Proceedings of 10th Global Business and Social Science Research Conference
23 -24 June 2014, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-55-9
Effective Governance and Corporate Culture: Shifting Effects
of Industrial Democracy and Uncertainty Avoidance
Mark M. Lennon, Richard Franke and Han Ye
Since World War II, there appear to have been three distinct eras of economic
performance for developed democratic nations: (1) A bureaucratic Gray Flannel
Suit land up to about 1980 where bureaucratic and uncertainty avoidance
tendencies were economically more successful than entrepreneurial tendencies.
(2) A transitional Thatcher-Reagan land over 1980-1990 where there were few
detectable patterns beyond apparent corporate disintegration and reformulation.
The current more entrepreneurial period of 1990 to 2010 (New Edisonland),
greater cultural acceptance of uncertainty seems economically beneficial, as are
less authoritarianism and greater acceptance of female aspirations. Analysis of
economic growth, governance, and cultural differences among 12 nations (Table
1) shows generally positive results for more effective corporate governance.
Only for the period since 1990 does uncertainty acceptance seem beneficial.
Improvement of corporate governance might prove helpful to avoid future free
enterprise disasters similar to the recent financial crises and perhaps-joined with
Enlightenment, values of anti-authoritarianism, technological openness, and
respect for more recent participants in economic behavior-to counteract present
collapse.
Synopsis
The current economic difficulty is attributed by Alan Blinder (Blinder 2009) to "six
blunders" in the regulation of financial organizations. However, fault attribution might be
extended beyond the financial industry and its governmental regulators: As described by
Gretchen Morgenson 2005’s article on "shareholder democracy" and her 2007’s "SEC
sends investors to the children's table," in the New York Times, actual governance of
American corporations by their stockholders is ineffective. Only in few companies are
directors elected by a majority vote of those who are owners. CEOs governed by their
own appointees (in effect) may have little but their own professionalism to regulate their
behavior.
Even stockholder democracy may not be adequate for effective governance, since many
stockholders do not have long term relationships with the companies they own. For
enduring concern for corporate behavior and performance, other stakeholders may be
important--especially the company's own employees as required by law in nations of the
European Union. As described by Bass and Shackleton (1979) and Dachler and Wilpert
(1978), this Mitbestimmung or codetermination governance innovation was required of
large German companies in the iron and steel business following World War II by the
British and American occupiers, and then was extended willingly by German and other
governments in Europe and elsewhere.
_________________
Dr. Mark M. Lennon, The Pennsylvania State University, United States.
Dr. Richard Franke, Loyola University Maryland, United States.
Dr. Han Ye, Washington & Jefferson College, United States.
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Proceedings of 10th Global Business and Social Science Research Conference
23 -24 June 2014, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-55-9
Drawing on the studies begun by European and American social scientists at the first
international Dubrovnik meeting on participation and self-management in 1972, attempts
were made to evaluate possible effects of improved governance upon economic
performance by Franke in 1973, and again in 1997, using data developed from hundreds
of firms over two decades by social scientists-under the umbrella of the Industrial
Democracy in Europe International Research Group-in the free market industrial nations
of Belgium, Denmark, Finland, France, Germany, Italy, Japan, the Netherlands, Norway,
Sweden, and the United Kingdom. Also studied were not strictly free market nations of
Israel, Poland, and the former Yugoslavia. The United States was not a participant,
although many U.S. social scientists were involved, since the United States does not
have industrial democracy as described in the previous paragraph (cf. Levine and Tyson
1990). Other nations studied directly have the varying degrees of employee participation
shown.
In the present study, this governance information is used for the 1970s and/or the 1980s
from the 12 free market economics noted above (see Table 3), including the United
States. National cultural information taken from Hofstede 1980 and 2001, and McClelland
(1961) also is used to evaluate possible underlying factors that may predispose nations to
embrace employee rights for participation in corporate governance. Performance
outcomes at the national level are calculated from data provided in the World Bank's
World Development Reports and World Development Indicators up through 2009. Growth
rates of real Gross Domestic Product per capita are organized for each decade and pair
of decades since 1960 and are related to extent of participative governance and to the
five Hofstede (2001) indices of adult cultural values and to McClelland’s.
