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.


Recent developments in corporate board diversity

The Hampton-Alexander Review of women on FTSE 350 boards

Earlier this year, the Department for Business, Innovation and Skills announced the formation of a new independent review on increasing the representation of women in corporate leadership positions. The review is led by Sir Philip Hampton, Non-Executive Chairman of GlaxoSmithKline (chair of the review) and Dame Helen Alexander, Chair of UBM (deputy chair of the review). The new body continues on from the Davies Review, which pushed the representation of women on FTSE 100 boards from 12.5% in 2010 to 26.1% in October 2015. A new target for female board representation is set at 33% of FTSE 350 by 2020. The Hampton-Alexander Review also extends the focus below the board, to the executive senior layers of FTSE 350 companies. It aims to consider options, make recommendations and work with the business community to improve the representation of women in corporate leadership. The review is expected to present recommendations by the end of 2016.

Viewed against the latest trends and figures, the objectives of the Hampton-Alexander Review appear optimistic. The most recent FTSE 350 statistics show that, overall, women hold 22% of the board seats. Only 60 companies (17%) have 33% or more women directors, and 16 companies have no female directors at all. More worryingly, the pace of progress has slowed significantly after October 2015, when the final Davies Report was released. According to the latest Female FTSE Board Report released by Cranfield University, City University London and Queen Mary University London, there has been no increase in the female representation on FTSE 100 boards after the Davies Review ended. Moreover, only 24.7% of the new board appointments after September 2015 went to female directors, the lowest rate in five years.

Progress is slow in the executive ranks as well. Only 7% of executive directors in FTSE 350 are women, dropping to 5.6% in FTSE 250. A recent study led by KPMG finds evidence of a ‘career bottleneck’ for senior female executives at executive committee level in FTSE 100 companies, where there was no significant increase in female representation over the past two years. The report cautions that, based on this pace of change, it is impossible to predict when, or if, women will acquire the 30% critical mass in executive committees of large UK businesses.

Cracking the lavender ceiling

The glass ceiling metaphor has become a popular representation of the informal barriers that prevent women from ascending to the highest levels in an organisation.[1] The glass ceiling is the most noted and debated form of systematic discrimination, but is not the only obstacle to diversity in leadership. Racial and ethnic stereotypes often portray qualified persons in a light that is unfavourable to leadership, thus preventing them from reaching board seats. African Americans are sometimes stereotyped as antagonistic and lacking competence, Hispanics as uneducated and unambitious, while Asian Americans are pigeonholed as quiet and unassertive.[2] Lesbian, gay, bisexuals and transgender (LGBT) employees are likely to face discrimination in male-dominated contexts, a phenomenon sometimes labelled as the ‘lavender ceiling’.[3] The lavender ceiling undermines the access of LGBT employees to leadership positions, as well as their acceptance as ethical leaders and role models.[4]

In the EU, the latest Eurobarometer survey shows that LGBT people face a high risk of discrimination. A majority of respondents believe that discrimination on the basis of sexual orientation (58%) and gender identity (56%) is widespread in their country. In the UK, 19% of LGB employees have experienced verbal bullying from colleagues, customers or service users because of their sexual orientation in the last five years. Almost a third of them have been bullied by their manager and more than half by people in their own team. Approximately 42% of transgender people are not living permanently in their preferred gender role because they fear it might threaten their employment status.

The effects of the lavender ceiling are clearly visible in large corporations around the world. A recent study by the Human Rights Campaign Foundation shows that 91% of Fortune 500 companies have policies against discrimination based on sexual orientation and 61% against gender identity. In practice, however, these LGBT-inclusive policies have significant limitations. Over half of the surveyed LGBT employees hide who they are in the workplace and 23% of them remain closeted for fear of not being considered for advancement or development opportunities.

Two recent market-led initiatives promise to crack the lavender ceiling in large US corporations. The first one is the Quorum Initiative, a project aiming to connect companies with qualified, experienced LGBT corporate executives and potential board candidates. The project was launched in 2015 by Out Leadership, a New York-based advisory firm dedicated to the promotion of the business case for LGBT inclusion in executive leadership.

According to Out Leadership, there are currently fewer than ten open LGBT directors on Fortune 500 companies, amounting to a dismal 0.03%. To address this lack of diversity, Out Leadership is building the world’s most comprehensive database of top LGBT executives around the world, with a particular focus on candidates who are women or people of colour. At the same time, it works on developing the companies’ internal pipeline of LGBT future business leaders, via the OutNEXT project. OutNEXT pairs outstanding openly LGBT employees identified and selected by member companies, with networking and leadership development opportunities offered by top experts such as EY or McKinsey & Co.

The second market initiative comes from institutional investors. A recent joint statement issued by public officials who are fiduciaries of 14 US public pension funds, notes that “straight directors predominate in corporate boardrooms” and calls on their portfolio companies to “include nominees who are diverse in terms of race, gender, and LGBT status.” The joint statement emphasises the corporate governance benefits of diversity, which include better financial performance, enhanced firm reputation, increased innovation and group performance. Another recent report by CalPERS, California’s largest public pension fund and one of the leading institutional investors worldwide, provides further support for the business case of LGBT diversity. The report finds evidence that companies with an open and inclusive LGBT environment outperform the market by 1.7 – 3.3% annually.

It is hoped that these recent market-driven initiatives and reports will increase awareness of the benefits of diversity in corporate leadership and will accelerate the efforts toward removing the glass and lavender ceilings from the corporate hierarchy.

[1] The origins this metaphor are not altogether clear. It is usually attributed to Carol Hymowitz and Timothy Schellhardt, whose 1986 Wall Street Journal article made this phrase popular. See Carol Hymowitz and Timothy Schellhardt, “The Glass Ceiling: Why women can’t seem to break the invisible barrier that blocks them from the top jobs” The Wall Street Journal, 24 March 1986.

[2] Ronit Kark and Alice H. Eagly, “Gender and Leadership: Negotiating the Labyrinth” in Joan Chrisler and Donald McCreary, eds, Handbook of Gender Research in Psychology, vol. 2 (New York; London: Springer, 2010) 443 at 449.

[3] Annette Friskopp and Sharon Silverstein, Straight Jobs, Gay Lives: Gay and Lesbian Professionals, the Harvard Business School, and the American Workplace (New York: Touchstone, 1995) 108.

[4] Kark and Eagerly, supra note 2 at 449.