on experience in organizational leadership.
2. Leader needs to know what leadership, organizational environment is like for effective
application of acquired leadership skills.
 Leadership an evolving field depending on changing facts, observations in organizational
environment.
 Process of acquiring leadership skills.
3. Leaders must analyze various issues, approaches to situations from different points of view.
 Need to assess all possibilities and explore benefits, risks associated with each possibility.
 Need to strive to find solutions to various leadership issues in organizations.
Leadership thus a science, too.

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According to Pigors, “Leadership is a process of control in which by the assumption of superiority a person
or group regulates the activities of others for purposes of his own choosing.” Considering this, we can
further say that the characteristics of leadership are as follows:

1) Leader is the total ideal of the followers.

2) Leader is shown regard.

3) Leader and the followers influence each other.

4) Leader’s order is a command.

5) Leader controls the other member of the group.

6) Leader determines the group’s conduct.

7) Leader is a respected and revered person.

Classification Of Leadership

 Executive Appointed Leadership

The person is appointed by the executive and the leadership stems from the office or post to which the
person is appointed by the executive. The class of government officers is of this type.

 Leader Appointed By the Group

These leaders are elected by the group. Public leaders of panchayats, local groups, the Lok Sabha and
Rajya Sabha are elected by the group.

 Self-Appointed Leader

There are some leaders whose authority derives neither from the executive nor the group because it is not
vested in them by these groups. They advance because of their individual qualities and having attained
the central position, lead the people. They are recognized as such because of their qualities. Besides the
above, we can classify leadership on the basis of some purpose. Different groups make efforts for the
achievement of different aims in their respective individual spheres. The individuals who appear to be
most resourceful in the attainment of any purpose and a qualified person are accepted as leader. We can
classify this into two categories, viz.,

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 (i) intellectual leadership and
(ii) artistic leadership and
(iii) exective leadership.
 Intellectual Leadership

This leadership is in the intellectual field. In the field of philosophy, science etc. the greatest thinkers can
be said as intellectual leaders because they show the way and the others follow them.

 Artistic Leadership

This leadership is in the field of art, only the great artists can provide the leadership.

 Executive Leadership

This type of leadership is in the sphere of administration, it is the authoritative personality who becomes
the leader.

Also leadership can be on the basis of nature, viz.,

(i) authoritarian leader

(ii) democratic leader
(iii) institutional leader
(iv) dominant leader
(v) expert leader
(vi) persuasive leader
 Authoritarian Leadership

The authoritarian leader is an individual who likes to assert his authority. He does not consult any one in
taking decisions and leads by creating fear into the hearts of his followers and subordinates. He keeps all
his authority in his hands and appoints reliable subordinates at crucial position. Leader of this kind is an
officer and an authoritarian. He prefers to issue orders and punishes who disobey

him.

 Democratic Leadership

This type of leader is of a democratic mould in his thoughts, modes of action and conduct. He takes advice
from every one and is always anxious to enlist the cooperation of any one who is willing to give it. His
leadership is based upon sympathy, belief and affection. He does not call himself a leader and neither does
he take all the authority into his own hands.

 Institutional Leadership

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There are some individuals who occupy the highest post. His orders are appreciated and implemented
because of the authority vested in his chair. The institutional leader is not leader but the officiating head.

 Dominant Leader

The leader is so called because he maintains a relation of authority and dominance with his followers or
subordinates. He does not rule over them. However successful he may appear because of his power and
authority.

 Expert Leadership

A Leader of this type does not put any premium on maintaining social contact with their followers,
understanding them or even knowing their thoughts. People come to them for advice from time to time,
respect their opinions. Expert leaders are experts, and should not be considered as leaders. The basis of
their contact with their followers and subordinates is their special ability and efficiency.

 Persuasive Leadership

The persuasive leaders win the heart of their followers and do their best to maintain the closest social
contact with them. These are the real leaders. It is only this kind of individual who really exhibits all the
qualities of leadership. The overall picture reveals a variety of leadership style and their characteristics
which we have to know about leadership. In can context of organizational setting only three major
leadership style we can discuss here. These are autocratic, democratic and lassiez-faire leadership style
and each of which have some significant features.

FACTORS OF LEADERSHIP

 Leader

The leader must have an honest understanding of who he is, what he knows, and what he can do. Also,
note that it is the followers, not the leader or someone else who determines if the leader is successful. If
they do not trust or lack confidence in their leader, then they will be uninspired. To be successful the
leader must convince his followers, that he is worthy of being followed.

 Followers

Different people require different styles of leadership. For example, a new hire requires more supervision
than an experienced employee. A person who lacks motivation requires a different approach than one with
a high degree of motivation. The leader must therefore know his people. The fundamental starting point
is having a good understanding of human nature, such as needs, emotions, and motivation. The leader
must know his employees and their attributes.

 Communication

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The leader leads through two way communication. He has to set the example and xcommunicate to them
that he would not ask them to perform anything that he would not be willing to do. What and how the
leader communicates either builds or harms the relationship between the leader and his employees.

 Situation

All situations are different. What one does in one situation will not always work in another. The leader
must use his judgment to decide the best course of action and the leadership style needed for each situation.
For example, the leader may need to confront an employee for inappropriate behavior, but if the
confrontation is too late or too early, too harsh or too weak, then the results may prove ineffective. Also
note that the situation normally has a greater effect on a leader’s action than his or her traits. This is
because while traits may have an impressive stability over a period of time, they have little consistency
across situations. This is why a number of leadership scholars think the Process Theory of Leadership is
a more accurate than the Trait Theory of Leadership.

CHARACTERISTICS OF GOOD LEADERS

Leadership characteristics are an interesting topic because some people wonder if they possess these
characteristics without completely understanding what they might be. In other words, we have people
trying to figure out if they are leaders, but they do not really understand what defines a leader. Let us take
a close look at some of the characteristics of a leader.

Characteristics of a Leader

Listed below are eight leadership characteristics

1. Interpersonal Skills

The first leadership characteristic is the interpersonal skills. Leaders that have earned the trust and respect
of their followers can use this trust to move the organization towards the achievements of its goal. These
leaders are able to use their interpersonal skills to work through difficult relationships, and keep the peace
in their departments. These individuals are good at listening as well as providing constructive feedback.

2. Communication Skills

Leaders demonstrating communication skills are both good speakers and listeners. Through their words
they can help keep the workforce motivated and committed. They also listen to their followers, and ask
questions when they want to make sure they have a good understanding of what is being expressed.

3. Values

Leaders must also value the diversity of a workforce, and understand that a diverse group of employees
will bring a broader perspective to the organization. They will treat followers with the respect they deserve,

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and do not display favoritism. They operate with a high level of ethics, which becomes an example for
others to follow.

4. Organizational Consciousness

Leadership characteristics sometimes go beyond personal traits, and touch on areas such as organizational
consciousness or knowledge. These are leaders that understand what the organization wants to achieve,
and know how it can be accomplished. They create networks within the organization to help their groups
get work done, and are just as adept at breaking down organizational barriers to progress.

5. Confidence

Leaders need to carry themselves with confidence, and should not be afraid to take ownership for both
popular and unpopular decisions. They must be able to learn from criticisms, and be often acutely aware
of their own shortcomings. Confident leaders are able to maintain a calm demeanor even during
emergencies, and this can be contagious when it needs to be.

6. Flexibility

Another important characteristic of leaders are their ability to remain flexible, and adapt their leadership
style to meet the demands of the current work environment. They must be able to work with others to
meet organizational goals, and shift focus as necessary.

7. Creativity Skills

Leaders demonstrating creativity skills are able to develop innovative solutions to old problems. The
diversity they build in their organizations helps them to develop more comprehensive answers to routine
questions. Creative leaders are able to translate technical information into solutions that are understood
by everyone.

8. Achieving Results

Leaders just do not set the example for others to follow. They also play a big role in achieving the goals
of the organization. Through their leadership skills, they maintain a high level of performance in their
organizations, and they are able to help keep their workforce motivated even when faced with a seemingly
impossible situation.

Since they have a deep understanding of what an organization needs to accomplish, they are able to quickly
identify and solve the important objectives of an organization.

Leadership is much more complex than merely earning a high-status position in a company, and the ability
to order people to do things. It is a participative journey that the leader must be willing to walk with others.

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It is a skill that’s acquired over a lifetime, and these characteristics are something we can practice about
every day of our life. A great leader is one who learns from his mistakes

TASKS OF LEADERSHIP

The principal tasks of leadership are presented below:

1) To recognize that people differ in their motivational pattern.

2) To gain an understanding of group dynamics.

3) To create an environment that produces convergence of individual goals and organizational goals.

4) To stimulate and inspire employees as individuals and group members to make their optimum
contribution to organizational efficiency and effectiveness.

5) To make sense of changing environment, interpret it to employees and redirect their efforts to
adapt to changing situation.

APPROACHES OF LEADERSHIP

The main approaches of leadership are:

1) The trait approach.

2) Approaches based on the use of authority.

3) Likert’s approach.

4) The managerial grid approach.

5) The path-goal approach.

6) The contingency approach.

7) The continuum approach.

The Trait Approach

The trait approach aims at identifying some unique qualities that would distinguish more effective
managers from less effective managers.

The Use of Authority Approach

One approach classified managers as democratic, authoritarian and lassiez-faire. The Ohio State
University studies identified leadership on two orthogonal dimensions, viz., consideration and initiation.
The University of Michigan studies distinguished between production oriented and employee oriented
leaders on a simple dimension.

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Likert System Approach

There are mainly four types of approach. System I is Exploitative Authoritarian system, System II is
Benevolent Authoritative system, System III is Consultative and System IV is Participative group
leadership. The system IV is most effective for employee need satisfaction as well as optimum
organizational performance.

Managerial Grid Approach

Leadership style in on a grid with 9-point on the horizontal axis and 9-point on vertical axis. Horizontal
axis indicates “Concern for production” and vertical axis indicates “ concern for people”.

We can say 1, 1 leadership style is impoverished management with minimum concern for production and
minimum concern for people; 9,1 style leader indicates maximum concern for production and minimum
concern for people. We can further say that 1,9 style indicates minimum concern for production and
maximum concern for people. 9,9 style is most effective because it indicates maximum concern for
production and maximum concern for people. In this context it can be said that 5,5 style is recognized as
mid-of-the-road style.

Path-Goal Approach

Leader’s effectiveness depends on his ability to provide opportunities for employee need satisfaction and
make need satisfaction contingent on performance effectiveness.

Contingency Approach

There are mainly two kinds of behaviour – (i) task-oriented and (ii) people and interpersonal-oriented.
What kind of leader will succeed depends on the three situations mainly:

• Leader’s personal relationship with group members.

• Formal authority of the leader and

• Degree of task structure.

Task oriented leaders will be effective when situation is very favourable or very unfavourable. In
intermediate situations, people and inter-personal oriented leader will be effective.

Continuum Approach

There are mainly seven types of leader’s behaviour on a continuum. At one end of the continuum, the
leader has almost full freedom to make decision and at the other end subordinate group has it. In the
middle, both have equal freedom when leader presents tentative decisions subject to change after non-
manager input. Mainly the choice of leadership style depends on the situation. On the other hand, manager
consider three following factors, viz.,
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• forces within himself,

• forces in the subordinate and

• forces in the situation.

An organization may choose any approach considering the above mentioned

HISTORICAL EVOLUTION OF THE LEADERSHIP CONCEPT

If presupposition is utilized where differing ideals of leadership are at least in part a product of
their time, then one needs parameters defined within the context of the time in which these theories arose.
King viewed evolution as a set of ideals that continually evolved without reference to historical periods
(King, 1990). While an appropriate and interesting approach, a historical timeframe must, at the very least
be acknowledged. We are a product, in some fashion, of the time and place in which we exist. Northouse
also proposed a view from a year to year approach utilizing a different time frame (Northouse, 2015).

The Old School Of Thought

Great man
The nascent field of leadership study began with what has been coined as the “Great Man Theory”
(Malakyan, 2014). This theory presupposes that leaders are born to lead (Malakyan, 2014). According to
early adherents of this theory, certain men (women at the time were not part of the research due to the
pervasive gender discrimination and views of the time) were born with innate characteristics that destined
them to lead (Johns & Moser, 1989). Researchers examined ancient and past leaders such as Napoleon,
Genghis Khan, Alexander the Great, and others (King, 1990). Their leadership assumed a certain born
ability to lead (Johns & Moser, 1989). Individuals were counseled that to be a leader, one needs to emulate
the historically great leaders of our ancient past (King, 1990). Obviously, this theory had several problems,
not the least of which is any empirical data to prove the validity of the Great Man. Further, a certain bias
inherently exists. Who decides out of the sum of human history who is a great leader, and who is not a
great leader? Interestingly enough, one can still find the “Art of War” by Sun Tzu on bookshelves.
Trait
Trait theory was born out of the early Great Man theory. Trait theory was an extension of the Great Man
theory in an attempt to provide an early framework for leadership study (Malakyan, 2014). Trait theorists
surmised that certain qualities were needed, such as: high energy, integrity, competence of their area of
expertise, intelligence, and faith, among others (Johns & Moser, 1989). Trait theory was written in
generalities of traits that were viewed to be common with great leaders. Like the Great Man theory, the
trait model allowed for no room for an individual to have any hope of becoming a leader. One was either
born a leader or they were not (Malakyan, 2014). The trait approach failed for the same reasons as did its
father theory, the Great Man. There was simply no empirically viable evidence to support the theory

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(Johns & Moser, 1989). These early theories were not situational. They existed in a vacuum and did not
account for the situation or circumstances in which leaders found themselves. These theories suggest that
leaders are pre-determined.
Interregnum period
There is no finite line to define when one period of leadership theory ends and where another begins. In
the dark recesses of academia, there are still probably individuals pining for the simplistic view of the
Great Man. As a society, we sometimes ascribe this theory to certain leaders especially in times of great
conflict and turmoil. Research evolves even in leadership. The idea of power and persuasion are no
different (King, 1990). With the failings of the Great Man and Trait Theory acknowledged, researches
turned to the study of power. The focus of this area was on the amount of power acquired by a leader and
the way the power was utilized to influence or otherwise persuade those subordinated to him (King, 1990).
This theory failed for the same reason as all other prior theories. Though the power theory ignores the
leader’s personality, there is a lack of empirical data to allow for justification of this theory (Johns &
Moser, 1989).
Modern research acknowledges that there is about a limit of 150 subordinates that can be led utilizing a
theory such as the Great Man or power theories (Ronay & Vugt, 2014). Beyond this number, leaders
would resort to the use of coercion to maintain control, which is not acceptable in our culture (Ronay &
Vugt, 2014). This theory was proposed during the years surrounding World War II. The cataclysmic
events and seismic shifts in the world order cannot be disregarded in the development of this theory.
People searched for strong leaders and found them in the likes of Churchill, Roosevelt, Stalin, Mao, and
others.

Post-war years until the 1980s

A survey of research during this extended period saw an explosion of new theories. The development of
any leadership theory can be said to be dependent on the context, both historical and cultural, in which
they develop (Middlehurst, 2008). The rapid growth of the United States following World War II and the
country’s presence both commercially and culturally cannot be ignored. This period saw the rise of
national and multi-national corporations employing thousands of employees. The cult of personality that
was promoted under the Great Man and other earlier theories could simply not support an adequate
understanding of leadership.

Behavior
The behavior theorists of leadership examined the actions of the leader as opposed to their personality
traits (King, 1990). The initial view of behavior theory is that while the leader focused on accomplishing
the task, he or she had concern and an understanding of group cohesiveness as well as the individual
members of the group (King, 1990). Studies in this early time of behavior research focused on a factor

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analytic procedure for conducting research (Johns & Moser, 1989). This theory evolved into the well-
known Theory X and Theory Y views of leadership. Theory X presupposed that 1) Individuals disliked
their work; 2) They needed to be controlled or else they would not work; and 3) Most, if not all people
wanted job security as opposed to responsibility (Northouse, 2015). Theory Y was in direct opposition to
Theory X (King, 1990). Theory Y proposed that 1) Individuals generally liked their work; 2) Individuals
are self-motivated and do not require any coercion; and 3) Individuals crave responsibility and will readily
accept it (Northouse, 2015). A large amount of research was conducted regarding behavior theory. The
results of such studies were not always consistent with these theories. (King, 1990).
The behavior studies of leadership were a step forward in distancing researchers away from the
unsupported earlier theories. There was copious amounts of data and studies in behavior. Unfortunately,
there were still elements that were not considered. First and foremost, these studies of leadership existed
in a vacuum where there was no consideration for subordinates and their role (Malakyan, 2014).
Furthermore, the behavior studies ignored the situation and environment of the leader.

