2.1.3 Aspects of British company culture

Although British, US and Dutch culture have much in common, such as the same Christian religions, tolerance, rationality and a tradition of individualism,1 there are special cultural aspects which account for differences in corporate governance, even in these originally Anglo-Saxon and North European countries. Four aspects of British corporate culture relevant to corporate governance will be described below:

While describing these aspects of corporate culture, I will make use of broad impressions, realizing that these are generalizations of British character and not a description of the character of each individual. My aim is to give a generalized impression by a foreigner and to try to clarify differences in board dynamics by looking at history and culture.

The UK has not been invaded by foreign powers since 1066 and has been fairly content with its forms of government2 and governance. Its system of government has evolved in its own way, sometimes behind and sometimes ahead of other countries, but always avoiding revolution after the beheading of Charles I in 1648 and the Commonwealth Republic. The so-called Glorious Revolution of 1688 was in fact a restoration of the "constitutional" monarchy without a written constitution, which had been the practice long before continental kings were forced to follow suit.

In 1992 the UK clearly took the lead in the field of corporate governance. The application of codes with the "comply or explain" rule is typical of the imaginative English approach to change, which differs from that of other countries and was in this case quickly followed by many other countries.

The British like a case by case approach. There is a reluctance to commit to rigid, unchangeable rules. The long experience of having a parliamentary monarchy without a constitution has convinced the British that not all principles of governance necessarily need to be pinned down in formal laws. The US for example does have a written constitution. As a result the US relies on extensive written acts. Another reason why the UK did not need written legislation, is that it was a close kuit society where people could rely on precedent. UK leaders still like to see themselves as pragmatical, which reinforces the will to have informal regulations.

London is a huge city and a financial hub. A good business reputation is essential in the City.3 Peer control works strongly: this starts in the public schools and at Oxbridge and then continues in the business world. During the Industrial Revolution, cities such as Birmingham and York became centres of industry, but provincial businesses and listed companies still had their head office in the City. Having a financial centre which is at the same time the place for the head office of all major listed companies makes dialogue with large shareholders easier, especially if one adds the "club membership" atmosphere.

"Fair play", "being a good sport" and avoiding and not doing things that are "not done" are important aspects of education and English life. In rugby the players listen to the referee and there are few fights. In cricket the players also listen to the umpire. In certain cases a player can be called out by the umpire only after an appeal by the players of the other team crying out "How's that?". Unwritten mies and listening to the referee are clearly very important in these games and in business.4

The background of abiding by unwritten mies goes back to the aristocracy and its code of honour, being further developed at schools, like Eton. At those schools rugby and especially cricket were taken very seriously. One speaks of the "spirit of cricket". Such admirable sentiments created the "stiff upper lip" and "my word is my bond". It was also deliberately developed as a government policy in the middle of the 19^th century, when the UK was colonizing so many countries around the world and needed a breed of young men that could take charge and would be admired by local princes.5 They promoted the public schools. Although the aristocracy has lost a great deal of its influence since the Great War, the new leading class aspires to the same set of values and the same sense of class.

Media and publicity play an important role in peer control. British citizens enjoy publicity6 and know how to use it to their advantage.

The Courts of Equity made law possible without formal laws. Peer control, tradition and belief in informal arrangements have worked well for the Takeover Panel and the Stock Exchange, with the City Code "If you misbehave you're out of business."

The same principle forms the basis for corporate governance codes of which the Cadbury Code of 1992 was the first.7

An aspect of pragmatism is common law. Around 1200 the UK had only limited specific writs for any legai action; they were particular actions, such as "delictus". Around 1250 other free actions were permitted to be brought in equity before the Lord Chancellor. Any request became possible and the law became flexible. An example is trust law. Later the flexible equitable principles flowed into the common law courts, but the common law courts and chancery courts remain to this day. The chancery courts deal with many business matters such as company law, intellectual property law and bankruptcy disputes. Around 1870 the two systems were brought together. At the high court level there are several divisions including a commercial division next to the chancery courts. The Court of Appeals has a separate chancery division. It is interesting that all US states took over the UK common law courts and that only Delaware kept the chancery court for business matters.

Land owners — the rural nobility — have always been the backbone of the English nation. The security brought by owning property and the sense of social obligations have been inherited in later times by the founders and owners of family businesses. Their position as owners has always been respected and in the same way owners of shares in a company are respected as having the ultimate power in the company.

