The Effective Governance of Organisations - Essay Example

The Leaders role in effective governance of organisations Introduction Leadership is an essential element in the survival and success of any group whether it belongs to the animal kingdom or the human world. Leadership is one of the most important factors that affect survival and development among the more advanced life forms on earth today. Leadership exists among humans, animals and even the insect world. All forms of life that live as a group or as a society will have some form of leadership that will help to lead an organised life. In the animal kingdom, for instance, a herd of elephants will have a bull or a matriarch. Among insects the honey bee has a queen. Among humans leaders appear in a variety of roles and include politics, business, religion, and other social factors. In such a scenario, absence of effective leadership will eventually lead to the destruction or at least decay in a group or society. Due to their superior intelligence, many styles and forms of leadership have evolved in the world of humans. This has also resulted in leadership being the subject of study by various scholars and theorists over a period of time. This paper is a study of leadership and corporate responsibility in business organizations and will look at a broad range of features, factors, and issues with regard to its influence in an organizational setting. Ethics, legal issues, and corporate governance Corporate governance is of great importance and focus in the world of business today. Undoubtedly, it has become one of the hot topics for writers and academicians. However, there is no consensus as to what constitutes CG. An academic paper points out, in this context that “Most academics, business professionals, and lay observers would agree that CG is defined as the general set of customs, regulations, habits, and laws that determine to what end a firm should be run. Much more fraught, however, is the question: “what defines good corporate governance” (Corporate Governance, 2006)? Corporations unlike its smaller counterparts like sole proprietorships, partnerships, and small and medium enterprises (SMEs) are much larger and hence more complex to govern. Even though no owner or partner can avoid the concept of good governance, the consequences of a smaller firm being unsuccessful due to poor practices is much lower when compared to larger corporations. One of the main reasons is that the number of stakeholders who are affected is comparatively huge in the case of corporations. In this case, the stakeholders are comprised of the employees, the shareholders, the local governing bodies, the creditors, other contractual partners, any subsidiaries and branches, the national government, management or board of directors, and the principal owners (if any) Just as good leadership can help organizations grow, poor leadership and corporate/personal greed can destroy it or give it an extremely bad reputation.  Poor governance can affect each one of these sectors in a big way. In some localities, the economy of that place may be dependent on the performance of its principal employer, a corporation. The economy will be badly affected if such a huge employer finds itself in the red and lays off all its employees. One of the factors could be the poor vision and incompetent corporate governance of the companies. This was shown just to indicate that the failure of large corporations has serious consequences. It is no wonder that governments and companies themselves are taking this concept quite seriously. There are several reasons why poor corporate governance occurs in corporations having a board of directors for its management. An article (Okane, 2008) in the Finance Week highlights some of the major reasons why poor or unethical governing can occur. “Among the problems highlighted was an underperformance in the stock price relative to benchmarks, entrenched directors on their boards, super-majority voting requirements, a lack of accountability for directors and the lack of a claw back policy to recapture executive compensation in the event of fraud or misconduct”. Examples abound in the business world, the collapse of Enron Corporation being the most infamous of them all. Other examples include the Sathyam Computer scandal in India and the failure of a large number of financial institutions in the USA due to the economic slowdown in the US and world economy. What is worrying in the latter case is that many of these banks failed primarily due to poor and greedy financial strategy. Some of the banks that failed in 2008 include IndyMac Bancorp, First Integrity Bank, ANB Financial NA, and Douglass National Bank (Fact Box, 2008). The Cadbury Report 1992, Hampel Committee Report on Corporate Governance, The Greenbury Report, and the Combined Code on Corporate Governance are some of the guidelines, statutes that have been introduced in the UK in the past in order to bring more responsibility among leadership in organizations in the UK. In the USA, the Sarbanes Oxley Act of 2002 was introduced after the collapse of Enron Corporation. Economic issues: In many instances poor leadership can lead to problems for organizations. It takes strong leadership for organizations to survive in today’s competitive and globalized environment. But sometimes, factors outside the control of leadership can also occur that create problems for the organization as well as