Situation and contingency

To recognize the role the environment played in the leader-subordinate dynamic, the situational theory
was added to the mix. There was finally recognition that certain environmental factors must be taken into
consideration (King, 1990). For example, the task itself as well as social status of all parties and nature of
the working environment were all considerations in the research (Bass, 1960). This theory recognized the
possibility that the leader mattered less than the environment in which the leader-subordinate dynamic
occurred (King, 1990). Leadership was becoming separated from the individual as a leader. Leadership
was more a function or process by which the larger organization could accomplish its goals (Middlehurst,
2008). There was also a branch of this situational approach to address the social status of the leader and
the subordinates (King, 1990). There was finally provable recognition that a leader had to adapt to the
situation in which he or she found themselves (Johns & Moser, 1989). The ability to adapt resulted in
more successful leaders (Johns & Moser, 1989).
The acknowledgement of adaptability as a trait led to a renaissance in the view of leadership. This area of
study has been termed contingency (King, 1990). Successful leadership was viewed as hinging on factors
such as personality, behavior, influence and the situational environment (King, 1990). Leadership under
a contingency approach is fluid and ever changing to the situation (Ronay & Vugt, 2014). The style of
leadership was given great importance. (Malakyan, 2014).
Path-Goal leadership is an offshoot of the contingency approach (King, 1990). The roles of leader and
subordinate remain strictly delineated with the leader directing and the subordinate following (Malakyan,
2014). Under a path-goal model, the leader directs the subordinates in accomplishing the goals of the
organization while working with subordinates to overcome obstacles to achieve that goal (Northouse,
2015). The normative approach was another off shoot of the contingency theory. Under this approach, a

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leader was viewed as most effective when he or she performed a differentiated diagnosis of the situation
to determine the best course of action (King, 1990).
Leadership in the modern era
Having journeyed though the development of leadership theories from the 19 th century into the 20th
century, it should be noted here that some theories have not been completely addressed herein. However,
they are no less important. An integral theme of all leadership theories from the past into a majority of the
present day is that they are focused squarely on the leader and the qualities that give rise to leadership.
Each theory has its place in this study of leadership. No one theory can address all the concerns regarding
leadership. The modern era though is a step in that direction. The modern era can be best characterized as
an early transition from the prior period to a more inclusive and flattened group structure.
Transformation
The theory of transformational leadership is the method by which leaders and followers mutually help
each other to increase motivation and ethical behavior (Miska & Mendenhall, 2018). Within this theory,
the burden of leadership rests upon all individuals in the group working towards a common goal (King,
1990). Change and adaptability are the hallmarks of transformative leadership (Johns & Moser, 1989).
Some researchers argue that effective transformative leadership requires charismatic leadership (King,
1990). Leaders must create a vision within this construct, and this vision needs to be conveyed by
hopefully a charismatic leader who can inspire others (King, 1990). Charismatic leaders are viewed by
Vugt as the exception rather than the rule in today’s society (Ronay & Vugt, 2014). Furthermore,
charismatic leadership creates an issue with up and coming theories. Under a more follower focused view
of leadership, charisma requires followers to adapt to the leader rather than giving importance to the
followers (Malakyan, 2014).

Authentic leadership
Appropriately named, authentic leadership focusses on the authenticity of the person in charge as well as
their actual leadership (Northouse, 2015). Still in the early phases of development, this leadership style
has many accepted definitions concentrating on the diverse aspects it embodies. Authentic leadership
draws from psychological positivism (Duignan, 2014). In other words, leaders and followers should focus
on positive traits as opposed to negative traits. Authentic leadership requires and necessitates an
organizational structure that is highly developed (Miska & Mendenhall, 2018). An authentic leader is one
who treats his followers with respect and shows reliability and consistency in thoughts, words and actions
(Duignan, 2014). Furthermore, leadership under authentic principles is far different from where this
research journey began. The theories are moving towards leadership being a social construct that
integrates all aspects of group dynamic and the environment and other non-tangible factors (Middlehurst,
2008).

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Servant leadership
Servant leadership is another approach arising from the transformative approach. The servant approach
emphasizes caring of subordinates (Northouse, 2015). In this context, the leader focuses more on the needs
of the follower (Northouse, 2015). The needs of the follower take priority over the needs of the
organization (Miska & Mendenhall, 2018). Some researchers have suggested that servant leadership
allows opportunities for followers to rise to the level of leaders (Malakyan, 2014). Further, if leadership
is considered a function in the modern era, then the leader and follower roles should be interchangeable
as the situation dictates (Malakyan, 2014).

The future of leadership principles and research

The view of the effective leader has changed markedly over time. The Great Man can no longer be found.
There is no single charismatic leader using power to lead others. Leadership is a process that is a function
of the individuals and the environment. With the development and growth of the study of leadership there
is a group that is still historically left out of leadership research. The subordinate, also known as the
follower, has not been as extensively researched as the leader (Malakyan, 2014). Furthermore, there is a
new approach that examines the context of leadership according to Darwinian principles of natural
selection (Ronay & Vugt, 2014). These are exciting avenues and future directions in leadership.

Follower based leadership

If we hold true that the leader and leadership are not one and the same, then one must recognize the
leadership qualities of the follower. A leader is an individual while leadership is a function shared between
leaders and followers who assume a measure of collective responsibility (Middlehurst, 2008). A leader
exists through the existence of those that follow him or her (Malakyan, 2014). A common theme
highlighted by Malakyan is that many of the leadership models the researcher’s explored are viewed as
static models. Regardless of whether one looks at leadership from a trait-based approach or servant
approach, there exists a leader and a follower (Malakyan, 2014).
The approach coined by researchers in this area is Leader Follower Trade (LFT) (Malakyan, 2014). Under
this approach, the leader and follower are no longer divided. Within the Theory X approach, the leader
had the power, and the goal was to get the most out of a subordinate that was disinterested (Northouse,
2015). The leader is above the follower in a set hierarchical construct. The very structure of leadership in
the United States is vertical with varying levels of management performing the functions of a leader
(Ronay & Vugt, 2014). The LFT approach is an overlay to other leadership theories. The values, beliefs,
ideas and influence of both leaders and followers flow freely on an equal level (Malakyan, 2014). Instead
of a one-way flow of information from the leader to the follower, a two-way circular flow is created where
the free exchange of ideas can take place (Malakyan, 2014). Malakyan and other proponents of LFT
highlight two important limitations to success of this approach: 1) Leaders and followers may not want

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the free-flowing exchange of ideas and 2) The competencies required for the interchangeability of leader
and follower may not exist (Malakyan, 2014).
Evolutionary approach to leadership
The evolutionary approach to leadership is novel and marries Darwinian theories with leadership
principles. Under the Evolutionary Leadership Theory (ELT), leadership is an adaptive behavior that has
been evolving in the human psyche (Kenney, 2012). While Darwin’s work was primarily in adaptive
physical characteristics, Vugt argued that our brains and very psyche fall under a Darwinian theory (Ronay
& Vugt, 2014). If our bodies have adapted and are subject to natural selection, then it is logical that our
brains are subject to natural selection (Kenney, 2012). Accordingly, the content within our brains such as
our behavior, mentality, emotional state, reaction to stimuli have adapted through natural selection over
time (Ronay & Vugt, 2014).
Vugt and his colleagues have studied peoples in southern Africa and Tanzania to gain anthropological
knowledge of behaviors of our ancestors (Ronay & Vugt, 2014). Within these cultures, leadership is fluid
and there is no permanent or semi-permanent leader (Ronay & Vugt, 2014). Leadership is fluid,
exchangeable, and task oriented (Ronay & Vugt, 2014). This is like the team leadership approach, where
ad hoc teams are created with differing leaders depending on the circumstances (Malakyan, 2014). Vugt
suggested that under Darwinian Theory, the word leadership does not exist (Ronay & Vugt, 2014). Rather,
the concept of dominance takes hold to explain how one rises to a dominant level through power,
negotiation, and persuasion (Ronay & Vugt, 2014).
As discussed in the beginning, the word leadership did not enter our vocabulary until the late eighteenth
century (King, 1990). Perhaps when dominance is viewed in the realm of behavior, the concept of
leadership is being examined. This is a novel approach as it provides a life science explanation for certain
actions undertaken by leaders.
ORGANISATION POWER
Organizations are made up of individuals that exercise greater or lesser degrees of power. Sometimes,
authority stems from a person's title in the organization, or from specialized knowledge and expertise.
Others may exercise power through interpersonal relationships or the force of their personality. And still
others gain influence through an ability to grant access to important resources.
Legitimate or Positional Power

Legitimate power is also known as positional power. It's derived from the position a person holds in an
organization’s hierarchy. Job descriptions, for example, require junior workers to report to managers and
give managers the power to assign duties to their juniors.

For positional power to be exercised effectively, the person wielding it must be deemed to have earned it
legitimately. An example of legitimate power is that held by a company's CEO.

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Expert Power Derived from Possessing Knowledge

Knowledge is power. Expert power is derived from possessing knowledge or expertise in a particular area.
Such people are highly valued by organizations for their problem solving skills. People who have expert
power perform critical tasks and are therefore deemed indispensable.

The opinions, ideas and decisions of people with expert power are held in high regard by other employees
and hence greatly influence their actions. Possession of expert power is normally a stepping stone to other
sources of power such as legitimate power. For example, a person who holds expert power can be
promoted to senior management, thereby giving him legitimate power.

Referent Power Derived from Interpersonal Relationships

Referent power is derived from the interpersonal relationships that a person cultivates with other people
in the organization. People possess reference power when others respect and like them. Referent power
arises from charisma, as the charismatic person influences others via the admiration, respect and trust
others have for her.

Referent power is also derived from personal connections that a person has with key people in the
organization's hierarchy, such as the CEO. It's the perception of the personal relationships that she has that
generates her power over others.

Coercive Power Derived from Ability to Influence Others

Coercive power is derived from a person's ability to influence others via threats, punishments or sanctions.
A junior staff member may work late to meet a deadline to avoid disciplinary action from his boss.
Coercive power is, therefore, a person's ability to punish, fire or reprimand another employee. Coercive
power helps control the behavior of employees by ensuring that they adhere to the organization's policies
and norms.

Reward Power and Ability to Influence Allocation of Incentives

Reward power arises from the ability of a person to influence the allocation of incentives in an
organization. These incentives include salary increments, positive appraisals and promotions. In an
organization, people who wield reward power tend to influence the actions of other employees.

Reward power, if used well, greatly motivates employees. But if it's applied through favoritism, reward
power can greatly demoralize employees and diminish their output.

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Leaders in business exert power over the people under their authority in the workplace. Yet not all power
is the same – and it's if used improperly, it can be detrimental to a leader's overall position. Psychologists
John French and Bertram Raven created a list of five types of social power that affect relationships,
including those in business. Learning which types of power can positively and negatively influence people
can give both leaders and employees insight into workplace dynamics.

Legitimate or Titular Power

Legitimate power is sometimes also called titular power, referring to the official title the person may hold.
Within the organizational structure of a business, those with a higher title hold more standing over those
with a less significant one or no title at all. For example, a department director has more power than a
manager but less than a vice president.

Individuals with this power must be careful to operate so those under them come to respect them and
respond positively. Those who abuse this power could be removed from their positions.

The Use of Coercive Power

When a leader uses threats or punishments to manipulate the behavior of the workforce, he is using
coercive power. A manager may force an employee to work long hours to meet a project deadline and
threaten to fire the worker or give a poor performance review if expectations are not fulfilled. In many
ways, a person who uses this type of power functions as the office bully and, therefore, will not gain the
respect and loyalty of those under his influence.

Motivating with Reward Power

Conversely, leaders can take a more positive approach by using reward power. This approach is used to
motivate workers by offering them incentives to work harder or faster. Rewards may take the form of a
pay increase or bonus for reaching new production levels, or a promotion or special award for achieving
a sales goal.

Workers become invested in their jobs, because they directly and personally benefit beyond just their
salaries. Therefore the company will reap rewards as well.

The Use of Referent Power

An individual holds referent power when people enjoy being around them or even desire to be like them.
Celebrities and leaders with lots of charisma tend to exude this power. They can exert influence because
people are eager to give them what they want, sometimes even because they are simply nice. Someone

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with this ability can easily use it to her advantage by coupling it with coercive power to manipulate
employees to do her bidding.

The Value of Expert Power

When someone has special knowledge or skills in an area, he is often called an expert. In the workplace,
an employee will stand out if he has a special skill or area of expertise, giving him a certain level of
importance. For example, if he is the "go to" person for fixing computer issues, he may be viewed as
especially valuable among the staff. Similarly, those with advanced training or specialized degrees are
considered experts in their field and therefore receive a higher level of respect than those with less
experience.

Additional Types of Power: Informational Power

Five years after French and Raven wrote their description of these five types of power, French amended
the work by adding a sixth: informational power. If a person has access to certain information that others
do not possess, she holds a sense of power over the others. She is the one "in the know" and will be sought
to provide insight and guidance in areas where others have no knowledge.

However, once this information is shared, the person's power may diminish unless she is able to sustain
herself as a source of continual new information. This power differs slightly from expert power in that is
limited in scope and can be lost once others have the same information.

Additional Types of Power: Connection Power

Connection power is a seventh area that some psychologists have added to the list. It is closely related to
referent power, but different in that a person may have an advantage over others simply because of who
they know. If someone has a personal connection to a powerful or famous person, she may be able to get
things done or have access to decision makers when others do not. In business, networking is key to
making connections with decision makers and leaders who have influence.

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 CHAPTER TWO
Leadership Vs Management
A Comparison Of Management And Leadership
Leadership
There are many diverse definitions of leadership. Stogdill concluded that "there are almost as many
definitions of leadership as there are persons who have attempted to define the concept”. While Peter
Drucker sums up that: "The only definition of a leader is someone who has followers. To gain followers
requires influence but doesn't exclude the lack of integrity in achieving this” (Yukl, 1989). Some theorists
believe that leadership is no different from the social influence processes occurring among all members
of a group and others believe that leadership is everything someone is doing in order to lead effective. The
classic question if leaders are made or born is still concerning many researchers. Is it a charisma or
something that can be taught? The answer to this question varies. Although it is unexceptionable that
leading isn’t easy, leaders should have some essential attributes such as vision, integrity, trust, selflessness,
commitment, creative ability, toughness, communication ability, risk taking and visibility (Capowski,
1994).

Management
Some would define management as an art, while others would define it as a science. Whether management
is an art or a science isn't what is most important. Management is a process that is used to accomplish
organizational goals. that is, a process that is used to achieve what an organization wants to achieve. But
do leaders and managers have the same role? Can organizations have only leaders or only managers? A
well balanced organization should have a mix of leaders and managers to succeed, and in fact what they
really need is a few great leaders and many first-class managers (Kotterman, 2006)

Managers and Leaders: Are they different?

Managers are the people to whom this management task is assigned, and it is generally thought that they
achieve the desired goals through the key functions of planning and budgeting, organizing and staffing,
problem solving and controlling. Leaders on the other hand set a direction, align people, motivate and
inspire (Kotter, 2001). Other researchers consider that a leader has soul, the passion and the creativity
while a manager has the mind, the rational and the persistence. A leader is flexible, innovative, inspiring,
courageous and independent and at the same time a manager is consulting, analytical, deliberate,
authoritative and stabilizing (Capowski, 1994).

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 MANAGEMENT LEADERSHIP
• Planning and budgeting • Creating vision and strategy
• Keeping eye on bottom line • Keeping eye on the horizon
• Organizing and staffing • Creating shared culture and values
• Directing and controlling • Helping others grow
• Create boundaries • Minimize boundaries
• Focuses on objects – producing/selling • Focuses on people – inspiring and
goods and services motivating followers
• Based on position power • Based on personal power
• Acting as boss • Acting as coach, facilitator, servant.
• Emotional distance • Emotional connections (heart)
• Expert mind • Open mind (mindfulness)
• Talking • Listening (communication)
• Conformity • Non-conformity (courage)
• Insight into organization • Insight into self (integrity)
• Implementation of the leader’s vision • Articulation of an organizational vision and
and changes introduced by leaders, and the introduction of major organizational
the maintenance and administration of change; provides inspiration and deals with
organizational infrastructures. highly stressful and troublesome aspects of
the external environments of organizations.
• Focuses on the tasks (things) when • Focuses on the interpersonal relationships
performing the management functions of (people).
planning, organization, and controlling. • Establishes direction; develops a vision and
• Planning. Establishes detailed the strategies needed for its achievement.
objectives and plans for achieving them. • Innovates and allows employees to do the
• Organizing and staffing. Sets up job any way they want, as long as they get
structure for employees to do the job the results that relate to the vision.
way the manager expects it to be done. • Motivates and inspires employees to
• Controlling. Monitors results against accomplish the vision in creative ways.
plans and takes corrective action. • Makes innovative, quick changes that are
• Predictable. Plans, organizes, and not very predictable. Prefers change.
controls with consistent behaviour.
Prefers stability.
• Managers do things right. Leaders do the right things.
• Focus is on a short-term view, avoiding • The focus is on a long-term view, taking
risks, maintaining and imitating. risks, innovating, and originating.
• Maintains stability • Creates change

ROLE OF THE CONSTITUTION OF KENYA IN LEADERSHIP

Chapter 6 of the constitution contains the following sections and sub-section about role leaders:

1) 73. Responsibilities of leadership

2) 74. Oath of office of State officers
3) 75. Conduct of State officers
4) 76. Financial probity of State officers
5) 77. Restriction on activities of State officers
6) 78. Citizenship and leadership
7) 79. Legislation to establish the ethics and anti-corruption commission
8) 80. Legislation on leadership.