1961 TAT-based measures of 8-10 year old children's motivational training through
textbooks, achievement (entrepreneurial) motivation and management (power minus
affiliation) motivation for about 1925 and 1950 textbooks, with average values for the
two periods centered on 1938 calculated where possible. These cultural or motivational
variables have been associated with rates of national, corporate, and individual
behavior and performance McClelland 1961 and 1985 , Skolnick (1966), Franke (1973),
Hofstede 1980 and 2001, by Franke, Hofstede, and Bond 1991 and 2002, and in
Strategic Management Society presentations by Franke and Barrett (2004) and Franke,
Kashlak, Prumo, and Barrett (2008) While it is apparent that the McClelland cultural
variables change radically from generation to generation, there is evidence that the
adult cultural variables developed by Hofstede from testing highly selected IBM
employees is rather stable over extended periods of time See Franke, Hofstede, and
Bond (2002).
The present analysis is the first to tie motivation and culture to governance and then
economic performance. Consideration of conditions and apparent effects of corporate
governance may suggest steps to remedy U.S. corporate instability over time and ways
to aid U.S. and world economic performance in the process.
Major results are presented in Tables 2 and 3 and in Figure 1, below. Since the effective
sample of 10 to 12 nations is small (see Table 1) ---even though the nations studied
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Proceedings of 10th Global Business and Social Science Research Conference
23 -24 June 2014, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-55-9
represent most of world economic produce, Spearman rank-order correlation is employed
(as described by Franke, Hofstede, and Bond (1991). Table 2 shows apparent effects of
corporate governance and underlying adult and prior childhood cultures upon growth
rates of GDP/capita over 1960-80, 1970-90, 1980-2000, and 1990-2007. Not presented
in Table 2 are single-decade results, in part shown in Figure 1. Inter correlations of
governance and cultural variables are provided in Table 3, to indicate apparent effects of
childhood motivational training upon adult cultural values and of both upon governance.
Figure 1 provides significant relationships of childhood culture upon adult culture, of both
upon governance, and of both cultural measures and governance upon economic
performance-showing that there appear to have been three distinct world eras since
World War II in developed Western nations. These are labeled provisionally (1) the "Era
of the Gray Flannel Suit" from 1960 to 1980 (probably all of the post-War period up to
1980; ,(2) the "Era of Thatcher and Reagan" from 1980 to 1990 (a period of corporate
and industrial disintegration and reformulation-to say the least); and (3) the "Era of
Thomas Edison once again" from 1990 to 2007 (the latest GDP/capita data for nations).
As outlined in Table 4, during era (1), in the Gray Flannel Suitland of 1960 to 1980,
growth rates of GDP per capita were positively related to more participative and
presumably more effective governance. But the underlying cultural values that led to
better economic performance were less entrepreneurism (ACH) and more managerism
(MGR) and bureaucratic orientation (LTO, or Michael Bond's and the Chinese Culture
Connection's "Confucian Work Dynamism"). Most interesting among adult cultural
measures is UAI uncertainty avoidance index, with more risk aversion economically
beneficial. In this era, nations such as Japan engaged in re-engineering performed better
that those such as the U.K. or the U.S. more engaged in origination. See Table 5 for a
breakdown of Hofstede variable definitions.
During era (2), in the Thatcher-Reaganland of 1980 to 1990, hundreds of years of
convergence (catching up by less developed industrial nations emulating more
developed ones, as described by Baumol (1986) halted for about a decade. Only during
this period of what appeared to be transformation and which may have been
retrogressive in economics and some aspects of human welfare was there no significant
impact of adult culture or of corporate governance. Childhood culture affecting persons
toward the end of common employment ages had some effect-both entrepreneurial (ACH)
and managerial (MGR) motivation in childhood showed long-tem positive effects on
economic performance. Uncertainty avoidance index (UAI) was unrelated to
performance---perhaps transitionally, as seen by comparison of eras (1) and (3).