for its stakeholders. The ideal example is the collapse of many companies across the world due to the current global economic crisis that exists today. “BDO Stoy Hayward has forecast a 9% rise in UK business bankruptcies in 2008, to reach the highest level since the dot.com crash five years ago” (BDO, 2007). Leadership in Business organizations Due to the inherent complexity of human behaviour the concept of leadership in society and business is difficult to define. There have been many definitions on leadership coined by social and management experts, and the one common thread that runs through all is the leader’s ability to influence. According to Lussier and Achu, “leadership is the influencing process of leaders and followers to achieve organizational objectives through change” (Lussier & Christopher 2003 p.3) This section focuses on different aspects of leadership that can be applicable to diverse situations with regard to corporate governance. So much of literature has been written about leadership in business that it is difficult to find a common list of qualities applicable in all situations. But one thing that all agree on is that certain leadership qualities are essential for a business to develop and thrive. This is true of any type and size of business. An attempt is made here to list some of the main qualities that would be agreed upon as essential by business leaders and theorists alike. In a study titled ‘Neohumility / Humility and Business Leadership: Do they belong together?’ by Pareena G. Lawrence, Associate Professor, Economics and Management, University of Minnesota, the author lists certain qualities that are suggested by various experts on the field of leadership and management. They are: a. Vision: b. Ability: c. Enthusiasm: d. Self Awareness: e. Empathy: f. Independence and self-confidence: g. Persistence: h. Rationality: i. Integrity: j. The leader should also possess the ability to communicate effectively, nurture, delegate, motivate and above all be a team player. Many leaders also have an inborn personal charisma which is something difficult to develop consciously (Lawrence, 2005). The existence of the second last point namely integrity is what plays a crucial role in good corporate governance. Too much ambition (personal or for the sake of business) can be harmful as in the case of Enron Corporation whose collapse took along with it a conniving Arthur Anderson also. Too much of ambition is referred to as greed. Unethical corporate leaders can exhibit or possess all or many of the above attributes except integrity. Exercise of power in leadership Throughout the ages, leadership has played a part in shaping the life of human beings across the globe. But it was only in the early 1900’s that this aspect began to be studied and theories related to the same began to be formulated. Whatever may be said in different theories, leaders often use some base or guidelines in exercising their power. It would depend on the ability, mentality and the situation faced by the leaders. It may also be that a single leader may use more than one guideline in exercising power over their subordinates. Some major guidelines are given below (Bases of Power). Coercive Power: This is the method by which leaders use coercion to exert power over their employees or followers. It can also be called the stick approach (from carrot and stick approach). This was one of the most widely uses forms of leadership across the world in business until modern management thinkers began to formulate ways in which productivity could be improved by treating employees as human beings rather than as a producing machine. In coercive style, the feelings and opinions of the employees are not taken into consideration. Usually there will be some form of punishment if the employee fails to carry out his orders properly. Lately, this form of leadership is not very popular especially in developed and developing economies. Some situations in which coercive power can be exercised is during a crisis, emergency or where the survival of the firm itself is at stake. Reward power: Reward power is an instance where workers are given rewards apart from their basic salary or wages in completing the work. Reward could be given for achieving or exceeding targets, finishing a stipulated work on or before time or even for producing better quality of work. It can also be given for disciplined work. Rewards can be monetary and non-monetary. Monetary rewards are generally in the form of additional cash calculated according to some predetermined criteria. Non-monetary rewards can include health care plans, paid vacations etc. one of the most powerful non-monetary reward is simple words of sincere praise. Reward power is being widely used in business circles nowadays. Legitimate power: This power comes from the legitimacy of the post held by the leader. A CEO is said to have legitimate power over his subordinates due to the official position held by him. This is also the case with managers and supervisors. Such persons can order employees to work solely on the basis of their position. This power is lost once the leader is exits from the position. Referent power: This type of power is available to the leader due to the respect he earns from his subordinates. People with charisma will usually hold this type of power and is seen more in social and political circles. This could be a lifelong power for the leader. In informal