MIDLANDS STATE UNIVERSITY

FACULTY OF COMMERCE
GRADUATE SCHOOL OF BUSINESS
LEADERSHIP

ASSIGNMENT 1 BUSSINES LEADERSHIP EMBA 851

Lecturer: ADVOCATE C DUBE

Bernard Divason

REG NUMBER: HRE/R2119123V

AN ASSIGNMENT SUBMITTED TO THE MIDLANDS STATE

UNIVERSITY (MSU) GRADUATE SCHOOL OF BUSINESS
LEADERSHIP IN PARTIAL FULFILLMENT OF THE
REQUIREMENTS FOR THE EXECUTIVE MASTERS OF
BUSINESS ADMINISTRATION DEGREE

1 November 2022

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How good and bad elements of ethical leadership combine with right
and wrong corporate governance determinants to yield failed or
successful sustainable firm performance is little understood, ill-
defined, poorly measured and tracked.

Discuss, citing two examples of failed firm performance and two

examples of successful firm performance in Zimbabwe’s listed entities.

Introduction

Innovation, leadership and psychological capital constitute the dynamic of

today’s world economy and affect many areas of life. Emerging technology
has made it necessary for the changing social construction enterprises to
create differences in service, even in the production sector, and differences
between customers and consumers. The economy is not only limited to
production, but the prospect of customer and service has been put forward
by the ideas of management philosophers. Along with these ideas,
behavioural sciences have been developed with the idea that human beings
are seen as machines in increasing productivity in business (Dust, Resick,
Margolis, Mawritz and Greenbaum, 2018). The concept of ethical
leadership emerged from this point, where significant developments were
made for new entrepreneurial and innovation-oriented ideas. Ethical
leadership and other leadership behaviours are important in this context
(Yang and Wei, 2018). The situation of leaders to influence their followers
has a significant impact on innovation and loyalty behaviours related to the
occupation and the task undertaken by the occupation, in particular by the
fact that those who act with ethical leadership concept leave honest,
reliable and fair impressions on their followers (Yang and Wei, 2018).
Corporate governance has also got attention and developed as a significant
mechanism more than in the last decades. The recent financial crisis, the
fast growth of privatizations, and financial institutions have reinforced the

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improvement of corporate governance practices in numerous institutions of
different countries. In this discussion, the impact of ethical behaviours on
corporate governance is discussed, highlighting how the goodness or
badness of these can impact on firms. In so doing, the examples of two
firms from the Zimbabwe Stock Exchange (ZSE), namely Delta Beverages
and Trust Bank Zimbabwe.

Ethical leadership

One of the key concepts in this discussion is that of ethical leadership.

Ethical leadership refers to the values and acts of leadership that conform
to ethical norms. It can be described as the display of proper social
behaviour through personal acts and interpersonal relationships and the
encouragement of such conduct to followers in a two-way contact process
(Chamtitigul and Li, 2021). The performance implications of ethical
leadership have been widely examined in previous studies in Western
countries, which have suggested different pathways that link ethical
leadership to firm performance. For example, Shin et al. (2015) claimed
that ethical leadership enhances firm performance by promoting firm-level
ethical and procedural justice climates. Another study by Wang et al.
(2017) reported that ethical leadership contains humane leadership
orientation, leadership accountability and sustainability orientation, which
are conducive to organizational success.

According to economist Milton Friedman, business's primary purpose is to

maximize profits while serving its owners and stakeholders (e.g.,
shareholders, employees, and customers). Therefore, guaranteeing financial
output is the most practical measurement for corporate performance.
Corporate image can increase customers' expenditure and make them more
loyal to the corporation, positively affecting corporate performance. In the

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long-term development journey, increased firm reputation leads to more
extraordinary business results (Chamtitigul and Li, 2021).

Consequently, firm reputation will gradually be enhanced, followed by an

increase in sales volume, a competitive advantage, and, finally, a higher
level of firm performance. Besides, supporting research shows the decisive
relevance of firm reputation and firm performance, both financially and
non-financially (Pham and Tran, 2020; Ahmad and Al-Shbiel, 2019).

