DSpace at VNU: What can corporate governance build in shipping companies?

Luu Trong Tuan School of Business, International University – Vietnam National University, Ho Chi Minh City, Linh Trung Ward, Thu Duc District, Ho Chi Minh City, Vietnam E-mail: luutrong

What can corporate governance build in shipping companies?

Luu Trong Tuan School of Business, International University – Vietnam National University,

Ho Chi Minh City, Linh Trung Ward, Thu Duc District,

Ho Chi Minh City, Vietnam E-mail: luutrongtuan@vnn.vn

Abstract: This empirical inquiry into shipping companies in Vietnam seeks to

discern whether corporate governance influences organisational culture and leadership, which in turn influences upward influence behaviour Structural equation modeling (SEM) was utilised for the analysis of 418 responses returned from self-administered structured questionnaires sent to 710 middle level managers From the findings emerged the linkage pattern of strong corporate governance and its organisational outcomes such as adhocracy, market, and clan cultures or transformational leadership Adhocracy, market, and clan cultures and transformational leadership were also found to cultivate organisationally beneficial upward influence strategies

Keywords: corporate governance; organisational culture; leadership; upward

influence behaviour

Reference to this paper should be made as follows: Tuan, L.T (2013)

‘What can corporate governance build in shipping companies?’, Int J Shipping

and Transport Logistics, Vol 5, No 2, pp.113–136

Biographical notes: Luu Trong Tuan is currently a Business Administration

(BA) Teacher at International University-Vietnam National University, Ho Chi Minh City He received his Master degree from Victoria University, Australia and PhD from Asian Institute of Technology (AIT), Thailand His research interest includes organisational behaviour, performance management, and business ethics

five pillars of sustainability according to the World Business Council for Sustainable Development’s (WBCSD) (Saha and Darnton, 2005)

The traditional focus on structural sources of power in corporate governance has been extended through growing research on managers’ utilisation of social influence tactics to promote their individual interests as well as their companies’ benefits (Stern and Westphal, 2010) Furthermore, according to Drori (2006), corporate governance can function as a mechanism for change in behaviours of members in the organisation

Corporate governance mechanism activates the motion of members including leaders from the orientation towards self-interests or interests of internal stakeholders of the organisation (intrapersonal or intraorganisational interests or stakes) to the harmony of all stakeholders’ interests (cross-organisational interests) Therefore, values oriented towards external stakeholders, especially customers and community, will be cultivated within the corporate governance framework Organisational culture is defined as the values, beliefs, and norms of an organisation that shape its behaviour (Davies et al., 2000) In other words, customer- or market-oriented culture may develop in the corporate governance mechanism

In the evolutionary philosophy and mechanism of corporate governance, leaders may adapt their own behaviours as well as promote changes in other organisational members’

behaviours or be influenced by behavioural changes in every point of the organisational network The wealth-creation function of corporate governance is often associated with encouraging entrepreneurial leadership and innovation even in large mature organisations (Filatotchev and Wright, 2005; Talaulicar et al., 2005)

Stern and Reve (1980) discern internal polity such as power and dependence and external polity such as culture as antecedents of influence strategies However, research

on how culture influences individuals’ choices of upward influence strategies still has scattered along the literature (Egri et al., 2000; Fu and Yukl, 2000)

Leadership can also act as a catalyst for a phenomenon to emerge in the organisation

Leadership, therefore, can catalyse upward influence behaviours Krishnan (2004) found that transformational leadership was positively associated with friendliness and reasoning among six upward influence strategies

Predicated on the separate relationships between corporate governance and organisational culture or leadership as well as between organisational culture and leadership on upward influence behaviours, the aim of this empirical inquiry is to discern the impact of corporate governance on organisational culture and leadership, which in turn cultivate upward influence behaviours The philosophy behind the study is that this relationship, to some extent, sketches the anti-gravity rocket-style model in which upward influence behaviours act like forces of a rocket generated by fuels (organisational culture and leadership) and platform (corporate governance)

This prelude of the paper leads to the review of corporate governance, organisational culture, and leadership literatures, followed by a discussion of upward influence behaviours as the dependent variables in this research, based upon which hypotheses were formulated The paper concludes with certain implications for managerial practice and potential research

