This paper investigates the effect of enacted ethical and instrumental values on corporate governance effectiveness. It further considers whether and how compliance with formal corporate governance codes influences the effect of these organizational values on governance effectiveness. Empirical evidence based on a sample of firms listed in the Athens Stock Exchange shows that strong ethical values are the key element for effective corporate governance, while instrumental values play a significant role only in the presence of compliance. Compliance, although not sufficient by itself, serves as a complementary mechanism strengthening the effects of ethical values and creating the conditions by which instrumental values can act in favor of corporate governance. The results highlight that governance benefits can emanate from maintaining high ethical standards as well as from synergies between compliance and a focus on organizational values. Overall, our findings provide important implications for managers regarding how to utilize behavioral along with structural governance mechanisms to enhance corporate governance. The findings add to the behavioral perspective of corporate governance bringing aspects of the social fabric into the corporate governance puzzle.
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Our sample size of 90 listed firms indicates a 9:1 ratio of observations to independent variables, which is well above the minimum cut-off point of 5:1 suggested by Hair et. al. (2006) and does not pose a threat to the reliability of our findings.
Since our sample consists of 90 observations and, in order to establish a sufficient number of degrees of freedom for the analysis, we compressed the 13 sectors, in which the ASE classifies its listed firms, into 4 broad sector categories (Sector 1 includes Industrial Goods and Services and Construction, Sector 2 includes Utilities, Sector 3 includes Banks and Financial Services, Leasing Services, Holdings, and Sector 4 includes Wholesale και Retail Trade, Hotels and Restaurants, Transport and Telecommunications, Health Care, Technology, Other).
1 denotes firms, in which the percentage of shares of the main shareholders (who own more than 5 percent of shares) is between 0 and 1/3 of the total shares, 2 indicates firms, where this percentage is between 1/3 and 1/2 of the total shares, 3 portrays firms, where this percentage is between 1/2 and 2/3 of the total shares, and 4 denotes firms, where this percentage is greater than the 2/3 of the total shares.
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See Table 4.
Although measuring organizational values by simply asking organizational members’ total perception is justified by prior literature (Guiso et al. 2015; Beatty 1988), we attempted to alleviate any potential concerns related to our single-item measure of enacted values by using an alternate more composite measure adapted from McDonald and Gandz (1992) and Bourne et al. (2017), for a sub-sample of 68 firms, for which we had data from a prior survey on Greek listed firms. Although the sub-sample consists of 68 listed firms, it indicates a 6,8:1 ratio of observations to independent variables, which meets the cut-off point suggested by Hair et. al. (2006) and does not pose a threat to the reliability of our results. Specifically, ethical values were measured by seven items providing information about cooperation (being cooperative and working well with others), courtesy (being polite and having respect for individual dignity), fairness (being fair and providing just recognition based on merit), humor (creating fun and being light-hearted), moral integrity (being honorable and following ethical principles), openness (being straightforward, sincere, and candid in discussions), and social equality (being neat, tidy, and well organized). Relatedly, instrumental values were measured by three items providing information about aggressiveness (being aggressive and pursing goals vigorously), initiative (seizing opportunity and taking responsibility without hesitation), and diligence (working long and hard to achieve results). Cronbach alpha equals 0.88 and 0.70 for ethical and instrumental values, respectively. An additional confirmatory factor analysis for the two-factor measurement model indicated an acceptable fit to the data (RMSEA = 0.122, CFI = 0,893, SMRM = 0.097). Moreover, all standardized factor loadings were above 0.50. Our results, presented in Table 2, did not change in any meaningful way and indicate robust power for the predominance of ethical values as well as for the synergistic effects between organizational values and compliance.
See Table 5.
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Fotaki, M., Lioukas, S. & Voudouris, I. Ethos is Destiny: Organizational Values and Compliance in Corporate Governance. J Bus Ethics (2019). https://doi.org/10.1007/s10551-019-04126-7
- Corporate governance
- Enacted organizational values
- Ethical values
- Instrumental values