3.1.3 Aspects of US corporate culture

Although the British, the Americans and the Dutch have much in common, such as Christian religions and tradition, tolerance, rationality and independence,1 there are certain aspects of their business culture that give rise to divergency in corporate governance. Four aspects of US culture are relevant to corporate governance:

Each aspect is described below. Again, my remarks are based on general impressions. I realize that I may be sometimes repeating old generalizations and that they are not applicable to each individual. The reader might nevertheless be interested or amused by these impressions of a foreigner with a long experience with Americans and their legal and business views and practice.

The US has a federal system of government and in principle leaves regulations of corporations to the individual states. Most states have flexible laws that facilitate business. In the field of corporate law Delaware plays an important role in providing a clear and predictable legal framework.

The SEC has played an important role since 1933, as did the strong disclosure provisions of President Roosevelt's New Deal laws after the 1929 Crisis. Most director liability cases are based on insufficient transparency in issuing securities (Securities Act 1933, Section 11) and in selling securities (Security Exchange Act 1934, Section 10(b)). The Enron crisis led to the passing of the Sarbanes-Oxley Act in 2002, which has had a marked disciplinary effect and caused the SEC, NYSE and NASDAQ to promulgate strong federal corporate governance regulations. The DoddFrank Act of 21 July 2010 may have an even greater impact.

State laws and court judgments determine corporate law; there has traditionally been little room for informal directives and codes coming from the government, although several big private institutions such as the National Association of Corporate Directors (NACD), the Conference Board, which advises its corporate members on corporate governance, large pension funds such as CalPERS and Risk Metrics, the largest voting advisor, have set up best practice guidelines, widely disseminated and available to any director and even taught in special educational courses for board members. NYSE and NASDAQ too have introduced several best practice regulations. In the US the law in liability cases reflects the minimum standard of the business judgment rule, which only applies when fiduciary duties are breached. Everything is allowed unless it oversteps the line of liability. This is the opposite of the British approach, where "comply or explain" codes set aspirational best practices but have not been tested in court.

People move from one end of the country to the other, making friends and new starts with equal chance. They worry little about burned bridges behind them. States have varying rules and laws and there are many different business cultures. Diversity is celebrated. America is a country made by immigrants.

Americans have a good feel for due process and fair hearing, the value of liberty and justice for all. The courts play an important role: in the field of corporate law. These are the state courts. In the 19^th century, different courts in different states often gave mutually contradictory judgments.

About that time states started to develop corporate law statutes to protect investors. And towards the end of the 19^th century a number of states lowered taxes and enacted corporate statutes, which were liberal and enabling. New Jersey was the first to liberalise. Delaware eventually took the lead and became the most attractive state for publicly held corporations. Some argue that Delaware law is purposely management-friendly in order to induce managers to opt for Delaware. Others argue that the logical course is to choose a shareholder-friendly state, because this enhances the value of the company. In fact the Delaware Courts usually find a nuanced middle ground between board and shareholder interests.

The Delaware Courts give clear direction on what boards of directors may and may not do and have managed to make the law clearer and more certain for the whole of corporate America. They have thereby attracted the vast majority of the Fortune 500 companies and more than half of all listed corporations to incorporate in Delaware. Because of the extensive experience of the Delaware courts, Delaware has a more well-developed body of case law than any other state,2 which gives corporations and their counsel greater guidance on matters of corporate governance and transaction liability issues.

Disputes on the interaal affairs of Delaware corporations are usually filed in the Delaware Court of Chancery, which is a separate court of equity, as opposed to a court of law. Because it is a court of equity, there are no juries, and its cases are heard by the judges, called Chancellors. Currently the Chancery Court has one Chancellor and four ViceChancellors. The Court of Chancery is a trial court, with one Chancellor hearing each case. Litigants may appeal from decisions of the Court of Chancery to the Delaware Supreme Court, which has five members. Chief Justice Myron Steele and Justice Jack Jacobs have rendered many important opinions and communicate openly with the corporate legal world, leading to a clear understanding of corporate law.

The Delaware courts have clearly supported the business judgment rule, leaving business decisions to the directors, provided they are loyal to the company and take their decisions with due care. The most recent case law makes clear that the complete board should be involved in each decision and that the board must be well-informed before taking a decision.