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73. Responsibilities of leadership

(1) Authority assigned to a State officer--

(a) is a public trust to be exercised in a manner that--

(i) is consistent with the purposes and objects of this Constitution;

(ii) demonstrates respect for the people;
(iii) brings honour to the nation and dignity to the office; and
(iv) promotes public confidence in the integrity of the office; and

(b) vests in the State officer the responsibility to serve the people, rather than the power to rule
them.

(2) The guiding principles of leadership and integrity include--

(a) selection on the basis of personal integrity, competence and suitability, or election in free and
fair elections;
(b) objectivity and impartiality in decision making, and in ensuring that decisions are not influenced
by nepotism, favouritism, other improper motives or corrupt practices;
(c) selfless service based solely on the public interest,demonstrated by--

(i) honesty in the execution of public duties;

and
(ii) the declaration of any personal interest that may conflict with public duties;

(d) accountability to the public for decisions and actions;

and
(e) discipline and commitment in service to the people.

74. Oath of office of State officers.

Before assuming a State office, acting in a State office, or performing any functions of a State office, a
person shall take and subscribe the oath or affirmation of office, in the manner and form prescribed by
the Third Schedule or under an Act of Parliament.

75. Conduct of State officers.

(1) A State officer shall behave, whether in public and official life, in private life, or in association with
other persons, in a manner that avoids--

(a) any conflict between personal interests and public or official duties;
(b) compromising any public or official interest in favour of a personal interest; or
(c) demeaning the office the officer holds.

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(2) A person who contravenes clause (1), or Article 76, 77 or 78 (2)--

(a) shall be subject to the applicable disciplinary procedure for the relevant office; and
(b) may, in accordance with the disciplinary procedure referred to in paragraph (a), be dismissed or
otherwise removed from office.

(3) A person who has been dismissed or otherwise removed from office for a contravention of the
provisions specified in clause (2) is disqualified from holding any other State office.

76. Financial probity of State officers.

(1) A gift or donation to a State officer on a public or official occasion is a gift or donation to the
Republic and shall be delivered to the State unless exempted under an Act of Parliament.
(2) A State officer shall not--

(a) maintain a bank account outside Kenya except in accordance with an Act of Parliament; or
(b) seek or accept a personal loan or benefit in circumstances that compromise the integrity of the
State officer.

77. Restriction on activities of State officers.

1) A full-time State officer shall not participate in any other gainful employment.
(2) Any appointed State officer shall not hold office in a political party.
(3) A retired State officer who is receiving a pension from public funds shall not hold more than two
concurrent remunerative positions as chairperson, director or employee of--

(a) a company owned or controlled by the State; or

(b) a State organ.

(4) A retired State officer shall not receive remuneration from public funds other than as contemplated in
clause (3).

78. Citizenship and leadership.

(1) A person is not eligible for election or appointment to a State office unless the person is a citizen of
Kenya.
(2) A State officer or a member of the defence forces shall not hold dual citizenship.
(3) Clauses (1) and (2) do not apply to--

(a) judges and members of commissions; or

(b) any person who has been made a citizen of another country by operation of that country’s law,
without ability to opt out.

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79. Legislation to establish the ethics and anti-corruption commission.

Parliament shall enact legislation to establish an independent ethics and anti-corruption commission,
which shall be and have the status and powers of a commission under Chapter Fifteen, for purposes of
ensuring compliance with, and enforcement of, the provisions of this Chapter.

80. Legislation on leadership.

Parliament shall enact legislation--

(a) establishing procedures and mechanisms for the effective administration of this Chapter;
(b) prescribing the penalties, in addition to the penalties referred to in Article 75, that may be
imposed for a contravention of this Chapter;
(c) providing for the application of this Chapter, with the necessary modifications, to public
officers; and
(d) making any other provision necessary for ensuring the promotion of the principles of leadership
and integrity referred to in this Chapter, and the enforcement of this Chapter

PROFESSIONAL BODIES
Whereas some Kenyans have expressed their aspirations to seek elective offices, such as to be the
president, governor, senator, or members of the national or county assemblies, there seems to be very little
debate about what is needed to vet those who are seeking these offices. The Chapter on Leadership and
Integrity, read together with the Chapter on Representation of the People, gives fair but firm principles,
which we could rely on to vet all candidates. This should be done from national to county levels. We
propose that before anyone appears on the ballot paper, they present the following 10 certificates or letters
of clearance to the Independent Electoral and Boundaries Commission (IEBC).

1) Tax compliance certificate.

2) Ethics and Anti-Corruption Commission.
3) Certificate of Good Conduct.
4) Chief Registrar of the Judiciary
5) Credit Reference Bureau Africa Limited.
6) Higher Education Loans Board.
7) Relevant/respective professional associations.
8) Kenya Counselling Association.
9) National Intelligence Service.
10) A joint letter from three public bodies (Commission for Administrative Justice, Kenya National
Commission on Human Rights and National Commission on Gender and Equality)

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1) Tax compliance certificate.
Without ranking, the first should be a Tax Compliance Certificate from the Kenya Revenue Authority.
This should be a clearance that these aspirants have paid all their taxes that are due, and also have not
participated in tax evasion. All those who seek these State Offices, should demonstrate that they are
committed to contribution of government revenue.
2) Ethics and Anti-Corruption Commission.
The second certificate should be from the Ethics and Anti-Corruption Commission, which should provide
a clearance that those seeking elective office have not participated in any fraud in the past and are not
under any investigations for both present and past scandals.
3) Certificate of Good Conduct.
The third clearance should be from the Criminal Investigations Department of the Kenya Police. The
“Certificate of Good Conduct” should be evidence that the persons vying to lead us, have no past criminal
records (in both their private and public lives) and are not undergoing present criminal investigation.
4) Chief Registrar of the Judiciary
Related to this certificate is a fourth clearance letter, which should be acquired from the Chief Registrar
of the Judiciary. This letter should inform us whether there is any ongoing criminal or civil case and the
nature of the cases. For example, we should know whether the aspirant has any civil or criminal case
involving some dishonesty to disclose interest to a private company or has simply stolen from it
respectively.
5) Credit Reference Bureau Africa Limited.
The fifth clearance should be acquired from the Credit Reference Bureau Africa Limited, which should
detail to us whether the aspirant has any financial delinquencies, has issued bounced cheques, has
fraudulent cases, or whether they have any legal suit. Indeed, we should know whether the aspirants have
inadvertently defaulted in repayment of bank loans or whether they have deliberately refused to pay such
loans.
6) Higher Education Loans Board.
The sixth clearance certificate should be from the Higher Education Loans Board, which should point to
us whether the aspirant has paid back the principal loan gotten from the body and the interest that accrued
from the college/university loan.
7) Relevant/respective professional associations.
The seventh certificate should be gotten from the relevant/respective professional associations, such as
accountancy, law, architecture or doctors associations, showing proof that the aspirants are paid-up
members and also, they have not committed any ‘professional crime’. For example, we may want to know
whether the so-called architect has been part and parcel of any of the collapsed buildings in Kenya or
elsewhere.

25
8) Kenya Counselling Association.
The eighth clearance should be to send the applicants to psychologists under the Kenya Counselling
Association to get a mental check-up, for purposes of knowing whether the aspirant suffers from any of
the stress disorders, mental imbalance, and so on. Indeed, there are instances where we have seen so-called
leaders do flip flops that are not explainable and not related to a normal human person. Just watch TV
news or programmes such Heka Heka, Bulls Eye or News Shot, which are evident of some pre-existing
mental problems with some of our leaders. Remember mental infirmity or incapacity is a ground for
removal from leadership, and so, lack of it should be a ground for candidacy.
9) National Intelligence Service.
The ninth certificate should be issued by the National Intelligence Service, which provides intelligence
material on individuals who are likely to sabotage our country either politically, economically, or socially.
We would know which aspirants are involved in illicit trade, such as import and sale of drugs, or those
who are dumping industrial or other waste (including dumping sub-standard goods) in our country.
10) A joint letter from three public bodies (Commission for Administrative Justice, Kenya
National Commission on Human Rights and National Commission on Gender and Equality)
The final certificate should be a joint letter from three public bodies (Commission for Administrative
Justice, Kenya National Commission on Human Rights and National Commission on Gender and
Equality) indicating the ‘public and human rights metre’ of the aspirant. These are public complaints
bodies, and if the aspirant has been accused of human rights abuses, including women’s human rights, or
is facing a probe about holding bank accounts outside the country, the aspirant should be blocked from
public office.

If these public institutions work effectively, efficiently and independently, then we should be able to lock
out cabals, charlatans, thieves and fraudsters among others from public office, as Kenya undertakes the
first general elections under this Constitution.

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 CHALLENGES OF LEADERSHIP
Corporate level
 Insecurity. Many people feel, at least some of the time, that they're not up to the tasks they face.
They may even believe that they're fooling people with their air of competence, when they know
they're really not very capable at all. Insecurity of that sort keeps them from being proactive, from
following their vision, from feeling like leaders. It can be crippling to both a leader and her group
or organization.
 Defensiveness. Also born of insecurity, defensiveness shows up most often as an inability to take
criticism (other people might catch on to the fact that you're as incompetent as you know you are),
and continuing hostility to anyone, even an ally, who voices it. Defensiveness often also includes
a stubborn resistance to change ideas, plans, or assumptions, even if they've been shown to be
ineffective.

 Lack of decisiveness. Sometimes it's hard to make a decision. You never know till later - and
sometimes not even then - whether you made the right decision. Maybe if you had a few more
facts... The reality is that leaders are called on to make decisions all the time, often with very little
time to consider them. It is important to have as much information as possible, but at some point,
you just have to make the decision and live with it. Some decisions are reversible, and some are
not, but in either case, it's important to learn to make a decision when necessary and understand
that living with the consequences is part of being a leader.
 Inability to be direct when there's a problem. Many people want so badly to be liked, or are so
afraid of hurting others, that they find it difficult to say anything negative. They may be reluctant
to tell someone he's not doing his job adequately, for instance, or to address an interpersonal
problem. Unfortunately, by letting these things go, they only make them worse, which makes them
still harder to address. It's essential to learn when firmness is necessary, and to learn how to
exercise it.
 Inability to be objective. Neither looking at situations through rose-colored glasses nor being
always on the edge of hysteria is conducive to effective leadership. Just as objectivity is important
in dealing with external issues, it's important to monitor your own objectivity in general. There's a
difference between being an optimistic individual and being unable to see disaster looming because
it's too painful to contemplate. By the same token, seeing the possible negatives in an apparently
positive situation is not the same as being paralyzed by the assumption that calamity lurks around
every corner. The inability to accurately identify the positive and negative in any situation and
react appropriately can create serious problems.
 Impatience - with others and with situations. It may seem, given the importance of decisiveness
and firmness, that patience is not a virtue a leader needs. In fact, it is perhaps the most important

27
 trait to develop. Situations do not resolve themselves instantly, and anyone who's ever been
involved in an organization knows that Rule #1 is that everything takes longer than you think it
will. People in unfamiliar situations need a while to orient themselves. Leaders who are impatient
may make rash decisions, may alienate staff members or volunteers or allies, and can often make
situations worse rather than better. It's hard to be patient, but it's worth the effort.

National Level
 Public criticism, especially uninformed criticism, of your group or mission.
 Flare-ups of others' interpersonal issues, either within the group or outside it.
 Crises, which could be tied to finances, program, politics, public relations (scandals), legal
concerns (lawsuits), even spiritual issues (loss of enthusiasm, low morale).
 Disasters. These are different from crises, in that, in a crisis, something important (usually
negative, but not always) seems to be happening, and you're trying to control the situation. In a
disaster, the worst has already happened, and you're trying to deal with that in some way.
 Opposition and/or hostility from powerful forces (business groups, local government, an
influential organization, etc.)
 A financial or political windfall. Sometimes an unexpected benefit can be harder to handle than a
calamity.
 Collaboration with another group or organization may call upon a leader to define clearly the
boundaries within which he can operate, and to balance the needs of his own group with those of
the collaborative initiative as a whole.
Family Level
Socio-cultural issues.
Balancing between work and family time.
Family neglect.
Family roles and obligations.
Money.
Coping With Challenges
 Be proactive
 Be creative
 Face conflict squarely
 Look for common ground
 Be objective
 Be collaborative
 Listen
 360-degree feedback

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  Look at what's going on around you
 Create mechanisms to review the vision
 Share the burden
 Find mutual support with those who share your experience
 Take time for yourself
LEADERSHIP THEORIES AND MODELS

In this section, examples of the different types of leadership theories will be discussed, namely trait
theories of leadership, behavioural leadership theories, contingency leadership theories, and integrative
leadership theories. The aim of this section is to provide the reader with a broad overview of the different
types of leadership theories and the way in which each theory explains and interprets leadership behaviour
and effectiveness. This will provide the reader with the necessary background and context for this study,
since the main purpose is to measure leadership behaviour and to demonstrate a model for leadership
development.

TRAIT THEORIES OF LEADERSHIP

The kind of traits studied in trait theories of leadership include personality, ability, motivation, power and
needs. A Trait can be defined as an inherent characteristic of a person while a competency can be defined
as ability of capability of a person to do something (Geddes & Grosset, 1998). In the earlier leadership
theories the focus seems to be more on the inherent traits of leaders while the focus of the more recent
leadership theories seems to be more on leadership competencies and behaviour. A possible reason for
this shift in focus may be because competencies and behaviour can change and can therefore be developed
while inherent traits of a person are difficult to change.
Achievement Motivation Theory
The Achievement Motivation Theory of David McClellan attempts to explain and predict behaviour and
performance based on a person’s need for achievement, power and affiliation.
David McClelland originally developed his Achievement Motivation Theory in the 1940s. He believes
that everybody has needs, and that our needs motivate us to satisfy them. Our behaviour is therefore
motivated by our needs. He further states that needs are based on personality, and are developed as we
interact with the environment. All people experience the need for achievement, power, and affiliation, but
to different degrees. One of these three needs (achievement, power and affiliations) tend to be dominant
in each of us, and motivates our behaviour (McClelland, 1960).

29
McClelland’s needs can be described as follows:
· Need for Achievement (n Ach)
According to McClelland (1960), this is the unconscious concern for excellence in accomplishments
through individual effort. Those with a strong need for achievement tend to have an internal locus of
control, self-confidence, and high-energy traits. People with a high need for achievement tend to be
characterized as wanting to take personal responsibility for solving problems. They are goal-oriented and
set moderate, realistic, attainable goals. They seek a challenge, excellence and individuality. They tend to
take calculated, moderate risks, they desire concrete feedback on their performance, and they are hard
workers. Those with high need for achievement think about ways in which to improve work performance,
about how to accomplish something unusual or important and about career progression. They perform
well in non-routine, challenging and competitive situations, while people with a low need for achievement
do not have the same characteristics.

· The Need for Power (n Pow)

According to McClelland (1960) the need for power is the unconscious need to influence others and to
seek positions of authority. Those with a strong need for power possess a trait for dominance, and tend to
be self-confident with high energy. Those with a strong need for power tend to be characterized as trying
to control situations, trying to influence or control others, enjoying competitiveness where they can win.
They resent the idea of losing and are willing to confront others. They tend to seek positions of authority
and status.
According to Nicholson (1998), people with a strong need for power tend to be ambitious and have a
lower need for affiliation. They are more concerned with getting their own way by for instance influencing
others, than about what others think of them. They tend to regard power and politics as essential for
successful leadership (Nicholson, 1998).