2 Literature review

The ultimate goal of corporate governance is to maximise the wealth creation of the company as a whole (Letza et al., 2008); nonetheless, most of the early definitions on corporate governance view corporate governance as a system utilised to shield investors’

interests Corporate governance is defined by Shleifer and Vishny (1997) as the ways in which suppliers of finance to companies assure themselves of getting a return on their investment La Porta et al (2000) refer to corporate governance as “a set of mechanisms through which outside investors protect themselves against expropriation by [managers and controlling shareholders]” However, through its definition of corporate governance

as “a set of relationships between a company’s management, its board, its shareholders and other stakeholders”, the OECD (2004) looks beyond the relationship between shareholder and director into a wider network of relationships including other stakeholders The above definitions discuss those who contribute to the value chain of the company in the context of corporate governance Furthermore, the first two definitions look at corporate governance mechanistically as ways or mechanisms, whereas the last definition turns the look toward relationships among stakeholders

Defining corporate governance as ‘the exercise of power over and responsibility for corporate entities’, Mallin (2002) places responsibility as a component of triple bottom line beside mechanism of control through laws and rules as reflected in numerous definitions Gillan and Starks (1998), for instance, view corporate governance as the system of laws, rules, and factors that control operations at a company Meanwhile, corporate governance is portrayed in Cadbury Report (1992) as “the system by which companies are directed and controlled” Cadbury Report (1992) is not merely concerned with the control mechanism but also the leadership required for that mechanism reflected

in the term ‘directed’ in the definition One of the reforms in this control mechanism in corporate governance is the scorecard on corporate governance (Cheung and Jang, 2008)

as an attempt to comprehensively manage and measure the performance of all stakeholders

Organisational culture is depicted as an expansion of the hypernym ‘culture’ (Schein, 2004) A universal definition on organisational culture has turned out to be elusive (Lewis, 2002); nonetheless, one of the most common definitions of organisational culture entails a set of beliefs, values, and behaviour patterns shaping the members’ behaviour and building the core identity of organisations (Deshpande and Farley, 1999) Culture builds a sense of identity in employees, providing unwritten guidelines on how to behave (Holbeche, 2006)

Imparting the notion of understandings to Schein’s (1985) definition, Daft (2005) views organisational culture as a set of key assumptions, norms, values, and understandings that is shared by an organisation’s members and taught to new members

as right

The rendezvous of most of the definitions on organisational culture is the shared nature of the values, beliefs, philosophies, norms, meanings, etc Numerous authors

contended that the function of organisational culture is to produce a feeling of esprit de corps within the organisation [Van Maanen and Barley, (1985), p.39]

Quinn and Rohrbaugh’s (1983) the competing values framework (CVF) was developed by Quinn (1988) into an organisational culture model predicated on two dimensions:

1 organisational process (organic vs mechanistic)

2 organisational orientation (internal vs external)

Cameron and Freeman (1991) and Deshpande et al (1993) further adapted the CVF, which enables the more profound investigation of organisational culture The first dimension and the second dimension are denoted by the vertical axis and the horizontal axis respectively, whose intersection produces four quadrants displaying four culture types labelled as clan, adhocracy, hierarchy and market

The current research is predicated on the CVF since the CFV was empirically derived, has been validated in previous studies, and captures most of the proposed dimensions of organisational culture (Cameron and Quinn, 2006) Additionally, the CVF aligns with widely accepted categorical schemes that outline how people think, how they organise their values and ideologies, and how they process information (Cameron and Quinn, 2006)

2.3 Leadership

Bass’ (1985) model portraying two leadership paradigms, transformational and transactional, has been criticised for having overlooked the capability of leadership to disperse throughout the organisation The notion that leadership is not the preserve of an individual but a fluid or emergent property rather than a fixed phenomenon is at the core

of the concept of distributed leadership (Harris, 2005; Spillane, 2006) Avery (2004) also looks at the distribution of leadership, but views this distribution as not emanating from a leader, but as contributions from multiple leaders in organic organisations Introduced by Drath (2001) and expanded by Avery (2004), organic leadership tends to obnubilate the distinction between leaders and subordinates Reciprocal actions which this paradigm rests on implies that team members work together in whatever roles of power they have, without being governed by power of position (Hirschhorn, 1997; Raelin, 2003)

