Towards a risk attitude mediated framework for corporate governance and firm performance: recognising the role of unbounded irrationality in decision-making

Abstract

Problem statement: Even with the institutionalisation of corporate governance, companies continue to collapse due to poor risk governance. Protecting shareholder value entails an in-depth understanding of the relationship between corporate governance and firm performance. The potential influence of cognitive biases on human rationality in decision-making under risk and uncertainty is often not considered. Individual risk attitudes as shaped by cognitive biases can assist in explaining irrational behaviour in decision-making. Purpose: The purpose of this study was to develop a corporate governance–firm performance framework that acknowledged the unbounded irrationality of individual risk attitudes. Methodology: The study adopted an exploratory sequential mixed method design in which seven interviews with industrial psychologists were conducted, followed by a survey of 161 managerial employees in Zimbabwe and South Africa. Serial mediation conditional analysis was conducted to determine the fit of the proposed framework with confirmation using Amos and validated by subject matter experts. Findings: Theoretically, the study found that literature on corporate governance and firm performance relationship was inconclusive and often assumed a direct causal path. Empirically, the study found that corporate governance and firm performance relationship is influenced by the serial intervention of individual risk attitudes and emotional intelligence, confirming that the relationship is not a simple causal interaction. Personality as measured by neuroticism was found to have no prediction power. The overall interpretation is that highly emotionally intelligent people tend to take well calculated risks that then drive firm performance and the opposite holds. In as much as individual risk attitude can be said to be unboundedly irrational; the study suggests that emotional intelligence can regulate the extent of the irrationality, thereby optimising individual decision-making. Originality/Value: The study offers three main contributions. It constructed a practice-based framework for corporate governance and firm performance which acknowledges the optimal interaction of emotional intelligence and individual risk attitude as crucial in achieving sustained performance in the wake of corporate governance. Secondly, the study expands on rationality theories by exploring the concept of unbounded irrationality. Lastly, it highlights the relevant risk attitude domains incidental to business performance, being, business and financial