· The Need for Affiliation (n Aff)

According to McClelland (1960), the need for affiliation is the unconscious concern for developing,
maintaining, and restoring close personal relationships. People with a strong need for affiliation tend to
be sensitive to others. People with a high need for affiliation tend to be characterized as seeking close
relationships with others, wanting to be liked by others, enjoying a wide variety of social activities and
seeking to belong. They therefore tend to join groups and organizations. People with a high need for
affiliation tend to think about friends and relationships. They tend to enjoy developing, helping and
teaching others. They often seek jobs as teachers, in human resource management, and in other support-
giving professions. According to Nicholson (1998), those with a high need for affiliation are more
concerned about what others think of them than about getting their own way by, for example, influencing

30
others. They tend to have a low need for power and they therefore tend to avoid management roles and
positions because they like to be seen as one of the group rather than as its leader (Nicholson, 1998).
THEORY X AND THEORY Y
Douglas McGregor (1966) classified attitudes or belief systems, which he called assumptions, as Theory
X and Theory Y. Theory X and Theory Y explain and predict leadership behaviour and performance based
upon the leader’s attitude toward followers. Those with Theory X attitudes believe that employees dislike
work and must be closely supervised in order to carry out tasks. Theory Y attitudes believe that employees
like to work and do not need to be closely supervised in order to carry out tasks (McGregor, 1966).
Managers with Theory Y attitudes tend to have a positive, optimistic view of employees, and display a
more participative leadership style, based on internal motivation and rewards (Tietjen and Myers, 1998).
In 1966, when McGregor published his Theory X and Theory Y, most managers had Theory X attitudes
(Tietjen & Myers, 1998). More recently, the focus changed from management to leadership, leading to a
change from a Theory X attitude to a Theory Y attitude, as more managers started to use a more
participative leadership style (Tietjen & Myers, 1998).
A study of over 12,000 managers explored the relationship between managerial achievement and attitude
toward subordinates (Hall & Donnell, 1979). The managers with Theory Y attitudes were better at
accomplishing organizational objectives and better at tapping the potential of subordinates. The managers
with strong Theory X attitudes were far more likely to be in the low-achievement group (Hall & Donnell,
1979).
TRAIT THEORIES
The trait research has been reviewed on various occasions by different scholars e.g., Lord, De Vader and
Alliger (1988); Mann (1959); Stogdill (1948, 1974). The two reviews by Stogdill will be compared to
discover how conceptions about the importance of leader traits evolved over a quarter of a century.
Figure 4.1 – Leadership Traits

31
The traits listed in Figure 4.1 can be described as follows:

Dominance
According to Lord, De Vader and Alliger (1986) successful leaders want to take charge. However, they
are not overly controlling, nor do they use an intimidating style. Should a person not wish to be a leader
the chances are very good that he/she will also not be an effective manager, because the dominance trait
affects leadership as well as management roles.
High Energy
According to Bass (1990), leaders with high energy have drive and work hard to achieve goals. Leaders
with high energy also tend to possess stamina and tolerate stress well. High energy leaders are usually
enthusiastic and do not abandon hope easily. However, they are not viewed as pushy and obnoxious. They
tend to have a high tolerance for frustration, since they strive to overcome obstacles through preparation.
Self-confidence
According to House and Baetz (1979), self-confidence indicates whether a leader has confidence in his/her
judgment, decision-making, ideas and capabilities. Leaders who have confidence in their abilities tend to
foster confidence among followers. Through gaining their followers’ respect, leaders with a high level of
self-confidence influence their followers.
Locus of Control
According to Bass (1990), locus of control indicates to what extent a leader believes that he/she has control
over their behaviour and what happens to them. Leaders with an external locus of control believe that they
have no control over their fate and that their behaviour has little to do with their performance. Leaders
with an internal locus of control believe that they control their fate and that their behaviour directly affects
their performance. Leaders with an internal locus of control take responsibility for who they are, for their
behaviour and performance and for the performance of their organizational unit.
Stability
According to Howard and Bray (1988), leaders who display a high level of stability are emotionally in
control of themselves, secure, and positive. Leaders with a high level of self-awareness and a desire to
improve, achieve more than those who don’t. Effective leaders tend to have a good understanding of their
own strengths and weaknesses and they are oriented toward self-improvement rather than being defensive
(Howard & Bray, 1988).
Integrity
According to Cox and Cooper (1989) integrity refers to honest and ethical behaviour which is
characteristic of people who are trustworthy. Trustworthiness is an important factor in business success.
Trusting relationships are at the heart of profit-making and sustainability in the global knowledge-based
economy (Cox & Cooper, 1989).

32
Intelligence
According to Lord, De Vader and Alliger (1986), good leaders generally have above-average intelligence.
Intelligence refers to cognitive ability to think critically, to solve problems, and to make decisions.
However, intuition, also referred to as hidden intelligence, is just as important to leadership success
(Weintraub, 1999).
Flexibility
According to Zaccaro, Fotiand and Kenny (1991), flexibility refers to the ability to adjust to different
situations. Leaders must be able to adapt to the rapid changes in the business world. Without flexibility,
leaders would be successful only in situations that fit their style of leadership. Effective leaders tend to be
flexible and can adapt to different situations.
Sensitivity to Others
According to Pfeffer and Viega (1999), sensitivity to others refers to understanding group members as
individuals, what their viewpoints are and how best to communicate with them as well as how to
influence them. To be sensitive to others requires empathy, the ability to place oneself in another person’s
position – to see things from another’s point of view. In today's global economy, companies require
people-centred leaders who are committed to treat people as valuable assets.
According to Stogdill (1981), the trait profile reflected in Table 4.2 is characteristic of successful leaders:
Table 4.2
PERSONAL CHARACTERISTICS OF SUCCESSFUL LEADERS
Physical characteristics Personality Social characteristics
Activity Alertness Ability to enlist
Energy Originality, creativity cooperation
Social background Personal integrity, ethical conduct Cooperativeness
Mobility Self-confidence Popularity, prestige
Intelligence and ability Work-related characteristics Sociability,
Judgement, decisiveness Achievement drive, desire to excel interpersonal skills
Knowledge Drive for responsibility Social participation
Fluency of speech Responsibility in pursuit of goals Tact, diplomacy
Task orientation

SOURCE: Albanese, R. and Van Fleet, D.D. (1983).

33
BEHAVIOURAL LEADERSHIP THEORIES
According to the behavioural approach to leadership, anyone who adopts the appropriate behaviour can
be a good leader. Researchers on leadership behaviour who followed the behaviour approach to
leadership, attempted to uncover the behaviours in which leaders engage, rather than what traits a leader
possesses.
Leadership Style Theory
Kurt Lewin and his associates conducted studies at Iowa State University that concentrated on leadership
styles (Lewin, Lippett & White, 1939). They identified the following two basic leadership styles in their
studies:
Autocratic leadership style
The autocratic leader makes the decisions, tells employees what to do and closely supervises workers
(Lewin, et al 1939); (Likert, 1967).
Democratic leadership style
The democratic leader encourages participation in decisions, works with employees to determine what to
do and does not closely supervise employees. (Lewin, et al. 1939); (Likert, 1967).
Figure
LEADERSHIP CONTINUUM
(Autocratic) (Democratic)
Boss-centred Subordinate
centred
Leadership Leadership

Use of authority by manager

Area of freedom for subordinates

Manager makes Manager presents Manager presents Manager permits

decision and ideas and invites problem, gets subordinates to
announces it questions suggestions, makes function within
decision defined limits

SOURCE: Tannenbaum, R, & Schmidt, W. (1973). How to Choose a Leadership Pattern.

Harvard Business Review.

The boss-centred leadership style

Refers to the extent to which the leader takes charge to get the work done. The leader directs subordinates
by communicating clear roles and goals, while the manager tells them what to do and how to do it as they
work towards goal achievement (Likert, 1961).

34
The employee-centred leadership style
Refers to the extent to which the leader focuses on meeting the human needs of employees whilst building
relationships. The leader is sensitive to subordinates and communicates to develop trust, support, and
respect, while looking out for their welfare (Likert, 1961).
LEADERSHIP GRID THEORY
Blake and Mouton developed a two-dimensional leadership theory called "The Leadership Grid" that
builds on the work of the Ohio State and the Michigan studies (Blake & Mouton, 1985). Researchers rated
leaders on a scale of one to nine, according to the following two criteria: concern for people and concern
for results. The scores for these criteria were plotted on a grid with an axis for each criteria. The two-
dimensional leadership model and five major leadership styles are reflected in Figure 4.3.
Figure 4.3: The Leadership Grid

High 9 1,9
9,9
Country Club Management Team Management
Thoughtful attention to the
Interdependence through a
8
needs of people leads to a “common stake” in organization
comfortable, friendly work purpose leads to relationships of

7 environment. trust and respect.

5,5
People

6
Middle-of -the-road Management
Adequate organization performance is
5 possible through balancing the necessity to
for

get work done while maintaining the morale

Concern

of people at a satisfactory level.

4

Authority- compliance Management

3 Impoverished Management Efficiency in operations results from

Exertion of minimum effort to get arranging conditions of work in such a
required work done as appropriate way that human elements interfere to
2
to sustain organization membership. a minimum degree.
1,1 9,1

1 1 2 3 4 5 6 7 8 9
Low
Low Concern for Results High

SOURCE: Blake, R.R. & McCanse, A.A. (1991). Leadership Dilemmas – Grid Solutions .
Houston: Gulf. (Grid Figure: p.29).

35
FIEDLER’S CONTINGENCY LEADERSHIP THEORY
In 1951, Fiedler began to develop the first contingency leadership theory. It was the first theory to focus
on how situational variables interact with leader personality and behaviour. Fiedler called his theory
“Contingency Theory of Leader Effectiveness,” (House & Aditya, 1997). Fiedler believed that leadership
style is a reflection of personality (trait-theory orientated) as well as behaviour (behavioural-theory
orientated), and that leadership styles are basically constant. Leaders do not change styles, they change
the situation. The contingency leadership model is used to determine whether a person’s leadership style
is task or relationship orientated, and if the situation matches the leader’s style to maximise performance
(House & Aditya, 1997). Fiedler teamed up with J.E. Garcia to develop the Cognitive Resources Theory
based on the Contingency Leadership Theory (Fiedler & Garcia, 1987).
Leadership Continuum Theory and Model
Robert Tannenbaum and Warren Schmidt also developed a contingency theory in the 1950’s
(Tannenbaum & Schmidt, 1958). They concluded that leadership behaviour is on a continuum from boss-
centred to subordinate-centred leadership. Their model focuses on who makes the decisions. Tannenbaum
and Schmidt (1973) identified seven major styles from which the leader can choose. The leadership
continuum model is used to determine which one of the seven styles should be selected to suit the situation
in order to maximise performance.
According to Tannenbaum and Schmidt (1973), the leader must consider the following three forces or
variables before choosing the best leadership style for a particular situation:
Supervisor
The leader’s personality and preferred behavioural style, expectation, values, background, knowledge,
feeling of security and confidence in the subordinates should be considered in selecting a leadership style.
Based on personality and behaviour, some leaders tend to be more autocratic and others more participative.
Subordinates
The leadership style preferred by followers is based on personality and behaviour. Generally, the more
willing and able the followers are to participate, the more freedom of participation should be used, and
vice versa.
Situation (Environment)
The environmental considerations, such as the organization size, structure, climate, goals and technology,
are taken into consideration when selecting a leadership style. Managers on higher levels also influence
leadership styles. For example, if a senior manager uses an autocratic leadership style, the middle manager
may tend to follow suit.

36
Figure 4.4 : Leadership Styles

Autocratic Style
Participative Style
1 2 3 4 5 6 7
Leader makes Leader makes Leader Leader Leader Leader Leader
decision and decisions and presents ideas presents presents defines limits permits
announces it sells it to and invites tentative problem, and asks the followers to
to followers followers by followers’ decision invites followers to make ongoing
individually or explaining why it questions. subject to suggested make a decisions
in a group is a good idea (it change. solutions and decision within defined
without could also be in makes the limits
discussion (it writing) decision.
could also be
in writing).

One major criticism of this model is that how to determine which style to use, and when, is not clear
in the model (Yukl, 1998).
Path-Goal Leadership Theory
The Path-goal Leadership Theory was developed by Robert House, based on an early version of the
theory by M.G. Evans, and published in 1971 (House, 1971). House formulated a more elaborate version
of Evans’s theory, which included situational variables. House’s theory specified a number of situational
moderators of relationships between task and person-orientated leadership and their impact (House &
Aditya, 1997). House attempted to explain how the behaviour of a leader influences the performance and
satisfaction of the followers. Unlike the earlier contingency leadership models, House’s theory does not
include leadership traits and behaviour variables (House & Aditya, 1997).
The Path-goal Leadership Model can be used to identify the most appropriate leadership style for a
specific situation to maximise both performance and job satisfaction (DuBrin, 1998). According to the
Path-goal Leadership Theory, the leader is responsible for increasing followers’ motivation to attain
personal and organizational goals. Motivation can
SITUATIONAL LEADERSHIP MODEL
Paul Hersey and Ken Blanchard published the Life Cycle Theory of Leadership in 1969. In 1977 they
published a revised version called the Situational Leadership Model. Unlike the other contingency
theories, situational leadership is not called a theory by its authors, since it does not attempt to explain
why things happen (Hersey & Blanchard, 1969). The primary contingency variable of situational
leadership is the maturity level of the follower. Like the Path-goal Theory, situational leadership does not
have a leader variable, and the situational variable (task) is included within the follower variable because
it is closely related to follower maturity. Task is therefore not included within the model as a separate
variable (Hersey & Blanchard, 1969).

37
The situational leadership theory is used to determine which of four leadership styles (telling, selling,
participating, and delegating) matches the situation (followers’ maturity level to complete a specific task)
to maximize performance (Hersey & Blanchard, 1969).
INTEGRATIVE LEADERSHIP THEORIES
Weber’s Charismatic Leadership Theory
In 1947, Weber used the term charisma to explain a form of influence based on follower perceptions that
the leader is endowed with the gift of divine inspiration or supernatural qualities (Weber, 1947). Charisma
can be seen as a fire that ignites followers’ energy and commitment, producing results above and beyond
the call of duty (Klein & House, 1995). Charisma can be described as the influencing of followers resulting
in major changes in their attitudes, assumptions and commitment (Yukl, 1998). According to Yukl (1998),
charismatic leaders are more likely to come forward as leaders during times of great social crisis. They
are often instrumental in focusing society’s attention to the problem it faces by means of a radical vision
that provides a solution.
Burns’ Theory Of Transformational Leadership
Burns (1978, p.20) described transformational leadership as a process in which “leaders and followers
raise one another to higher levels of morality and motivation.” Transformational leaders appeal to higher
ideals and moral values of followers such as liberty, justice, equality, peace and humanitarianism. In terms
of Maslow’s (1954) needs-hierarchy theory, transformational leaders activate higher-order needs in
followers. Followers are elevated from their “everyday selves to their better selves”. According to Burns
(1978), transformational leadership may be exhibited by anyone in an organization in any type of position.
SERVANT-LEADERSHIP
Servant-leadership is an employee-focused form of leadership which empowers followers to make
decisions and keep control of their jobs. Servant-leadership is leadership that transcends self-interest in
order to serve the needs of others, by helping them grow professionally and emotionally (Daft, 1999).
The focus of servant-leadership is on empowering followers to exercise leadership in accomplishing the
organization’s goals. Traditional leadership theories emphasize the leader-follower structure, in which the
follower accepts responsibility from the leader and is accountable to the leader. The non-traditional view
of leadership however, views the leader as a steward and servant of the employees and the organization.
It is less about direction or controlling and more about focusing on helping followers do their jobs, rather
than to have followers help the managers do their jobs (Greenleaf, 1997).
Servant-leadership requires a relationship between leaders and followers in which leaders lead without
dominating or controlling followers. Leaders and followers work together in a mutually supportive
environment in order to achieve organizational goals. According to Greenleaf (1997) the key to servant-
leadership is based on the following four supporting values:

38
 · Strong teamwork orientation
Servant-leadership works best in situations where self-managed teams of employees and leaders work
together in formulating goals and strategies to deal with a changing environment and marketplace. The
leader’s role is less dominant and more supportive of the process.
· Decentralized decision-making and power
Servant-leadership is evident when authority and decision-making are decentralized down to where the
work gets done and employees interact with customers. Servant-leadership has a great chance to succeed
in an environment where employees are empowered and have a good relationship with their managers.
The absence of this value renders stewardship impossible.
· Equality assumption
Servant-leadership works best when there is perceived equality between leaders and followers. It is a
partnership of equals rather than a leader-follower command structure. The applicability of servant-
leadership is enhanced as leaders find opportunities to serve rather than manage. Honesty, respect and
mutual trust will be evident when equality prevails. These are values that enhance the success of
stewardship.
· Reward assumption
Servant-leadership places greater responsibility in the hands of employees. Servant-leaders are known not
for their great deeds, but for empowering others to achieve great deeds. Servant-leaders offer the best
chance for organizations to succeed and grow in today’s dynamic environment because these leaders do
not only lead, but also coach followers to do the leading. The strong focus on people is what encourages
followers to be more creative, energetic, and committed to their jobs.
EXEMPLARY LEADERSHIP THEORY
Kouzes and Posner (2002) discovered though their studies of leadership experiences that successful
leaders have certain behaviours in common. They developed a model of leadership based on this common
behaviour which they called (The Five Practices of Exemplary Leadership.”
The five practices of exemplary leadership identified by Kouzes and Posner (2002) are the following:
· Model the way
To effectively model the behaviours which are expected of others, leaders must first be clear about their
own guiding principles. Leaders must find their own voice and then they must clearly and distinctively
express their values.
· Inspire a shared vision
Leaders inspire a shared vision. They desire to make something happen, to change the way things are, to
create something that no one else has ever created before. Leaders breathe life into the hopes and dreams
of others and enable them to see the possibilities which the future holds.

