Cultural values and corporate governance

What is the role of cultural values in understanding the mechanisms and processes that influence the way in which corporations are governed and controlled? There are two facets to this question. The first one is external culture: the social and cultural norms characteristic to the country where the company carries on its business. The second one is internal culture: the internal set of corporate values that underpin the relations among corporate constituencies. Both aspects of corporate culture have become prominent topics in the corporate governance literature.

External culture as driver of corporate governance

Scholars approaching corporate governance from a socio-cultural perspective argue that informal rules, such as social and cultural norms are at least as relevant as law, politics or economics in influencing corporate governance structures and models. Geert Hofstede is one of the pioneer researches on the interplay between national cultural beliefs and workplace values embedded in corporate governance policies. In his extensive research, Hofstede identified four national cultural dimensions that underpin the diverse corporate governance models around the world: the power distance index, individualism versus collectivism, masculinity versus femininity, uncertainty avoidance index, long term versus short term normative orientation, and indulgence versus restraint.[1] Two of these factors are especially thought-provoking and deserve a closer examination: the power distance index, and masculinity versus femininity index.

The power distance element refers to commonly held beliefs and attitudes about inequality of power in organisations and institutions. This index is useful in understanding the role of national cultural values in shaping the dynamics between employees working at different levels on the corporate ladder. It casts light on the widely diverging expectations and attitudes that exist worldwide as regards acceptance of unequal powers and rights, styles of management and leadership, power-dependency relations, and employee obedience and loyalty. Members of organisations from societies exhibiting a high power distance index (PDI) are likely to be more accepting of a strict hierarchical order. China is one of the countries with a very high PDI index. Inequalities among people and the power of formal authority tend to be broadly accepted in this country. Employees are generally not encouraged to have aspirations beyond their rank, and there are very few defences against power abuses in the superior-subordinate work relationships. Russia is another example of a very high PDI index. The gap between powerful and dependent people is high, which leads to a great significance of status symbols and roles in business interactions inside and between organisations. Other countries with a high DPI include France, Brazil and India. At the opposite end of the spectrum, countries with a low DPI are characterised by a decentralised organisational structure, high value placed on egalitarianism, close relations between managers and team members, consultations of employees, and straightforward communication channels. Countries falling in this category include Austria, Canada Finland, Norway and the United Kingdom.

The masculinity versus femininity (MAS) index is another driver of differences in national corporate governance and organisational values. Societies that embrace stereotypical masculine values such as competitiveness, assertiveness, and material rewards for success tend to favour managerial decisiveness and a focus on financial returns. Switzerland, the United Kingdom  and the United States are examples of high MAS index countries. Prominent masculine corporate values include a ‘live in order to work’ philosophy, decisive management, and a strong emphasis on competition and financial performance. Scandinavian countries, in contrast, are feminine societies with a low MAS index. Translated into corporate culture, feminine values underpin organisations that prioritise participatory decision making procedures, consensus, solidarity, equality, and conflict resolution though compromise and negotiation. Sweden is the most feminine society according to Hofstede’s rankings, followed by Norway and Denmark.

Hofstede’ path-breaking research provides a unique insight into the correlation between national cultural values and the internal structures and values of organisations. Although his work has been criticised on both theoretical and empirical and grounds, Hofstede’s ideas highlight the essential role of national culture as a driver of corporate governance structures and processes.

A renewed focus on internal corporate culture

The role of the internal corporate culture in promoting high quality corporate governance is the focus of a special report by the UK Financial Reporting Council published last month. The report, entitled ‘Corporate Culture and the Role of Boards’ examines how boards and executive management establish and promote a corporate culture capable of delivering long-term business and economic success. More specifically, the Report draws on interviews with FTSE chairpersons and CEOs to determine the values, attitudes and behaviours that companies apply in their relations with shareholders, employees, customers, suppliers and the wider community. The key observations and suggestions of the Report include:

  • the responsibility of the board to evaluate the company’s internal set of cultural values, to consider how to report on it, and to ensure that the company’s purpose, strategy and business model are aligned with its internal values
  • the responsibility of senior managers to embody the desired culture and oversee its implementation at all levels and in every aspect of the business
  • increased transparency and accountability regarding the way in which the company’s business respects the wide range of stakeholder interests

The Financial and Reporting Council aims to use this Report and the feedback it generates to update its 2011 ‘Guidance on Board Effectiveness’.

[1] Geert Hofstede, Gert Jan Hofstede and Michael Minkov, Cultures and Organizations: Software of the Mind, 3rd ed (New York: McGraw-Hill USA, 2010), originally published in 1991; Geert Hofstede, Culture’s Consequences: Comparing Values, Behaviors, Institutions and Organizations Across Nations, 2nd ed (Thousand Oaks, Calif: Sage Publications, 2001), originally published in 1984.

 

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