The impact of indigenous culture and business group affiliation on corporate governance of African firms

• Published date: 01 May 2024
• Author: Bruce Hearn,Lars Oxelheim,Trond Randøy
• Date: 01 May 2024
• DOI: http://doi.org/10.1111/corg.12547

ORIGINAL ARTICLE

The impact of indigenous culture and business group affiliation

on corporate governance of African firms

Bruce Hearn

1,2

| Lars Oxelheim

3,4,5

| Trond Randøy

6,7

1

School of Management, Bright Building,

University of Bradford, Bradford, UK

2

University of Southampton, Southampton,

UK

3

Research Institute of Industrial Economics

(IFN), Stockholm, Sweden

4

University of Agder, Kristiansand, Norway

5

Lund University, Lund, Sweden

6

Centre for Corporate Governance,

Department of Accounting, Copenhagen

Business School, Frederiksberg, Denmark

7

School of Business and Law, University of

Agder, Kristiansand, Norway

Correspondence

Bruce Hearn, School of Management, Bright

Building, University of Bradford, Bradford,

Yorkshire, UK.

Email: b.hearn@bradford.ac.uk

Funding information

The authors declare no funding has been

received in association with this

research work.

Abstract

Research Question/Issue: This is a study of the relationship between business group

ownership and constituent firms' adoption of Anglo-American shareholder value

governance in African firms at the undertaking of an initial public offering (IPO).

Research Findings/Insights: We find business group ownership to be associated with

lower Anglo-American corporate governance adoption by constituent firms.

However, this association is reversed in the institutional context of higher tribalism,

while correspondingly being exacerbated in the context of lower tribalism.

Theoretical/Academic Implications: We theorize that the influence of business

group ownership on firms' adoption of Anglo-American corporate governance is bet-

ter understood when considering the institutional context. We highlight how infor-

mal cultural institutions are heterogeneous and thus shape the indigenous political

economy and impact business groups. Specifically, we argue institutional contexts

with higher tribalism are associated with more in-group favoritism and nepotism. This

association makes it critical for business group constituent firms to escape the con-

straints of the political economy of tribalism when attracting outside funding, leading

to a higher inclination to adopt Anglo-American governance. Contrastingly, in lower

tribalism contexts, there is more universal trust across societies and an increased

availability of domestic funding.

Practitioner/Policy Implications: Given the proliferation of business group ownership

within economies worldwide, the study provides a useful framework with which to

gauge the influence of business group ownership on a constituent firm's adoption of

Anglo-American governance best practice. In particular, the study emphasizes that

the interdependence of formal institutional architecture and tribalism—both funda-

mentally associated with the demographic shape and with the incentive structures

embedded within the underlying national political economy—calls for careful consid-

erations when making national corporate governance recommendations.

KEYWORDS

Africa, corporate governance, corporate governance rating/index, corporate governance

theories, firm-level governance outcomes, governance environments, institutional theory

Received: 4 October 2022 Revised: 4 June 2023 Accepted: 5 June 2023

DOI: 10.1111/corg.12547

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium,

provided the original work is properly cited.

© 2023 The Authors. Corporate Governance: An International Review published by John Wiley & Sons Ltd.

Corp Govern Int Rev. 2024;32:449–473. wileyonlinelibrary.com/journal/corg 449

1|INTRODUCTION

Emerging economies are characterized by institutional voids and an

accompanying reliance on social networks and business groups (BGs)

as essential elements of informal, internalized intermediation of

resources (Ge et al., 2019; Tajeddin & Carney, 2019). While

networks and BGs are distinctively shaped by the indigenous cultural

context from which they originate and hold cognitive legitimacy

(Suchman, 1995), the need for expansion and growth in BGs

stimulates their seeking supplementary external funding (Masulis

et al., 2011). This leads to a juncture occurring between the legitimacy

sought and resources procured from opaque indigenous networks,

versus the increased legitimacy from and conformity with interna-

tional capital market norms, essential in external funding (Luo

et al., 2009). However, a largely overlooked issue in the literature is

that the underlying “national”cultural configuration of societies is

rarely uniform, but rather shaped by varying degrees of socio-cultural

fragmentation, recently labelled tribalism (Hearn & Filatotchev, 2019).

Therefore, we explore the impact of BG ownership on constituent

firms' adoption of Anglo-American shareholder value corporate gover-

nance and how this relation is moderated by the level of tribalism in

the country.