39
 · Challenge the process
Leaders are pioneers – they are willing to step out into the unknown. They search for opportunities to
innovate, grow and improve. They learn from their mistakes as well as from their successes.
· Enable others to act
Leadership is a team effort. Exemplary leaders enable others to act. They foster collaboration and build
trust.
· Encourage the heart
Leaders encourage their followers to carry on despite setbacks. They build a strong sense of collective
identification and community spirit that can carry a group through exceptionally tough times.
CHAPER THREE

MONSTRATE AN UNDERSTANDING OF THE KEY CONCEPTS IN GOVERNANCE

Introduction

Corporate governance is a central and dynamic aspect of business. The term ‘governance’ is derived from
the Latin word gubernare, meaning ‘to steer’, usually applying to the steering of a ship, which implies that
corporate governance involves the function of direction rather than control. In fact, the significance of
corporate governance for corporate success as well as for social welfare cannot be overstated. Recent
examples of massive corporate collapse resulting from weak systems of corporate governance have
highlighted the need to improve and reform corporate governance at international level. In the wake of
Enron and other similar cases, countries around the world have reacted quickly by pre-empting similar
events dramatically.

40
Definitions

Corporate governance comprehends the framework of rules, relationships, systems and processes
within and by which fiduciary authority is exercised and controlled in corporations.

Corporate governance is the collection of mechanisms, processes and relations used by various
parties to control and to operate a corporation.

Objectives Of Corporate Governance

1. The motivation of value-maximizing decisions.

2. The protection of assets from unauthorized acquisition.

3. Use or disposition, and the production of proper financial statements (e.g., that meet the
legal requirements)

4. The purpose of corporate governance is to help build an environment of

5. To help build an environment of trust.

6. To help build an environment of transparency.

7. To help build an environment of accountability.

8. To foster long-term investment.

9. To ensure financial stability.

10. To encourage business integrity.

11. To support stronger business growth.

12. To ensure more inclusive societies.

What Are The 4 P's Of Corporate Governance?

That's why many governance experts break it down into four simple words:

1. People,
2. Purpose,
3. Process,and

41
 4. Performance.
Elements Of Corporate Governance

Keeping that definition in mind, here are the essential elements for effective corporate governance:

1. Director independence and performance.

2. A focus on diversity.
3. Regular compensation review and management.
4. Auditor independence and transparency.
5. Shareholder rights and takeover provisions.
6. Proxy voting and shareholder influence
Benefits Of Corporate Governance

1. Good corporate governance ensures corporate success and economic growth.

2. Strong corporate governance maintains investors' confidence, as a result of which,
company can raise capital efficiently and effectively.
3. It lowers the capital cost.
4. There is a positive impact on the share price.
Disadvantages Of Corporate Governance

1. Separation of ownership and management. The officials and executives who oversee a
company's internal affairs and make the bulk of its policies are not necessarily
shareholders.
2. Illegal Insiders' Trading.
3. Misleading Reports.
4. Regulation Costs.
The Context Of Governance
Governance As Process

In its most abstract sense, governance is a theoretical concept referring to the actions and processes
by which stable practices and organizations arise and persist. These actions and processes may
operate in formal and informal organizations of any size; and they may function for any purpose,
good or evil, for profit or not. Conceiving of governance in this way, one can apply the concept
to states, to corporations, to non-profits, to NGOs, to partnerships and other associations, to

42
business relationships (especially complex outsourcing relationships), to project teams, and to any
number of humans engaged in some purposeful activity.

Most theories of governance as process arose out of neoclassical economics. These theories build
deductive models, based on the assumptions of modern economics, to show how rational actors
may come to establish and sustain formal organizations, including firms and states, and informal
organizations, such as networks and practices for governing the commons. Many of these theories
draw on transaction cost economics.

Public Governance

There is a distinction between the concepts of governance and politics. Politics involves processes
by which a group of people (perhaps with divergent opinions or interests) reach collective
decisions generally regarded as binding on the group, and enforced as common policy.
Governance, on the other hand, conveys the administrative and process-oriented elements of
governing rather than its antagonistic ones. Such an argument continues to assume the possibility
of the traditional separation between "politics" and "administration". Contemporary governance
practice and theory sometimes questions this distinction, premising that both "governance" and
"politics" involve aspects of power and accountability.

In general terms, public governance occurs in three broad ways:

1. Through networks involving public-private partnerships (PPP) or with the collaboration of

community organisations;
2. Through the use of market mechanisms whereby market principles of competition serve to
allocate resources while operating under government regulation;
3. Through top-down methods that primarily involve governments and the state bureaucracy.
Private Governance

Private governance occurs when non-governmental entities, including private organizations,

dispute resolution organizations, or other third party groups, make rules and/or standards which
have a binding effect on the "quality of life and opportunities of the larger public." Simply put,
private—not public—entities are making public policy. For example, insurance companies exert a
great societal impact, largely invisible and freely accepted, that is a private form of governance in
society; in turn, reinsurers, as private companies, may exert similar private governance over their

43
underlying carriers. The term "public policy" should not be exclusively associated with policy that
is made by government. Public policy may be created by either the private sector or the public
sector. If one wishes to refer only to public policy that is made by government, the best term to
use is "governmental policy," which eliminates the ambiguity regarding the agent of the policy
making.

Corporate Governance

Corporate organizations often use the word governance to describe both:

1. The manner in which boards or their like direct a corporation

2. The laws and customs (rules) applying to that direction
Corporate governance consists of the set of processes, customs, policies, laws and institutions
affecting the way people direct, administer or control a corporation. Corporate governance also
includes the relationships among the many players involved (the stakeholders) and the
corporate goals. The principal players include the shareholders, management, and the board of
directors. Other stakeholders include employees, suppliers, customers, banks and other lenders,
regulators, the environment and the community at large.

The first documented use of the word "corporate governance" is by Richard Eells (1960, p. 108)
to denote "the structure and functioning of the corporate polity". The "corporate government"
concept itself is older and was already used in finance textbooks at the beginning of the 20th
century (Becht, Bolton, Röell 2004).

Global Governance

Global governance is defined as "the complex of formal and informal institutions, mechanisms,
relationships, and processes between and among states, markets, citizens and organizations, both
inter- and non-governmental, through which collective interests on the global plane are articulated,
right and obligations are established, and differences are mediated". In contrast to the traditional
meaning of "governance", some authors like James Rosenau have used the term "global
governance" to denote the regulation of interdependent relations in the absence of an overarching
political authority. The best example of this is the international system or relationships between
independent states. The term, however, can apply wherever a group of free equals needs to form a
regular relationship.

44
Governance Analytical Framework

The Governance Analytical Framework (GAF) is a practical methodology for investigating

governance processes, where various stakeholders interact and make decisions regarding collective
issues, thus creating or reinforcing social norms and institutions. It is postulated that governance
processes can be found in any society, and unlike other approaches, that these can be observed and
analysed from a non-normative perspective. It proposes a methodology based on five main
analytical units: problems, actors, norms, processes and "nodal points". These logically articulated
analytical units make up a coherent methodology aimed at being used as a tool for empirical social
policy research.

Nonprofit Governance

Nonprofit governance has a dual focus: achieving the organization's social mission and ensuring
the organization is viable. Both responsibilities relate to fiduciary responsibility that a board of
trustees (sometimes called directors, or Board, or Management Committee—the terms are
interchangeable) has with respect to the exercise of authority over the explicit actions the
organization takes. Public trust and accountability is an essential aspect of organizational viability
so it achieves the social mission in a way that is respected by those whom the organization serves
and the society in which it is located.

Environmental Governance

Governance in an environmental context may refer to:

 A concept in political ecology which promotes environmental policy that advocates

for sustainable human activity (i.e. that governance should be based upon environmental
principles).
 The processes of decision-making involved in the control and management of the
environment and natural resources.
The International Union for Conservation of Nature (IUCN), define environmental governance as
the "multi-level interactions (i.e., local, national, international/global) among, but not limited to,
three main actors, i.e., state, market, and civil society, which interact with one another, whether in
formal and informal ways; in formulating and implementing policies in response to environment-
related demands and inputs from the society; bound by rules, procedures, processes, and widely

45
accepted behavior; possessing characteristics of 'good governance'; for the purpose of attaining
environmentally-sustainable development."

Scope Of Corporate Governance

Corporate governance covers the following functional areas of governance:

1. Preparation of company’s financial statements: Financial disclosure is a very important and

critical component of corporate governance. The company should implement procedures
to independently verify and safeguard the integrity of the company’s financial reporting.
Disclosure of material matters concerning the organization should be timely and balanced
to ensure that all investors have access to clear, factual information.
2. Internal controls and the independence of entity’s auditors: Internal control is implemented
by the board of directors, audit committee, management, and other personnel to provide
assurance of the company achieving its objectives related to reliable financial reporting,
operating efficiency, and compliance with laws and regulations. Internal auditors, who are
given responsibility of testing the design and implementing the internal control procedures
and the reliability of its financial reporting, should be allowed to work in an independent
environment.
3. Review of compensation arrangements for chief executive officer and other senior
executives: Performance-based remuneration is designed to relate some proportion of
salary to individual performance. It may be in the form of cash or non-cash payments such
as shares and share options, superannuation or other benefits. Such incentive schemes,
however, are reactive in the sense that they provide no mechanism for preventing mistakes
or opportunistic behaviour, and can elicit myopic behaviour.
4. The way in which individuals are nominated for the positions on the board: The Board of
Directors have the power to hire, fire and compensate the top management. The owners of
a business who have decision-making authority, voting authority, and specific
responsibilities, which in each case is separate and distinct from the authority, and
responsibilities of owners and managers of the business entity.
5. The resources made available to directors in carrying out their duties: The duties of the
directors are the fiduciary duties similar to those of an agent or trustee. They are entrusted
with adequate power to control the activities of the company.

46
 6. Oversight and management of risk: It is important for the company to be fully aware of the
risks facing the business and the shareholders should know that how the company is going
to tackle the risks. Similarly the company should also be aware about the opportunities
lying ahead.
Participants To Corporate Governance

Corporate governance is concerned with the governing or regulatory body,

1. The CEO,
2. The board of directors and management.
3. Suppliers,
4. Employees,
5. Creditors,
6. Customers, and
7. The community at large.
Historical Perspective Of Corporate Governance

Table 1: Overview of the Evolution of Corporate Governance

Year Evolution of Corporate Governance

Globally

Pre The origin of corporate governance can be traced to the creation of the registered
1990 company under the Joint Stock Companies Act of 1844 (UK). This marked the beginning of
the modern corporation that separates control from ownership (Berle & Means, 1967)

Corporate governance frameworks began developing to protect firms from the actions of
professional managers with the passage of the Limited Liability Act of 1855 (UK) to protect
shareholders from debt beyond their investment (Parker et al, 2002).

1980’s Corporate governance gains prominence in the 1980s due to stock market crashes across
the world and inability of corporate governance frameworks to prevent corporate failures
(Francis, 2000)

1990’s Different corporate governance structures are adopted across the world.

 Countries that followed civil law (such as France, Germany, Italy, and Netherlands)
developed frameworks that focused on stakeholders (Solomon & Solomon, 2004)

47
  Countries that followed common law (such as USA, UK, Canada, Australia and New
Zealand) developed frameworks that focused on shareholders returns/interests
(Department of Treasury).

1997 Commonwealth Heads of Government develop the International Corporate Governance

Network to promote and coordinate research and development in corporate governance.

1999 Commonwealth Heads of Government establishes Commonwealth Association for

Corporate Governance (CACG), which developed CACG Guidelines – Principles for
Corporate Governance in the Commonwealth

1999 Global Corporate Governance Forum was developed by the World Bank Group and OECD.

Corporate Governance in Sub-Saharan Africa

1990’s The King’s Committee Report and Code of Practice for Corporate Governance in South
Africa published in 1994 stimulate corporate governance in Africa. South Africa, Ghana,
and Zimbabwe establish national institutional mechanisms to promote good corporate
governance. World Bank Group and Commonwealth Association provide training and
technical support to Botswana, Mali, Cameroon, Mauritania, Senegal, Sierra Leone, Tunisia,
Zambia, Gambia and Mozambique to establish national corporate governance mechanisms

1998, Regional conferences held in Kampala, Uganda in June 1998 and September 1999 to create
1999, awareness and promote regional cooperation in corporate governance.
2000
 June 1998 conference: there is a resolution that each member state should develop a
corporate governance framework and code of best practice, with particular emphasis on
harmonizing frameworks under the East African region by establishing a regional body
under East African Cooperation to promote corporate governance.  September 1999
conference: the June 1998 resolutions are re-affirmed and the need for good corporate
governance strengthened.

 Uganda establishes the Institute of Corporate Governance of Uganda to formulate a

national code of best practice for corporate governance.

 Tanzania organizes the East African Regional Workshop on corporate governance early in
the year 2000.

 In Kenya, the Private Sector Initiative for Corporate Governance continues to liaise with
Uganda and Tanzania towards the establishment of a Regional Center of Excellence in
Corporate Governance.

Corporate Governance In Kenya

1998, Consultative Corporate Sector seminars held in November 1998 and March 1999 resolves
1999 to establish a Private Sector Initiative for Corporate Governance charged with the
responsibility to formulate and develop a code for best practice for corporate governance
in the country; exploring ways of establishing a national body for corporate governance;

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 and coordinating developments in corporate governance in Kenya with other initiatives in
East Africa, Africa, and globally

October The Private Sector Initiative for Corporate Governance develops and adopts a national
1999 code of best practice for corporate governance to guide developments in Kenya

2002 The desire to institutionalize the principles of corporate governance in Kenya led to the
promulgation of the Guidelines on Principles of Corporate Governance for Public Listed
Companies in 2002 by the Capital Market Authority (CMA)

THEORY AND PRACTICE OF CORPORATE GOVERNANCE

There are four broad theories to explain and elucidate corporate governance. These are:

(i) Agency Theory;

(ii) Stewardship Theory;
(iii) Stakeholder Theory; and
(iv) Sociological Theory.
Agency Theory

Recent thinking about strategic management and business policy has been influenced by agency
cost theory, though the roots of the theory can be traced back to Adam Smith who identified an
agency problem (managerial negligence and profusion) in the joint stock company. The
fundamental theoretical basis of corporate governance is agency costs. Shareholders are the owners
of any joint stock, limited liability company, and are the principals of the same. By virtue of their
ownership, the principals define the objectives of a company. The management, directly or
indirectly selected by shareholders to pursue such objectives, are the agents. While the principals
generally assume that the agents would invariably carry out their objectives, it is often not so. In
many instances, the objectives of managers are at variance from those of the shareholders. For
instance, a chief executive may want to increase his managerial empire and personal stature by
using the company’s funds to finance an unrelated diversification, which could reduce long term
shareholder value. The shareholders and other stakeholders of the company, may not be able to
counteract this because of inadequate disclosure about such a decision and because the principals
may be too scattered or even not motivated enough to effectively block such a move. Such
mismatch of objectives is called the agency problem; the cost inflicted by such dissonance is the
agency cost. The core of corporate governance is designing and putting in place disclosures,

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monitoring, ‘oversight’ and corrective systems that can align the objectives of the two sets of
players as closely as possible and, hence, minimize agency costs.The main thrust of the agency
theory runs like this. In the modern corporation, in which share ownership is widely held,
managerial actions depart from those required to maximise shareholder returns. In agency theory
terms, the owners are principals and the managers are agents and there is an agency loss which is
the extent to which returns to the residual claimants, the owners, fall below what they would be if
the principals, the owners themselves, exercised direct control of the corporation. Agency theory
specifies mechanisms which reduces agency loss. These include incentive schemes for managers
which reward them financially for maximizing shareholder’s interests. Such schemes typically
include plans whereby senior executives obtain shares, perhaps at a reduced price, thus aligning
financial interests of executives with those of shareholders. Other similar schemes tie executive
compensation and levels of benefits to shareholders, returns and have part of executive
compensation deferred to the future to reward long-run value maximization of the corporation and
deter short-run executive action which harms corporate value.