Already in the late 1950s large pension funds and institutional investors had large shareholdings in the bigger listed companies. They were a strong force. They supported the first hostile takeovers in 1958. They supported the creation of the Takeover Panel and later they supported the Cadbury Code and the Higgs Review.

The English view commercial cooperation and joint ventures as engagements of sound self-interest.8 They believe that each person is free to follow his own interests, and can leave a joint venture at will. They are convinced a CEO will not work as hard for his shareholders as he would for himself (Adam Smith, see sub-section 2.1.2 under "History"). The British would say that the same applies to the US culture. They are right: it has to do with free enterprise.

Appointing responsible governors or directors to safeguard the interests of partners or shareholders sterns from the same critical common sense. It means that governors or directors must do their very best in their fiduciary function. Within their renrit they are allotted freedom of judgment, provided they act in good faith. Accountability is a very English word. Directors are appointed by shareholders and must account for their performance at the meeting of shareholders. If they fail to give proper account for themselves, they can be dismissed or "moved out".9 In fact, directors are rarely forrnally dismissed by shareholders. They are, in practice, manoeuvred out of their position, by informal shareholder pressure.10 They will not be sued at the drop of a hat, as they would be in the US. The British emphasize the two-sided nature of the relationship between governors and those for whom they act. There is focus on the communication aspect, that there are responsibilities on both sides. "Accountability is like a telephone conversation: it requires both sides to listen".11

UK company law is based on the premise that a company is a type of partnership. In consequence, shareholders are free to arrange their company as they see fit, unhampered by any mandatory law, and are free to elect and dismiss directors as they wish, which is a right even US shareholders do not have, at least not on paper.12

Surrounded by the sea, the British did not need to fear sudden attacks and had time to think strategically about their friends and enemies on the continent. The familiarity with the sea, which needs careful planning in advance, gave them a broader view than many of their land locked fellow Europeans. And what is more, navigating needs creative responses to uncertainties of nature and tenacity to keep the projected course.13

Studying history is popular in the UK. While CEOs in other countries have usually studied economy, business administration or engineering, the university study that is most popular with CEOs in the UK is history. Even if they have not studied history, their education tends to favour the arts.

Military generals and admirals have often studied history. There is a feeling that a good understanding of history gives a broad view and stimulates strategic thinking. The study of history is kept alive and has influenced the thinking of corporate governance.

Tradition is held in honour in the UK. Foreigners admire the British approach to tradition. In many areas it is often not necessary to have a specific law on a certain subject. It should be enough if everybody realizes that something has always been done in the same way and should therefore continue to be done in that way. Change occurs in the UK too, but is not promoted for change sake only.

People who have studied history get a good understanding of strategy and people who are capable of thinking creatively and broadly are highly respected, even in these times of specialism and analytical detail. It is this concept of strategic thinking that is regarded as important, especially for the role of non-executive independent directors. There is an emphasis on independent, creative and broad thinking, which is regarded as an essential asset. The conviction counts that the talented amateur can add value. The art of debating is cultivated at school and university. Their education should be broad and debating stressed. It gives them the ability to find the right words. Directors go into meetings with an open mind and are prepared to accept that someone else may come up with a better alternative as long as they win in the end. This is different from many foreigners, who are less prepared to consider meetings as grounds for free debate. M. Tabaksblat values the informality of the debate of the English.14

The Higgs Review15 and the Combined Code and the UK Corporate Governance Code16 use the word "dialogue". The Compact Oxford English Dictionary defines dialogue as a conversation carried on between two or more persons. According to British understanding, this requires a willingness on the part of both sides to listen as well as speak.

The chairman and the senior independent director should listen to the views of shareholders. And the chairman should listen to all directors.17 In this way a fresh strategy can be developed by the board. The Dutch often spend much time thinking about what they should or should not say as opposed to thinking of what they could hear or sound out.

History and custom have it that results are achieved through an attitude open to debate. Discussions in Parliament are contentious, the court system is competitive, relations between the nobility and the Crown have been competitive and throughout history kings have often won the Crown in competitive circumstances. You tend to prefer what you are used to. The British have a pugnacious attitude without resorting to wars or revolutions. Thorough debate is the key to the best strategy, since this is the only way to be sure that all options have been considered.18

