A Study on the effect of Organization Culture on Corporate Governance: Mediating role of

Ethical leadership

Ms. Aswathy Mohan

Assistant Professor, Bhavan’s Royal Institute of Management,
Tripunithura, Ernakulam-Kerala
&
Research Scholar
Alagappa University
Karaikudi-Tamil Nadu,
aswathymohan4387@gmail.com
91-9995812346
 1. Introduction

In recent days, among the Indian corporates issues related to corporate governance is
gaining momentum and the shift from simple ‘Management’ to ‘Effective Governance ‘is evident
among the Indian incorporates. This has more or less paved way to the most stringent Corporate
Governance regulations in India when compared with rest of the world. Recent bank scandals and
others as observed in case of Tata, Infosys and other Indian corporates have shaken the regulators
and questioned the very existence of such regulations. Thus it can be inferred that corporate
governance is much more than complying with the recommendations put forth by several
committees. The recent recommendations put forth by the Kotak committee constituted by
Securities and Exchange Board of India (SEBI) to bring in newer faces in the board room, ceiling
on the number of directorships, CEO duality, exclusion of board interlocks, presence of women
on board, board composition, quorum of board meetings and the like have all triggered the CG
norms. On March 28th, 2018, SEBI’s Board decided on these recommendations whereby (i) 40
out of 80 were accepted without any modifications; (ii) 15 were accepted with modifications; and
(iii) 18 were rejected.

But in spite of all the efforts put in by the regulatory authorities of India, the stakeholders
are not protected from poor CG. The consequences of poor governance are adverse and there is no
mechanism to compensate the stakeholders for the loss suffered by them. This make it more
evident that a good governance will have an impact on organizational performance. Hence it can
be learned that good corporate governance is not the product of regulations to be complied whereas
it is one of the vital differentiators of business that is distilled from an organization’s culture,
ethical leadership and especially the people in the organization.

This study tries to figure out the effect of organization culture on corporate governance
when the mediating role of ethical leadership is analyzed. The data was collected through Google
forms from 100 participants spread across the country. The survey included statements measuring
organization culture, ethical leadership and corporate governance.

2. Methodology

2.1 Research Questions

(a) Is Corporate Governance an organizational issue or financial issue?

(b) Do Culture, Leadership and People have an impact on corporate governance?

(c) Does corporate governance affect organizational performance?

2.2 Research Gap

There are numerous studies on the effect of corporate governance on financial

performance. Majority of the studies consider the compliances with the regulation,
 furnishing of reports and presence of various committees as a measure of good corporate
governance and measure its impact on various financial ratios. Even though previous
corporate governance literatures recognize the importance of board of directors (Kula,
2005; Wan & Ong, 2005), the studies on the directors’ behavior and practices in conducting
their roles are still lacking (Hasnah & Hasnah, 2009). Most of previous studies focus on
the direct effect of board structure, composition and characteristics on company
performance or leverage (Noriza, 2010; Rohana, Halimi & Erlane, 2009; Yu, Rwegasira &
Bilderbeek, 2002). But when we take the case of Indian corporates almost all the listed
firms comply the governance norms put forth by SEBI and are struggling through
governance issues related to board effectiveness, related party transactions and so on. This
reveals that good corporate governance does not mean complying with the governance
norms put forth by the regulators but much more than that which affects the organization
as a whole. Thus came the thought of corporate governance as an organizational issue
affected by culture, people and leadership which has an impact on the organizational
performance.

2.3 Research Goal

Based on the review of literature done, the conceptual model of the study as seen (in
Fig.1) was developed. The study aims to understand the effect of organization culture on
corporate governance and the mediating role of ethical leadership.

Figure 1: Conceptual Model

Ethical
Leadership

Corporate
Organization
Governance
Culture

2.4 Hypotheses formulated

H1: Organization culture has an effect on corporate governance.

H2: Ethical leadership has a mediating effect on organization culture and corporate governance
relationship.
2.5 Sample and Data Collection

A survey was conducted to test the various hypotheses developed. The data was collected through
Google forms from 100 respondents. The study used simple random sampling where
questionnaires were emailed to employees of managerial cadre from private sector randomly
chosen by the researcher. For the purpose of this study items were drawn from the Denison
Organizational Culture Survey (Denison and Mishra 1995, Denison and Neale 1996, Denison et
al. 2002) measuring organizational culture on a five point Likert scale with anchors strongly
disagree (=1) to strongly agree (=5) was used. This structure focuses on cultural traits of
involvement, consistency, adaptability, and mission. Ethical leadership statements were taken and
adapted from De Hoogh and Den Hartog (2008), Arnaud and Schminke (2006), House (1998),
Craig and Custafson (1998), Brown et al. (2005). And finally corporate governance which stressed
on the parameter board effectiveness was drawn from………….