Problems with the Agency Theory

Total control of management is neither feasible nor required under this theory. The underlying
assumption in the trade-off that shareholders make on employing agents is that they must accept a
certain level of self-interested behaviour in delegating responsibility to others. The objective of
agency theory is to check the abuse in this trade-off, but its limited success raises the question of
its utility as a theoretical model to promote corporate governance. Besides, in agency theory the
assumption is with the complexities of investor-board relationship in large organizations,
shareholders should have correct and adequate information to wield effective control. Equity
investors rarely get these and besides they rarely make clear their exact target returns, and yet
delegate authority to meet the target. It is also to be understood that in terms of controls, equity
investors hardly have sanctions over boards. Instead, they have to rely on self-regulation to ensure
that an orderly house is maintained.There are two broad mechanisms that help reduce agency costs
and hence, improve corporate performance through better governance. These are:

1. Fair and accurate financial disclosures: Financial and non-financial disclosures, which
relate to the role of the independent, statutory auditors appointed by shareholders to audit
a company’s accounts and present a ‘true and fair’ view of the financial health of the

50
 corporation. Indeed, the quality and independence of statutory auditors are fundamental to
achieve the purpose. While it is the job of the management to prepare the accounts, it is the
responsibility of the statutory auditors to scrutinise such accounts, raise queries and
objections (if the need arises), arrive at a true and fair view of the financial position of the
company, and report their independent findings to the board of directors and, through them,
to the shareholders and investors of the company.A company that discloses nothing can do
anything. Improving the quality of financial and non-financial disclosures not only ensures
corporate transparency among a wide group of investors, analysts and the informed
intelligentsia, but also persuades companies to minimise value-destroying deviant
behaviour. This is precisely why law insists that companies prepare their audited annual
accounts, and that these be provided to all shareholders and is deposited with the Registrar
of companies. This is also why a good deal of effort in global corporate governance reform
has been directed to improving the quality and frequency of disclosures.
2. Efficient and independent board of directors: A joint-stock company is owned by the
shareholders, who appoint directors to supervise management and ensure that it does all
that is necessary by legal and ethical means to make the business grow and maximise long-
term corporate value. Directors are fiduciaries of the shareholders, not of the management.
They are accountable only to the shareholders. ‘Independence’ has of late become a critical
issue in determining the composition of any board.
Stewardship Theory

The stewardship theory of corproate governance discounts the possible conflicts between corporate
management and owners and shows a preference for a board of directors made up primarily of
corporate insiders. This theory assumes that managers are basically trustworthy and attach
significant value to their own personal reputations. The market for managers with strong personal
reputations serves as the primary mechanism to control behaviour, with more reputable managers
being offered higher compensation packages. Financial reporting, disclosure and auditing are still
important mechanisms, but there is a fundamental presumption that these mechanisms are needed
to confim managements’ inherent trustworthiness.Stewardship theory can be reduced to the
following basics: The theory defines situations in which managers are not motivated by individual
goals, but rather they are stewards whose motives are aligned with the objectives of their
principles.

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Given a choice between self-serving behaviour and pro-organizational behaviour, a steward’s
behaviour will not depart from the interests of his/her organization.

Control can be potentially counterproductive, because it undermines the pro-organizational

behaviour of the steward, by lowering his/her motivation.

This emphasis on the responsibility of the board to shareholders in the Anglo-Saxon model of
corporate governance in terms of stewardship and trusteeship is nowhere better articulated than in
the Canadian guidelines. It is stated therein: ‘Stewardship refers to the responsibility of the board
to oversee the conduct of the business and to supervise management which is responsible for the
day-to-day conduct of the business. In addition, as stewards of the business, the directors function
as the catch-all to ensure no issue affecting the business and affairs of the company falls between
cracks.’ Similar views, though differently told, predominate in corporate governance guidelines of
many countries of the world.

The greatest barrier, however, to the adoption of stewardship mechanisms of governance lies in
the risk propensity of principals. Risk taking owners will assume that executives are pro-
organization and favour stewardship governance mechanisms. Where executives, investors cannot
afford to extend board power, agency costs are effective insurance against the self-interest
behaviours

Of course, these concepts of stewardship and trusteeship are not new. The sacred scriptures, both
in India and Christendom, emphasize the almost filial relationships between the rulers and the
ruled. Gandhiji too elaborated the concept of trusteeship to make Indian industrialists better
understand and appreciate their roles and responsibilities towards their employees. It is said in
many oriental societies including Japan, that an employer has been ordained by God to act as His
trustee to own and administer assets for the benefit of his employees.

Though the Agency and Stewardship Theories have something in common, there are certain basic
differences. The tables set out below summarize the main differences between the two theories.

Davis, Schoorman and Donaldson (1997) state that the owners-managers relationship depends on
the behaviour adopted respectively by them. Managers choose to act as agents or as stewards
according to certain personal characteristics and their own perceptions of particular situational
factors. Principals choose to create a relationship of one type or the other depending on their

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perceptions of the same situational factors and of their managers’ psychological mechanisms. The
following tables set out these variables and the differences between the two theories.

Shareholder Versus Stakeholder Approaches

While studying theories of corporate governance, it is common to distinguish between shareholder

and stakeholder approaches. Shareholder approaches argue that corporations have a limited set of
responsibilities, which primarily consist of obeying the law and maximizing shareholder wealth.
The basic argument is that corporations, by focussing on shareholder interests maximize societal
utility. The logic of this position goes back to the ability of the shareholder model to maximize
utility, however, is tenuous in that it is based on the assumption of perfect competition. To the
extent that the conditions of perfect competition are not in place, the argument falters. More
specifically, as deviations from the conditions of perfect competition increase (e.g. imperfect
markets, incomplete contracts, information asymmetries), after a certain point, corporations will
not be maximizing societal utility by merely pursuing shareholder interests. The shareholder
approach is logically most compatible with the Anglo-American model of corporate governance.

Table 1 Behavioural Differences

Agency Theory Stewardship Theory

Managers act as agents. Managers act as stewards.

Governance approach is materialistic, Governance approach is sociological and

psychological.

Behaviour pattern is Behaviour pattern is

• individualistic • collectivistic

• opportunistic • pro-organizational

• self-serving • trustworthy

Managers are motivated by their own objectives. Managers are motivated by the principal’s
objectives.

Interests of the Managers and principals differ. Interests of the managers and principals
converge.

The role of the management is to monitor and The role of the management is to facilitate and
control. empower.

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 Owners’ attitude is to avoid risks. Owners’ attitude is to take risks.

Principal-manager relationship is based on Principal-manager relationship is based on trust.

control.

Adapted from “Development of Corporate Governance System: Agency Theory Versus Stewardship
Theory in Welsh Agrarian Cooperative Societies”, by Alfonso Vargas Sanchez.

Table 2 Psychological Mechanisms

Agency Theory Stewardship Theory

Motivation revolves around Motivation revolves around

• lower order needs • higher order needs

• extrinsic needs • intrinsic needs

Social comparison is between compatriots. Social comparison is between principals.

There is little attachment to the company. There is great attachment to the company.

Power rests with the institution. Power rests with the personnel.

Adapted from “Development of Corporate Governance System: Agency Theory Versus Stewardship
Theory in Welsh Agrarian Coorperative Societies”, by Alfonso Vargas Sanchez.

Table 3 Situational Mechanisms

Agency Theory Stewardship Theory

Management philosophy is control oriented To To deal with increasing uncertainty and risk, the
deal with increasing uncertainty and risk, the theory advocates exercise of
theory advocates exercise of
• training and empowering people
• greater controls
• making jobs more challenging and motivating
• more supervisions

Risk orientation is done through a system of Risk orientation is done through trust.
control.

Time frame is short term. Time frame is long term.

The objective is cost control. The objective is improving performance.

Cultural differences revolve around Cultural differences revolve around

• individualism • collectivism

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 • large power distance • small power distance

Adapted from “Development of Corporate Governance System: Agency Theory Versus

Stewardship Theory in Welsh Agrarian Coorperative Societies”, by Alfonso Vargas Sanchez.

In contrast to shareholder approaches, stakeholder models of corporate governance argue that those
responsible for the governance of the corporation have responsibilities to parties other than
shareholders and that, any fiduciary obligations owed to shareholders to maximize profits might
be subject to the constraint of respecting obligations owed to such stakeholders.

Stakeholder Theory

The stakeholder theory of corporate governance has a lengthy history that dates back to 1930s.
The theory represents a synthesis of economics, behavioural science, business ethics and the
stakeholder concept. The history and the range of disciplines that the theory draws upon has led to
large and diverse literature on stakeholders. In essence, the theory considers the firm as an input-
output model by explicitly adding all interest groups—employees, customers, dealers, government
and the society at large—to the corporate mix.

The theory is grounded in many normative theoretical perspectives including the ethics of care,
the ethics of fiduciary relationships, social contract theory, theory of property rights, theory of the
stakeholders as investors, communitarian ethics, critical theory, etc. While it is possible to develop
stakeholder analysis from a variety of theoretical perspectives, in practice much of stakeholder
analysis does not firmly or explicitly root itself in a given theoretical tradition, but rather operates
at the level of individual principles and norms for which it provides little formal justification.
Insofar as stakeholder approaches uphold responsibilities to non-shareholder groups, they tend to
be in some tension with the Anglo-American model of corporate governance, which generally
emphasises the primacy of ‘fiduciary obligations’ owed to shareholders over any stakeholder
claims.

The stakeholder theory is often criticized, more often than not as ‘woolly minded liberalism’,
mainly because it is not applicable in practice by corporations. Another cause for criticism is that
there is comparatively little empirical evidence to suggest a linkage between stakeholder concept
and corporate performance. But there are considerable theoretical arguments favouring promotion

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of stakeholders’ interests. Managers accomplish their organizational tasks as efficiently as possible
by drawing on stakeholders as a resource. This is in effect a ‘contract’ between the two, and one
that must be equitable in order for both parties to benefit.

Criticisms of the Stakeholder Theory

The major problem with the Stakeholder Theory stems from the difficulty of defining the concept.
Who really constitutes a genuine stakeholder? There is an expansive list suggested by authors of
the theory, ranging from the most bizarre to include terrorists, dogs and trees, to the least
questionable such as employees and customers. Some writers have suggested that any one
negatively affected by corporate actions might reasonably be included as stakeholder, and across
the world this might include political prisoners, abused children, minorities and the homeless.
However, a more seriously conceived and yet contested list of stakeholders would generally
include employees, customers, suppliers, the government, the community, assorted activist or
pressure groups, and of course, shareholders. Some writers on the theory opine that where there
are too many stakeholders, ‘in order to clarify and ease the burden it places upon directors’ it is
better to categorize them as primary and secondary stakeholders. Clive Smallman, in his article
‘Exploring Theoretical Paradigms in Corporate Governance’ says: ‘The case for including both
the serious claimants and the more flippant are rooted in business ethics, in managerial morality
and in best practice in business strategy. However, whilst the inclusion of a wide range of interested
parties may be well-intentioned, in practice if directors (as agents) attempt to serve too many
principals they will fail to satisfy those who have a genuine claim on an organization.’

Further, Clive Smallman points out to another problem that stems from the Stakeholder Theory.
‘Relating to the range and diversity of stakeholders, some critics also accuse stakeholder theory of
being “superfluous”, by which they mean that the intent of the theory is better achieved by relying
on the hand of management to deliver social benefit where it is required.’

In the assessment of Clive Smallman, ‘the stakeholder model also stands accused of opening up a
path to corruption and chaos; since it offers agents the opportunity to divert wealth away from
shareholders to others, and so goes against the fiduciary obligations owed to shareholders (a
misappropriation of resources)’.5 Thus, the stakeholder model of corporate governance leads to
corrupt practices in the hands of managements with a wide option and also to chaos, as it does not

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differ much from the agency model, while increasing exponentially the number of principals the
agents have to tackle.

Sociological Theory

The sociological approach to the study of corporate governance has focussed mostly on board
composition and the implications for power and wealth distribution in society. Problems of
interlocking directorships and the concentration of directorships in the hands of a privileged class
are viewed as major challenges to equity and social progress. Under this theory, board
composition, financial reporting, disclosure and auditing are necessary mechanisms to promote
equity and fairness in society.

Characteristics of Good Governance

a. Participatory
b. Consensus oriented
c. Accountable
d. Transparent
e. Responsive
f. Effective & Efficient
g. Equitable and inclusive
h. Follows the rule of law

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 CHAPTER FOUR

APPLY THE GOVERNANCE FRAMEWORKS ELEMENTS IN A BUSINESS CASE

GOVERNANCE FRAMEWORK AND STRUCTURES

ROLES OF BOARD OF DIRECTORS – MEMBERSHIP & FUNCTIONS &

COMMITTEES OF THE BOARD

BOARD OF DIRECTORS:

Meaning of Directors

In general terms, a director is someone appointed to take responsibility for the policy formation
and control of a company because of particular ability and expertise in an industry. Directors advise
management of the company on behalf of the shareholders (the owners of the company). However,
the exact position of 'director' is hard to define, as no formal definition, either statutory or judicial,
of the term has been given. The judicial pronouncements have described them as

(i) agents,
(ii) trustees, or
(iii) managing partners.
Types of Directors

Various types of directors that can exist in a company are:

1. Ordinary Directors
Ordinary directors are also referred to as simple directors who attends Board meeting of a company
and participate in the matters put before the Board. These directors are neither whole time directors
nor managing directors.

2. Managing Directors
Managing Director is a director who, by virtue of an agreement with the company or of a resolution
passed by the company in general meeting or by its Board of directors or, by virtue of its
Memorandum or Articles of Association, is entrusted with substantial powers of management
which would not otherwise be exercisable by him, and includes a director occupying the position
of a managing director, by whatever name called.

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 3. Executive Directors
An executive director is a director who performs a specific role in a company under a service
contract which requires a regular, possibly daily, involvement in management. Such a director may
also be an employee of the company. This fact may create a potential conflict of interest which in
principle a director is required to avoid. To allow an individual to be both a director and employee
the articles usually make express provision for it, but prohibit the director from voting at a board
meeting on the terms of their own employment.

4. Non-executive Directors
A non-executive director does not have a function to perform in Notes a company's management
but is involved in its governance. They are subject to the same legal duties as executive directors.
In listed companies, corporate governance codes state that boards of directors are more likely to
be fully effective if they comprise both executive directors and strong, independent non-executive
directors.

5. Shadow Directors
According to company law, a director is a person who is responsible for the overall direction of
the company's affairs. This means any person occupying the position of director, by whatever name
they are called. A shadow director has also been defined as any person in accordance with whose
instructions the directors are accustomed to act. However this does not include professionals such
as accountants or solicitors. A person might seek to control a company as a director but avoid the
legal responsibilities of being a director. The law seeks to prevent this by extending several
statutory rules to shadow directors. Shadow directors are directors for legal purposes if the board-
of-directors is accustomed to act in accordance with their directions and instructions.

6. Additional Directors
Additional Directors are appointed by the Board between the two annual general meetings subject
to the provisions of the Articles of Association of a company. Additional directors shall hold office
only up to the date of the next annual general meeting of the company. Number of the directors
and additional directors together shall not exceed the maximum strength fixed for the Board by
the Articles.

7. Alternate Director

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An Alternate Director is a person appointed by the Board if so authorised by the Articles or by a
resolution passed by the company in the general meeting to act for a director called "the original
director" during his absence for a period of not less than three months from the State in which
meetings of the Board are ordinarily held. Generally, the alternate directors are appointed for a
person who is Non-resident Indian or for foreign collaborators of a company.

8. Professional Directors
Any director possessing professional qualifications and do not have any pecuniary interest in the
company are called as "Professional Directors". In big size companies, sometimes the Board
appoints professionals of different fields as directors to utilise their expertise in the management
of the company.

9. Nominee Directors
The banks and financial institutions which grant financial assistance to a company generally
impose a condition as to appointment of their representative on the Board of the concerned
company. These nominated persons are called as nominee directors.

10. Independent Directors

As per the definition of independent director in the code of Corporate Governance, an independent
director should not have any pecuniary relations or transactions with the company or its promoters;
his decisions should be independent of those who have controlling stake in a company and be in
the overall interest of the company and its stakeholders.

Power and Liabilities of Directors

A board of directors is a group of people elected by the owners of a business entity or shareholders
who have decision-making authority, voting authority, and specific responsibilities which in each
case is separate and distinct from the authority and responsibilities of owners and managers of the
business entity. Directors are the members of the board of directors. The members of the board
can be insider or outsider. Insiders are those who are somehow related to the corporation and may
be referred to as executive directors. Outsiders are not related to the company, they may be referred
as non executive directors or the independent directors. The legal responsibilities of boards and
board members vary with the nature of the organisation, and with the jurisdiction

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Duties Of Directors

Duties of directors may be divided under two heads:

i. Statutory duties
ii. Duties of a general nature
Statutory Duties

The statutory duties are the duties and obligations imposed by the Companies Act. These have
been discussed at appropriate places. Important among them are:

1. To file return of allotments:

2. Not to issue irredeemable preferences shares or shares
3. To disclose interest
4. To disclose receipt of compensation from tranferee of shares.
5. To disclose receipt from transferee of property.
6. Some other statutory duties are: to attend Board meetings; to convene and hold general
meetings; to prepare and place before AGM financial accounts; to make declaration of
solvency.
General Duties

The general duties of directors are as follows:

1. Duty of good faith

The directors must act in the best interest of the company. Interest of the company implies the
interests of present and future members of the company on the footing that the company would be
continued as a going concern.