Apart from the Delaware corporate injunction and liability cases directors are generally confronted with securities class action cases in the federal courts. All of these cases deal with the issue of insufficient information in filed registrations. Although many cases are lodged, it is rare for directors personally to have to pay out of pocket, because in nearly all cases the company indemnifies them and they are protected by good D&O policies. Enron, WorldCom, Tyco and about 11 other cases are the exception, where independent directors did have to stump up individually, because the plaintiffs found the behaviour so seriously breaching all duties of directors that an example had to be set. These "send a message" lawsuits are making directors increasingly nervous.

Americans believe that a person can make a success of a new business even though he has failed before. A failure is seen as a lesson for the future and as an opportunity rather than as a bad mark that makes it impossible to do business later. Sturing from nothing is possible. From newspaper boy to CEO is the American Dream, and everything is possible for "comeback kids". Americans love comebacks. "Yes we can" is an appealing term, although at the time of publication of this study, not so much heard as two years ago. Success and money are not dirty words in the USA, whereas they are downplayed in the UK and the Netherlands. Working hard in the US does not make a person look suspicious and ambition is nota negative word.

Government does not get in the way of enterprise. Anti-trust laws help new entrants. The Sarbanes-Oxley Act and Dodd-Frank Act might be called exceptions to the concept of free enterprise. They are certainly more restrictive on corporate freedom than any laws before.

The first key element of voluntarism is believing and behaving as if each person is a sovereign individual: unique, independent, self-reliant, selfgoveming and ultimately self-responsible. Free men of early America stressed "competency" and virtue. The second key element of voluntarism is believing and behaving as if each individual succeeds through fellowship in a group of his free choice. Because success means doing well in voluntary groups, a voluntary culture encourages individuals to strive for status. The typical American has a "can-do" confidence, conformism in his team and a status-driven culture.3

Americans are winners, they want to win and as soon as they start an enterprise they really "go for it" in all respects. A job application letter and CV of an American person looks very different from the letter and CV of the same type of person from the Netherlands. The American letter is full of superlatives and landitory expressions, while the Dutch letter is — or used to be — rather modest. The US scores very high on the assertiveness list of Geert Hofstede as do the British.4 Americans value hard work, whereas the English set great store by success that seems effortless and "natural". In the US risk-taking is encouraged: people are encouraged to "shoot for the stars". Business leaders (the CE05) value talent and gather talented people around them. They are also prepared to encourage to share in successes. Successful businessmen show magnanimity for charitable foundations; examples are Gates, Buffet, American Aid and the Peace Corps.

The country's immense size and ample natural resources mean that companies can grow strong within the US market, as there are no practical borders and no import duties between states. This strength provides them with an excellent springboard for doing business and mounting takeovers throughout the world.

US business has a reputation for success engineered by all-powerful CEOs. Examples are Rockefeller, J. Pierpont Morgan and, more recently, Eisner at Disney, Greenburg at AIG, Robert Woodruff at Coca Cola, Jack Welch at GE, Bill Gates at Microsoft and Steve Jobs at Apple. How did this strong one man leadership develop in an otherwise predominantly democratic country? Some say it goes back to the first British settlers at the start of the l7^th century, when Britain was not democratic yet. Some say it developed in the Lincoln era, when many strong heads of enterprises were successful in developing pan American companies. Some say it is connected with respect for individualism and meritocracy: if someone is successful, give him freedom to develop. Some say it is custom and has always been that way and has led to spectacular successes. Custom and following the example of successful "imperial CEOs" must be an important cultural aspect. However, the situation has changed since the Enron, WorldCom and the Disney disasters. Now a strong counterbalance is provided by independent directors and non-CEO chairmen. The strong charismatic CEO/chair is no longer the model. More modest CEOs are often successful in this day and age.5

All Americans feel they are immigrants. This explains their diversity, their "can do" mentality and their direct way in communication, which is like the Dutch directness, but unlike the British.

If a company is underperforming the company should be taken over. It was this notion that led to the formation of huge conglomerates, starting with Gould and Vanderbilt (railroads) in the 19^th century and US Steel and Standard Oil at the turn of the 20^th century. At the same time Americans wish to prevent monopolies, hence the American anti-trust, anti-monopoly and anti-cartel laws. Corporations are allowed to develop defence mechanisms to remain independent. Just as in the sporting world, the weakest team gets first choice of the draft of the best new players each year. Ever since 1830 there has been a culture, backed by state laws, of keeping banks small and inhibiting the growth of interstate banks. Only since 1990 have banks grown through mergers to much larger banks. Although established business power is admired, there is always support for a new entrant.