groups, this power can be stronger than legitimate or reward power. Expert power: This power arises from the knowledge of expertise of the leader is his chosen field. To continue having this power, the leader should constantly update himself with relevant information. This is also not linked to positions within the organization. For example, a mechanic (expert) coming to repair equipment in the CEO’s office will have the power to require his boss to perform relevant acts on his request. Here again, use of these powers in a responsible manner is crucial. For example, a leader can be coercive, but ethical, and exhibit ethical corporate governance. Reward power can be used to corrupt for personal and business greed. Leaders may use its different forms according to individual circumstances. What is more important than types of power is the way it is used so that proper corporate governance takes place. But in a logical sense, a corrupt leader will be more helped by using coercive, referent, or reward power. Followers can be coerced, awed, or corrupted using these powers. Leadership theories and styles Modern management thinkers often stress that leaders are developed and not born. Some of the important theories and styles evolved and identified over a period of time are discussed here. Some of the earlier ones believe that some leadership traits/theories like Great Man Theory and charismatic leadership (to a large extent) are inborn and cannot be developed. Path-Goal Theory: The path-goal theory of leadership was propounded by Robert House and Mitchell. It is of the opinion that the leader has the ability to motivate, satisfy and improve performance of subordinates. As the name suggests, the leader has to develop a goal out of his vision and set a path for his subordinates to follow to achieve that goal. In the process the leader has to first make clear to the subordinates the way or path to follow. He must then remove or guide in removing obstacles along the path. He must also set and provide relevant rewards and incentives so that the employees are motivated to follow the path and achieve the goals set for them. The creators of this theory also say that there are four style of leadership that a person can follow depending on his mentality, capability and the situation. Supportive leadership: As the name suggests, the leader follows a supportive style in the process of achieving goals. Support can be given by providing facilities, giving the right working atmosphere, giving support to and motivating the employees etc. The leader can also show his support by raising the self esteem of the employee through words of sincere praise for doing the work correctly and also make efforts to make the job more interesting. Concern for the needs of the employees is also another factor in this type of leadership. All this indicates that this type of leadership is mainly effective in a situation where the work is repetitive boring or in some cases even dangerous. Directive leadership: This is a style where the work needs constant direction from the leader. So the leader has to be on hand most of the time to see that work is being done in the right way at the right speed. In case he sees a variance, he has to give the right directives to correct the situation. This type is suited to jobs which are complex and complicated. It is also a useful method to follow if the workers are new to the job or are inexperienced. Participative leadership: In following this style, the leader takes into consideration the opinions and suggestions of the employees in completing the task. This type will be characterized by regular meetings between employees (or their representatives) and the leader. This style is best suited in situations where the job might be complex and the employees themselves are experts in their fields. Being experts they can assist the leader in making the right decisions. Achievement-oriented leadership: This type of leadership is best suited when the employees are ambitious and also when the work is challenging or complex. The leader’s approach would be to set challenging targets to the employees and also providing suitable rewards when the targets are achieved. High quality of work and also an element of self improvement will also be expected of the worker. Great Man Theory: This is similar to trait theory, in the sense that this line of thought believes in born leadership rather than developed leadership (Assumptions). But this line of thought does not discount other styles and models. It basically states that a leader will emerge in times of great problems or stress. But it appears to be more relevant to social, religious, and political environments rather than organizational ones. But it can happen in business settings even though a leader is appointed rather than automatically emerging from within or outside. Autocratic leadership: This approach does not involve employees in suggestions and decision making. The leader gives orders and employees follow them. This type is not acceptable by many leaders today and will usually work only in smaller organizations. Laissez-fair: In this form of leadership, the leader gives enough freedom to his followers or sometimes. There won’t be any involvement of the leader. A research project is an ideal situation where this type of leadership will work best. This is assuming that individuals are motivated at getting results and resents directions from above. 