Researchers have focussed on ethical leadership because this behaviour is

instrumental in the effective functioning of organisations and also
influences employee attitudes, behaviour and performance (Wadei et al.,
2020; Lin et al., 2019; Liu et al., 2019; Sosik et al., 2019; Bavik et al.,
2018). Ethical leadership refers to the presentation and encouragement of
normatively appropriate behaviour (Dust, Resick, Margolis, Mawritz and
Greenbaum, 2018). Ethical leaders accept personal responsibility for team
performance, signalling to followers the value and importance of the
assigned task and the requirement for appropriate behaviour (Buye, 2021).

Firm performance

Performance is the core objective of every business organisation, it is

widely agreed that the structure and decision making in an organisation is
influenced by environmental complexity and instability (Strydom, 2021).
Firm performance can be viewed as the measure of how a manager utilises
the resources of the organisation efficiently and effectively to accomplish
the goals of the organisation as well as satisfying all the stakeholders
(Gardner et al., 2021). Sarwar et al., (2020) described firm performance as
the real output measured against the intended or expected output. Guluma
(2021) prayed that firm performance is made up of three major areas of
firm outcomes which can be regarded as financial performance that is made

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up of profits, return on assets (ROA), return on investment (ROI); product
Market Performance such as sales, market share; and shareholders return
such as total shareholder return (TSR), economic value added (EVA).

Gang et al., (2021) broaden the definition of firm performance to include

incorporate operational performance (nonfinancial) in addition to the
measurement of financial performance because the financial measures are
not fully able to provide a real picture of the state of the company. This can
be measured using market share, new product introduction, product quality,
marketing effectiveness, manufacturing value-added, and another
measurement of the efficiency of the technology included as indicators of
organizational performance measurement (de Villiers and Dimes, 2020).

From the foregoing, firm performance may be seen as return on asset while
corporate governance can be measured as composition of board member,
board size, CEO status and shareholding (ownership) concentration.

Corporate governance

Corporate governance is the system by which organizations or institution

are directed and controlled. The corporate governance structure specifies
the distribution of rights and responsibilities among different participants in
the corporation, such as, the board, managers, shareholders and other
stakeholders, and spells out the rules and procedures for making decisions
on corporate affairs (Hasnan, Mohd Razali and Mohamed Hussain, 2020).
It is concerned with the processes, systems, practices and procedures as
well as the formal and informal rules that govern institutions, the manner in
which these rules and regulations are applied and followed, the
relationships that these rules and regulations determine or create, and the
nature of those relationships. It also includes the structure, process, cultures

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and systems that engender the successful operation of the organizations
(Khidmat, Khan and Ullah, 2020).

Good corporate governance embodies both enterprise (performance) and

accountability (conformance) (Guluma, 2021). Through such structure,
processes and mechanisms, the well-known agency problem, that is, the
separation of ownership (by shareholders) and control (by managers) which
gives rise to conflict of interest within a firm may be addressed such that
the interest of the managers are more aligned with that of the shareholders.
The importance of high performance in boosting economic growth and the
standards of living of the people has been severally canvassed (Khidmat et
al., 2020).

Wasdani et al., (2021) define good CG as the application of best

management practices, compliance of law in true letter and spirit and
adherence to ethical standards for effective management and distribution of
wealth and discharge of social responsibility for the sustainable
development of all stakeholders. Kim, Choi and Choi (2019) have
identified three important criteria for good CG, namely board
independence, board accountability and board quality. According to Gangi
et al., (2021), the characteristic features of good governance are separating
the roles of the Chairman and CEO (who represent ownership and control,
respectively), as implied by the agency theory, balancing the composition
of the board in terms of skills and competencies as well as the proportions
of insiders and outsiders, having defined criteria for director independence,
establishing audit committees for remuneration of top-level executives,
nomination of directors and for making business strategies, creating robust
and transparent processes for appointment of directors and setting up
effective performance evaluation systems (linking rewards to performance)
and communicating it with investors (Kim et al., 2019).

