Culture greatly influences the quality of corporate governance

Eric Hallett, Jakarta

There has been much recent debate over how universal the policies of good corporate governance are across cultures (transparency and disclosure, ethical decision-making, shareholder rights, proper risk management, appropriate executive remuneration, stakeholder interests, etc.).

Many suggest that the policies set forth by the Organization for Economic Co-operation and Development (OECD) for good corporate governance apply everywhere -- good business is good business no matter where your are. Others insist that cultural values influence what is considered good business and that "best business practices" can mean different things in different places.

The element of culture plays an important role in how we do business and what we consider good and bad conduct. And it's this difference in perception about what is good and bad based on cultural values that divides business leaders between different definitions of best business practices. In many eastern countries, for example, the selection of board members is still heavily influenced by family relationships and informal network ties.

This makes good business sense in these countries and it contributes to the ongoing interests of the companies. However, policymakers in the west frown on this type of behavior by claiming that appointing family and friends to the board of directors is a blatant display of favoritism and bias and will lead to unavoidable conflicts of interest.

Can we reconcile the two viewpoints? Is it wise to do so? One approach to good corporate governance across cultures might be found somewhere between the two. There are certain business practices which universally benefit companies around the world, and there are other culturally-specific practices which benefit companies that must adhere to locally accepted values in order to prosper.

In fact, allowance is currently made by the OECD for the "divergence" of culturally-specific practices and systems as long as these practices and systems lead to the overall objective of good corporate governance which is the long-term welfare of the company's shareholders and stakeholders.

At the same time the OECD also recommends that divergent practices and systems eventually be minimized or eliminated. By doing this the OECD is taking the side of the universalists even though it is currently allowing for exceptions. It is encouraging companies with divergent practices to move along the path to universal acceptance of its "best business practices".

This is where the challenge lies for Indonesia and other countries that have long-standing, culturally-based business practices which lie outside of those that are recommended by the OECD. It is a challenge because the practices are rooted in cultural values that are extremely difficult to change, if they are changed at all.

Resistance to cultural change is part of human nature. We like to keep things predictable and running smoothly even though we know there are negative long-term consequences for doing so. Change brings with it a sense of short-term discomfort, pain, even loss. Sometimes, waiting for long-term consequences seems easier to contend with than dealing immediately with short-term consequences. This is the psychological predicament that all companies face when struggling with change.

This resistance should not get in the way of making immediate, informed decisions about the extent to which our companies are willing to accept and uphold best business practices as stipulated by the OECD.

When evaluating the usefulness of divergent practices, and whether we should maintain them or not, we must avoid the psychological trap of preferring divergent practices over generally accepted practices because "that's the way we've always done it".

Leaders resistant to healthy change may also defer to prevailing practices because the rewards are immediate and the risk of change is minimized. This is the power of culture speaking.

Instead, our companies must grapple with how they justify divergent practices and whether that justification is legitimate. Besides the example given above, consider the practice of paying higher prices for raw materials from suppliers who are connected to an informal network, instead of receiving open bids and paying the lowest price for the same materials. Is this practice legitimate? Who loses or gains if it the practice is changed? These are the types of questions we must consider among others.

Our companies must also consider the consequences, both short- term and long-term, of maintaining or eliminating divergent practices. If divergent practices are maintained, future investors and customers world-wide may get the impression that we're not serious about good corporate governance. On the other hand, if we eliminate divergent practices we upset comfortable and culturally-accepted ways of doing business which bring their own rewards and may even be necessary for sustaining business in the short-term.

Good corporate governance is needed and best business practices as set forth by the OECD give us a fundamental approach to achieving this. It is up to our business leaders to decide how to meet the challenge of integrating these policies into very unique corporate cultures within a very unique national culture, or to decide how to meet the challenge of not integrating them.

The writer is Head of the Business English Center at Prasetiya Mulya Business School. He lectures on International Comparative Management topics and can be reached at eric@pmulya.ac.id