Employees become interacting partners in determining what makes sense Organic leader

is rather a temporal coordinator for the group of like-minded people, a servant or facilitator, sharing the vision and values based on self-control and self-organisation, where people have a lucid sense of purpose and autonomy within a particular setting

Bass’ (1990) review of the various conceptualisations of leadership culminates in the ensuing definition of leadership:

“Leadership is an interaction between two or more members of a group that often involves a structuring or restructuring of the situation and the perceptions and expectations of the members Leaders are agents of change – persons whose acts affect other people more than other people’s acts affect them

Leadership occurs when one group member modifies the motivation or competencies of others in the group.”

This definition of leadership by Bass (1990), analogous to the concept of organic leadership, endeavours to erase the boundary between leaders and subordinates Since this definition underscores that “leadership occurs when one group member modifies the motivation or competencies of others in the group” without specifying “this group member”, leadership can come from any member in an organisation Thus, transformational and transactional styles in this definition are not associated with a particular leader, but distributed through the organisation and instilled in the organisation’s culture Moreover, the rendezvous between the notions of interaction and meaning-making in Bass’ (1990) definition and those of reciprocal actions and sense-making in Avery’s (2004) discussion on organic leadership denote that the definitions of leadership incrementally converge, so Bass’ (1990) definition can serve as

a underpinning on which the conceptual model is built

2.4 Upward influence behaviours

Influence is crucial for managers’ effective performance An effective manager must influence others to implement requests and decisions The success of an endeavour by a person (the ‘agent’) to influence another person (‘the target’) is highly contingent on the influence tactics adopted by the agent (Yukl et al., 2008)

Upward influence denotes an agent’s influential behaviours oriented toward individuals at higher levels in the organisational hierarchy (Wayne et al., 1997) This study resorted to a spectrum of upward influence behaviours ranging from organisationally positive, legal and socially desirable to negative, illegal and ethically questionable (Ralston et al., 1993) encompassing organisationally beneficial behaviours, self-indulgent behaviours, and destructive behaviours (Egri et al., 2000)

2.4.1 Organisationally beneficial behaviours

As its name hints, organisationally beneficial behaviours tend to be directly beneficial to the organisation and viewed as the ‘organisational person’ approach to upward influence

They are the standard prescribed behaviours for organisational members encompassing caring for other stakeholders and behaving in a manner seen as promoting organisational sustainability

2.4.2 Self-indulgent behaviours

Self-indulgent behaviours reflect ‘it is me first’ approach in individuals’ behaviours toward other stakeholders in an organisation Their self-interest is not merely above the interests of other stakeholders but also diverges from the interests and values of the organisation as a whole Whether these behaviours functionally or dysfunctionally influence the organisation is contingent on the contextual factors such as ethical degree of organisational culture and leadership Self-indulgent behaviours encompass discerning and following an influential superior and using professional expertise to render the superior dependent on them

3 Conceptual framework and methodology

3.1 Conceptual framework and research hypotheses

In a value-creating stakeholder network, there is a growing magnitude of the notions of customers and market orientation (Enquist et al., 2005) Corporate governance looks beyond internal stakeholders towards external stakeholders, so tends to cultivate market orientation in the organisation Ho et al (2010) study also divulged that companies with effective corporate governance demonstrate a strong propensity for market orientation

Corporate governance is viewed as “a set of relationships between a company’s management, its board, its shareholders and other stakeholders” (OECD, 2004)

Meanwhile, market orientation encompasses not merely interfunctional coordination (Slater and Narver, 1994), but coordination among stakeholders as well, so can be nourished by a strong corporate governance Strong corporate governance therefore cultivates market culture

Furthermore, corporate governance influences innovation in a manner that institutional devices promote knowledge flows and the integration of diverse capabilities (Lacetera, 2001) Corporate governance is also a framework for change (Drori, 2006), so corporate governance can help build values of innovation through the organisation, which is consistent with dominant attributes of adhocracy culture, so the correspondence between strong corporate governance and adhocracy culture is rationally presumed