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Internal CG includes the controlling mechanism between various actors
inside the firm: that is, the company management, its board, and
shareholders. The shareholders delegate the controlling function to internal
mechanisms such as the board or supervisory board. Effective internal CG
is essential in accomplishing company strategic goals. Shao (2019)
described internal mechanisms by dividing them into boards, managers,
shareholders, debt holders, employees, suppliers, and customers. These
internal mechanisms of CG work to check and balance the power of
managers, shareholders, directors, and stakeholders. Accordingly,
independent board, CEO duality, and ownership concentration are the main
internal corporate governance controlling mechanisms suggested by
various researchers in the literature. Thus, the study considered these three
internal corporate structures in this study as internal control mechanisms
that affect firm performance (Guluma, 2021). Concurrently, external CG
mechanisms are mechanisms that are not from the inside of the firm, which
is from the outside of the firms and includes: market competition, take over
provision, external audit, regulations, and debt finance. There are a lot of
studies that examine and investigate the effect of external CG practices on
the financial performance of a company, especially in developed nations.

However, several prior studies reported different results of the manager's

role in corporate governance in different ways. Previous studies claimed
that overconfidence is a dysfunctional behaviour of managers that deals
with unfavourable consequences for the firm outcome, such as value
distraction through unprofitable mergers and suboptimal investment
behaviour, and unlawful activities (Guluma, 2021). Shao (2019) argued the
human character of individual managers affects the effectiveness of
corporate governance. Top managers' behaviours and experience are
primary determinants of directors' ability to effectively evaluate their

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managerial decision-making (de Villiers and Dimes, 2020). In another way,
Chen (2019) noted managerial overconfidence can encourage some risk
and make up for managerial risk aversion, which leads to suboptimal
investment decisions. Uribe-Bohorquez, Martínez-Ferrero and García-
Sánchez (2018) suggested in the presence of free cash flow, the manager
may overinvest and they can accept a negative net present value project.
Therefore, the existence of CG mechanisms aims to eliminate or reduce the
effect of agency and asymmetric information on the CEO’s decisions
(Uribe-Bohorquez et al., 2018). This means that the objectives of CG
mechanisms are to counterbalance the effect of such problems in the
corporate organization that may affect the value of the firms in the long
run. Even with the absence of agency conflicts and asymmetric information
problems, there is evidence documented for distortions such as the case of
corporate investment. Managers will over- or under-invest regarding their
optimism level and the availability of internal cash flow.

Influence of ethical leadership on firm performance

Brown and colleagues posit that ethical leadership may affect team
outcomes (Brown et al., 2005). Social exchange theory by Buye (2021)
suggests that individuals who are well-treated by others feel obliged to
react positively or offer positive treatment in some way (Walumbwa et al.,
2011). Ethical leadership is associated with honesty, trustworthiness and
fairness in decision-making (Sarwar, Ishaq, Amin and Ahmed, 2020).
High-quality social exchange between ethical leaders and team members
may encourage them to put extra effort into their work (Nguyen, Nguyen
and Thanh Hoai, 2021). When ethical leaders exhibit such behaviour
towards their team members, the latter may reciprocate through job
dedication, leading to improved performance (Peng and Lin, 2017).

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Previous research suggests a positive relationship between ethical leaders
and team performance. According to Lin et al. (2019), ethical leadership
can enhance team performance indirectly through leader–member exchange
and capitalisation. Liu et al. (2019) found that ethical leadership is
positively linked to team performance through a team development
competition, while the findings of Gardner, Karam, Alvesson and Einola
(2021) reveal that ethical leadership is positively related to group in-role
performance. According to Kim and Jang (2020), ethical leadership has a
positive influence on task performance in nursing teams.