2. Duty of care
A director must display care in performance of the work assigned to him.

3. Duty to attend board meetings

A number of powers of the company are exercised by the Boardof Directors in their meetings held
from time to time.

4. Duty not to delegate

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Director being an agent is bound by maxim 'delegatus non protest delegate' which means a delegate
cannot further delegate.

5. Some other duties

are to convene statutory, annual general meeting and also extraordinary general meeting general
meeting when required by the shareholders of the company; to prepare and place at the AGM along
with the balance sheet and profit and loss account a report on the company's affairs; to make a
declaration of solvency in the case of a Member's voluntary winding up.
Role of Board of Directors

1. Recruit, supervise, retain, evaluate and compensate the manager.

2. Provide direction for the organization.
3. Establish a policy based governance system.
4. Govern the organization and the relationship with the CEO.
5. Fiduciary duty to protect the organization's assets and member's investment.

BOARD COMMITTEES

INTRODUCTION

The oversight function of corporate governance is performed by the company's board of directors
and its designated committees. Boards of directors perform their advisory and oversight function
through well-structured, planned, and assigned committees to take advantage of the expertise of
all the directors. Board committee formations and assignments depend on the size of the company,
its board, and assumed responsibilities. Committee members address relevant issues and make
recommendations to the entire board for final approval. Board committees normally function
independently from each other and are provided with sufficient authority, resources, and assigned
responsibilities in assisting the entire board.

RELEVANCE OF BOARD COMMITTEES

1. Review all relevant material before committee meetings.

2. Attend committee meetings and voice objective opinions on issues.
3. Pay attention to association activities that affect or are affected by the committee's work.

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 4. The idea behind committees of the board is to tap the specific talents, skills and knowledge
of individual board directors to inform and educate the full board on particular areas of
concern.
5. Committees allow boards to divide the work of the board into manageable sections.
6. The boards of larger organisations often delegate work to committees of directors to more
effectively deal with complex or specialised issues and to use directors' time more
efficiently.
7. Committees make recommendations for action to the full board, which retains collective
responsibility for decision making.
AUDIT COMMITTEE

Definition of the Audit Committee

1. The audit committee has been narrowly defined as a standing committee of the company's
board of directors to act as a liaison between management and the external auditor.
2. The audit committee has also been broadly defined as acting as a representative of
shareholders to protect their interests and rights.
3. A committee (or equivalent body) established by and amongst the board of directors of an
issuer for the purpose of overseeing the accounting and financial reporting processes of the
issuer and audits of the financial statements of the issuer; and if no such committee exists
with respect to an issuer, the entire board of directors of the issuer.
This definition is broad enough to address all important oversight functions, roles, and
responsibilities of audit committees.

Audit Committee Relationships with Other Corporate Governance Participants

1. Relationships with the board of directors. The audit committee is one of the major standing
committees of the company's board of directors and, as such, works with the other board
committees (compensation, nomination, and governance) to fulfill the board's fiduciary
duties.
2. Audit committee working relationships with management. The audit committee should
interact with management by asking appropriate questions pertaining to the company's
corporate governance structure, internal controls, financial reporting, audit activities, risk
assessment, codes of ethics, and whistleblower programs.

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3. Audit committee working relationships with external auditors. The committee must be
directly responsible for hiring, compensating, and firing external auditors, as well as
overseeing their work. External auditors are held ultimately accountable to the audit
committee and should submit their reports of the audit and the audit of financial reporting
to management via the audit committee.
4. Audit committee working relationships with internal auditors. The audit committee should
be responsible for hiring, overseeing, compensating, and firing the head of the internal
audit department and internal auditors should report their audit findings directly to the
audit committee, being ultimately accountable to that committee.
Audit Committee Responsibility

Audit committee oversight responsibilities can be grouped into the following categories:

1. Corporate governance. The audit committee, as one of the crucial and influential
participants of corporate governance, should participate with other board committees
(compensation, nominating, governance) in overseeing the effectiveness of corporate
governance without assuming a managerial responsibility.
2. Internal controls. The audit committee should oversee the company's internal control
structure to assure

(a) the efficiency and effectiveness of operations,

(b) the reliability of financial reporting, and

(c) compliance with applicable laws and regulations.

3. Financial reporting. The audit committee should oversee the financial reporting process by
reviewing annual and quarterly financial statements, including

(a) MD&A;

(b) accounting principles, practices, estimates, and reserves; and

(c) independent auditors' suggestions, comments, adjusting, and classification entries. The
audit committee is responsible for overseeing the integrity and transparency of the company's
financial disclosures.

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4. Audit activities. The audit committee is responsible for overseeing both internal and external
audit activities. The committee has the direct responsibility for hiring, compensating, and firing
the company's independent auditor

5. Code of ethics conduct. The audit committee is responsible for overseeing the establishment
and enforcement of the company's code of ethical conduct to ensure that an appropriate “tone
at the top” policy is implemented to promote ethical conduct throughout the company.

6. Whistleblower program. The audit committee is responsible for overseeing the

establishment and enforcement of whistleblower programs in compliance with the
requirements

7. Enterprise risk management. The audit committee is responsible for overseeing the
company's enterprise risk management and making sure it is suitable in identifying business
events and transactions, their related risks, management risk tolerance, and actions taken to
monitor and minimize risks threatening the integrity of financial reports.

8. Financial statement fraud.

COMPENSATION COMMITTEE

The compensation committee is usually formed to determine the compensation and benefits of
directors and executives. To be effective and objective, the compensation committee should
be composed of independent outside directors with sufficient human resources experience in
compensation and related issues. This committee should hire outside compensation advisors
that report directly to and are compensated by the committee to ensure objectivity. The recent
debate over the reasonableness of executive compensations and the recognition of stock-based
executive compensations as expenses has generated a considerable amount of interest in the
formation and function of this committee.

Structure

The committee should be composed of all independent directors who rotate periodically, are
knowledgeable or take responsibility to become knowledgeable regarding compensation and
related issues, and can exercise due diligence and professional judgment in carrying out their
assigned responsibilities.

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Responsibilities

Committee responsibilities include

(1) developing, approving, monitoring, and disclosing the company's executive pay
philosophy, which considers the full range of pay components such as structure of programs,
desired mix of cash and equity awards, relation of executive pay to compensation of other
employees, policy regarding dilution, and the use of employment contracts;

(2) vigilantly overseeing all aspects of compensation for top executives, including the
company's CEO, CFO, and other highly paid executives of subsidiaries, special purpose
entities, and other affiliates to ensure fair, nondiscriminatory, rewarding, and forward-looking
pay;

(3) implementing pay-for-performance executive compensation that rewards superior

performance; (4) reviewing annually the performance of individuals in the oversight group
(directors) and approving their bonuses, severance, equity-based award, death/disability,
retirement, termination with or without cause, changes of control, and voluntary termination;

(5) assuming accountability for the committee's operations, including attending all annual and
special shareholder meetings, being available to respond directly to questions regarding
executive compensation, reporting on its activities to the independent directors of the board,
and preparing the compensation committee report included in the annual proxy materials; and

(6) assuming the responsibilities for hiring, retaining, and firing outside independent experts,
including legal counsel, financial advisors, and human resources consultants, when negotiating
contracts with executives.

CORPORATE GOVERNANCE COMMITTEE

The corporate governance committee should be composed of both executive and nonexecutive
directors and be responsible for developing and monitoring the company's governance
principles, including the roles and responsibilities of directors and officers. The governance
committee should ensure a proper power sharing balance between the board and management,
the board and shareholders, and management and shareholders, as defined by state and federal
statutes. The committee should describe job descriptions and responsibilities for the

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chairperson of the board or lead director, each of the board committees and their members, and
the CEO. The committee should have executive sessions with and without the CEO present to
discuss strategic decisions.

Responsibilities of the Corporate Governance Committee

The corporate governance committee should

(1) Manage the agenda and the meeting by focusing on both long-term strategic and short-term
performance issues,

(2) Review past agendas and minutes of meetings to ensure adequate time and discussion were
devoted to each issue,

(3) Revise the agenda as necessary and set priorities for meetings,

(4) Ensure agenda topics are supported by relevant and timely documents, and

(5) Present briefing materials and supporting documents for the board agenda in advance.

The corporate governance committee should provide sufficient information to the board to
enable it to effectively review the company's financial performance. The information should
consist of both financial and nonfinancial measures of performance, its comparison with
industry best practices, and the company's budget.

Financial measures are

1. Annual audit financial statements;

2. Quarterly reviewed financial statements;
3. Management certifications of financial statements and internal controls;
4. Audit report
5. Earnings releases;
6. Management risk assessment;
7. Budget performance; and
8. Other relevant financial information (e.g., mergers and acquisitions, research and
development, related party transactions.

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Nonfinancial measures are

1. Shareholders' and other major stakeholders' assessments of the business;

2. Shareholder proposals and resolutions;
3. audit committee reports;
4. Compensation committee reports and disclosures;
5. Shareholder relations;
6. Market share and positioning of key products, services, and brands;
7. Customer satisfaction and retention;
8. Supplier reliability and responsiveness;
9. Employee satisfaction and turnover;
10. Market share and proportion of the business attributable to new products and
customers;
11. Research and development investments and innovative measures; and
12. Social, environmental, and ethical performance.
The corporate governance committee should be established to develop, assess, and
continuously improve the company's governance structure, mechanisms, processes, and
practices by

1. maintaining board independence;

2. ensuring directors receive relevant, reliable, and timely information to effectively carry
out their oversight responsibilities;
3. working as a liaison between the board and management by providing opportunities for
directors to express their concerns about the company's governance;
4. regularly reviewing the company's governance and recommending changes to the board
of directors;
5. keeping the board updated on new corporate governance reforms, including
legislations, regulatory developments, rules, listing standards, and industry best
practices;
6. periodically speaking directly to employees other than senior executives; and
7. Periodic evaluation of the company's social, ethical, and environmental performance.

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NOMINATING COMMITTEE

The nominating committee is usually responsible for evaluating and nominating a new director to
the board, and it also facilitates the election of the new director by shareholders. The committee
may use staffing support provided by the CEO in identifying and recruiting the new members of
the company's board of directors. An effective nominating committee can substantially reduce the
traditional role played by the CEO in selecting new directors who may not be independent from
management.

Responsibilities of the Nominating Committee

The nominating committee is responsible for;

1. Reviewing the performance of current directors;

2. Assessing the need for new directors;
3. Identifying and evaluating the skills, background, diversity, and knowledge of candidates;
4. Having an objective nominating process for qualified candidates; and

5. Assisting in the election of qualified new directors.

THE AUDIT STRUCTURES AND FUNCTIONS

Internal Auditor

An internal auditor (IA) is a trained professional tasked with providing independent and objective
evaluations of company financial and operational business activities. They are employed to ensure
that companies follow proper procedures and function efficiently

External Auditor

An external auditor is a public accountant who conducts audits, reviews, and other work for his or
her clients. An external auditor is independent of all clients, and so is in a good position to make
an impartial evaluation of the financial statements and systems of internal controls of those clients.

Internal auditors will examine issues related to company business practices and risks,
while external auditors examine the financial records and issue an opinion regarding the financial
statements of the company. Internal audits are conducted throughout the year, while external
auditors conduct a single annual audit.

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Types of Auditors

There are four types of auditors:

1. Internal: Internal auditors are hired by a company to work for that company. They examine
only internal financial documents relating to their employer. Internal auditors help the
company increase the accuracy of their financial data and avoid any legal or monetary
problems. They serve as quality control for the financial processes of the company.

2. External: While internal auditors can be useful, especially to larger companies, they are not
always unbiased and smaller companies often cannot afford to hire a permanent companies
only hire them for a specific project. These auditors work for firms that specialize in selling
auditing services to companies.

3. Government: Government auditors are specialists in tax and disclosure regulations. They
inspect both businesses and individuals to determine precisely what regulations they fall
under and if they are following these regulations properly. Government auditors help clear
up confusion and investigate suspicious activity for government entities.

4. Forensic: Forensic auditors specialize in crimes and are used by law enforcement
organizations when financial documents are involved in a crime. This does not necessarily
mean the crime was financial (although this can be the case) but rather that the law
enforcement organization needs to track money used to find out where it began or ended
up.

Functions Of Internal Auditors

Furthermore, internal auditors are well trained and positioned to

1. Assess and ensure effective performance management and accountability;

2. Identify and communicate risks and related controls to the company's board of directors,
audit committee, and management;
3. Promote appropriate ethical behavior and conduct throughout the company;
4. Assess both internal and external corporate governance mechanisms and procedures;
5. Assist in the preparation of corporate governance reports and providing assurance on the
effectiveness of the corporate governance structure; and

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 6. Review the company's quality assurance programs and procedures.
Functions Of External Auditors

1. Protecting the interests of shareholders.

2. External auditors report the state of a company's finance and attest to the validity of
financial reports that may have been released.
3. They ensure that the board receives accurate and reliable information.
4. An External Auditor reviews the financial information of a company and reports on
findings.
5. The External Auditor is responsible for investigating financial statements for errors and
fraud, performing audits on operations, and reporting on findings, and providing
recommendations.
External auditors are not and should not be expected to provide absolute assurance regarding
reliability of financial statements primarily because of

1. The nature and limitation of evidence-gathering procedures that are conducted on selective
testing;
2. Management assertions and financial representations that include accounting estimates that
are not certain by nature;
3. The use of judgments in the preparation and audit of financial statements; and
4. The possibility of collusion, false documentation, management override, or engagement in
fraud.
AUDITOR COMPETENCY

Auditors' competencies in providing reasonable assurance that financial statements are free from
material misstatements, whether caused by errors or fraud, can be classified into professional
competencies, technical competencies, process competencies, and reporting competencies.

a) Professional competencies.
b) Technical competencies.
c) Process competencies.
d) Reporting competencies.

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AUDIT FAILURES AND AUDIT QUALITY

Audit failure occurs when a company with reported unqualified financial statements discloses low-
quality and misleading financial information or has to restate previously audited financial
statements. Audit failure can be separated into two categories of audit process failure and
independent audit failure. This distinction is important because

1. Reported financial scandals and related audit failures provide evidence of impairments in
auditor independence;
2. Regulations and auditing standards are more concerned with and address the incidence of
independent audit failure rather than audit process failure;
3. The audit process has often discovered misstatements, but auditors failed to disclose them
due to financial and personal ties to their clients;
4. Audit process failures are often unintentional, resulting from a lack of exercising due
professional care and the imperfection in audit methodology, whereas independent audit
failure is caused by auditors intentionally compromising their professional responsibilities;
and
5. Auditors are more likely to benefit directly by compromising their independence to secure
continuity of their contract with their clients.
AUDIT COMMITTEE OVERSIGHT OF EXTERNAL AUDITORS

. The extended oversight responsibilities for the audit committee are;

1. Appointment, compensation, and retention of registered public accounting firms.

2. Preapproval of audit services and permissible non audit services.
3. Review of the independent auditor's plan for an integrated audit of both ICFR and annual
financial statements.
4. Review and discussion of financial statements audited or reviewed by the independent
auditor.
5. Monitoring the auditor's independence.
6. Auditor rotation requirement.
Review And Discussion Of Financial Reports

1. Issues that should be addressed in this meeting include

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 2. The quality and integrity of financial reports in terms of their content, format and
disclosure, and presentation in conformity
3. All critical accounting policies and practices used by management in measuring and
recognizing the company's transactions and events as well as the preparation of
financial statements.
4. All alternative treatments within government for accounting policies and practices
related to material financial items used by management and approved by the
independent auditor.
5. Disagreements between management and the independent auditor regarding accounting
and internal control issues and presentation of financial statements
6. All material communications (oral and written) between management and the
independent auditor, including audit adjustments, fraud risk factors, significant
deficiencies, and material weaknesses
7. All material unusual transactions, significant fluctuations, accounting estimates and
reserves, and significant internal control issues
8. The independent auditor disagreements with management about the scope of the
integrated audit, material weaknesses, and the wording of the audit (reports)
9. Any difficulties or lack of cooperation and coordination by management during the
audit engagement, including any delays in providing requested information, schedules,
records, or documents
10. Substantial changes in the audit fee resulting from departures from the initial integrated
audit plan
11. Any suspected fraud by management, or material employee fraud affecting the
reliability and integrity of financial statements or illegal acts by senior management,
including violations of applicable laws and regulations.
Independent Auditor Communication With The Audit Committee

Corporate governance reforms require or suggest a variety of formal and informal communications
between the audit committee and the independent auditor. Communications from the committee
to the independent auditor include

1. Appointment and retention approval of the independent auditor

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 2. Formal approval of audit and permissible nonaudit services
3. Formal approval of fees for both audit and nonaudit services with a keen focus on
improving the quality of audit and nonaudit services
4. Any concerns or risks threatening management's reputation and integrity, the reliability of
financial reporting, or the effectiveness of internal controls known to the audit committee
that could possibly affect audit activities and the quality of audit services
5. Allegations of financial statement fraud known to the audit committee that affect the
integrity and reliability of financial statements and the effectiveness of a related audit
Communications from the independent auditor to the audit committee include

1. Seeking committee preapproval of all audit and nonaudit services in a timely manner.
2. The critical accounting policies and practices used by management in the preparation of
financial statements.
3. All alternative treatments of financial information within GAAP that have already been
discussed with management, the ramifications of the use of such alternative accounting
treatments, and the treatment preferred by the auditor.
4. Any accounting disagreements between the independent auditor and the company's
management.
5. Any material written communications between the independent auditor and the company's
management throughout the course of the audit.
6. Significant deficiencies and material weaknesses.
7. The audit report on annual financial statements.
8. The review report on quarterly financial statements.
9. The audit report on management's assessment of the effectiveness of the reports
10. The audit report on the effectiveness of the reports
11. Financial risks associated with financial reports.
AUDITOR INDEPENDENCE

Auditor independence is the cornerstone of the auditing profession and one of the fundamental
aspects that makes audit functions value-adding services to society and the investing community.
External auditors are outside, independent contractors hired to independently assess and lend

74
credibility to the accuracy of the financial statements. Thus, auditor independence in both fact and
appearance is important in assessing the value of audit services provided to clients.