During era (3), in the new Thomas Edisonland of 1990 to 2007, growth rates of
GDP/capital again were related positively to more corporate governance-itself
derivative of lower adult authoritarianism (lower PDI), where lower PDI also benefits
economic growth directly. As in era (1), lower UAI uncertainty avoidance also leads to
more growth. Era (3) economic growth seems aided by greater cultural acceptance of
women as shown by lower MAS misogyny. It seems reasonable that, with labor forces
potentially 50% or more female and with substantial scientific and other professional
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Proceedings of 10th Global Business and Social Science Research Conference
23 -24 June 2014, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-55-9
education attained by women, greater cultural acceptance of female attitudes,
behavior, and economic involvement would be beneficial. In the New Edison era, the
interrelated cultural syndrome of low authoritarianism, openness to innovation, and
openness to female participation-joined with better governance-benefit national
economies.
From this analysis, perhaps the era (3) cultural and governance values that now appear
economically beneficial can be utilized to overcome problems resulting from past
under-governance and government regulatory and corporate irresponsibility. Data and
empirical analyses of these relationships for 1990 up to at least 2007 suggest potential
for these optimistic suggestions even now. However, there are limitations to these
findings as only a limited number of industrialized nations were scrutinized.
Future Directions for Research
Amongst the initial 12 nations that were under scrutiny, emerging economies such as s
the BRIC’s (Brazil, Russia, India, and China) were not included. All of these countries
over the last twenty years have had significant GDP per Capita Growth (annual % Rate)
as outlined in Table 6. The influential factors that were identified for the initial 12
countries may not necessarily be applicable to these additional four nations.
A notable example is China, where it was not until 1999 that the term ―corporate
governance‖ found its way into common Chinese parlance (Qian and Wu 1999).
Braendle, Glasser, et al (2005) argue that the existence of the Chinese cultural
phenomenon of Guanxi (关系) or personal relationships or connections (Fan 2002)
amongst senior management hinders effective corporate governance. Managers and
directors of Chinese firms exhibit opportunistic behavior to advance their own interests
ahead of other stakeholders (He 2000). This opportunistic behavior is a major problem
as it limits the growth of the development of industrial democracy (Tam 2002).
In the case of Chinese SOE’s (state owned enterprises) which have been privatized,
these problems are further aggravated. By Chinese law, the controlling shareholder
(typically the government of the PRC) is able to appoint the chairman of the board and
the CEO directly (Lin 2001). Therefore, Guanxi is an important role regarding job
placement, which further degrades democratic corporate governance. Board positions
are in many cases politically determined, and the board members are selected based
on party connections (Tam 2002; Qiang 2003).
In contrast to these findings, however, others such as Dunfee and Warren (2001) in a
normative analysis of the use of Guanxi or personal ties find it to be efficacious in some
instances, as they determined that there a number of different forms of Guanxi which
have distinctive impacts on the well-being of Chinese citizens and economic efficiency.
Ironically, according to Dunfee and Warren (2001), their findings on the efficacy of
certain types of social ties concurs with the conclusions by Donaldson and Dunfee
(1999)’s work in which the use of personal ties benefitted Western micro social
communities. Thus applying the Hofstede and McClelland TAT analysis to the Chinese
context as had been done to the initial 12 country sample, may help to elucidate these
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Proceedings of 10th Global Business and Social Science Research Conference
23 -24 June 2014, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-55-9
contradictions. Another future direction for research is the area of corruption in the
other BRIC nations, where concepts like Guanxi are not so culturally embedded.
Russia and the states of the former Soviet Union may prove a useful example.
Guergen and Wolf (2002) in their chapter on Governance, Corruption, and Economic
Performance in ―Improving Governance and Fighting Corruption in the Baltic and CIS
Countries: The Role of the IMF‖ argue that there is a crucial role to be played by
outside developmental and regulatory agencies like the IMF in corporate governance.
