Dialectics of culture & corporate governance by Pratip Kar

Filed under Corporate Governance |

Approaches to corporate governance reforms need to recognise the influence of cultural heritage and social structure

It is not often apparent that behaviours of individuals that are shaped by cultural and personal concepts of hope, ambition, greed, fear, uncertainty and hubris, as well as by the social ethos, can exert a significant influence on the structures, institutions and legal framework of corporate governance. The sensitive interplay of culture and governance is often overlooked when implementing the best practices in corporate governance. This is partly because cultural traditions run deep and, hence, are difficult to address, let alone change.

The concept of “culture” itself is very interesting. It originally meant “the cultivation of the soul or mind” but through the ages it acquired different meanings in the social and anthropological contexts. The commonality underlying the rubric of definitions and meanings of culture is that it can be identified by four elements – collective norms, values, beliefs and symbols of expression – to reflect patterns of human activities.

Organisations have certain structures that function under certain rules and procedures. The people who run them are a part of society. Hence, organisations are social units that are naturally subject to the influences of social norms and structures, cultural practices, philosophies and value systems. Social and cultural norms govern individual and collective behaviours and hence organisational behaviours.

The core concepts of corporate governance – equity, transparency, faith and accountability – all have deep moorings in values, a component of culture. How human beings handle guilt and shame in society, for example, determines in part the content, application and enforcement of accountability standards. So traditions and culture do interact with the establishment of corporate governance systems but tend to create distortions when there is an attempt to shape the “universal” model of governance to reflect country-specific conditions. In the case of a company’s governance, the problems arise in attempting a balance between the two, for an emphasis on understanding and maintaining local cultural norms may often lead to compromising a company’s adherence to high standards.

The clashes between culture and governance become particularly apparent in family-owned businesses. In most Asian economies that still have a dominance of family-owned businesses, these are strongest in several areas: related-party transactions, the promoter’s or large shareholder’s actions, and the board’s nominations, deliberations and effectiveness.

The intensity of family-ownership in India is comparable to that found throughout Asia, West Asia, Italy and Spain. About a third of Indian companies are controlled by one or more family members in concert with one another. The level of concentration is confirmed by the fact that Moody’s Investor Service found that 17 of the 30 companies in the Bombay Stock Exchange’s benchmark Sensex index were family-controlled in 2007. This ratio may have changed only slightly since then.

From a corporate governance standpoint, research validates that when family business groups are involved, there are “significant pyramiding and evidence of tunnelling activity that transfers cash flow and value from minority to controlling shareholders.” Inbred, insular decision-making processes, in which family issues are inextricably intertwined with business matters and blind loyalty of directors to those who brought them to the board, become common. These situations run counter to the underpinnings of corporate governance and boards’ effective stewardship.

For example, in India, as in many other emerging markets, respect for elders and their views are important. But, protection of minority shareholders’ interests may demand that this cultural norm should not keep board directors from challenging one another’s opinions, exposing problems or vigilantly protecting shareholders’ rights and interests.

Another local norm may demand family members to be promoted to leadership positions over non-family employees. It could also mean an unquestioning attitude toward the chairman if he is the family’s eldest member and this attitude may well pervade across the company. There is little doubt that the commitment, loyalty, stability and pride of family members are valuable traits for effective leadership. And as managers family members tend to have long-term relationships with stakeholders, including capital providers. But the stress needs to be on merit to ensure that a company has the leaders it needs to prosper. Indeed in the enlightened family-owned businesses in India, there is a growing trend in which family members are baptised by making them “go through the grind” through education and experience before anointment.

Riti parampara — custom, tradition and family bonding, personal or family trust and relationships all have an impact on leadership styles, board composition, choice of independent directors, boardroom behaviour, succession planning and disclosure of related-party transactions, especially in family-owned businesses. Family bonding is important and the concept of the extended family is still very much prevalent. Often the entire business is considered to be part of the extended family; the distinction between what belongs to the family legally and what belongs to the company is lost.

But family heritage and value systems can also have a significant positive influence on the companies’ governance practices — influences that can transcend generations. This has been seen in several business groups in India with a progressive mindset. Such groups, however, are still limited in number. Take the Tata Group for example. The crest of the Tata Group bears the legend, Humata, Hukhta, Hvarshta, which in the Avesta language means good thoughts, good words and good deeds. This legend is integral to the group’s value system, including its position on corporate social responsibility.

Although principles that are well-integrated into Indian culture have much in common with corporate governance’s fundamentals, it is Western culture, law and thought that have shaped the approaches that have been formally adopted by India’s companies, stock exchanges and regulators in modern times. This Western influence has advantages and disadvantages. The move toward global harmonisation of regulatory standards and accounting principles intensifies the perceived need by India’s business leaders to adopt Western best practices. Pragmatism, the pace of economic change and global expansion of business are also helping expedite this process. The disadvantages of Western influence arise when the founding principles of business are rooted in a country’s dharma. Corporate governance includes moral values and ethics, and these concepts are largely defined by the cultural and personal contexts in which they exist. Concepts of equity, fairness and stewardship have deep moorings.

In India, the evolution of corporate governance is a complex narrative about how a uniquely diverse society comes to terms with global standards as part of its economic transformation. Conflicts exist, so it is better that these are recognised and dealt with not by law, because cultural changes cannot be legislated, but by companies. India’s diversity illustrates well the need for company leaders to involve a broad group of stakeholders rather than acting unilaterally. The implementation of corporate governance at a national or company-specific level is in the ultimate analysis a trust-building endeavour demonstrating the value of understanding mutual expectations and concerns.

Adapted from a Global Corporate Governance Forum publication “Culture and Corporate Governance Principles in India: Reconcilable Clashes?” written by the author. The author is a member of the Advisory Council of the Forum and a consultant to the Forum and the World Bank.

( Author can be reached at pratipkar21@gmail.com  )
(Sourced from Business Standard)

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Posted by on Oct 10 2011. Filed under Corporate Governance. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.

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