Strong corporate governance is built through guidelines rather than through strict laws and rules Bonding forces of all members are based on the relationships rather than rules or policies, which are the underpinning of adhocracy culture, market culture, and clan culture rather than hierarchy culture (Deshpande et al., 1993) Forces of all or most organisational members are directed towards the organisation’s vision and sustainable growth Above discussions lead to the ensuing hypotheses and subhypotheses:

H1 Strong corporate governance positively relates to adhocracy culture, market culture, and clan culture, but negatively relates to hierarchy culture

H1a Strong corporate governance positively relates to adhocracy culture

H1b Strong corporate governance positively relates to market culture

H1c Strong corporate governance positively relates to clan culture

H1d Strong corporate governance negatively relates to hierarchy culture

From OECD’s (2004) definition of corporate governance as “a set of relationships between a company’s management, its board, its shareholders and other stakeholders”, and Mallin’s (2002) view of corporate governance as ‘the exercise of power over and

responsibility for corporate entities’, in an organisation with strong corporate governance, the relationships between the management and all stakeholders are nurtured, and the leader exercises their power in a socialised manner to fulfil their responsibilities for the organisation as a whole and to all stakerholders The leader can build an organisational mechanism; however, an organisational mechanism also can promote a leadership style

Strong corporate governance mechanism can drive leaders on the path of organisational sustainable growth Leaders, within corporate governance mechanism as a framework for change (Drori, 2006), are not only agents for all stakeholders as corporate governance designates, but also change agents and encourage all members to be change agents as well as build distributed change agentship among members Strong corporate governance therefore tends to adapt the leader into transformational leadership style, paving the path for the following hypothesis and subhypotheses:

H2 Strong corporate governance positively relates to transformational leadership, but negatively relates to transactional leadership

H2a Strong corporate governance positively relates to transformational leadership

H2b Strong corporate governance negatively relates to transactional leadership

Bonds among organisational members based on rules may generate smoothness in operations; however, this smoothness may be superficial or even ‘artificial’ Therefore, rule obedience in the organisation may not promote functional or constructive upward influence behaviours Upward influence tactics which are in compliance with rules tend

to grow in the thin consent context where subordinates have no other alternatives than abiding by rules or policies and member-organisation fit in terms of interests or values does not occur In organisations with hierarchy culture where rules prevail (Deshpande et al., 1993), subordinates thus tend to look at themselves rather than their organisation and develop self-indulgent behaviours or even destructive behaviours rather than organisationally beneficial behaviours

Growth forces in organisations with adhocracy culture or market culture tend to be outward for external positioning (Deshpande et al., 1993), encouraging the stream of upward interaction in which market-oriented innovative ideas drift up towards leaders

The flow of upward interaction also increases the understanding and fit between subordinates and leaders in terms of interests or values, which in turn increases organisationally beneficial upward influence behaviours Despite its focus on internal maintenance, clan culture, with high sense of ‘cosy family’ (Deshpande et al., 1993), tends to allow all directions of influence, especially upward influence as a way to contribute to the cosiness of the organisation The following hypotheses and subhypotheses thus emerged:

H3 Adhocracy culture positively relates to organisationally beneficial behaviour, but negatively relates to self-indulgent behaviour or destructive behaviour

H3a Adhocracy culture positively relates to organisationally beneficial behaviour

H3b Adhocracy culture negatively relates to self-indulgent behaviour

H3c Adhocracy culture negatively relates to destructive behaviour

H4 Market culture positively relates to organisationally beneficial behaviour, but negatively relates to self-indulgent behaviour or destructive behaviour

H4a Market culture positively relates to organisationally beneficial behaviour

H4b Market culture negatively relates to self-indulgent behaviour

H4c Market culture negatively relates to destructive behaviour

H5 Clan culture positively relates to organisationally beneficial behaviour, but negatively relates to self-indulgent behaviour or destructive behaviour

H5a Clan culture positively relates to organisationally beneficial behaviour

H5b Clan culture negatively relates to self-indulgent behaviour

H5c Clan culture negatively relates to destructive behaviour

H6 Hierarchy culture negatively relates to organisationally beneficial behaviour, but positively relates to self-indulgent behaviour or destructive behaviour

