Abstract We investigate the effect of culture on corporate governance using the extraordinary opportunity that the corporate landscape of Switzerland provides. Within a single institutional framework (e.g., Swiss federal corporate law), we use language (German and French) and religion (Roman Catholicism and Protestantism) as proxies for culture. These groups share a distinct set of values particularly in their tolerance for hierarchical structures. We observe that firms in Swiss-French areas and firms in Roman Catholic cantons are more likely to have one-tier boards, whereas two-tier boards are more prevalent in Swiss-German areas and Protestant cantons. Furthermore, board composition is significantly driven by language. In contrast, ownership and equity structure are not significantly related to culture.
Keywords Corporate governance * Board of directors * Ownership structure * Culture * Language * Religion
Economists often aim to explain cross-country heterogeneity in terms of economic features such as financial development, business practices or corporate governance (see Djankov et al. 2003; Aguilera and Jackson 2010). Typically, corporate governance can be seen as a set of devices aimed to protect (minority) shareholders against managerial misbehaviour or misbehaving (large) shareholders (see e.g., Shleifer and Vishny 1997). Corporate governance is a crucial success factor in a firm's strategy. However, striking international differences have been found in important elements of corporate governance such as the structures of the board of directors (Wymeersch 1998) and corporate ownership (La Porta et al. 1999a; Faccio and Lang 2002).
Due to the close relationship between corporate governance and the legal system, the law and finance theory has provided the reference for explaining the various corporate governance regimes around the world (see e.g., La Porta et al. 1998). The theory of legal origins assumes that common law countries and their respective systems of corporate governance (i.e., minority investor protection, dispersed ownership, and takeover activity) are related to better economic outcomes relative to civil law countries (see e.g., La Porta et al. 2008). Higher investor protection results in a more efficient allocation of capital. In consequence, it is believed that introducing elements of Anglo-American corporate governance practices would potentially improve economic development. However, such corporate governance reforms have not per se led to greater stock market development (Armour et al. 2009). We can still observe a variety of corporate control structures around the globe. Doidge et al. (2007) find that country characteristics explain the variation of a firm's governance better than firm characteristics can. The convergence process is hampered by factors at the firm level, but also at the institutional and the national level (Aguilera and Jackson 2003; Denis and McConnell 2003; Buck and Shahrim 2005; Yoshikawa et al. 2007).
Some researchers thus claim that culture may play an important role in corporate governance practices around the world (Bebchuk and Roe 1999; Buck and Shahrim 2005; Clarke and dela Rama 2006; Aguilera and Jackson 2010). International organizations such as the World Bank, the IMF, the OECD or large pension funds such as CalPERS share this view (see Licht 2001). For instance, the business practices of American, Japanese or German managers differ, and this is likely to be associated with their underlying culture.
However, culture is a complex concept and is often regarded as a black box. In his seminal work, Hofstede (1980) defines culture as a shared set of values which separates one group of people from another. Culture is seen as being the expression of the aggregate of common individual personalities forming a group. Beliefs, values and norms constitute a "collective programming of the mind" which is deep-rooted in society and therefore changes only very slowly from one generation to the next (Hofstede 1980, p. 25). Licht (2001) denotes culture as the "mother of all path dependencies", suggesting that culture is fundamental to an explanation of the global differences in corporate governance. Proponents of the new institutional theory argue that both informal institutions (e.g., culture) and formal institutions (e.g., laws) constitute the "rules of the game" according to which individuals and organizations interact. In consequence, (both) institutions affect economic outcomes (e.g., management practices, economic growth) directly and indirectly (North 1990, p. 3; Williamson 2000). Lowe (1998) contends that culture is important in the transmission process from old to new institutions combining the two perspectives. Hence, it is widely acknowledged that culture directly (Hofstede 1980) or indirectly via (formal) institutions (Williamson 2000) is important in explaining economic outcomes. However, there are various relationships between culture, institutions, corporate governance, firm performance and economic growth. Another important problem in evaluating and operationalizing culture lies in its measurement (see e.g., Shenkar 2001). Hofstede's basic framework measures cross-cultural differences along four dimensions of national culture (power distance, uncertainty avoidance, individualism, and masculinity) using survey data (see also Schwartz 1999). While some studies rely on such classifications of culture (e.g., Licht et al. 2005, 2007; Li and Harrison 2008; Siegel et al. 2011) or measures of cultural distance derived from Hofstede's cultural indices (e.g., Kogut and Singh 1988), other studies rely on more easily observable characteristics such as a country's predominant language or religion (e.g., Grinblatt and Keloharju 2001; Stulz and Williamson 2003; Guiso et al. 2003, 2006). Groups which speak the same language or believe in the same religion often share the same values. These values can also be identified in Hofstede's typology of cultural dimensions. However, both cultural dimensions and cultural proxies often overlap with countries and thereby their institutions. For instance, Protestantism, English and common law are commonly linked characteristics which are associated with similar corporate governance regimes.
This study investigates the effect of culture on corporate governance using the cultural pluralism within one country and one single institutional system: Switzerland. Culture is proxied by language (French and German) and religion (Roman Catholic and Protestant) which are the most important factors in Switzerland's cultural pluralism (see Mayer 1951). (1,2) The literature shows that there are significant cultural differences between German-speaking people and French-speaking people as well as between Protestants and Catholics. Most importantly, French, Swiss-French, and Roman Catholics tend to tolerate hierarchical structures and strong leadership. In contrast, German, Swiss-German, and Protestants tend to be skeptical towards a concentration of power (see e.g., Hofstede 1980; Stulz and Williamson 2003). (3)
The distribution of power within the corporation determines the relationships between managers, controlling shareholders and (minority) shareholders and corporate governance aims to mitigate potential conflicts between these parties. We focus in our study on two relevant features of corporate governance: board of directors and ownership structure. In particular, we evaluate the impact of culture on board structures, board composition, and ownership structure. Firstly, in Switzerland, corporations can choose between two forms of board structure: one-tier and two-tier boards. The more hierarchical one-tier board consists of executives (insiders and, most frequently, the chief executive officer, CEO) and non-executive directors (outsiders) who, together, within one centralized corporate body conduct daily business and monitor the management. A two-tier board, on the other hand, consists of a management board and a supervisory board. The day-to-day 1 management of the corporation is delegated to a management board which is completely separate from the supervisory board. Splitting the corporation's highest level of authority into an executive and control function increases the (supervisory) board's independence, promotes the sharing of tasks and responsibilities, and reduces the concentration of power. Secondly, culture also appears to affect board composition, as board members' values and beliefs determine not only who is selected for board membership but also which decisions are made and consequently how the firm is directed. Directors may be chosen because they share the same values as the other board members, and these values are likely to correspond to those of the regional culture of the firm's headquarters. These shared values may result in a uniform and distinct management style. Thirdly, the separation of ownership from control shapes the principal-agent relationships within corporations. Strong shareholders have a significant influence on the board and the corporation as a whole by using their voting rights. In more hierarchically-oriented cultures, ownership may therefore be more concentrated, especially if controlling shareholders benefit from a multiple class equity structure.
In our study, we relate distinct features of culture directly to corporate governance structures, holding institutional factors constant. We contribute to the discussion of the effect of culture on corporate governance practices for three main reasons. First of all, culture is generally difficult to operationalize. We use two languages (German and French) and two religions (Roman Catholicism and Protestantism) as measures for culture. Each of these two proxies is presumed to be linked to different tolerances for hierarchical structures and therefore have a potential impact on corporate governance. Such an approach was also recommended...