Does Religious Affiliation Influence the Design of Corporate Governance? Evidence from the Global Microfinance Industry

• Published date: 01 March 2017
• DOI: http://doi.org/10.1002/jsc.2113
• Author: Roy Mersland,Kwame Ohene Djan
• Date: 01 March 2017

RESEARCH ARTICLE

Strategic Change 26: 101–116 (2017)

Published online in Wiley Online Library

(wileyonlinelibrary.com) DOI: 10.1002/jsc.2113

Copyright © 2017 John Wiley & Sons, Ltd.

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Strategic Change

DOI: 10.1002/jsc.2113

Does Religious Afliation Inuence the Design of

Corporate Governance? Evidence from the Global

Micronance Industry1

Kwame Ohene Djan

School of Business and Law, University of Agder, Kristiansand, Norway

Roy Mersland

School of Business and Law, University of Agder, Kristiansand, Norway

Christian afliation has a minimal impact on the design of corporate governance

in micronance organizations.

Firms organize their governance according to their nature and needs (Demsetz,

1983; Fama and Jensen, 1983). Adams et al. (2010) argue that corporate gov-

ernance arises endogenously as rms choose governance design, depending on

the overall governance situation of the rm. Factors such as prot orientation,

legal incorporation, rm size, market situation, and task characteristics are

known to inuence a rm’s governance design. What has not been studied in

the literature is whether religious aliation inuences the governance choices

of rms. is article aims to ll this void, examining whether Christian orga-

nizations and secular organizations operating in the same markets are governed

dierently.

Hall (2002) notes that, until quite recently, religious bodies and faith‐based

organizations were free of many pressures for accountability. However, he remarks

that the continuous record of misdeeds involving clergy, religious bodies, and

faith‐based organizations has tarnished the image of high purpose and that in

reality, political inuence has long protected religious entities from being held

answerable. Across the globe, several spectacular scandals involving Christian

organizations have emerged. One example is the nancial improprieties of the

leadership of the Orthodox Church in America between 2005 and 2008 (Cooper-

man, 2006). Another example, from Norway, is a case of embezzlement by the

CEO of Betanien, a large Christian Foundation that operates hospitals, kinder-

gartens, nursing homes, and a university college. In court, the CEO admitted

spending more than US$2 million of the foundation’s money on revelry,

1 JEL classication codes: G21, G32, G34.

In comparison to secular

micronance institutions (MFIs),

Christian MFIs do not have a

slacker governance design.

Christian MFIs have a higher audit

quality and a signicantly higher

number of board meetings.

Christian MFIs are relatively less

regulated by national banking

authorities.

102 Kwame Ohene Djan and Roy Mersland

Copyright © 2017 John Wiley & Sons, Ltd. Strategic Change

DOI: 10.1002/jsc

prostitutes, and private consumption (Verdens Gang, May

2, 2015). Another incident concerns a faith‐based mutual

fund established by the Baptist Foundation of Arizona in

the USA to nance charities managed by the Church.

According to Hall (2002), after having sold securities

worth more than US$500 million during half a century,

the foundation contributed only US$1.3 million to the

Church. is suggests that there is certainly a need to

better understand governance in religious organizations.

An industry that has attracted Christian actors is the

micronance industry, where the hope is that the provi-

sion of nancial services to economically poor families

and their income‐generating activities will foster eco-

nomic and social development (Armendáriz and

Morduch, 2010). Opportunity International, a Christian

international micronance network, in the early 1970s

preceded Nobel Prize Laureate Mohammad Yunus in

servicing economically poor people with microcredit

(Mersland et al., 2013). In the global dataset applied in

this study, approximately one‐sixth of all micronance

institutions (MFIs) have a Christian origin. e micro-

nance industry oers a unique setting in which to study

governance dierences between Christian and secular

organizations.

This study was inspired by Du (2013), who inves-

tigated the impact of religion on agency costs, finding

that religion has a significant negative influence on

owner‐manager agency costs. Our hypothesis is that

such religious influence results in different governance

systems. Agency theory suggests that governance struc-

tures are necessary to mitigate divergences in motiva-

tions between owners/stakeholders of firms and their

managers (Jensen and Meckling, 1976; Fama and

Jensen, 1983). Besley and Ghatak (2005), however,

indicate that some organizations are mission‐driven

and that those working in such organizations are moti-

vated agents (i.e., agents who pursue goals because

they perceive intrinsic rewards from doing so) (Besley

and Ghatak, 2005). Therefore, if Christian MFIs are

more mission‐driven than secular MFIs, we should

expect them to have slacker governance structures than

secular MFIs.

e UK’s corporate governance code has inspired the

development of codes of best practice for corporate gov-

ernance across the globe. e UK code clearly stipulates

that a sucient board size, board meetings, and a well‐

diversied board with due regard to gender will immea-

surably contribute to the eective governance of rms. In

addition, the code highlights the role of shareholders or

owners in appointing directors and auditors of the rm,

as well as the governance role of laws and regulations.

Accordingly, this article measures the quality of corporate

governance around a rm’s legal status, board size, number

of board meetings in a year, number of international

directors, audit quality, probability of having a female

CEO or a CEO with business education, and tendency

for the rm to be regulated by national banking

authorities.

e data used in the analysis contain information

from 402 MFIs in 73 countries. Of this number, approxi-

mately 17% have a Christian origin. Generally, the results

do not support the hypothesis that Christian organiza-

tions exhibit slacker governance than secular organiza-

tions. ere are few signicant dierences between the

governance structures of Christian and secular MFIs.

With regard to some governance variables, Christian

MFIs actually display stricter governance practices than

their secular counterparts: they have signicantly higher

numbers of board meetings per year, better audit quality,

and signicantly higher numbers of international direc-

tors. However, in regard to public regulations, Christian

MFIs are relatively less regulated by national banking

authorities.

is article is structured in six sections. Following this

introduction, the rst section reviews the relevant empiri-

cal literature, while the second section describes the basic

applicable theories and research hypotheses. e third

section sets out the data and research methodology, while

results are presented in the fourth section and a fth

section concludes the study.