Guergen and Wolf (2002) believe that through increased regulatory oversight, corruption
will decrease, and thereby level the playing field, and in so doing promote increased
industrial democracy and corporate governance, thereby leading to economic gains. This
concurs with our earlier optimistic suggestions based on the 12 nation study that more
oversight may lead to a return to greater economic prosperity in the post ’New Edisonland‖
era. Thus, through future research we seek to draw a more complete picture of the
relationships of corporate governance and culture, and the impacts of changes in
industrial democracy.
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Proceedings of 10th Global Business and Social Science Research Conference
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Table 1: List of Countries under Examination
Analysis of economic growth, governance, and cultural
differences among these 12 nations
Belgium
Denmark
Finland
France
Germany
Italy
Japan
The Netherlands
Norway
Sweden
United Kingdom
United States
Source: Authors’ Research
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Proceedings of 10th Global Business and Social Science Research Conference
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Proceedings of 10th Global Business and Social Science Research Conference
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Table 4: Three Distinct Eras and Major Findings
Three Distinct Eras of Economic Performance and Major Findings in Each Era


“Bureaucratic Gray
Flannel Suit Land” up to
1980’s
Bureaucratic and

uncertainty avoidance
tendencies were

economically successful
Transitional
“Thatcher-Reagan Land”
1980-1990
Few detectable patterns 
Apparent corporate
disintegration and
reformulation.
Entrepreneurial
tendencies less
successful
“New Edisonland”
1990-2007
Greater cultural acceptance of
uncertainty acceptance seems
economically beneficial.

Less authoritarianism

Greater acceptance of female
aspirations
Source: Authors’ Research
Table 5: List of Meanings of Hofstede Variables
Hofstede’s Adult Culture Variable Definitions
Extent to which the less powerful members of organizations and institutions (like the family)
PDI 1970’s
accept and expect that power is distributed unequally. This represents inequality (more versus
Power
less), but defined from below, not from above. It suggests that a society's level of inequality is
Distance
endorsed by the followers as much as by the leaders.
Deals with a society's tolerance for uncertainty and ambiguity; it ultimately refers to man's
UAI 1970’s
search for Truth. It indicates to what extent a culture programs its members to feel either
Uncertainty
uncomfortable or comfortable in unstructured situations. Unstructured situations are novel,
Avoidance
unknown, surprising, different from usual. Uncertainty avoiding cultures try to minimize the
IDV 1970’s
Individualism
MAS 1970’s
Masculinity
LTO 1980’s
Long-Term
Orientation
possibility of such situations by strict laws and rules, safety and security measures, and on the
philosophical and religious level by a belief in absolute Truth
On the one side versus its opposite, collectivism, that is the degree to which individuals are
inter-grated into groups. On the individualist side we find societies in which the ties between
individuals are loose: everyone is expected to look after him/herself and his/her immediate
family. On the collectivist side, we find societies in which people from birth onwards are
integrated into strong, cohesive in-groups, often extended families (with uncles, aunts and
grandparents) which continue protecting them in exchange for unquestioning loyalty.
Versus its opposite, femininity, refers to the distribution of roles between the genders which is
another fundamental issue for any society to which a range of solutions are found. The IBM
studies revealed that (a) women's values differ less among societies than men's values; (b)
men's values from one country to another contain a dimension from very assertive and
competitive and maximally different from women's values on the one side, to modest and caring
and similar to women's values on the other.
Versus short-term orientation: this fifth dimension was found in a study among students in 23
countries around the world, using a questionnaire designed by Chinese scholars It can be said
to deal with Virtue regardless of Truth. Values associated with Long Term Orientation are thrift
and perseverance; values associated with Short Term Orientation are respect for tradition,
fulfilling social obligations, and protecting one's 'face'. Both the positively and the negatively
rated values of this dimension are found in the teachings of Confucius, the most influential
Chinese philosopher who lived around 500 B.C.; however, the dimension also applies to
countries without a Confucian heritage.
Source: http://geert-hofstede.com Accessed 10/15/2010
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