It is derived from the seven basic independence principles of;

1. Auditors cannot be part of management or its team,

2. Auditors cannot audit their own works, and
3. Auditors cannot serve in advocacy roles.
4. Independence rules.
5. Manner in which services are performed.
6. Services performed.
7. The appointment of auditors.
ROLES AND RESPONSIBILITIES OF MANAGEMENT

The emerging corporate governance reforms create unprecedented and profound demand for
competent and ethical corporate officers. They include the following;

a) CEO- chief executive officer.

b) CFO- Chief finance officer.
c) CRO- chief compliance officer.
d) COO-chief operating officer.
e) CDO-Chief development officer
f) Company secretary.
The CEO, as an icon of the company's management team, plays a key role in the improvement of
corporate governance. Many state corporate laws require a corporation to have a president and
secretary. Corporations usually have a management team consisting of a CEO, CFO, controller,
treasurer, and other key members, including chief compliance/governance officer, CRO, chief
operating officer (COO), chief development officer (CDO), and corporate legal counsel. The role
of the management team in the United States is to run the company and is generally vested by the
board in the CEO. The managerial function in countries such as Germany is vested in the
management board that operates collectively to carry out managerial responsibilities, where the
supervisory board oversees the management board on behalf of the shareholders and employees.

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Chief Executive Officer

The CEO is the heart of the managerial function of corporate governance. All other senior
executives and managerial personnel look to the CEO for direction, guidance, and ethical conduct.
The CEO sets the appropriate tone at the top by promoting effective functioning, ethical conduct,
and professional behavior throughout the company. The long-term survival and success of the goal
of sustainable and enduring stakeholder value creation are in the hands of the CEO. The CEO is
in the driver's seat for taking the company on its long journey of success, growth, prosperity,
failure, or bankruptcy. Thus, personal attributes, ethical values, and professional characteristics of
the CEO should be in line with the company's board of directors' and shareholders' values, visions,
and strategic plans. The wave of financial scandals and business misconduct raised serious
concerns about the professional accountability, personal integrity, and competency of many CEOs.

Functions of the CEO

The typical duties, responsibilities, and job description of a CEO include:

a) Communicating, on behalf of the company, with shareholders, government entities, and

the public.
b) Leading the development of the company's short- and long-term strategy.
c) Creating and implementing the company or organization's vision and mission.
d) The CEO provides information and data to the board regarding strategy formulation.
e) The CEO provides data regarding external environment, to senior mangers, guides and
helps them in formulating, implementing and evaluating and
reformulating strategies at strategic business units are based on the corporate strategies.
Challenges Facing CEOs

This section presents key CEO challenges, including

1. Fiduciary duties,
2. Self-serving and self-dealing,
3. Succession planning,
4. Duality, and
5. Financial knowledge and understanding.

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Chief Financial Officer

Traditionally, the role of CFOs has been defined as controllership, financial reporting, decisions
support, and regulatory compliance. Emerging corporate governance reforms have refocused the
role of CFOs in the new C-suite environment into both business and strategic corporate decision
making. The role of the CFO has evolved from the traditional responsibility for the company's
financial stewardship to a major corporate governance participant involved in internal control,
financial reporting, and strategy execution.

Functions Of The Chief Finance Officer

a) A chief financial officer (CFO) is the senior executive responsible for managing the
financial actions of a company.
b) The CFO's duties include tracking cash flow and financial planning as well as analyzing
the company's financial strengths and weaknesses and proposing corrective actions.

c) A CFO is in charge of a company's financial operations. This includes responsibility for

internal and external financial reporting, stewardship of a company's assets, and ownership
of cash management.
d) Increasingly, the role is more forward-looking and expanding to incorporate strategy and
business partnership.
e) Oversee all financial related matters where depth and scope is relative to the size of the
company. Create financial plans as defined by the board of directors.
f) Direct financing strategies, analysis, forecasting and budget management.

Corporate Development Officer

Recent corporate governance reforms and increased investor scrutiny necessitate the establishment
of a new position of the CDO, particularly for companies actively engaged in mergers and
acquisitions.

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Corporate Development Officer

1. Facilitate development of competitive proposals including win strategy, partner strategy

and cost strategy.
2. Provide support and guidance to partners to obtain required information and ensure
the development of a collaborative, complete, and compliant proposal.
3. Contacting potential clients to establish rapport and arrange meetings.
4. Planning and overseeing new marketing initiatives.
5. Researching organizations and individuals to find new opportunities.
6. Increasing the value of current customers while attracting new ones.
Chief Risk Officer

Organizations of all sizes and types are facing a variety of risks concerning operating, financing,
and investing issues. The enterprise risk management (ERM) framework has been used to identify
and manage risks to minimize their detrimental effects. ERM enables organizations to implement
a cost-effective and risk-based approach to achieve their objectives and foster accountability to
their stakeholders, including shareholders. The CRO can significantly assist organizations with
their ERM activities. ERM was originally used by organizations to identify and manage financial
and litigation risks that impede production or negatively affect revenues.

Functions Of The Chief Risk Officer

a) The CRO is responsible for all risk management strategies and operations, as well as
supervising the organization's risk mitigation and identification procedures.
b) To address the risks associated with data breaches and hackers.
c) Identifying, measuring, managing and reporting risks.
d) Helping develop processes to better evaluate business-specific risk.
e) Monitoring important as well as critical risk issues.
f) Conducting risk and compliance assessements.

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Company Secretary

The Company Secretary normally plays an important role in ensuring compliance with the
Companies Act and the Capital Markets licensing requirements and general 4 regulations for the
listed companies. The Company Secretary comes to "act as the 'grout' to fill knowledge cracks that
might otherwise appear during a board meeting (Handicott, 2002). The Company Secretary’s
duties are an essential ingredient in the implementation of sound corporate governance procedures
(Maltas, 2000). In the eyes of many directors the position represents a shield against non-
compliance and breaches of the Company law. The Company Secretary is thus required to be fully
conversant with the law and procedure of meetings which at times is least appreciated, but can be
crucial in the good management of a company’s affairs (Lang, 1998).

Functions of the company secretary in corporate governance

Is regarded by the Board as its trusted adviser and who ensures total compliance with the
legislative, regulatory and governance developments that may impact the company and in
ensuring that the board is appropriately briefed on them.

The company secretary is responsible for the efficient administration of a company, particularly
with regard to ensuring compliance with statutory and regulatory requirements and for ensuring
that decisions of the board of directors are implemented. Despite the name, the role is not clerical
or secretarial.

To call the meeting of a company or to commence proceedings on behalf of the company,

Alter the register of members,

Formal duties

All directors should have access to the advice of the company secretary, who is responsible for
advising the board on all governance matters. Both the appointment and removal of the company
secretary should be a matter for the whole board."

The secretary is an officer of the company and their duties can be wide ranging. While the
Companies Act does not generally specify the role of the company secretary, they usually
undertake the following duties:

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  Maintaining the company’s statutory books, including:
 a register of present and past directors and secretaries
 a register of all shareholders, past and present and their shareholdings
 a register of any charges on the company’s assets
 minutes of general meetings and board meetings
 a register of the debenture holders (typically banks)
 Filing annual returns at Companies House. Other documents which must be filed include
the directors’ report and auditors’ report (unless the company is exempt), and financial
statements, including details of the company’s assets and liabilities.
 Arranging meetings of the directors and the shareholders. This responsibility will involve
the issue of proper notices of meetings, preparation of agenda, circulation of relevant
papers and taking and producing minutes to record the business transacted at the meetings
and the decisions taken.
 Informing Companies House of any significant changes in the company’s structure or
management, for example the appointment or resignation of directors.
 Establishing and maintaining the company’s registered office as the address for any formal
communications. Ensuring that all the company’s business stationery carries its name,
registered number, country of registration and registered address. These details must also
appear on the company website, emails, order forms and invoices.
 Ensuring the security of the company’s legal documents, including for example, the
certificate of incorporation and memorandum and articles of association.
 Deciding on the company’s policy for the filing and retention of documents.
 Advising directors on their duties, and ensuring that they comply with corporate legislation
and the articles of association of the company.
Additional Duties

The company secretary will often be required to take on a variety of additional administrative
duties. Typically, these may include:

 Insurance
 Company pension scheme
 Administration of share schemes

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  PAYE & payroll
 VAT registration
 Management of the company’s premises and facilities
 Office management
 Compliance with data protection and health and safety requirements
 Intellectual property
PROFESSIONAL BODIES IN GOVERNANCE AND THEIR ROLES
A. East Africa Community
The East African Community (EAC) is a regional intergovernmental organisation of six (6)
Partner States, comprising Burundi, Kenya, Rwanda, South Sudan, Tanzania and Uganda, with
its headquarters in Arusha, Tanzania.
The EAC is structured into seven main Organs:
a) The Summit
b) The Council of Ministers
c) The Co-ordinating Committee
d) Sectoral Committees
e) The East African Court of Justice
f) The East African Legislative Assembly
g) The Secretariat
Corporate Governance Role Of The EAC
The EAC Code of Conduct for Business will be managed by a Code secretariat hosted by EAC.
The Code secretariat will have the following duties:
1. Promoting business ethics and motivating companies to become Code members
2. Reviewing and approving membership applications
3. Maintaining and updating the register of members
4. Receiving and verifying implementation progress reports as sent in by members
5. Facilitating trainings, workshops and seminars relevant for the promotion of the
objectives of the Code
6. Preparing tools and materials to support members internal assessments and
implementation of the Code

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 7. Receiving reports of about transgression of Code by members and submitting them to
the Code committee
8. Develop and maintain a website portal providing information on business ethics, the
Code of Conduct and its membership.

B. THE ORGANISATION FOR ECONOMIC CO-OPERATION AND

DEVELOPMENT (OECD)
The Organisation for Economic Co-operation and Development (OECD; French: Organisation de
Coopération et de Développement Économiques, OCDE) is an intergovernmental economic
organisation with 37 member countries, founded in 1961 to stimulate economic progress and world
trade. It is a forum of countries describing themselves as committed to democracy and the market
economy, providing a platform to compare policy experiences, seek answers to common problems,
identify good practices and coordinate domestic and international policies of its members.
Generally, OECD members are high-income economies with a very high Human Development
Index (HDI) and are regarded as developed countries. As of 2017, the OECD member countries
collectively comprised 62.2% of global nominal GDP (US$49.6 trillion) and 42.8% of global GDP
(Int$54.2 trillion) at purchasing power parity. The OECD is an official United Nations observer.

Code on Corporate Governance

Good corporate governance helps to build an environment of trust, transparency and accountability
necessary for fostering long-term investment, financial stability and business integrity, thereby
supporting stronger growth and more inclusive societies.
Our areas of work
a) Corporate governance principles
b) Corporate governance of state-owned enterprises
c) Capital markets
d) Responsible business conduct
e) Due diligence guidance for enterprises
f) Trust in business

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 C. THE COMMONWEALTH CODE ON CORPORATE GOVERNANCE
The Commonwealth is a voluntary association of 54 independent and equal countries. It is home
to 2.4 billion people, and includes both advanced economies and developing countries. 32 of our
members are small states, including many island nations. Our member governments have agreed
to shared goals like development, democracy and peace. Our values and principles are expressed
in the Commonwealth Charter. The Commonwealth's roots go back to the British Empire. But
today any country can join the modern Commonwealth. The last country to join the
Commonwealth was Rwanda in 2009.
Codes set up by organizations regulating the activities of its members.
a) Civil and Criminal Justice Reform
b) Performance Management and Accountability
c) Monitoring and Evaluation
d) Strategy Development and Implementation
e) Risk Management
D. INDIVIDUAL ORGANIZATIONS INTERNAL CODE OF CONDUCT
(A CASE STUDY OF EQUITY BANK GROUP)
Corporate Governance Principles
a) Principle 1: Corporate Governance
b) Principle 2: Ethical Leadership and Integrity
c) Principle 3: Oversight Responsibility of the Board
d) Principle 4: Ethos, Values and Strategy
e) Principle 5: Balance of the Board
f) Principle 6: Independence of the Board
g) Principle 7: Supervision of the Board
h) Principle 8: Assessment of the Board
i) Principle 9: Induction and Professional Development of the Board
j) Principle 10: Appointment and Development of Senior Management

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 E. THE KENYAN CAPITAL MARKETS AUTHORITY
The Capital Markets Act (Cap. 485a)
1. The Guidelines encourage listed companies to embrace a positive corporate culture of
accountability and responsiveness to the interests of investors.
2. To reduce the overconcentration of power in the hands of one person, through, segregation
of the office of the chairman of the board from that of the chief executive of the company.
3. The Authority advocates the adoption of standards of governance.
4. To formulate additional internal policies and strategies that enable their companies to grow
but that also protect the interests of shareholders, stakeholders and the community at large.
F. THE KENYAN JUDICIARY
The Judiciary and its related institutions (Judicial Service Commission (JSC), Kenya Law;
previously National Council for Law Reporting (NCLR), Tribunals and the Judiciary Training
Institute (JTI) perform the following functions;

1. Administration of justice on matters concerning corporate governance.

2. Formulation and implementation of judicial policies on corporate governance.
3. Compilation and dissemination of case law and other legal information for the effective
administration of justice on matters concerning corporate governance.
4. The Court has jurisdiction to grant appropriate relief in matters of corporate governance or
violation of the constitution brought before it.
THE CENTRE FOR CORPORATE GOVERNANCE (CCGC) KENYA
BACKGROUND OF THE CENTRE FOR CORPORATE GOVERNANCE
The Centre for Corporate Governance (CCG), the Premier and Pioneer Corporate Governance
Training Institution in Africa, is a company limited by guarantee, which was established by a
private sector initiative for corporate governance in 1999 to foster the highest standards of
corporate governance and excellence in all types of corporations. At inception, the Centre was
registered as the Private Sector Corporate Governance Trust (PSCGT), renamed the Centre for
Corporate Governance in 2002. The Centre achieves its mandate through training, education,
research, monitoring, evaluation and advocacy.

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Objectives Of The Centre

The Centre endeavours to achieve the following fundamental objectives:

 Promoting the implementation of good corporate governance principles and practices in

Africa.
 Creating public awareness and sensitising corporate leaders and policy makers on the need
for good corporate governance for enhanced public and political leadership.
 Conducting research studies in corporate governance practices with a view to identifying and
replicating good practices for enhanced corporate performance.
 Facilitating the development and implementation of appropriate educational, training and
development programmes aimed at enhancing the performance of corporate leaders and
policy makers in all sectors of the economy.
 Providing an institutional framework for the evaluation, monitoring and recognition of
corporate governance practices in corporations and institutions.
 Co-operating and co-ordinating with other organizations with similar aims and objectives
within and outside the continent to advance the cause of good corporate governance.
The Centre is a company limited by guarantee that endeavors to achieve high standards of
corporate governance in corporations and institutions through;

a) Training,
b) Education,
c) Research,
d) Advocacy,
e) Monitoring and evaluation.

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