Class has been a constant feature of British society for many centuries: the upper class, the middle class and the working class. Moving from one to the other has not been easy. Normally there is a balance in society. Thinking about balance amongst the social classes leads to strategie thinking and needs room for a long-term view. Since the First World War ideas and practices have changed, with a widely questioned honours system, a weaker House of Lords and a directionless monarchy. However, Britain has a very different soit of society from that of France, Ireland or the USA, principally because since 1688 it has never experienced a time when those in power have consciously sought to expand the historie symbols of rank and privilege. The members of the aristocracy may have lost their influence, but they have been replaced by the members of the upper middle class, who aspire to much the same set of values.19 David Cameron, the Prime Minister elected in 2010, is again an Etonian. It is sometimes said that it is striking, how linie Britain's social structures have changed since the 18^th century.20

Members of the upper middle class have a sense of their position in society and many of them are company directors.21 This may also be a reason why diversity has not yet worked well in Britain. The rather strong separation of the social classes has occasionally even played a destructive role, vide the "Death of Gentlemanly Capitalsm", above onder "History".

In the Industrial Revolution socially aware groups came to the fore, who embraced hard work, better treatment of employees and tranquil solutions to problems, be good for employees and be peaceful. A good example are the Quakers, who were excluded from many activities by the Test Act of 1620, and prohibited from going to university, but were remarkably good at making things, developing industry and looking after their employees.

It was the independent Quaker and nonconformist families that came up with inventions in steel (Darby and Huntsman), railways (Pease, Ellis and Bradshaw), pottery (Cookworthy and Champion), cotton (Bright), banking (Gurney, Barings and Barclay) and chocolate (Cadbury). They created better conditions for employees, combatted slavery and fought for peace. This group has played a major role in American industrial history as well (e.g. William Penn).22

As mentioned above in connection with the English East India Company, it has always been recognized that some shareholders have short-term goals (profit from a single trip) and others a long-term goal (profit after many trips to a region). Modern corporate governance acknowledges that both views can go together.23 There is a continuing debate about how to match them and the UK Stewardship Code gives some solutions.24

Of the three countries, UK, US and The Netherlands, the UK scores the highest on the "uncertainty avoidance index" of Geert Hofstede.25 This means that the British do not get nervous or stressed about new situations. They do not try to avoid surprises.

Since the l7^th century Britain has accepted and assimilated many minorities, which have ideas and entrepreneurial ambitions. The commercial strength of the UK has benefited from these immigrants. Although the UK has had an honest and effective legal system, the British did not develop the US tendency to embark on litigation immediately. There is a willingness to seek out-of-court solutions. In the corporate world too, few liability cases have been brought against directors. Informal ways of resolving issues are: suspending and disqualifying directors and publishing bad results. Such informal solutions often surprise outsiders.26

Warburg, Schroders, Rothschild and Kleinwort are all merchant banks set up by continental European families, as was Casenove, an important stockbroker. These families adopted English values to a marked degree.27

Books published in Germany, France or the US on how to run meetings and boards and on the composition of boards will seldom, if ever, state that board meetings should be fun. In the UK this is generally emphasized.28 The English sense of humour and its relish for social gatherings are widely recognized all over the world.

Although the British are independent-minded they are good at forming teams. Past and present have shown them that teamwork is necessary for good results. They get an early taste for it by practising spons as youngsters at school and develop it further in the course of their work. Books about boards emphasize the need for teamwork and stress that creating a team is one of the important functions of the chairman.29

The British realize and are convinced that from time to time leadership should be centred in one person. The team must be led by a leader since this produces optimal results. There should be discussion, but the discussion should not be for discussion's sake, but lead to a decision. A leader is needed to steer this process to conclude the discussion. That person should also communicate with the outside world.30 CEOs and chairmen have to hold these leading roles. CEOs run and represent the company. Chairmen run boards and lead the dialogue with shareholders.

Unlike France (with its Président Directeur Général or "PDG"), Germany and the US, the English do not like to have or worship heroes. There has to be a leader, but that leader is at all times replaceable. Winston Churchill was a hero during the Second World War, but was easily replaced in 1945 when the UK electorate had set their minds on Labour. CEOs in Britain can be dismissed by the meeting of shareholders and thus it has been since the first English companies were established in 1600.31

Although respect for hierarchy is stronger in the UK than for example in the Netherlands, there is a tendency to get rid of directors readily in the UK. This contrasts markedly with Dutch board culture. The Dutch have no real hierarchy and sometimes keep members on board for too long. They sometimes frown on the easy way the British can dismiss a director.

Making money is respected. The British realize that you need money to engage in enterprise. The British, as a seagoing nation, have always been good traders. Gambling also is accepted in every level of society, albeit not among Quakers and some other smaller groups.32