H6a Hierarchy culture negatively relates to organisationally beneficial behaviour

H6b Hierarchy culture positively relates to self-indulgent behaviour

H6c Hierarchy culture positively relates to destructive behaviour

Transactional leaders who involve subordinates in the exchange between performance and rewards (McShane and Von Glinow, 2008) tend to cultivate in subordinates’

mindsets financial exchange between their contributions and compensations

Transactional leadership thus may nourish calculation-based attitude, ‘it is me first’

behaviour or self-interest in subordinates, whose behaviours may even become too self-serving to turn toward ‘win-win’ approach among members ‘Win-lose’ behavioural attitude may grow in the relationships with their colleagues

The transactional leader works within norms (Bass, 1985), so when subordinates can not obtain support from the transactional leader to ‘break’ the norms, they tend, on the surface, support these norms, but deep down develop their self-indulgent behaviours or,

in other words, ‘break’ these norms in silence

The transformational leader, on the contrary, redefines or alters the norms of the organisational culture based on her or his visioning of a more satisfactory alternative future state (Bass, 1985) A transforming leader, as Burns (1978, p.4) identified,

“… looks for potential motives in followers, seeks to satisfy higher needs, and engages the full person of the follower” Burns (1978, p.4) also suggested that transforming leaders built “… [a] relationship of mutual stimulation and elevation that converts followers into leaders” Examples of transformational leadership include ‘the leader’s providing a sense of vision’, ‘challenging the status quo’ and ‘providing stimulation and inspiration’ The transformational leader thus tends to open the door and cascade down the organisational hierarchy to welcome upward influence from subordinates for mutual stimulation and inspiration

Bass (1990, p.631) observed that “… transformational leaders have better relationships with their supervisors and make more of a contribution to the organisation than do those who are only transactional” Transformational leaders therefore also implement organisationally beneficial upward influence behaviours and may stimulate upward influence behaviours in their subordinates through this role modelling

Being innovative in nature, transformational leaders are more concerned with the improvement of the life quality of their subordinates (Tucker and Russell, 2004) as well

as other stakeholders A leader with transformational leadership, therefore, acts as a change agent to harmonise interests of all stakeholders Individualised consideration

as an element of transformational leadership implies the building of this value and interest fit between individuals and organisation as well as the alignment between individual tactics and organisational strategy Transformational leadership, as a result, tends to cultivate organisationally beneficial upward influence behaviours and diminish the density of egotism in their upward influence behaviours The ensuing hypotheses and subhypotheses are consequently expected to surface:

H7 Transformational leadership positively relates to organisationally beneficial behaviour, but negatively relates to self-indulgent behaviour or destructive behaviour

H7a Transformational leadership positively relates to organisationally beneficial behaviour

H7b Transformational leadership negatively relates to self-indulgent behaviour

H7c Transformational leadership negatively relates to destructive behaviour

H8 Transactional leadership negatively relates to organisationally beneficial behaviour, but positively relates to self-indulgent behaviour or destructive behaviour

H8a Transactional leadership negatively relates to organisationally beneficial behaviour

H8b Transactional leadership positively relates to self-indulgent behaviour

H8c Transactional leadership positively relates to destructive behaviour

Effective corporate governance entails the principles of accountability, transparency, fairness and responsibility in the management of the organisation (Ehikioya, 2009) An organisation with strong corporate governance is a place where responsibilities develop from code of ethics rather than strict laws and rules and intrinsically motivated

Dimensions of responsibility encompassing economic, legal, and ethical responsibilities are harmonised, and self-responsibility and responsibility for others and the organisation are also balanced In the organisation with strong corporate governance, upward influence is seen as a crucial means to display responsibility for value creation However,

it is likely that organisationally beneficial behaviour has more chances to develop than self-indulgent behaviour or destructive behaviour Strong corporate governance builds the compatibility between individual interests and organisational interests (Cadbury, 2000),

so can minimise self-indulgent behaviour or destructive behaviour Strong corporate governance, furthermore, with transparency mechanism to defend interests of stakeholders, both inside and outside, can filter destructive behaviour The subsequent hypothesis and subhypotheses were hence proposed:

