3.3.1 Hofstede's cultural dimensions

As stated in the introduction, the design of corporate governance systems is influenced by many factors, among which the culture factor, which can be regarded as an all-embracing factor since it also incorporates other important factors such as economical, political and legal factors. This section reviews what culture is, which cultural dimensions exist and how they influence corporate governance and the comply or explain principle.

For a long time culture was considered a black box or a vague concept with many definitions (Breuer and Salzmann 2008, p. 3). The organisational psychologist Hofstede formulated a definition for culture still often used: "the collective programming of the mind which distinguishes the members of one human group from another" (Hofstede 1984, p. 21) (Hofstede, Hofstede et al. 2011, p. 21). Moreover, he states that culture includes systems of values which are the building blocks of culture: "culture is a system of collectively held values" (Hofstede 1984, p. 21).

Culture exists i.a. in nations, societies, organisations, regions and ethnic groups. Hofstede concludes that there must be mechanisms in human groups (societies) that permit the maintenance of stability in culture patterns across many generations. He argues that these mechanisms operate as shown in the figure below (Hofstede 1981, p. 24).

In the centre the societal norms can be seen which consist of the collectively held values (the building blocks of culture). These values have led to the development and maintenance of social institutions with particular structures and systems such as religion, family patterns and legislation (the right side block). Those institutions reinforce the social norms and in the end the origins (the ecological factors) that led to them. The cultural mental programs are hard to change. Hofstede states that national and regional differences are here to stay and he rules far-reaching convergence out (Hofstede 1983, p. 75). Culture only changes slowly and the main changes come from outside by means ofthe forces of nature or the forces of man such as discoveries, conquest or colonisation.

Therefore, the arrow in figure 3.3.1 is deliberately directed from the outside influences to the origins and not to the societal norms since Hofstede believes that: "norms rarely change by direct adoption of outside values, but rather through a shift in ecological conditions (...). In general norm shifts will be gradual, unless the outside influences are particularly violent' (Hofstede 1981, p. 26).

For the purpose of his empirical research Hofstede formulated four cultural dimensions. These four dimensions represent elements of common structure in the cultural systems of countries. The dominant value systems (see the middle block in figure 3.3.1 above) and corporate governance systems in countries can be ordered along these cultural dimensions. Moreover, they influence the structure and functioning of institutions/firms. For an overview and definitions of these dimensions see table 3.3.1a below.

Hofstede's study was the frontrunner for many other important studies. The countries under research in the underlying study (Belgium, Germany, Italy, the Netherlands and the UK) were part of his research as well, hence a short description. He empirically researched the above cultural dimensions in 40 countries by means of a survey in 1968 and 1972 (in total 116,000 questionnaires) collected within subsidiaries of a large multinational company (IBM). The answers in his surveys showed that the differences among countries reflected the above four underlying cultural dimensions (Hofstede 1984a, p. 83). Each country was given a score between 0 and 100 on those cultural dimensions and multivariate statistics (factor analysis) and 'theoretical reasoning' was performed. Regarding the countries under research in this study see the results of Hofstede below in table 3.3.1b.

In chapter 4 the results as shown in the above table are discussed in more detail per country to be able to explain further the functioning of the corporate governance system and comply or explain principle in that country. In general the countries under review score high on individualism, high on masculinity (except for the Netherlands) and divided on power distance and uncertainty avoidance.

In later research Hofstede and Bond added a fifth cultural dimension, i.e. longterm versus short-term orientation: "Values associated with Long-Term Orientation are thrift and perseverance; values associated with Short-Term Orientation are respect for tradition, fulfilling social obligations, and protecting one's 'face'" (www.geert-hofstede.com). Hofstede based this fifth dimension on a study among students in 23 countries around the world performed with a questionnaire designed by Chinese scholars. The study revealed that long-term orientation is mostly found in East Asian countries such as China, Hong Kong and Japan (Hofstede and Bond 1988). The scores on long-term orientation for the countries under review in this study are quite low: Germany 31 (rank 12 out of 18 ranks), UK 25 (rank 15 out of 18 ranks) and the Netherlands 44 (rank 10 out of 18 ranks) (www.clearlycultural.com/geert-hofstede-cultural-dimensions/long-term-orientationClearlyCultural). Italy and Belgium were not included in Hofstede's and Bond's study.