Ethical leaders clarify performance goals and task expectations to help their
team members know what is expected from them (Strydom, 2021).
Clarification of the goal provides a sense of belonging among employees
by enabling them to concentrate on activities designed to achieve that goal
(Liang, Ling, Tang, Zeng and Zhuang, 2019). It helps them to learn faster
in a changing environment (Özsungur, 2019). According to Kim and Lee
(2010), vision and goal clarification is positively related to employee
knowledge acquisition and application capability. Furthermore, Strydom
(2021) reveals that role clarity helps information system development
teams improve the identification of customers’ business requirements.
Team information acquisition, in turn, leads to higher team performance.
Bhardwaj and Kalia (2021) suggest that teams are likely to perform their
tasks better and boost long-term success when acquiring information from
outside the team, while Özsungur (2019) reveals that team information
acquisition has a positive effect on operational effectiveness in software
implementation. In this present study, a positive relationship is proposed
between ethical leadership and team performance, partially mediated by
team information acquisition.

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Good and bad ethical leadership and corporate governance in
Zimbabwe

Zimbabwe currently has a set of corporate governance provisions (CGI) as

provided in the Zimbabwe Corporate Governance Code (Zimcode)
(Nyarukwa, 2021).The Zimcode was introduced in 2015 in Zimbabwe and
its main purpose was to curtail corporate scandals that had ravaged listed
companies as a result of inadequate corporate governance compliance and
was meant to augment the outdated colonial-era Companies Act of 1951
(Nyarukwa, 2021).

Delta Beverages is one example of listed firms which have been practicing
good corporate governance in Zimbabwe. As many studies revealed, well-
managed corporate governance mechanisms play an important role in
providing corporate performance. Good corporate governance, as is
currently being practice in Delta Beverages, is fundamental for a firm in
several ways. de Villiers and Dimes (2020) indicate the good corporate
governance increases the company image, reduces the risks, and boosts
shareholders' confidence. Furthermore, good corporate governance
develops a number of consistent mechanisms, internal control systems and
external environments that contribute to the business corporations’ increase
effectively as a whole to bring about good corporate governance. The basic
rationale of corporate governance is to increase the performance of
companies by structuring and sustaining incentives that initiate corporate
managers to maximize firm’s operational efficiency, return on assets, and
long-term firm growth through limiting managers’ abuse of power over
corporate resources (Guluma, 2021). Mazikana (2019) suggests that
corporate governance practices play a pivotal role in enhancing the
financial performances of firms.

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However, there are also some listed firms which continue to struggle with
corporate governance in Zimbabwe. Trust Bank Zimbabwe had a myriad of
corporate governance challenges including the abuse of depositors’ funds
and violating the provisions of the Banking Act. The example of this bank
shows the high level of poor corporate governance among some firms on
the ZSE. There is a need for good corporate governance practices in
Zimbabwe. Famba, Kong, Kurauone and Chituku-Dzimiro (2020)
suggested that over 50% of on the Zimbabwe stock exchange have poor
corporate governance practices and weak organisational control structures.
In particular are the issues of the lack of board independence and board
gender diversity which should be significantly related to the ROA
performance of the firms.

With the dawn of the new millennium, corporate failures and scandals were
reported globally, in both developing and developed countries. Whilst the
majority of such corporate governance cases have been noted in private
manufacturing and service-oriented firms, Trust Bank has been a
noteworthy part of such corporate governance challenges. In particular,
banking entities are characterized by high opaqueness or severe
information asymmetries, unique capital structures in that depositors
provide far more financial resources than shareholders, and peculiar
contractual forms (Rashid, Mohd and Islam, 2020). Analyses of the causes
of bank failures seem to suggest the role played by bad board structures as
leading to poor corporate governance practices. For instance, Renaissance
Merchant Bank which was placed under curatorship at the beginning of
June 2011 after investigations revealed the collapse of corporate
governance structures within the institution. The bank came under spotlight
after several irregularities were found to be working against the interests of
business. According to Chokuda et al., (2017), these included the collapse

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of corporate governance structures leading to gross abuse of depositors’
funds, capitalisation through borrowed and depositors’ funds, irregular
shareholding structure, technical insolvency and lack of separation of
ownership and management.

