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Conflicting research findings on corporate governance

Brett Chulu

CORPORATE governance is a fairly young management discipline, especially in Zimbabwe. The country has experienced serious corporate governance challenges over the past 12 months and several hypotheses have been advanced to try to explain the causes thereof. They range from poor business strategy to weak management oversight and weak regulatory regimes.

This article explores conflicting research findings from relatively recent studies on the subject. Studies from Brazil, India and Germany are cited to illustrate conflicting findings on the relationship between multiple directorships and firm performance. By placing the current Zimbabwean corporate governance dynamics within the context of global research, we hope to broaden and sharpen the discussion on our fledgling domestic corporate governance landscape.

Conflicting research findings
We begin by looking at a study recently conducted in India.
In 2009 researchers Jayati Sakar and Subrata Sakar used a sample of 500 large Indian firms to investigate the relationship between multiple-board directorships and the market value of a firm.


They cut the data into two sets, namely non-executive multiple directorships and executive multiple directorships. They found that multiple directorships involving non-executive directors were correlated positively with the value of a firm. In non-technical terms, they found that a large Indian firm with non-executive directors who hold several directorships was more likely to have a higher market valuation than one that had fewer non-executive directorships holding multiple directorships.


In contrast, the researchers found that multiple directorships involving executive directors were negatively correlated with the value of the firm. Put simply, executive directors of large Indian firms holding multiple directorships are associated with firms that have relatively low market values.

Sakar and Sakar suggested that in an emerging economy, multiple directorships involving non-executive directors placed a firm at a competitive advantage. They cited that firms benefitted from the extensive networks to which multiple directors belonged. It would appear investors in India view multiple directorships involving non-executive directors of large companies as a proxy for superior business strategy formulation and implementation. These investors show their vote of confidence by rewarding such firms with higher market valuation.


In sharp contrast, investors in large Indian firms seem to be put off by large firms whose executive directors sit on the boards of several companies. It would appear that investors in large Indian firms regard executive directors sitting on multiple boards as being too busy to focus on implementing business strategy and staying on top of the onerous management demands associated with a large listed firm. We might say these investors punish large listed firms that are run by ‘absentee executive directors’.

The findings from India stand in conflict with those from a recent study from Germany.

In 2010, two German researchers, Christian Andres and Mirco Lehmann of the University of Mannheim studied 150 listed German firms. Using the “busy board” criteria, they found no significant relationship between a “busy board” and a firm’s performance. A “busy board” is defined as one where half or more non-executive directors in a firm hold more than three directorships.

Andres and Lehmann, dissatisfied with the “busy board” approach, used social network analysis to define a more refined measure to establish the degree of  a director’s over-commitment. They used a measure called connectiveness.


Connectiveness tries to capture the quality of a director’s contacts.

For instance, a director of a large company who is connected to directors from other large firms and  influential institutions have higher degree of connectiveness than a director who sits on the boards of several small firms. A director with a higher degree of connectiveness is likely to have more commitments than one with a lower degree of connectiveness.


Connectiveness is about an influential director being connected to other influential directors in corporate and institutional networks. Andres and Lehmann, counter-intuitively,  found that listed German firms exhibited relatively low market-to-book values when dominated by directors with a high degree of connectiveness.

This runs counter to the thinking that well-connected directors bring their influence to bear on a company’s performance by way of better access to resources and information. In particular, the German findings appear to contradict those from India. Germany uses a two-tier board system, in which there is a supervisory board and a management board. A supervisory board is made up entirely of non-executive directors and representatives of employees. Thus the supervisory board, in terms of composition, is more or less similar to the non-executive directors in India.

One would have expected the German findings to be similar to those from India for a good reason. The Indian sample is composed of large listed firms. In that respect, we would expect a high degree of connectiveness, leading to lower firm values as per the German findings.

Meanwhile, a recent study of listed firms in Brazil appears to contradict that from India. Both India and Brazil are classified as emerging economies.

In 2008 Rafael Linta Santoz, Alexandre Di Miceli da Silveira and Lucas Ayres B. de C. Barros of the University of Sao Paulo’s School of Economics, Management and Accounting studied the effect on a firm’s value of Brazilian directors holding multiple directorships. The study was based on a sample of 320 listed firms in Brazil. The inquiry found that multiple directorships in listed firms in Brazil were associated with lower corporate values such as the price-to-book ratio. In particular, the researchers wanted to find out the relationship between corporate value and a ‘busy board’. The research found that the busier the board the lower the corporate value. Thus investors in listed Brazilian companies seem to be generally averse to multiple directorships.

The contradictions highlighted in the preceding three cases need to be reconciled. These findings belong to what is known as descriptive management theory. In descriptive theory, contradictions abound due to the fact that researchers use simple-to-observe phenomena and try to establish relationships among variables. More importantly, under descriptive management theory, there is no attempt to explain the underlying causes between apparent relationships. Corporate governance theory is yet to transition to positive theory. When it does, underlying causes are investigated.


Critically too, the analysis transitions to circumstances from easy-to-observe characteristics. This gives rise to a theory that has an explanatory power cutting across boundaries.

Applicability to Zimbabwe
Since corporate governance theory is still in its infancy, ie, it is still in the descriptive stage; care must be taken when applying findings from elsewhere to Zimbabwe.

The contradicting cases of India, Brazil and Germany reflect that circumstances differ. Some banking analysts in Zimbabwe believe that poor corporate governance is associated with indigenous banks. Implicitly, they see non-indigenous banks as showing good corporate governance. It’s easy to classify banks into indigenous and non-indigenous. That classification, admittedly, is partially valid from an empirical point of view.  It is an example of descriptive management theory.

However, the validity of that classification is open to challenge due to anomalies. For instance, NMB Bank is an example of a long-standing indigenous bank that has survived both the recent and the 2004 corporate governance banking storms.  This shows us that being indigenous is not the cause of corporate governance failure.

A better classification would be circumstance-based, such as poor banking business strategy versus superior banking business strategy. It would be more plausible to hypothesise that banks with a poor business strategy are more likely to engage in questionable corporate governance practices than banks with a superior business strategy. We could suggest the causal mechanism as the need to survive overpowering ethical inhibitions.

We need local research on corporate governance.

  • Lets discuss at brettchulu@consultant.com

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