Hybridity in the Governance and Delivery of Public Services

Andrea Bonomi Savignon, Luca Gnan, Alessandro Hinna, Fabio Monteduro, Andrea Bonomi Savignon, Luca Gnan, Alessandro Hinna, Fabio Monteduro

• Publisher: Emerald Publishing Limited
• Year: 2018
• ISBN:
  9781787439733
• Topic: Política y relaciones internacionales
• Subtopic: Política pública

The concept of hybridity, although well developed in various research areas, is relatively new in the management field, where "organisational hybridity" refers to organisations that combine managerial features, value systems and institutional logics of different sectors (market, state, civil society). Hybrid organisations have traditionally been compared with private, public and non-profit ones, by considering goal ambiguity, governance, organisational structures, personnel and purchasing processes, and work-related attitudes and values. This research has led to substantial evidence on relevant differences between hybrid and other organisations. Hybridisation has also become a permanent feature in today's welfare system. New Public Management and welfare state reforms of the mid 1990s contributed to the emergence of hybrid organisations, with neo-institutional theory also attributed to this phenomenon.
Considering the hybrid phenomenon as a whole, little is known about governance and controls, especially with regard to accountability mechanisms and issues such as the prevention of corruption. Even less is known when we consider the main variables of hybridity to be mixed ownership, competing institutional logics, multiplicity of funding arrangements, and public and private forms of financial and social control.
This book seeks to answer the unsolved questions related to hybrid organisations. It does so by adopting a multifaceted approach along its ten chapters, which focus on different national contexts, including the UK, Italy, Australia, and Sweden, as well as global organisations. The authors consider policy sectors including humanitarian aid, local transport, healthcare, and welfare services.

THE ROLE OF BOARDS OF DIRECTORS IN TRANSPARENCY AND INTEGRITY IN STATE-OWNED ENTERPRISES

Ilenia Cecchetti, Veronica Allegrini and Fabio Monteduro

ABSTRACT

The chapter aims to analyse the influence of the board of directors on transparency and integrity in hybrid organisations like state-owned enterprises. The effect of several characteristics of directors on the board’s effectiveness was assessed. The empirical analysis was based on 60 Italian listed and non-listed state-owned enterprises. Each enterprise’s website was individually examined and coded to obtain two self-constructed indexes on transparency and integrity, and a regression model was created to test the hypotheses.

The ‘knowledge structure’ of interlocking directors and board compensation were found to be both positively related to the level of commitment among state-owned enterprises to transparency and integrity. Skill and gender diversity on the board had no significant impact. The analysis used data from a one-year period but dealt with hidden and complex phenomena like corruption. Future longitudinal studies and qualitative approaches would provide more comprehensive insights into the relationship between the board of directors, transparency and integrity over time.

Policymakers and all those involved in the appointment of directors to state-owned enterprises should be aware that some features of board members may affect the levels of organisational transparency and integrity. The chapter contributes to the literature on governance of state-owned enterprises, emphasising the board’s role and its effectiveness in sustaining transparency and integrity.

Keywords Corporate governance; board of directors; state-owned enterprises; integrity; transparency; disclosure

INTRODUCTION

State-owned enterprises (SOEs) are legal entities that undertake commercial activities on behalf of the state owner. They can be considered as hybrid organisations that combine elements of both private and public sector. Beyond the advantages and synergies, several questions may arise from this mixed nature. The external mechanisms of corporate governance (such as competition, takeovers and monitoring by large shareholders) are usually less effective than in the private sector, or even absent, in the state-owned sector (Wong, 2004). In addition, an SOE may be prone to corruption or misbehaviour, just as politicians may divert public sector resources and taxpayers’ money away from their proper allocation (Boycko, Shleifer, & Vishny, 1996; Nguyen, 2006). Factors like political interference and the achievement of profitability in line with public sector obligations would make SOEs inclined to corruption, and also to non-transparency, since one way to hide corrupt practices is to disclose very little information (Agyei-Mensah, 2017).

The board of directors in an SOE is therefore a fundamental governance mechanism designed to address these issues. It monitors organisational stewardship and performance, oversees management and provides resources and strategies to the organisation. The governing body of an SOE might therefore have an influence on organisational efforts around integrity and transparent conduct.

Huberts (2014) defined integrity as to the propensity for an SOE to act in accordance with ethics, or moral values and norms. When studying a company’s integrity in depth, it is also worth considering its commitment to transparency. Here this falls under the comprehensive concept of disclosure, and includes disclosure of financial, non-financial, mandatory and voluntary information. Disclosure acts as a principle of good governance to enhance accountability towards citizens and stakeholders, reinforcing the SOE’s legitimacy (Boubaker, Lakhal, & Nekhili, 2011; Gajewski & Li, 2015; Rodríguez, Pérez, & Godoy, 2012).

Much of the literature on private sector firms has investigated the board of directors’ effectiveness with respect to disclosure (Alfraih, 2016; Bear, Rahman & Post, 2010; Patelli & Prencipe, 2007), ethical conduct (Dominguez, Alvarez, & Sanchèz, 2009; García-Sánchez, Aceituno, & Domínguez, 2015) and the occurrence of fraud or misconduct within the organisation (Beasley, 1996; Daboub, Rasheed, Priem, & Gray, 1995; Fama, 1980; Fama & Jensen, 1983; Greenle, Fischer, Gordon, & Keating, 2007; Ramirez, 2003; Zahra, Priem, & Rasheed, 2007). Most of these studies have emphasised the monitoring role of the board and the influence of its composition in terms of board size and directors’ status or independence.