H9 Strong corporate governance positively relates to organisationally beneficial behaviour, but negatively relates to self-indulgent behaviour or destructive behaviour

H9a Strong corporate governance positively relates to organisationally beneficial behaviour

H9b Strong corporate governance negatively relates to self-indulgent behaviour

H9c Strong corporate governance negatively relates to destructive behaviour

Figure 1 displays the hypothesised interconnections amongst corporate governance, organisational culture types, leadership styles, and upward influence behaviours

Figure 1 Hypothesised framework

3.2 Methodology 3.2.1 Sample and procedure

The sample for this study was derived from a population of 1,037 shipping companies listed in the 2010 Vietnam Trade Directory Since companies should be sufficiently large to ensure that organisational and strategy variables apply (Miller, 1987), merely

142 companies reached the two criteria:

1 annual sales are at least Vietnam Dong25 billion (equivalent to $1,170 thousand US)

2 at least 100 employees are working

The criterion on sales is based on average sales of small enterprises in Vietnam market context (Ministry of Planning and Investment, 2008) Data on such variables as corporate governance, organisational culture, leadership, and upward influence behaviour were collated via self-administered structured questionnaires despatched to 710 middle level managers in these 142 companies, an average of five middle managers in each company

Middle management members were relied on as the respondents since they would have more opportunities to observe high as well as low layers of organisational behaviours than would lower level members Data collection was conducted between March 2011 and August 2011 As displayed in Table 1, the demographic profile of the sample represented a relatively wide range of company ownership types

Table 1 The demographic profile of the sample

Due to scanty time among middle and top managers, the response rate range of 15%–25% has been found in numerous studies (e.g., Baines and Langfield-Smith, 2003;

Spanos and Lioukas, 2001) In this research, nonetheless, out of 710 questionnaires relayed to middle level managers, 418 were returned in completed form for a response rate of 58.87% This high response rate resulted from the voluntary cooperation from these 418 managers with most of whom the relationships were forged through the researcher’s close business partners in the snowball sampling process (Robson, 1993)

3.2.2 Quantitative measures

While the quantitative approach utilised in this study does not allow for an analysis of the most profound level of the constructs, it, as a “journey of the facts” [Smith, (1983), p.10], enables the investigation of respondents’ perceptual realities (Ashkanasy et al., 2000)

3.2.2.1 Corporate governance

To measure the strength of the governance mechanisms for a firm, an index of composite governance mechanisms developed by institutional shareholder services (ISS) was utilised The ISS index consists of 61 separate variables covering the eight corporate governance categories, with each variable equally weighted by ‘1’ This governance index composite score was identified as ‘GI’ A higher index score implies stronger governance effectiveness

The eight corporate governance categories encompass audit issues (e.g., audit committee consists solely of independent outside directors; auditors were ratified at the most recent annual meeting; consulting fees paid to auditors are less than audit fees paid

to auditors; company has a formal policy on auditor rotation), board structure and composition (managers respond to shareholder proposals within 12 months of shareholder meeting; CEO serves on no more than two additional boards of other public companies; all directors attended at least 75% of board meetings or had a valid excuse for non-attendance; size of board of directors is at least six but not more than 15 members), charter and bylaw provisions (e.g., a simple majority vote is required to approve a merger (not a supermajority); company either has no poison pill or a pill that shareholder approved; shareholders are allowed to call special meetings; a majority vote is required to amend charter/bylaws (not a supermajority)), director education (At least one member of the board has participated in an ISS-accredited director education programme), executive and director compensation (e.g., no interlocks exist among directors on the compensation committee; non-employees do not participate in company pension plans; option re-pricing did not occur within last three years; stock incentive plans were adopted with shareholder approval), director and officer ownership (e.g., all directors with more than one year of service own stock; officers’ and directors’ stock ownership is at least 1% but not over 30% of total shares outstanding; executives are subject to stock ownership guidelines; directors are subject to stock ownership guidelines), progressive practices (e.g., mandatory retirement age for directors exists; performance of the board is reviewed regularly; a board-approved CEO succession plan is in place; board has outside advisors), and the state of incorporation related to takeover defences (incorporation in a state without any anti-takeover provisions)