Academia play an important role in the US. The courses in business administration at Harvard, Yale, Columbia, Stanford and Michigan are world famous and many top directors from the US and elsewhere have studied there. These universities have developed important economie theories which have influenced legal developments. They also have famous law schools. Law professors in the US might give less direction to the law than in the UK and the Netherlands, because of the strong role in the US of judges, lawyers and the SEC, but still professors, such as Bebchuck and Bainbridge have produced research and theories that have a large following among law makers and judges. Contrary to the other two countries studied in this book, judges in the US write in legal professional publications and give regular talks at seminars. Chancellor Leo Strine and Chief Justice Myron Steele of the Delaware courts are good examples. They wield great influence, as do leading lawyers such as Martin Lipton, Ira Millstein and Holly Gregory.

It is common knowledge that Americans are good at devising and implementing plans, at least in business. This is something they have leamed when studying for their masters degree in Business Administration.

An MBA is highly regarded and a feature of US business culture.6 The British and Dutch have followed this example of their US competitors by establishing business schools at their own institutions of higher learning.

The law advances as a result of an adversarial process in which advocates challenge each other in debate and the best argued case wins the day. The law develops organically and steadily. Examples are the development of poison pils, the rights of shareholders, the long fight for independent directors and, most recently, the move towards independent non-CEO chairmen. Change often comes after protracted debate over many years and lobbying by pressure groups. The CEOs are organized in the Business Roundtable. Besides, there is the NACD; recently the Chairman's Forum is gaining momentum. Shareholder activists and their organizations such as Risk Metrics, now called ISS, add to this influence.

The US believes in teamwork and is convinced that people working together are more likely to come up with good ideas than a person working alone, provided teams have strong leaders. A US company is built up of groups in many levels who report to each other. At each level the group leaders know what mandate and room for action they have. Europeans are often struck by the many written interaal regulations at US corporations, also called "systems", as well as by the combination of teamwork and a strong hierarchy. That particular combination provides a good breeding ground for future leaders. The Dutch can learn from them how to lead. It also provides management with a talent scouting opportunity throughout the grades and promotes efficient planning of careers and succession.

A strong point of US business leaders is finding new ways of improving communication within the corporation and with shareholders and the outside world. In the area of negotiating, for example, a method has been developed at Harvard University to ascertain both parties' real interests, as opposed to taking strong positions at the start of the negotiations.7 New forms of mediation as a form of alternative dispute resolution also evolved at Harvard.8 Moreover, many ideas about talent development and coaching, about "recognition of joint success moments" as corporate culture development and systems have been formulated in the US and brought into practice in the past ten years.

Students practise the Socratic method. They learn how to debate in a civilised manner. They learn to ask questions. There is a real understanding that strategie decisions are best taken after extensive debate, where the alternatives have been thoroughly investigated. In this respect there is a difference between the US and the UK. In the US the independent directors only challenge the strategy plans of the officers. In the UK, by contrast, non-executive directors are actively involved in development of ideas of strategy. American directors are good at asking questions. British directors like to think creatively about strategy.

Although US law has evolved from English law, public corporations in the US are not looked upon as partnerships as they are in the UK. As early as the late 19^th century, it was realized that it is impossible for a large number of shareholders to manage a corporation. The need for separation of ownership and control was seen early on. A corporation is seen as a "nexus of contracts" and the board represents and executes this nexus. The primacy of the board is accepted. Shareholders have traditionally had linie influence over the appointment and dismissal of directors. This only started to change in the 1990s as a result of very vocal shareholder activism.

Success in business can come very quickly in the US, failure too. Both are accepted. "Leave the burned ashes behind you" is advice that gains ready acceptance and so is the recommendation of what to do next: "go West, young man". Quick success is possible because of the vast space of the US and its ample resources. This often implies a short-term perspective.

Money is seen as a measure of success. The realization in the 1990s that the best way of motivating executives was to give them a carrot led to the development of the bonus culture and meant that executives could make millions of dollars a year. This culture has spread to other countries, but is still strongest in the US. However, it has promoted the short-termism and over-optimistic risk taking leading to the financial crisis of 2008-2009.

Disclosure is always paramount. Privacy is not important. Everything about people's private life and finances is in the public domain. The English, on the other hand, are very fond of their privacy and try to keep their financial situation out of the public eye.

Notwithstanding strong tendancies to short-termism, strategie investors, such as Warren Buffet, are highly regarded in their support for long-term strategies.