Our theoretical approach is centered on the institutional perspec-

tive that accommodates the contextual embeddedness of economic

actors and firms within underlying social frameworks (Filatotchev

et al., 2018). This perspective is of particular importance given our

focus on BGs, where these sociologically emanate from within the cul-

tural fabric of society and are reflected by a coalescence of constitu-

ent firms centered on a socially cohesive entity such as an extended

family, but also on corporate, state, and individual business interests

(Khanna & Palepu, 2000). In our empirical analysis, we focus on Africa,

where the latter are exemplified by Nigeria's Dangote and Egypt's

Sawiris extended family groups (The Economist, 2019). In order to

attain expansionary and/or growth goals, BGs necessarily require sup-

plementary external capital, with this leading to a trade-off in the

adoption of two opposing forms of corporate governance—one asso-

ciated with the indigenous socio-cultural context and the other with

international capital market norms. Corporate governance in the for-

mer context is typified by opacity and the dominance of insider wel-

fare and property rights protection, usually in the form of culturally

imbued relational contracting. Contrastingly, in the latter context,

minority welfare and property rights protection are emphasized, as

enshrined in the shareholder value corporate governance model

(Aguilera & Jackson, 2010). Our theoretical model implicitly assumes

the transition between the two frameworks as being mirrored by a

continuum in the level of adoption of shareholder value governance

elements by individual constituent firms. In this way, we capture the

role played by the change in the institutional framework. We also cap-

ture the dominant actors embedded in this framework, from which

BG-controlled constituent firms seek legitimacy and conformity in

their corporate governance arrangements. Our emphasis on

contextual embeddedness and legitimacy underscores our first theo-

retical contribution, which differentiates our approach from that of

agency-based and neoclassical studies. The agency-based studies

are restricted in considering institutions as a “thin veil”in

contractual enforcement (e.g., Aguilera & Jackson, 2010; Jensen &

Meckling, 1976), while neoclassical studies are constrained by their

singular view emphasizing convergence of firms' governance

(e.g., Coffee, 2001) to a dominant Anglo-American shareholder value

model.

We draw upon the concept of tribalism and highlight its relevance

to corporate governance research on emerging market firms. Specifi-

cally, we utilize a novel index that captures tribalism as a continuum

(Jacobson & Deckard, 2012), thereby overcoming shortfalls in prior

typological categorizations of national institutional frameworks based

on variations of this phenomenon (Fainshmidt et al., 2018). Our defini-

tion of tribalism relates to the concept of ethno-cultural fragmenta-

tion that leads to powerful institutionalized within-group social

cohesion and loyalties, where these are often controversially associ-

ated with varying degrees of favoritism and nepotism (Areneke

et al., 2022). Tribal or clan-based lineages are common worldwide and

especially within emerging and developing economies (Greif &

Tabellini, 2010). Countries across Africa in particular, but also in Asia

and the Middle East, exhibit often high and varying degrees of

tribalism, where related institutions are subverted beneath

modern and essentially incongruous state bureaucracy (Nunn &

Wantchekon, 2011). While this pattern reflects institutionalized fault

lines within many emerging economies, it is representative of a pow-

erful phenomenon in terms of societal organization. The role of tribal-

ism is almost entirely overlooked in studies on culture and corporate

governance (Hooghiemstra et al., 2014; Mintz, 2005), where

aggregated “national”cultures are considered determinants of

Anglo-American shareholder value corporate governance adoption.

Moreover, existing studies mostly focus on the more static nature of

ethnic, linguistic, and religious fractionalization (Alesina et al., 2003).

Thus, past research captures fragmentation within a given society but

overlooks a deeper appreciation of the institutionalized influences

arising from this fragmentation.

Our empirical analysis is based on a hand-collected dataset of

189 firms that underwent initial public offerings (IPOs) in 22 markets

across the African continent between January 2000 and August 2016.

We find that the degree of tribalism significantly moderates the nega-

tive relation between the BG's ownership of a constituent firm and

the degree of adoption of Anglo-American corporate governance

practice. Our study makes two methodological contributions. The first

is our adaptation of the New York Stock Exchange manuals' gover-

nance criteria (NYSE, 2016) to form a firm-level Anglo-American

shareholder value index appropriate for emerging market firms. The

new index is adjusted for data availability and institutional limitations

on corporate governance. The adjustment implies that the index is

simple to construct, tractable, and has universal applicability. The sec-

ond methodological contribution is our novel application of a tribalism

index (Jacobson & Deckard, 2012), which addresses shortcomings

associated with static fractionalization metrics by providing a more

dynamic measure. The index also considers interactions between eth-

nic groups and the institutionalized means of operationalizing culture

450 HEARN ET AL.