It has also been suggested that there have also been a number of banking
institutions with deep-rooted structural anomalies, inadequate risk
management systems, poor corporate governance practices (The Sunday
News, 2020). Bank failures have reportedly resulted from poor corporate
governance, insolvency and imprudent lending activities, exacerbated by
low confidence in the banking sector due to high transactional costs and
marginal rates on deposits (Research and Markets, 2020). During a policy
dialogue briefing recently held in Zimbabwe, Mr Jabusile Sibanda, a senior
policy advisor at Transparency International Zimbabwe (TIZ), said “A total
of six banks, AfrAsia Bank Zimbabwe, Interfin, Trust Bank, Allied Bank,
Capital Bank and Royal Bank, have closed operations since dollarisation in
2009 due to poor governance structure and bad loan books.”

The lack of integrity of BODs in Trust Bank was also evident in their
unethical practices. The Reserve Bank of Zimbabwe (RBZ) (2017) states
that some banking institutions have been characterised by such unethical
business practices as the abuse of positions by shareholders and senior
management, using depositors’ funds for personal gain and as insider loans
were granted without collateral security. Added to this, there has reportedly
been the abuse of associate companies and/or related parties to enable
banks to venture into non-banking activities and to channel depositors’
funds to non-regulated entities such as asset management or investment
companies. Some banks have also been noted to have poor corporate
governance structures characterised by an improperly constituted board of

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directors, poor board oversight, inadequate, inexperienced management and
undue influence or domination by leaders with a high concentration of
shareholding influence. Inadequate risk management practices and systems,
including poor management information systems, exposing banking
institutions to increased liquidity and solvency challenges. There have also
been reports of ineffective boards which failed to interrogate management
decisions and information presented, risk management systems not being
fine-tuned to reflect the changing operating environment and undue
influence by founder shareholders were listed among other problems. This
duplicity suggests that these BODs in Trust Bank were not properly
constituted and needed realignment.

Chigudu (2020) suggests that the current corporate governance practice has
not effectively improved the efficiency and effectiveness of firms in
Zimbabwe. This is a result of corruption, inconsistencies, lack of
commitment and absence of the rule of law and above all, excessive
political interference. There are also ethical matters stemming out from
such challenges and malpractices have been some form of complicity or an
underestimation of the effect of good corporate governance in Zimbabwean
firms (Mazikana, 2019). Corruption has been institutionalized with cases of
impunity on the rise. Issues of governance that countervail the
sustainability and risk nexus are depicted.

The example of Trust Bank shows that many listed firms in Zimbabwe face
the accusations of poor corporate governance practices, and some are debt-
ridden (Muswere and Dube, 2022). Machiavellian practices like high board
turnover, ineffective boards, inappropriate board mix, poorly qualified
directors and political appointments affect the performance of the firms
(Muswere and Dube, 2022).

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In general, the examination of corporate governance, ethical leadership and
firm performance among firms listed on the ZSE shows a grave picture.
Whilst firms like Delta Beverages have been able to make use of corporate
governance principles to enhance the performance of their firms, some
firms continue to lag behind in doing so. Nyarukwa (2021) suggests that
the corporate governance reform in Zimbabwe through the introduction of
the Zimcode did not significantly affect the financial performance of
Zimbabwean companies. This might be a signal that the regulators need to
overhaul the code or gravitate toward mandatory compliance.

References

Ahmad, M.A. Al-Shbiel, S.O. (2019) The effect of ethical leadership on

management accountants’ performance: the mediating role of
psychological well-being. Problems and Perspectives in Management.

Buye, R. (2021) The impact of ethical leadership on organizational

performance. ResearchGate.

Chamtitigul, N. Li, W. (2021) The influence of ethical leadership and team

learning on team performance in software development projects. Team
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Chigudu, D. (2020) Public sector corporate governance: zimbabwe’s

challenges of strategic management in the wake of sustainable
development. Academy of Strategic Management Journal, 19 (1).

Chokuda, T.S. Nkomazana, N. Mawanza, W. (2017) A Bank Failure

Prediction Model for Zimbabwe: A Corporate Governance Perspective.
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de Villiers, C. Dimes, R. (2020) Determinants, mechanisms and
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Mazikana, A.T. (2019) Corporate Governance and Financial Performance

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