There is very little literature on integrity and transparency in SOEs. Attention has focused on economic and political corruption (Hua, Miesing, & Li, 2006; Nguyen & Van Dijk, 2012). No studies have examined the way in which the board can prevent violations of integrity. Transparency has been investigated in terms of risk disclosure, by testing the effect of board composition on its effectiveness (Allini, Manes Rossi, & Hussainey, 2016). However, there is a need to broaden these studies to improve understanding of the SOE board’s role and its effectiveness in sustaining organisational transparency and integrity.

Our chapter, through an analysis of Italian listed and non-listed SOEs, will help to answer the following research questions:

1. What are the functions of the board of directors in SOEs and how does it push the organisation towards transparency and integrity?
2. How do the characteristics and dynamics of particular directors affect the effectiveness of the board in carrying out its role and fostering the efforts of the SOE to achieve transparency and integrity?

Drawing on a framework involving multiple theories – agency theory, resource-based view, upper echelons theory, institutional theory and the sociocognitive perspective – we will try to explain whether, and if so how, the board of directors of an SOE and certain characteristics of its members, including board capital (interlocking directors), board diversity (skills diversity and the presence of a critical mass of female directors) and board compensation, may affect the company’s tendency to transparency and integrity. Our chapter therefore intends to fill several existing literature gaps. First, in spite of corporate governance studies on the role of the board and its impact on corruption and business ethics, there is a gap in the literature on SOEs, and the public sector more generally (Hinna, Gnan, & Monteduro, 2016). Second, unlike the majority of studies on corporate governance (Beasley, 1996; Sharma, 2004), we consider monitoring and provision of resources as simultaneous board tasks (Korn/Ferry, 1999). Third, again unlike previous studies, we assume that it is difficult to evaluate the directors’ independence in these hybrid organisations (Calabrò, Torchia, & Ranalli, 2013) and that it will therefore be impossible to capture properly the contribution of heterogeneity among directors in performing board tasks (Hillman, Cannella, & Paetzold, 2000).

We therefore use a multiple theoretical approach to create a comprehensive understanding of how board capital, board diversity and board compensation affect the performing of board roles, and in turn, the levels of effort to achieve SOE transparency and integrity. The study, of course, has limitations, which will be examined in some detail. However, it may offer theoretical and practical implications to support suggestions to improve the governance of these complex companies and achieve greater transparency and integrity.

The remainder of this chapter is structured as follows. First, there is a section on theoretical background, including an overview of SOEs, with definition, role, features and their link with issues like integrity, transparency and disclosure. The next section examines the role of the board of directors and its impact on organisational transparency and integrity, initially with reference to any company, then for SOEs. We then describe the development of the hypotheses, the methodology, data and sample characteristics. The final section discusses the results and outlines the study’s major contributions and implications as well as limitations.

THEORETICAL BACKGROUND: STATE-OWNED ENTERPRISES, TRANSPARENCY AND INTEGRITY

During the 1980s and 1990s, following the application of New Public Management (Pollitt, 1993), state-dominated sectors throughout the world underwent a major administrative and socio-economic transformation. The rationale behind this transformation was to separate public policy from commercial aspects, and to enhance public service provision in terms of proximity, representativeness and innovativeness. As a result of this evolution, SOEs became the main bodies responsible for the production and provision of several public services. Even now, despite extensive privatisation, they play a crucial role in society and in the economy throughout the world (OECD, 2015; World Bank, 2014).

As the name implies, SOEs are enterprises or companies in which the state has full, majority or minority ownership. The term ‘state’ refers to all entities, including central government, local government and autonomous agencies, responsible for executing the ownership rights of the state (OECD, 2005b). Both public and private entities can invest in SOEs, so they can be categorised as mixed companies (Hodge & Greve, 2007) or hybrid organisations that incorporate characteristics of both the public and private sector (Musacchio & Lazzarini, 2014). An SOE can be thus considered as a particular type of public administration body that conducts business activities in the marketplace by acting as a profit-making organisation entrusted by the state to achieve public policy goals (OECD, 2015), such as providing essential services to members of society (Heath & Norman, 2004).

Profit maximisation is not the primary goal of SOEs, since they are also required to achieve other objectives, such as innovation, employment creation and social stability (Bruton, Peng, Ahlstrom, Stan, & Xu, 2015; OECD, 2015; World Bank, 2014). It therefore cannot be assumed that SOEs will behave or should be governed in the same way as private firms (Bruton et al., 2015). Despite the advantages and synergies arising from the interaction between public and private elements (Bovaird, 2004; Caro, 1974; Eckel & Vining, 1985; Hafsi, 1985; McCraw, 1971; Shirley, 1997), an extensive stream of literature highlights several inefficiencies stemming from SOEs as hybrid organisations, rather than private firms (Aharoni, 1986; Domberger & Piggott, 1994; Gathon & Pestieau, 1996; Megginson & Netter, 2001; Tittenbrun, 1996; Vining & Boardman, 1992). These inefficiencies can be traced back to the existence of limited competition in the market where these organisations operate, as well as to the political proximity (Lamont, 1979; Sapienza, 2004; Walters & Monsen, 1979). Public...