Understanding Cultural and Social Forces is Crucial to Improving Corporate Governance
CG Insights - top corporate governance experts discuss the latest research. Bruce Kogut is the Bernstein Professor of Ethics and Leadership at Columbia Business School and directs the Sanford C. Bernstein Center there. He is currently on leave to the Wissenschaftskolleg in Berlin, where he is writing a book on productivity as the driver of national wealth. Professor Kogut has served on corporate and research boards in India, UK, France, and Russia.
The most interesting piece on corporate governance I read recently was….
… David Roodman's book, Due Diligence: An Impertinent Inquiry into Microfinance. Microfinance essentially shifts the governance that emanates from top leadership down through the organization to the customers who evaluate and monitor each other. The customers have the collective responsibility for deciding how to enforce individual obligations. In this book, Roodman offers an insightful analysis of the problems in peer governance and monitoring, some of which may contribute to the mixed delivery on the promises of microfinance.
Right now, I am working on…
… A follow up to The Small Worlds of Governance, an MIT press book I co-authored along with 20 colleagues that looked at corporate governance in emerging market countries through the informal social networks that connect people. The argument is quite simple: governance is exercised through powerful clubs that constitute the social and business networks among owners, directors, and managers. However, the dynamics of simple behaviors can be quite surprising!
These connections in networks act as societal pulls on boards and executive decision makers. Of course, laws and regulations matter, but the idea is to use increasingly more powerful and detailed algorithms to detect the sources of power and influence on corporate behaviors, such as which companies acquire others, and why.
Based on this approach, the new work analyzes statistics on 50 million companies around the world and their progression towards increased global integration over a period of years. This gives us a deeper understanding of the structure of globalization. The sheer size of the data combined with the more powerful algorithms will allow novel insights into the flows of foreign direct investments. This should lead to new ways to measure foreign investment and enable us to simulate systemic interdependence in the world economy.
I think the most relevant CG research topic for emerging markets now is…
…Understanding more about the dynamics of cultural and social connections and interactions within and between unique country contexts in the effort to improve corporate governance. The research suggests that laws and regulations alone are not sufficient to promote good governance—you have to account for the underlying sociology at play.
For example, a recent study by Ahern and Dittmer shows some unintended consequences of Norway’s law requiring 40 percent female representation on the boards of public companies, a rule that the European Union currently is considering. Their study revealed that because of an ongoing shortage in the number of women in senior positions, the women who became directors under this new quota system brought less experience to the table. The authors determined that this lack of experience damaged company performance and led to declines in stock prices.
Perhaps a more effective approach would be more nuanced: a smaller quota can generate the structural conditions to tip the selection of directors towards sustainable gender diversity. This way, the void in leadership and experience would be filled so that there would be a stronger pipeline and a stronger talent pool. In our research, we have simulated these dynamics and the results suggest that smaller quotas can, in some circumstances, have powerful positive impacts.
Similarly, you can see social forces at play in…
…The ballooning of executive pay packages in the last 15 years. It is becoming clear that compensation packages for senior leadership are not determined solely on the basis of supply and demand. Simply put: how much their peers get paid matters a lot to executives.
In addition, our research suggests that these forces play a role in business group growth and expansion. Looking at the social and genealogical rules that drive family business group evolution and getting a handle on these dynamics would be a valuable contribution to the current global debate over whether business groups are bad or good for an economy.
The bottom line here is that sociology matters. You can’t just write a governance rule and expect an outcome—you have to take into account societal norms as well as the network structures to the informal social connections, interactions, and relationships. The good news is that we have a better understanding today of how to account for these issues in an analytical way.
Watch for the November release of the film Financial Innovation: A Risky Business, which addresses governance and regulation. It will be available for free at the site of the Sanford C. Bernstein & Co. Center on Leadership, Ethics, and Governance: http://www8.gsb.columbia.edu/leadership/