3. Literature review

3.1 Organizational culture

Organisational culture which is also referred to as organisational climate or corporate culture has
been linked to performance (Silverzweig and Allen 1976). Organisational culture has been defined
differently by various researchers due to the obscurity in the field of anthropology and sociology
(Cameron and Ettington 1988). Although, there are similarities in this field as regard culture but
the difference is that while the literature on anthropology views culture as something the
organization is, the literature on sociology views culture as something an organization has
(Cameron and Ettington 1988).
The review of literature has shown that culture makes the difference among organisations and their
output (Daniels et al., 2004; Piercy et al., 2004). The management of culture has been found to be
used strategically for competitive advantage. Thus organisational culture has been argued as a
management philosophy and a way of managing organisations to improve their overall
effectiveness and performance (Kotter and Heskett, 1992). It is essential for maximizing the value
of human capital and success of organizational change. Schein (1992) suggested that in addition
to greater needs to adapt to external and internal changes, organizational culture has become more
important, because intellectual as opposed to material assets now constitute the main source of
value and that maximizing the value of employees will require a culture that promotes their
intellectual participation.

3.2 Ethical Leadership

Ethics refers to accepted principles of right or wrong that govern the conduct of a person, the
members of a profession or the actions of organizations (Hill, 2009). Thus, ethics is of great
importance to a good business. The importance of ethics further engenders the formulation of code
of ethics as a process for creating and promoting ethical behavior among employees. However,
this process has not been wholly possible (Miller, 2004; Loumbeva, 2008). This is because code
of ethics is not sufficient for making an organization ethical. Moreover, not all the elements
essentials to defining a system of ethics can be contained in code of ethics. However, they can be
formulated into ethical principles and integrated into the culture of the organization (Loumbeva,
2008). For such organization to become ethical, it needs an ethical leader to mainstream the ethical
principles and other core valves in the organizational culture for the purpose of influencing the
behavior of others in the organization. Therefore, leadership is the process by which an individual
exerts influence over other people and inspires, motivates and directs their activities to help
achieve group or organizational goals (Yukl, 2006; Jones & George, 2008). Ethical leadership is
the demonstration of normatively appropriate conduct through personal actions and interpersonal
relationships, and the promotion of such conduct to followers through two–way communication,
reinforcement and decision-making (Trevino et al., 2003). Trust and commitment are positive
externalities that are associated with ethical leadership (Berrone, Surroca & Tribo, 2007). Trust is
a positive expectation that another will not act opportunistically (Robbins, Judge, Millet & Water-
Marsh, 2008). Employees’ trust in leaders results to better employees’ performance, and
compliance to ethical standards, while low level of trust result to strife, ineffectiveness and
inefficiency (Robbinson, 1996; Covey, 1998; Van Zyl & Lazeny, 2002, as cited in Ponnu &
Tennakoon, 2009). Organizational commitment on the other hand is a state in which an employee
identifies with a particular organization and its goals and wishes to maintain membership in the
organization (Meyer & Allen, 1991). High level of ethical leadership has been found to be
associated with higher level of employee commitment and by extension better quality of products,
reduced cost, decreased employee turnover and higher customer loyalty (Mize, 2000, as cited in
Zhu, May & Avolio, 2004; Ponnu & Tennakoon, 2009; Upadhya & Singh, 2010; Bello, 2012).
Ethical leadership is related to corporate governance due to their characteristics and principles
(Heath & Norman, 2004; Scott, 2007).

3.3 Corporate Governance

Corporate governance is an internal system encompassing policies, processes and people that serve
the needs of shareholders and other stakeholders by directing and controlling management
activities with good savvy, objectivity and integrity (Dovonan, 2003). It is also defined as a system
of structures and processes intended to guide and control the company in order to ensure economic
viability and legitimacy (Cadbury, 1992; Neubauer & Lank, 1998). An effective corporate
governance ensure that companies are managed and governed in the best interests of their owners
and shareholders through decentralization of power, checks/balances, fairness, ethical/moral
values and transparency (Ahmed, Alam, Jafar & Zaman, 2008; Ogbulu & Emini, 2012; Peters &
Bagshaw, 2014). Thus, the failure of Enron and Worldcom in the United States, Transmile, Megan
Media and Nasion in Malaysia can be attributed to poor corporate governance (Gompers, Ishii &
Metrick, 2003; Hussin & Othman, 2012; Abdul-Qadir & Kwambo, 2012). Ngwube (2013)
identified the factors that determine corporate governance as: working board; transparency; whistle
blowing, power decentralization; formal and periodic evaluation of the Chief Executive Officer
(CEO)/directors; strong market institutions; external regulation and monitoring; disclosure of
compensation policies and practices; open and well implemented conflict of interest policy; and
candor between executives of a firm and the staff. Berrone et al. (2007) empirically established
that corporate application of ethics has a positive impact on financial performance. In addition,
ethical leadership is related to improved task performance (Piccolo, Greenbaum, De Hartog &
Folger, 2010; Walumbwa, Mayer, Wang, Workman & Christensen, 2011).

Analysis & Discussion

*Data collection and analysis is in process.