Impact of Destructive Leadership and Corporate Governance on ethical practices in Financial Sector of Pakistan

Abstract

Pakistan is one of the prominent developing countries and has gone through significant changes in the financial sector since its independence in 1947. The banking industry’s financial stabilisation, in Pakistan, has focused on financial institutions’ legitimacy, innovation, implementation and provision of high-quality services. It has widened the scope of financial markets, reduced the inefficiency levels in banks, and eliminated or decreased the corruption ratio. However, fraud and corrupt banking practices still prevail in Pakistan, which is mainly attributable to the organisational culture based on the norms and values of the people working in it; these norms and values are articulated by the leaders. The primary role of the leader is to enforce legitimate and transparent banking services. A leader with a destructive style of leadership will embed values that are not congruent with organisational goals and that rather may lead to the achievement of personal goals. A good leader, on the contrary, directs a bank towards its development and growth within the banking industry, as with great power comes great responsibility: it is leaders who can make breakthroughs. In other words, the success of management, employees and the organisation greatly depend on the leadership style. In Pakistan, the banking industry’s leadership style is a little biased by the attributes such as the character, ethics, beliefs and values of the leader, and all these traits make every leader unique and distinct. Leadership comprises of four main factors: the leader him- or herself, the follower, situations that arise, and communication. A good leader is important for any organisation for creative thinking, structural reasoning, innovation and creation of new procedures and processes, and for effective and efficient collaborative engagement. The organizations in Pakistan including the financial institutions are bound to follow the Code of Corporate Governance issued by Security Exchange Commission of Pakistan (SECP) but the research suggests the otherwise.
In this research I have analysed the impact of Destructive leadership and defiance of Code of Corporate Governance on fraudulent activities and unethical practices in the banking industry of Pakistan. The focus has been Islamic banks in which interviews of top management (leaders) of Islamic banks and Auditor of Central Bank of Pakistan were conducted to enquire about their best practices and compliance with the Corporate Governance policies. The followers (middle managers have been surveyed using Destructive Leadership Questionnaire (DLQ) and inquired about the Leadership styles and practices of their supervisors and leaders. The research has highlighted both theoretical and practical aspects of this sensitive area in the banks. The analysis projects the destructive behaviours the leaders possess which brings toxicity in the banks. Not much has been researched with regard to destructive leadership and defiance of Code of Corporate Governance and its relationship. I found gap in theory and practical aspect of how both are being practiced in the financial sector. The research results depict that followers believe that there is toxicity in Leadership and noncompliance of corporate governance from their leaders which leads to demotivation and unethical practices. Finally, recommendation for enhancing the corporate governance code and strict vigilance and audit of compliance of same is given to implement a fool-proof system which doesn’t allow misappropriations of funds and other unethical practice by the leaders.