5.2. Transactional Leadership: Here the leader is in the role of a negotiator. He appeals to his followers for their performance. He encourages his followers by giving positive ideas and try to achieve the target. Punishment and encouragements are used simultaneously to achieve the very aim. Commands rule this system. The followers must obey the commands of their leaders. 5.3. Transformational Leadership: The leader himself acts as a role model to his followers. He inspires them by his very actions. Encouragement and motivation are used to achieve the desired results. Since the leader always shows concern in the well being of his followers, they have a feeling of security and in turn they show their sincerity. They can air their opinions and get their doubts cleared with their leaders. The leader has the power to transform and even build a second rung of leadership within the organization. Charismatic leadership: Charisma is a quality that is possessed by only a few people. An article titled “Charismatic Leadership” quotes Max Weber on the aspect of charismatic leadership. It says that charismatic leadership is defined as “resting on devotion to the exceptional sanctity, heroism or exemplary character of an individual person, and of the normative patterns or order revealed or ordained by him” (Charismatic Leadership). It is often said that leaders with charisma have an added advantage over others who lack it. It should be interesting how such leaders hold their power over their followers: “The Charismatic Leader gathers followers through dint of personality and charm, rather than any form of external power or authority” (Changing Minds Group, 2007). According to Naomi Frances Miller et al such leaders will, have an appealing vision, have high performance expectations of others, display self-confidence, exhibit role model behaviour, show confidence in others to achieve targets and work towards achieving collective identity. Other characteristics include unconventional behaviour, ability to take personal risks and sensitivity to other’s needs (Bryman, 1986, p. 19). Here also, corporate governance is solely dependent on motives rather than on styles. Just like power mentioned earlier, some styles can actually help an unethical leaders. Charismatic, transformational, and autocratic approaches are some of the styles which is useful to corrupt employees and other stakeholders. The awe in which a leader is held by followers can influence their personal judgment and make them go along with their leaders’ unethical practices. The ability to transform employee outlook can also result in the same situation. The same situation can arise due to the fear of the autocratic leader. Personal viewpoint and conclusion In a sense, discussing about one style of leadership is not practical since the common consensus is that there is no universal theory or style that can be applied to all situations of corporate .governance. This is where the concept of situational leadership becomes relevant. Corporate responsibility is not an easy concept even in normal situations. The complexity of human behaviour is an inherent factor that adds to this complexity. Moreover, other internal and external factors make the situation more complex. Situational leadership is an approach where the leader applies different leadership styles or models according to the situation. A leader can adapt a participative style during normal business cycles. In times of crisis or an emergency he or she can adapt a directorial approach or given the personal capability, a charismatic approach. In case this writer is faced with a particular situation, the style of leadership that will be implemented will be a situational one. This personal viewpoint is derived from what has been learnt from this course. In normal circumstances, a participative leadership style is the approach that will be followed. But in crisis or emergency situations, a charismatic leader with ideal leadership characteristics is the best option. Not everyone has the charisma; hence an alternative approach is to adopt a directive style leadership. In such circumstances, followers (employees) are afraid of the future and needs guidance rather than participation. Directorial, charismatic, and transformational leadership will be effective during such situations. Personally, I feel more inclined towards a situational leadership style. Elements of transformational and participative approach are also appreciable because of its ability to transform employee outlook into achieving organizational goals. Charisma is something that few people have or develop and it is possible for good corporate governance even without it. But an insincere or greedy attitude will negate any of the above mentioned qualities with regard to corporate responsibility. A charismatic leader can actually mislead followers into taking a wrong path. What is needed is a situational leadership combined with ethics, and caring for the followers as well as the organization. With regard to good corporate governance, any other leadership trait or qualification is an added advantage. 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And Christopher F. Achua, 2003, Leadership: Theory, Application, Skill Development, 2, revised, Thomson South-Western Okane Gerry, 2008, ‘Companies with poor corporate governance named’, Finance Week, viewed 25, April, 2009, http://www.financeweek.co.uk/item/6029 Read More