The personality of company directors and behavioural risks in corporate governance: Bridging the unidentified gap

The investigations following major corporate failures that occurred in the last two decades have highlighted that the inappropriate behaviour of corporate officers such as company directors contributed to these failures. Therefore, it means that behavioural issues constitute risks to the corporate governance process as they have the potential to result in corporate failures. This article examines behavioural risks in corporate governance, and seeks to ascertain what constitutes behaviour. It finds upon the examination and analysis of psychology literature that personality and situation are the basic elements that contribute to behaviour. A question then arises as to whether and how behavioural risks have been identified and managed in corporate governance. Taking cognisance of the processes involved in risk identification and risk management, it is found that the personality aspect of behavioural risks have not been identified or managed effectively in relation to company directors under any of the existing corporate governance mechanisms in the United Kingdom, such as the Turnbull Guidance, Corporate Governance Code, Companies Act, Company Law Directives and so on. From an analysis of the risk management mechanisms in place as regards corporate governance, it is argued that behavioural risks have only been managed from the perspective of situations, and considering the significant impact of personality and its associated risks on behaviour this represents a gap in the corporate governance process. This article argues for a remedy in this regard and suggests that personality risks must be managed effectively if corporate failures are to be prevented. In relation to identifying and managing personality risks, the article discusses the five-factor model of personality, which is the most robust and widely accepted explanation and measurement of personality dimensions. The article also evaluates different approaches that might be adopted in managing personality risks and presents arguments in support of regulatory intervention as an effective option for the management of personality risks in corporate governance.